<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998
REG. NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4/S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PARAGON HEALTH NETWORK, INC.
(TO BE RENAMED MARINER POST-ACUTE NETWORK, INC. UPON CONSUMMATION OF THE
MERGER
DESCRIBED HEREIN, SUBJECT TO APPROVAL OF THE STOCKHOLDERS OF PARAGON HEALTH
NETWORK, INC.)
(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)
ONE RAVINIA DRIVE, SUITE 1500
ATLANTA, GEORGIA 30346
(770) 393-0199
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SUSAN THOMAS WHITTLE, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
ONE RAVINIA DRIVE, SUITE 1500
ATLANTA, GEORGIA 30346
(770) 393-0199
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
RICHARD H. MILLER, ESQ. MARK H. BURNETT, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP TESTA, HURWITZ & THIBEAULT, LLP
191 PEACHTREE STREET N.E. HIGH STREET TOWER
ATLANTA, GEORGIA 30303 125 HIGH STREET
(404) 572-6600 BOSTON, MASSACHUSETTS 02110
(617) 248-7000
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 merger of Mariner Health Group, Inc. ("Mariner") with a
wholly-owned subsidiary of Paragon Health Network, Inc. ("Paragon") pursuant
to the Merger Agreement (defined hereafter) described herein have been
satisfied or waived.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value.................. 31,784,707 $14.16 $450,071,452 $132,772
</TABLE>
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(1) Based on the maximum number of shares of Paragon Common Stock (defined
hereafter), to be issued in connection with the Merger (defined
hereafter), approximately 31,784,707 shares which amount includes an
aggregate of 733,550 shares of Paragon Common Stock issuable upon the
exercise of certain outstanding options of Mariner which may be assumed by
Paragon in connection with the Merger.
(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 the average of the high and low sales prices of
Mariner Common Stock (defined hereafter) on June 15, 1998 as reported on
The Nasdaq National Market. Pursuant to Rule 457(b), the fee required in
connection with this filing is partially offset by an aggregate fee of
$106,271 previously paid at the time of filing, on a confidential basis,
of the Preliminary Proxy Materials of Paragon and Mariner on May 22, 1997.
As a result, the $26,502 balance of the required fee is being paid
concurrently with the filing hereof.
----------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[LOGO OF MARINER HEALTH GROUP, INC. APPEARS HERE]
JUNE 19, 1998
Dear Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders (the
"Mariner Special Meeting") of Mariner Health Group, Inc., a Delaware
corporation ("Mariner"), to be held on Tuesday, July 28, 1998, at 10:00 a.m.,
local time, at State Street Bank & Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
At this very important meeting, Mariner stockholders will be asked to
consider and vote upon a proposal (the "Mariner Merger Proposal") to approve
and adopt an Agreement and Plan of Merger, dated as of April 13, 1998 (the
"Merger Agreement"), among Paragon Health Network, Inc., a Delaware
corporation ("Paragon"), Mariner and Paragon Acquisition Sub, Inc., a Delaware
corporation and a wholly-owned subsidiary of Paragon ("Merger Sub"), pursuant
to which, among other things: (i) Merger Sub will merge (the "Merger") with
and into Mariner, with Mariner surviving and continuing as a wholly-owned
subsidiary of Paragon; and (ii) each share of common stock ("Mariner Common
Stock"), par value $.01 per share, of Mariner, issued and outstanding
immediately prior to the effective time of the Merger will be converted as of
the effective time of the Merger into the right to receive one share of common
stock, par value $.01 per share, of Paragon.
In order to more fully understand the proposed Merger and the related
transactions thereto, I urge you to read the enclosed material carefully.
After careful consideration, the Board of Directors of Mariner has
unanimously approved the proposed Merger and the Merger Agreement described in
the attached Joint Proxy Statement/Prospectus and has determined that the
proposed Merger is fair to and in the best interests of Mariner's
stockholders. THE BOARD OF DIRECTORS OF MARINER UNANIMOUSLY RECOMMENDS THAT
THE STOCKHOLDERS OF MARINER VOTE FOR THE MARINER MERGER PROPOSAL AS SET FORTH
IN THE ATTACHED NOTICE OF SPECIAL MEETING OF STOCKHOLDERS AND JOINT PROXY
STATEMENT/PROSPECTUS.
In the materials accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, the Joint Proxy Statement/Prospectus relating to,
among other things, the actions to be taken by the Mariner stockholders at the
Mariner Special Meeting, and a Proxy Card. The Joint Proxy
Statement/Prospectus more fully describes the Merger, the Merger Agreement and
certain transactions relating thereto. It also includes information about
Mariner and Paragon and information with respect to the combined company,
which is expected to operate under the name "Mariner Post-Acute Network, Inc."
following the Merger.
All Mariner stockholders of record as of June 15, 1998 are cordially invited
to attend the Mariner Special Meeting in person. However, whether or not you
plan to attend the Mariner Special Meeting, please complete, sign, date and
return the Proxy Card in the envelope enclosed herewith, which requires no
postage if mailed in the United States. If you attend the Mariner 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 Mariner Special Meeting.
Sincerely,
/s/ Arthur W. Stratton
------------------------------------
Arthur W. Stratton, Jr., M.D.
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
MARINER HEALTH GROUP, INC.
1881 WORCESTER ROAD
FRAMINGHAM, MASSACHUSETTS 01701
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 28, 1998
To the Stockholders:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Mariner
Special Meeting") of Mariner Health Group, Inc., a Delaware corporation
("Mariner"), will be held on Tuesday, July 28, 1998 at 10:00 a.m., local time,
at State Street Bank & Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, to consider and vote upon the following matters more
fully described in the accompanying Joint Proxy Statement/Prospectus:
(1) The approval and adoption of an Agreement and Plan of Merger, dated
as of April 13, 1998 (the "Merger Agreement"), among Paragon Health
Network, Inc., a Delaware corporation ("Paragon"), Mariner and Paragon
Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary
of Paragon ("Merger Sub"), pursuant to which, among other things, (a)
Merger Sub will merge (the "Merger") with and into Mariner, with Mariner
surviving and continuing as a wholly-owned subsidiary of Paragon, and (b)
each share of common stock (the "Mariner Common Stock"), par value $.01 per
share, of Mariner, issued and outstanding immediately prior to the
effective time of the Merger will be cancelled and converted as of the
effective time of the Merger into the right to receive one share of common
stock, par value $.01 per share, of Paragon (the "Mariner Merger
Proposal"); and
(2) Such other business as may properly come before the Mariner Special
Meeting or any adjournment or postponement thereof.
THE BOARD OF DIRECTORS OF MARINER UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF MARINER VOTE FOR THE MARINER MERGER PROPOSAL.
Only holders of record of Mariner Common Stock as of the close of business
on June 15, 1998 are entitled to notice of and to vote at the Mariner Special
Meeting, or any adjournment or postponement thereof.
Holders of Mariner Common Stock are not entitled to dissenters' rights of
appraisal under Section 262 of the General Corporation Law of the State of
Delaware.
By order of the Board of Directors,
/s/ Arthur W. Stratton
------------------------------------
Arthur W. Stratton, Jr., M.D.
Chairman of the Board, President and
Chief Executive Officer
June 19, 1998
THE APPROVAL OF THE MARINER MERGER PROPOSAL REQUIRES THE AFFIRMATIVE VOTE OF
A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF MARINER COMMON STOCK.
THEREFORE, FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
MARINER MERGER PROPOSAL. WHETHER OR NOT YOU PLAN TO ATTEND THE MARINER 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 MARINER SPECIAL MEETING, YOU MAY VOTE
IN PERSON IF YOU WISH TO DO SO, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR
PROXY CARD.
<PAGE>
[LOGO OF PARAGON HEALTH NETWORK, INC. APPEARS HERE]
JUNE 19, 1998
Dear Stockholders:
A Special Meeting of Stockholders (the "Paragon Special Meeting") of Paragon
Health Network, Inc., a Delaware corporation ("Paragon") will be held on
Tuesday, July 28, 1998 at 10:00 a.m., local time, at the Crowne Plaza Ravinia,
4355 Ashford Dunwoody Road, N.E., Atlanta, Georgia 30346.
At this very important meeting, Paragon stockholders will be asked to
consider and vote upon several interrelated proposals in connection with the
proposed merger of Paragon and Mariner Health Group, Inc., a Delaware
corporation ("Mariner"), pursuant to an Agreement and Plan of Merger, dated as
of April 13, 1998 (the "Merger Agreement"), among Paragon, Mariner and Paragon
Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of
Paragon ("Merger Sub"). Pursuant to the Merger Agreement, among other things,
(a) Merger Sub will merge (the "Merger") with and into Mariner, with Mariner
surviving and continuing as a wholly-owned subsidiary of Paragon and (b) each
share of common stock ("Mariner Common Stock"), par value $.01 per share, of
Mariner issued and outstanding immediately prior to the effective time of the
Merger will be converted as of the effective time of the Merger into the right
to receive one share of common stock ("Paragon Common Stock"), par value $.01
per share of Paragon, resulting in the issuance of up to 31,784,707 additional
shares of Paragon Common Stock. Based upon the advice of its outside counsel,
Paragon does not expect the Merger to have any tax effect on current Paragon
stockholders.
At the Paragon Special Meeting, Paragon stockholders will be asked to
consider and vote on the following matters: (i) the issuance of shares of
Paragon Common Stock pursuant to the Merger Agreement (the "Stock Issuance
Proposal"); (ii) a proposal to amend the Amended and Restated Certificate of
Incorporation of Paragon to change the corporate name from "Paragon Health
Network, Inc." to "Mariner Post-Acute Network, Inc." (the "Name Change
Proposal"); (iii) a proposal to amend the Amended and Restated Certificate of
Incorporation of Paragon to increase the authorized amount of Paragon Common
Stock from 75 million shares to 500 million shares (the "Amendment Proposal");
and (iv) a proposal to increase the number of shares of Paragon Common Stock
available under the Paragon Health Network, Inc. 1997 Long-Term Incentive Plan
by an additional four million shares (the "Paragon Plan Proposal" and,
together with the Stock Issuance Proposal, the Name Change Proposal and the
Amendment Proposal, the "Paragon Proposals").
In order to more fully understand the proposed Merger and the Paragon
Proposals, I urge you to read the enclosed material carefully.
After careful consideration, the Board of Directors of Paragon has
unanimously approved the proposed Merger, the Merger Agreement and the Stock
Issuance Proposal and, by action of the directors present, has unanimously
approved the other Paragon Proposals, as described in the attached Joint Proxy
Statement/Prospectus, and has determined that the proposed Merger is fair to
and in the best interests of Paragon. THE BOARD OF DIRECTORS OF PARAGON, SO
ACTING, UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF PARAGON VOTE FOR EACH OF
THE PARAGON PROPOSALS AS SET FORTH IN THE ATTACHED NOTICE OF SPECIAL MEETING
OF STOCKHOLDERS AND JOINT PROXY STATEMENT/PROSPECTUS.
In the materials accompanying this letter, you will find the Notice of
Special Meeting of Stockholders, the Joint Proxy Statement/Prospectus relating
to, among other things, the actions to be taken by Paragon stockholders at the
Paragon Special Meeting, and a Proxy Card. The Joint Proxy
Statement/Prospectus more fully describes
<PAGE>
the Merger, the Merger Agreement, and the Paragon Proposals. It also includes
information about Paragon and Mariner and information with respect to the
combined company operating under the name "Mariner Post-Acute Network, Inc."
following the Merger.
All Paragon stockholders as of June 15, 1998 are cordially invited to attend
the Paragon Special Meeting in person. However, whether or not you plan to
attend the Paragon Special Meeting, please promptly complete, sign, date and
mail the enclosed Proxy Card in the enclosed return envelope, which requires no
postage if mailed in the United States. If you attend the Paragon Special
Meeting you may vote in person, even if you have previously returned your Proxy
Card.
Sincerely,
/s/ Keith B. Pitts
--------------------
Keith B. Pitts
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
PARAGON HEALTH NETWORK, INC.
ONE RAVINIA DRIVE, SUITE 1500
ATLANTA, GEORGIA 30346
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 28, 1998
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "Paragon
Special Meeting") of Paragon Health Network, Inc., a Delaware corporation
("Paragon"), will be held on Tuesday, July 28, 1998, at 10:00 a.m., local time,
at the Crowne Plaza Ravinia, 4355 Ashford Dunwoody Road, N.E., Atlanta, Georgia
30346 to consider and vote upon the following matters more fully described in
the accompanying Joint Proxy Statement/Prospectus:
(1) The approval of the issuance of up to 31,784,707 shares of common
stock ("Paragon Common Stock"), par value $.01 per share, of Paragon to the
stockholders of Mariner Health Group, Inc., a Delaware corporation
("Mariner"), pursuant to an Agreement and Plan of Merger, dated as of April
13, 1998 (the "Merger Agreement"), among Paragon, Mariner and Paragon
Acquisition Sub, Inc., a Delaware corporation and wholly-owned subsidiary
of Paragon ("Merger Sub"), pursuant to which, among other things, (a)
Merger Sub will merge (the "Merger") with and into Mariner, with Mariner
surviving and continuing as a wholly-owned subsidiary of Paragon and (b)
each share of common stock, par value $.01 per share, of Mariner, issued
and outstanding immediately prior to the effective time of the Merger will
be converted as of the effective time of the Merger into the right to
receive one share of Paragon Common Stock (the "Stock Issuance Proposal");
(2) The approval and adoption of an amendment to the Amended and Restated
Certificate of Incorporation of Paragon to change the corporate name from
"Paragon Health Network, Inc." to "Mariner Post-Acute Network, Inc." (the
"Name Change Proposal");
(3) The approval and adoption of an amendment to the Amended and Restated
Certificate of Incorporation of Paragon to increase the authorized number
of shares of Paragon Common Stock from 75 million shares to 500 million
shares (the "Amendment Proposal");
(4) The approval of an increase in the number of shares of Paragon Common
Stock available under the Paragon Health Network, Inc. 1997 Long-Term
Incentive Plan by an additional four million shares (the "Paragon Plan
Proposal"); and
(5) Such other business as may properly come before the Paragon Special
Meeting or any adjournment or postponement thereof.
THE BOARD OF DIRECTORS OF PARAGON, BY ACTION OF THE DIRECTORS PRESENT,
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF PARAGON VOTE FOR EACH OF THE
PROPOSALS SET FORTH ABOVE.
Only holders of record of Paragon Common Stock as of the close of business on
June 15, 1998 are entitled to notice of and to vote at the Paragon Special
Meeting, or any adjournment or postponement thereof.
By order of the Board of Directors,
/s/ Susan Thomas Whittle
------------------------------
Susan Thomas Whittle
Senior Vice President, General
Counsel and Secretary
June 19, 1998
<PAGE>
THE APPROVAL OF THE STOCK ISSUANCE PROPOSAL AND THE PARAGON PLAN PROPOSAL
REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF PARAGON COMMON
STOCK REPRESENTED AT THE PARAGON SPECIAL MEETING IN PERSON OR BY PROXY AND
ENTITLED TO VOTE. APPROVAL OF THE NAME CHANGE PROPOSAL AND THE AMENDMENT
PROPOSAL REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE ISSUED AND
OUTSTANDING SHARES OF PARAGON COMMON STOCK. THEREFORE, FAILURE TO VOTE WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE NAME CHANGE PROPOSAL AND THE
AMENDMENT PROPOSAL AND WILL ALSO HAVE THE SAME EFFECT AS A VOTE AGAINST THE
STOCK ISSUANCE PROPOSAL AND THE PARAGON PLAN PROPOSAL TO THE EXTENT SUCH
SHARES ARE INCLUDED IN THE NUMBER OF SHARES PRESENT OR REPRESENTED IN THE
QUORUM FOR THE PARAGON SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE
PARAGON 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 PARAGON SPECIAL
MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO, EVEN IF YOU HAVE
PREVIOUSLY RETURNED YOUR PROXY CARD.
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
PARAGON HEALTH NETWORK, INC.
MARINER HEALTH GROUP, INC.
JOINT PROXY STATEMENT FOR SPECIAL MEETINGS OF STOCKHOLDERS
TO BE HELD ON JULY 28, 1998
PROSPECTUS OF PARAGON HEALTH NETWORK, INC.
(TO BE RENAMED "MARINER POST-ACUTE NETWORK, INC." UPON CONSUMMATION OF THE
MERGER DESCRIBED HEREIN, SUBJECT TO APPROVAL OF THE STOCKHOLDERS OF PARAGON
HEALTH NETWORK, INC.)
This Joint Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is
being furnished to the holders of common stock ("Paragon Common Stock"), par
value $.01 per share, of Paragon Health Network, Inc., a Delaware corporation
("Paragon"), in connection with the solicitation of proxies by the Board of
Directors of Paragon (the "Paragon Board") for use at a Special Meeting of
Stockholders of Paragon to be held at the Crowne Plaza Ravinia, 4355 Ashford
Dunwoody Road, N.E., Atlanta, Georgia 30346, on Tuesday, July 28, 1998, at
10:00 a.m., local time, and at any and all adjournments or postponements
thereof (the "Paragon Special Meeting"). Only holders of record of Paragon
Common Stock as of the close of business on June 15, 1998 (the "Paragon Record
Date") will be entitled to notice of and to vote at the Paragon Special
Meeting.
This Proxy Statement/Prospectus is also being furnished to the holders of
common stock ("Mariner Common Stock"), par value $.01 per share, of Mariner
Health Group, Inc., a Delaware corporation ("Mariner"), in connection with the
solicitation of proxies by the Board of Directors of Mariner (the "Mariner
Board") for use at a Special Meeting of Stockholders of Mariner to be held at
State Street Bank & Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, on Tuesday, July 28, 1998, at 10:00 a.m., local time, and at any and
all adjournments or postponements thereof (the "Mariner Special Meeting" and,
together with the Paragon Special Meeting, the "Special Meetings"). Only
holders of record of Mariner Common Stock as of the close of business on June
15, 1998 (the "Mariner Record Date") will be entitled to notice of and to vote
at the Mariner Special Meeting.
PROPOSALS TO BE CONSIDERED AT THE PARAGON SPECIAL MEETING
Stock Issuance Proposal. The Paragon Board has unanimously approved, and
recommends that the Paragon stockholders vote in favor of, the issuance of up
to 31,784,707 shares of Paragon Common Stock pursuant to an Agreement and Plan
of Merger, dated as of April 13, 1998 (the "Merger Agreement"), among Paragon,
Mariner and Paragon Acquisition Sub, Inc., a Delaware corporation and wholly-
owned subsidiary of Paragon ("Merger Sub"), pursuant to which Merger Sub will
be merged with and into Mariner (the "Merger"), with Mariner surviving and
continuing as a wholly-owned subsidiary of Paragon (the "Stock Issuance
Proposal"). Upon consummation of the Merger, each share of Mariner Common
Stock issued and outstanding immediately prior to the time the Merger becomes
effective under the Delaware General Corporation Law (the "Effective Time")
will be converted as of the Effective Time of the Merger into the right to
receive one share of Paragon Common Stock (the "Exchange Ratio"). For a more
complete description of the terms of the Merger, see "The Merger Agreement."
Name Change Proposal. The Paragon Board, by action of the directors present,
unanimously has approved, and recommends to the Paragon stockholders, the
adoption of an amendment to the Amended and Restated Certificate of
Incorporation of Paragon (the "Paragon Charter") to change the corporate name
from "Paragon Health Network, Inc." to "Mariner Post-Acute Network, Inc." (the
"Name Change Proposal"). For a more complete description of the Name Change
Proposal, see "Proposal to Amend the Paragon Charter to Change Paragon's
Name."
<PAGE>
Amendment Proposal. The Paragon Charter permits Paragon to issue up to 75
million shares of Paragon Common Stock. As of the Paragon Record Date, there
were 42,574,753 shares of Paragon Common Stock issued and outstanding and
4,532,419 shares of Paragon Common Stock issuable pursuant to outstanding
options under various Paragon stock incentive plans. In connection with the
consummation of the Merger, Paragon will be required to issue to the holders
of Mariner Common Stock up to 31,784,707 shares of Paragon Common Stock and to
assume options to purchase up to 733,550 shares of Mariner Common Stock which
will become options to purchase an equal number of shares of Paragon Common
Stock. In addition, Paragon anticipates granting options to purchase
approximately 1.7 million shares of Paragon Common Stock to certain Mariner
executives who will become executives of the combined company following the
Merger. See "Interests of Certain Persons in the Merger--Options." Although
Paragon currently has sufficient unissued shares available under the Paragon
Charter to effect the Merger without the adoption of the Amendment Proposal,
following the Merger, Paragon would not have sufficient shares available to
satisfy all of Paragon's other commitments to issue Paragon Common Stock.
Accordingly, the Paragon Board has, by action of the directors present,
unanimously approved, and recommends to the Paragon stockholders, the adoption
of an amendment to the Paragon Charter to increase the number of shares of
Paragon Common Stock authorized to be issued to a total of 500 million shares
(the "Amendment Proposal"). For a more complete description of the Amendment
Proposal, see "Proposal to Amend Paragon Charter to Increase the Number of
Authorized Shares of Common Stock."
Paragon Plan Proposal. Upon consummation of the Merger, the business and
operations of Paragon and Mariner will be conducted under a management team
that includes executives of both companies. In addition, as a consequence of
the Merger, substantially all of the stock options held by members of
Mariner's management team will be cancelled in exchange for cash payments. See
"The Merger Agreement--Mariner Stock Options." Furthermore, Paragon intends to
grant options to purchase approximately 1.7 million shares of Paragon Common
Stock to certain Mariner executives who will become executives of the combined
company following the Merger. See "Interests of Certain Persons in the
Merger--Options." While the shares of Paragon Common Stock that remain
available for grants pursuant to stock options under the Paragon Health
Network, Inc. 1997 Long-Term Incentive Plan (the "Long-Term Incentive Plan")
are sufficient to enable Paragon to make the awards described above upon
consummation of the Merger, only 590,000 shares would remain available for the
grant of awards under the Long-Term Incentive Plan in the future following the
grant of such awards. Therefore, the Paragon Board has, by action of the
directors present, unanimously approved, and recommends to the Paragon
stockholders, the adoption of an amendment to the Long-Term Incentive Plan to
increase the number of shares of Paragon Common Stock available for issuance
thereunder by four million shares (the "Paragon Plan Proposal," and together
with the Stock Issuance Proposal, Name Change Proposal and Amendment Proposal,
the "Paragon Proposals"). For a more complete description of the Paragon Plan
Proposal, see "Proposal to Amend the Paragon 1997 Long-Term Incentive Plan."
Votes Required--Paragon Proposals. Approval of the Stock Issuance Proposal
and the Paragon Plan Proposal requires the affirmative vote of a majority of
the shares of Paragon Common Stock represented at the Paragon Special Meeting
in person or by proxy and entitled to vote. Approval of the Name Change
Proposal and the Amendment Proposal requires the affirmative vote of a
majority of the issued and outstanding shares of Paragon Common Stock. If a
stockholder does not return a properly executed proxy and does not attend and
vote at the Paragon Special Meeting, such stockholder's shares will not be
voted, which will have the same effect as a vote against the Name Change
Proposal and the Amendment Proposal. Abstentions and broker non-votes (which
are included in the determination of the size of the quorum) will have the
effect of a vote against any proposal to which the abstention or non-vote
relates. Apollo Management, L.P. and certain of its affiliates have voting
authority over approximately 42% of the Paragon Common Stock issued and
outstanding as of the Paragon Record Date and have agreed to vote all of such
shares in favor of the Stock Issuance Proposal. In addition, they have
indicated that they intend to vote such shares in favor of the other Paragon
Proposals. See "Paragon Special Meeting--Record Date, Voting Rights and Vote
Required" and "Certain Other Agreements--Paragon Voting Agreement."
ii
<PAGE>
PROPOSAL TO BE CONSIDERED AT THE MARINER SPECIAL MEETING
Mariner Merger Proposal. At the Mariner Special Meeting, holders of Mariner
Common Stock will be asked to consider and vote upon a proposal (the "Mariner
Merger Proposal" and, together with the Stock Issuance Proposal, the "Merger
Proposals") to approve and adopt the Merger and the Merger Agreement. For a
more complete description of the terms of the Merger, see "The Merger
Agreement."
Vote Required--Mariner Merger Proposal. Approval of the Mariner Merger
Proposal requires the affirmative vote of a majority of the issued and
outstanding shares of Mariner Common Stock. Therefore, the failure to vote,
including by abstention or non-vote (including a broker non-vote), will have
the same effect as a vote against the Mariner Merger Proposal. Certain Mariner
stockholders that possess voting authority over approximately 21% of the
shares of Mariner Common Stock issued and outstanding as of the Mariner Record
Date have agreed to vote such shares in favor of the Mariner Merger Proposal.
See "Certain Other Agreements--Mariner Voting Agreement."
MARINER STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF MARINER
STOCK CERTIFICATES WILL BE MAILED TO MARINER STOCKHOLDERS SHORTLY AFTER THE
EFFECTIVE TIME OF THE MERGER.
GENERAL
SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DESCRIPTION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PARAGON AND MARINER STOCKHOLDERS IN CONNECTION
WITH THEIR CONSIDERATION OF THE PROPOSALS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS.
This Proxy Statement/Prospectus also constitutes the Prospectus of Paragon
filed as part of a Registration Statement on Form S-4/S-8 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), relating
to the shares of Paragon Common Stock to be issued in connection with the
Merger. A conformed copy of the Merger Agreement is attached hereto as Annex
I.
Paragon Common Stock is listed for trading under the symbol "PGN" on the New
York Stock Exchange ("NYSE"). Mariner Common Stock is listed for quotation
under the symbol "MRNR" on The Nasdaq National Market ("Nasdaq"). Assuming
approval of the Name Change Proposal by the Paragon stockholders,
simultaneously with the Effective Time of the Merger, Paragon will change its
name to "Mariner Post-Acute Network, Inc.," and it is expected that the
outstanding common stock of the combined company will be listed for trading on
the NYSE under the symbol "MPN."
This Proxy Statement/Prospectus, together with the applicable Notices of
Special Meeting of Stockholders and Letters to Stockholders and the
accompanying Proxy Cards, are first being mailed to the stockholders of
Paragon and Mariner on or about June 23, 1998.
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 JUNE 19, 1998.
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AVAILABLE INFORMATION
Paragon and Mariner are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements 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. Paragon
Common Stock is listed on the NYSE. Mariner Common Stock is quoted on Nasdaq.
Such reports, proxy statements and other materials can also be inspected (in
the case of Paragon information) at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005 and (in the case of
Mariner information) at the offices of Nasdaq at 1735 K Street, N.W.,
Washington, DC 20006. 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).
Paragon 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 Paragon, Mariner 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 PARAGON, MARINER 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 PARAGON OR MARINER 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, THE EXCHANGE ACT AND THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND BUSINESSES OF PARAGON AND MARINER, STATEMENTS UNDER THE
CAPTIONS "PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS," PARAGON'S
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" (INCORPORATED BY REFERENCE HEREIN), MARINER'S "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
(INCORPORATED BY REFERENCE HEREIN), "THE MERGER--OPINION OF MORGAN STANLEY &
CO. INCORPORATED" AND "THE MERGER--OPINION OF BT ALEX. BROWN INCORPORATED."
THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO
ASSURANCE CAN BE GIVEN THAT PROJECTED RESULTS WILL BE REALIZED. FACTORS THAT
MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
iv
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FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING:
(1) 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; (2) EFFECTS OF LIMITATIONS ON LIQUIDITY RESULTING FROM PARAGON'S
LEVERAGED POSITION FOLLOWING THE MERGER, WHICH COULD ADVERSELY AFFECT THE
COMBINED COMPANY'S PLANNED STRATEGIES; (3) EXPECTED COST SAVINGS FROM THE
MERGER MAY NOT BE FULLY REALIZED OR, IF REALIZED, THE TIMING THEREOF; (4)
COMPETITIVE PRESSURE IN THE COMBINED COMPANY'S INDUSTRY COULD INCREASE
SIGNIFICANTLY; (5) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE
BUSINESSES OF PARAGON AND MARINER COULD BE GREATER THAN EXPECTED; (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 THE COMBINED COMPANY
AFTER THE MERGER AND SUCH FORWARD-LOOKING STATEMENTS IS INCLUDED IN THE
SECTION HEREIN ENTITLED "RISK FACTORS."
INCORPORATION OF DOCUMENTS BY REFERENCE
DOCUMENTS INCORPORATED BY PARAGON
The following documents filed with the Commission by Paragon (File No. 1-
10968) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
(1) Paragon's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997;
(2) Paragon's Quarterly Reports on Form 10-Q for the quarters ended
December 31, 1997 and March 31, 1998;
(3) Paragon's Current Report on Form 8-K dated November 12, 1997, as
amended by Form 8-K/A filed on January 20, 1998 and Current Report on Form
8-K dated April 13, 1998; and
(4) The GranCare, Inc. Audited Consolidated Balance Sheets as of December
31, 1996 and 1995, Consolidated Statements of Income, Shareholders' Equity
and Cash Flows for the years ended December 31, 1996, 1995 and 1994, and
Schedule II-Valuation and Qualifying Accounts, together with the notes
thereto and the Reports of Ernst & Young LLP thereon, and the report of
KPMG Peat Marwick LLP with respect to the Evergreen Healthcare, Inc.
Consolidated Statement of Operations, Stockholders' Equity and Cash Flows
for the year ended December 31, 1994 included in the Joint Proxy
Statement/Prospectus contained in the Registration Statement on Form S-4
filed by Living Centers of America, Inc. (Registration No. 333-36525).
DOCUMENTS INCORPORATED BY MARINER
The following documents filed with the Commission by Mariner (File No. 0-
21512) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement/Prospectus:
(1) Mariner's Annual Report on Form 10-K (as amended by Form 10-K/A dated
April 30, 1998) for the year ended December 31, 1997;
(2) Mariner's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998; and
(3) Mariner's Current Report on Form 8-K dated April 13, 1998.
All documents and reports filed by Paragon or Mariner, pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meetings
v
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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 PARAGON AND MARINER 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 PARAGON COMMON STOCK OR MARINER
COMMON STOCK, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED UPON
RECEIPT OF WRITTEN OR ORAL REQUEST (IN THE CASE OF PARAGON INFORMATION) TO
PARAGON HEALTH NETWORK, INC., ONE RAVINIA DRIVE, SUITE 1500, ATLANTA, GEORGIA
30346, ATTN: SECRETARY (TELEPHONE NUMBER (770) 393-0199) OR (IN THE CASE OF
MARINER INFORMATION) TO MARINER HEALTH GROUP, INC., 1881 WORCESTER ROAD,
FRAMINGHAM, MASSACHUSETTS 01701, ATTN: SECRETARY (TELEPHONE NUMBER (508) 598-
8106). IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS
SHOULD BE MADE NO LATER THAN JULY 20, 1998, WHICH IS SIX BUSINESS DAYS BEFORE
THE SPECIAL MEETINGS.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION...................................................... iv
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................. iv
INCORPORATION OF DOCUMENTS BY REFERENCE.................................... v
Documents Incorporated by Paragon........................................ v
Documents Incorporated by Mariner........................................ v
SUMMARY.................................................................... 1
RISK FACTORS............................................................... 22
PARAGON SPECIAL MEETING.................................................... 29
General.................................................................. 29
Record Date, Voting Rights and Vote Required............................. 29
Proxies; Revocation of Proxies........................................... 30
MARINER SPECIAL MEETING.................................................... 32
General.................................................................. 32
Record Date, Voting Rights and Vote Required............................. 32
Proxies; Revocation of Proxies........................................... 33
THE MERGER................................................................. 34
General.................................................................. 34
Closing; Effective Time.................................................. 34
Exchange of Stock Certificates........................................... 34
Background of the Merger................................................. 35
Reasons for the Merger; Recommendations of the Boards of Directors....... 38
Opinion of Morgan Stanley & Co. Incorporated............................. 43
Opinion of BT Alex. Brown Incorporated................................... 47
Delisting and Deregistration of Mariner Common Stock..................... 51
THE MERGER AGREEMENT....................................................... 52
General.................................................................. 52
Merger Consideration..................................................... 52
Exchange of Certificates................................................. 52
Conditions to the Consummation of the Merger............................. 52
Accounting Treatment..................................................... 54
Certain Federal Income Tax Consequences.................................. 54
Governmental and Regulatory Approvals.................................... 56
Other Approvals and Consents............................................. 56
Effect on Mariner Employee Benefit Plans and Employee Agreements......... 56
Indemnification and Insurance............................................ 56
Mariner Stock Options.................................................... 57
Restrictions on Resales by Affiliates.................................... 58
Conduct of Business of Mariner Prior to the Merger....................... 58
Conduct of Business of Paragon Prior to the Merger....................... 59
No Solicitation of Acquisition Transactions.............................. 60
Termination.............................................................. 61
Termination Fees; Expenses............................................... 62
Amendment and Waiver..................................................... 63
Representations and Warranties........................................... 63
CERTAIN OTHER AGREEMENTS................................................... 63
Mariner Voting Agreement................................................. 63
Paragon Voting Agreement................................................. 64
Mariner Option Agreement................................................. 65
Paragon Option Agreement................................................. 65
DESCRIPTION OF FINANCING ARRANGEMENTS...................................... 67
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................. 69
Stratton Employment Agreement............................................ 69
Amendment to Pitts' Employment Agreement................................. 69
Mariner Executive Employment Agreements with Messrs. Hansen and Diaz..... 69
Continuing Indemnification of Mariner's Directors and Officers........... 70
Continued Employment and Other Relationships............................. 70
</TABLE>
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<TABLE>
<S> <C>
Options.................................................................. 70
Management and Share Ownership........................................... 71
Agreements with Apollo................................................... 71
Certain Arrangements with the Kelletts and Their Affiliates.............. 72
INFORMATION CONCERNING PARAGON............................................. 74
INFORMATION CONCERNING MARINER............................................. 75
DIRECTORS AND EXECUTIVE OFFICERS OF COMBINED COMPANY FOLLOWING THE MERGER.. 76
PROPOSAL TO AMEND THE PARAGON CHARTER TO CHANGE PARAGON'S NAME............. 80
Vote Required for Approval............................................... 80
Paragon Board Recommendation............................................. 80
PROPOSAL TO AMEND THE PARAGON CHARTER TO INCREASE THE NUMBER OF AUTHORIZED
SHARES OF COMMON STOCK.................................................... 80
Vote Required for Approval............................................... 81
Paragon Board Recommendation............................................. 81
PROPOSAL TO AMEND THE PARAGON 1997 LONG-TERM INCENTIVE PLAN................ 82
Vote Required for Approval............................................... 82
Paragon Board Recommendation............................................. 82
PARAGON HEALTH NETWORK, INC. PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS................................................................ 83
Paragon Health Network, Inc. Pro Forma Condensed Consolidated Balance
Sheet................................................................... 84
Paragon Health Network, Inc. Pro Forma Condensed Consolidated Statement
of Income Year Ended September 30, 1997................................. 86
Paragon Health Network, Inc. Pro Forma Condensed Consolidated Statement
of Income Six Months Ended March 31, 1998............................... 88
Paragon Health Network, Inc. Pro Forma Condensed Consolidated Statement
of Income Reflecting the Merger of Living Centers of America, Inc. and
GranCare, Inc. Six Months Ended March 31, 1998.......................... 89
DESCRIPTION OF PARAGON CAPITAL STOCK....................................... 90
Paragon Common Stock..................................................... 90
Preferred Stock.......................................................... 90
COMPARISON OF STOCKHOLDER RIGHTS........................................... 90
General.................................................................. 90
Classified Board of Directors............................................ 91
Number of Directors; Removal of Directors; Filling Vacancies on the Board
of Directors............................................................ 91
Adjournment and Notice of Stockholder Meetings........................... 92
Call of Special Stockholder Meetings..................................... 93
Stockholder Consent in Lieu of Meeting................................... 93
Business Combinations.................................................... 93
Super-Majority Vote Requirements......................................... 94
Amendments to Bylaws..................................................... 94
LEGAL OPINIONS............................................................. 94
EXPERTS.................................................................... 95
STOCKHOLDER PROPOSALS...................................................... 95
GLOSSARY OF SELECT TERMS................................................... 96
LIST OF ANNEXES
</TABLE>
<TABLE>
<C> <S> <C>
Annex I -- Agreement and Plan of Merger (Merger Agreement)
Annex II -- Company Stock Option Agreement (Mariner Option
Agreement)
Annex III -- Parent Stock Option Agreement (Paragon Option
Agreement)
Annex IV -- Company Voting Agreement (Mariner Voting Agreement)
Annex V -- Parent Voting Agreement (Paragon Voting Agreement)
Annex VI -- Opinion of Morgan Stanley & Co. Incorporated
Annex VII -- Opinion of BT Alex. Brown Incorporated
Annex VIII -- Second Amended and Restated Certificate of
Incorporation of Mariner Post-Acute Network, Inc.
Annex IX -- Second Amended and Restated Bylaws of Mariner Post-
Acute Network, Inc.
</TABLE>
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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. Certain other terms used herein are defined
elsewhere in this Proxy Statement/Prospectus and a glossary of certain defined
items used herein appears beginning on page 96 hereof. 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 Paragon and
Mariner 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 22 hereof. Except where the
context otherwise indicates, all references to "Paragon" or "Mariner" are
intended to include the operating subsidiaries of Paragon or Mariner,
respectively, through which the services described herein are directly
provided.
THE COMPANIES
PARAGON. Paragon, through its various operating subsidiaries, is one of the
nation's leading providers of post-acute care. Paragon's continuum of post-
acute care services encompasses skilled nursing, sub-acute and medically
complex care, as well as a variety of related ancillary services. These
ancillary services include pharmacy, rehabilitation and hospital program
management. Paragon operates in 36 states with significant concentrations of
facilities and beds in its key markets. On a pro forma basis giving effect to
the LCA/GranCare/Apollo Mergers (as defined below) for the year ended September
30, 1997, and for the six months ended March 31, 1998, Paragon generated
revenues of approximately $1.9 billion and $977 million, respectively.
Paragon's operations are organized into four divisions: (i) post-acute care;
(ii) pharmaceutical services; (iii) rehabilitation services; and (iv) hospital
services. Paragon operates 336 skilled nursing and assisted living facilities
containing over 38,000 beds, as well as 34 institutional pharmacies servicing
more than 100,000 beds. Paragon also operates over 150 outpatient
rehabilitation clinics and manages specialty medical programs in acute care
hospitals through more than 100 management contracts. In addition, Paragon
provides sub-acute care, home health, hospice and private duty nursing
services.
Paragon was formed on November 4, 1997, through the recapitalization of
Living Centers of America, Inc. ("LCA") pursuant to the merger of an affiliate
of Apollo Management, L.P., with and into LCA (in connection with which LCA
changed its name to "Paragon Health Network, Inc.") and the subsequent merger
of GranCare, Inc. ("GranCare") with a wholly-owned subsidiary of Paragon
(collectively, the "LCA/GranCare/Apollo Mergers") with GranCare continuing to
operate as a wholly owned subsidiary of Paragon.
MARINER. Mariner is a leading provider of outcome-oriented, post-acute health
care services in selected markets, with a particular clinical expertise in the
treatment of short-stay, sub-acute patients in cost-effective alternate sites.
Mariner's services and products include pre-acute care, inpatient care,
comprehensive inpatient and outpatient rehabilitation services, medical
services and products (including institutional and home pharmacy services,
respiratory and infusion therapy and durable medical equipment), home care and
physicians' services. By providing this continuum of care in selected markets,
Mariner believes that it is better able to maintain quality of care and to
control costs while coordinating the treatment of patients from the onset of
illness to recovery. Mariner seeks to cluster facilities and other post-acute
health care services around large metropolitan areas and major medical centers
with large acute-care hospitals from which to generate post-acute admissions.
Mariner currently operates or manages 93 inpatient facilities and 32 hospital
or skilled nursing facility units, with an aggregate of approximately 13,043
beds, and 43 outpatient rehabilitation clinics and, as of April 30, 1998,
provides contract rehabilitation services within 460 skilled nursing
facilities.
<PAGE>
Mariner has established standardized clinical programs based on defined
protocols to address the medical requirements of large groups of patients with
similar diagnoses in a high-quality, cost-effective manner. MarinerCare(R)
clinical programs, such as the orthopedic recovery, cardiac recovery and
pulmonary management programs, are short-stay regimens based on defined
protocols that address the needs of sub-acute patients. Sub-acute patients are
medically stable and generally require three to six hours of skilled nursing
care per day. MarinerCare(R) clinical programs typically involve 20 to 45 days
of inpatient care and utilize Mariner's nursing, rehabilitation, pharmacy and
other ancillary medical services, with patients generally discharged directly
to their homes. Mariner is also developing standardized clinical home care
programs. Mariner believes that careful adherence to its clinical programs
enables it to produce consistent and measurable clinical and financial outcomes
for patients and payors and to conduct clinical programs consistently in all of
its sites. Using a case management approach, patient progress is carefully
monitored so that the appropriate level of care is being delivered at the right
time and in the appropriate setting under the applicable clinical program.
Mariner believes that its standardized approaches to delivering care and
measuring outcomes are particularly attractive to managed care organizations
and large payors and position Mariner to contract with payors on a case rate or
capitated basis.
MERGER SUB. Merger Sub is a Delaware corporation and wholly-owned subsidiary
of Paragon. Merger Sub has no operations and was formed solely for the purpose
of effecting the Merger.
PARAGON SPECIAL MEETING
TIME, DATE AND PLACE; MATTERS TO BE CONSIDERED. The Paragon Special Meeting
is scheduled to be held at the Crowne Plaza Ravinia, 4355 Ashford Dunwoody
Road, N.E., Atlanta, Georgia 30346, on Tuesday, July 28, 1998, at 10:00 a.m.,
local time, to consider and vote upon: (i) the Stock Issuance Proposal; (ii)
the Name Change Proposal; (iii) the Amendment Proposal; (iv) the Paragon Plan
Proposal; and (v) such other matters as may be properly brought before the
Paragon Special Meeting. Only holders of record of shares of Paragon Common
Stock on the Paragon Record Date, will be entitled to receive notice of and to
vote at the Paragon Special Meeting.
REQUIRED VOTE; QUORUM. At the close of business on the Paragon Record Date,
there were 42,626,980 shares of Paragon Common Stock issued and outstanding,
each of which entitles the registered holder thereof to one vote except with
respect to 52,227 of such shares issuable in exchange for shares of common
stock of corporations acquired by Paragon in previous acquisitions and not yet
submitted for exchange. A majority of the issued and outstanding shares of
Paragon Common Stock entitled to vote, represented in person or by proxy, will
constitute a quorum at the Paragon Special Meeting.
At the close of business on the Paragon Record Date, Paragon directors and
executive officers owned an aggregate of 950,577 shares of Paragon Common
Stock, or approximately 2.2% of the then issued and outstanding shares of
Paragon Common Stock (excluding shares of Paragon Common Stock beneficially
owned by the Apollo Investors). In addition, as of the Paragon Record Date,
17,777,778 shares, or approximately 42%, of Paragon's Common Stock was
beneficially owned by Apollo Management, L.P., Apollo Investment Fund III,
L.P., Apollo UK Partners III, L.P. and Apollo Overseas Partners III, L.P.
(collectively, "Apollo") and certain other investors (together with Apollo, the
"Apollo Investors"). Apollo has agreed to vote all shares of Paragon Common
Stock beneficially owned by the Apollo Investors for the Stock Issuance
Proposal and has indicated that it intends to vote such shares in favor of the
other Paragon Proposals. The directors of Paragon, who, as of the Paragon
Record Date, beneficially owned approximately 2.2% of the issued and
outstanding shares of Paragon Common Stock (excluding shares of Paragon Common
Stock beneficially owned by the Apollo Investors), have indicated to Paragon
that they intend to vote their shares for the Stock Issuance Proposal, as well
as the other Paragon Proposals. See "Certain Other Agreements--Paragon Voting
Agreement."
Approval of the Stock Issuance Proposal and the Paragon Plan Proposal will
require the affirmative vote of the holders of a majority of the shares of
Paragon Common Stock represented in person or by proxy and entitled to vote at
the Paragon Special Meeting. Approval of the Name Change Proposal and the
Amendment Proposal will require the affirmative vote of a majority of the
issued and outstanding shares of Paragon Common Stock. If
2
<PAGE>
a stockholder does not return a properly executed proxy and does not attend and
vote at the Paragon Special Meeting, such stockholder's shares will not be
voted, which will have the same effect as a vote against the Name Change
Proposal and the Amendment Proposal. Abstentions and broker non-votes (which
are included in the determination of the size of the quorum) will have the
effect of a vote against any proposal to which the abstention or non-vote
relates. Consummation of the Merger is contingent on approval of the Merger
Proposals by the stockholders of Paragon and Mariner, respectively. See
"Paragon Special Meeting--Record Date, Voting Rights and Vote Required" and "--
Proxies; Revocation of Proxies."
PARAGON BOARD RECOMMENDATION
The Paragon Board recommends that stockholders of Paragon vote FOR each of
the Paragon Proposals.
MARINER SPECIAL MEETING
TIME, DATE AND PLACE; MATTERS TO BE CONSIDERED. The Mariner Special Meeting
is scheduled to be held at State Street Bank & Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110, on Tuesday, July 28, 1998, at 10:00 a.m.,
local time, to consider and vote upon: (i) the Mariner Merger Proposal; and
(ii) such other matters as may be properly brought before the Mariner Special
Meeting. Only holders of record of shares of Mariner Common Stock on the
Mariner Record Date will be entitled to notice of and to vote at the Mariner
Special Meeting.
REQUIRED VOTE; QUORUM. At the close of business on the Mariner Record Date,
there were 29,574,385 shares of Mariner Common Stock issued and outstanding,
each of which entitles the registered holder thereof to one vote. A majority of
the issued and outstanding shares of Mariner Common Stock entitled to vote,
represented in person or by proxy, will constitute a quorum at the Mariner
Special Meeting.
As of the Mariner Record Date, 6,052,771 shares, or approximately 21% of the
issued and outstanding shares of Mariner Common Stock, were owned by Stiles A.
Kellett, Jr., Samuel B. Kellett, William R. Bassett, in his capacity as Trustee
for both the Charlotte R. Kellett Irrevocable Trust and the Samuel B. Kellett,
Jr. Irrevocable Trust, and Kellett Partners, L.P. (the "Kellett Group"). At the
close of business on the Mariner Record Date, Mariner directors (excluding
members of the Kellett Group) and executive officers owned an aggregate of
259,454 shares of Mariner Common Stock, or less than 1.0% of the then
outstanding shares of Mariner Common Stock. The members of the Kellett Group
and Arthur W. Stratton, Jr., M.D., Mariner's Chairman of the Board, President
and Chief Executive Officer, have agreed to vote all shares of Mariner Common
Stock owned by them for the Mariner Merger Proposal. The officers and directors
(including members of the Kellett Group) of Mariner who, as of the Mariner
Record Date, owned approximately 18.5% of the issued and outstanding Mariner
Common Stock, have agreed to vote, or indicated their intent to vote their
shares of Mariner Common Stock for the Mariner Merger Proposal. See "Certain
Other Agreements--Mariner Voting Agreement."
Approval and adoption of the Mariner Merger Proposal will require the
affirmative vote of the holders of a majority of the issued and outstanding
shares of Mariner Common Stock. A failure to vote, including by abstention or
non-vote (including a broker non-vote), will have the same effect as a vote
against the Mariner Merger Proposal. Consummation of the Merger is contingent
on approval of the Merger Proposals by the stockholders of Paragon and Mariner,
respectively. See "Mariner Special Meeting--Record Date; Voting Rights and
Votes Required" and "--Proxies; Revocation of Proxies."
MARINER BOARD RECOMMENDATION.
The Mariner Board unanimously recommends that stockholders of Mariner vote
FOR the Mariner Merger Proposal.
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RISK FACTORS
In considering whether to vote in favor of the Merger Proposals or any of the
other proposals described herein, the stockholders of Paragon and Mariner, as
applicable, should consider the following: (i) Paragon will continue to have a
substantial amount of debt and a high degree of "leverage," and a significant
portion of such debt will bear interest at variable rates; (ii) as of the
Paragon Record Date and Mariner Record Date, on a pro forma basis after giving
effect to the Merger, the Apollo Investors and the Kellett Group would own
approximately 24.6% and 8.4%, respectively, of the issued and outstanding
Paragon Common Stock, and Apollo will have the right to designate five nominees
for election to the Paragon Board and will continue to have the ability to
exert substantial influence over Paragon; and (iii) there can be no assurance
that management of the combined company will be successful in integrating the
operations of Paragon and Mariner or achieving all or any significant portion
of the currently anticipated synergies from the Merger. For additional
information on these and other factors to consider before deciding on the
Merger Proposals or any of the other proposals described herein, see "Risk
Factors."
THE MERGER
Subject to the approval of the Merger Proposals by Paragon's stockholders and
Mariner's stockholders and the satisfaction or waiver of certain other
conditions, the Merger Agreement provides that at the Effective Time of the
Merger (which under the terms of the Merger Agreement is the time that a
certificate of merger ("Certificate of Merger") is filed with the Secretary of
State of the State of Delaware and becomes effective under law): (i) Merger Sub
will merge with and into Mariner, with Mariner surviving and continuing as a
wholly-owned subsidiary of Paragon; and (ii) each share of Mariner Common Stock
issued and outstanding prior to the Effective Time of the Merger will be
converted as of the Effective Time of the Merger into the right to receive one
share of Paragon Common Stock.
PARAGON'S REASONS FOR THE MERGER AND RECOMMENDATION OF THE PARAGON BOARD. The
Paragon Board, by action of the directors present, unanimously recommends that
the Paragon stockholders vote FOR the approval of the Stock Issuance Proposal
and the other Paragon Proposals.
In its deliberations and in making its determination and recommendation, the
Paragon Board considered a number of factors including, among others, the
following principal factors: (i) the Paragon Board's knowledge of the business
and prospects of Mariner and the complementary geographic relationship between
Paragon's and Mariner's various skilled nursing and inpatient facilities as
well as the complementary strengths of their respective ancillary services
operations; (ii) the assessment of the Paragon Board of certain impending
changes in the health care industry and the ability of Paragon and the ability
of the combined company to adapt to such changes; (iii) the enhanced trading
liquidity expected to result from the increased number of shares of Paragon
Common Stock outstanding; (iv) the various strategic alternatives available to
Paragon, including continuing without any extraordinary transactions; (v) the
expected accretion to Paragon's earnings per share and the deleveraging effect
of the transaction on Paragon's balance sheet in terms of various benchmark
credit ratios; (vi) the presentation of Morgan Stanley & Co. Incorporated
("Morgan Stanley") and its oral opinion that as of April 12, 1998, and based
upon and subject to the assumptions made, procedures followed, matters
considered and limitations on the review undertaken, as set forth in its
written opinion, the Exchange Ratio pursuant to the Merger Agreement is fair
from a financial point of view to Paragon; (vii) the terms and conditions of
the Merger Agreement; (viii) the terms and conditions of the Voting Agreement,
dated as of April 13, 1998, by and among Paragon and certain stockholders of
Mariner and attached as Annex IV hereto (the "Mariner Voting Agreement"); (ix)
the terms and conditions of the Company Stock Option Agreement, dated as of
April 13, 1998, by and between Paragon and Mariner, attached as Annex II hereto
(the "Mariner Option Agreement"); and (x) the terms and conditions of the
Parent Stock Option Agreement, dated as of April 13, 1998, by and between
Paragon and Mariner, attached as Annex III hereto (the "Paragon Option
Agreement"). See "The Merger--Reasons for the Merger; Recommendations of the
Boards of Directors."
MARINER'S REASONS FOR THE MERGER AND RECOMMENDATION OF THE MARINER BOARD. The
Mariner Board unanimously recommends that the Mariner stockholders vote FOR the
approval of the Mariner Merger Proposal.
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In its deliberations and in making its determination and recommendation, the
Mariner Board considered a number of factors including, among others, the
following principal factors: (i) the Mariner Board's knowledge of the business
and prospects of Mariner and Paragon, including the complementary geographic
locations of their inpatient facilities and ancillary services operations and
the complementary strengths of their ancillary services operations; (ii) the
Mariner Board's assessment of changes in the health care industry and the
ability of Mariner and the combined company to adapt to such changes; (iii) the
opportunity of the combined company to achieve significant potential synergies
in terms of revenue enhancements and cost savings; (iv) the opportunities for
the combined company to further certain of Mariner's strategic objectives and
the opportunity for Mariner's stockholders to participate in benefits resulting
therefrom; (v) the leveraged financial model of the combined company, which
holds potential for favorable earnings per share growth comparisons and a
higher long-term earnings per share growth rate than Mariner; (vi) the strength
of the combined management of the combined company; (vii) the opinion of BT
Alex. Brown Incorporated ("BT Alex. Brown") that as of April 13, 1998, based
upon the facts and circumstances as they existed at that time, and subject to
certain assumptions and factors set forth in such opinion, the Exchange Ratio
is fair, from a financial point of view, to the holders of Mariner Common
Stock, see "The Merger--Opinion of BT Alex. Brown Incorporated;" (viii) the
terms and conditions of the Merger Agreement; the Voting Agreement dated as of
April 13, 1998 by and among Mariner and certain stockholders of Paragon
attached as Annex V hereto (the "Paragon Voting Agreement"), the Mariner Option
Agreement and the Paragon Option Agreement; and (ix) the anticipated tax
treatment of the Merger to Mariner's stockholders. See "The Merger--Reasons for
the Merger; Recommendations of the Boards of Directors."
OPINION OF MORGAN STANLEY & CO. INCORPORATED
Morgan Stanley has delivered its written opinion to the Paragon Board, dated
April 13, 1998, to the effect that, on the date of such opinion, and based upon
and subject to the assumptions made, procedures followed, matters considered
and limitations on the review undertaken, as set forth in the opinion, the
Exchange Ratio pursuant to the Merger Agreement was fair from a financial point
of view to Paragon. See "The Merger--Opinion of Morgan Stanley & Co.
Incorporated." Morgan Stanley's written opinion is attached as Annex VI to this
Proxy Statement/Prospectus. Paragon's stockholders are urged to, and should,
read the Morgan Stanley opinion carefully and in its entirety.
OPINION OF BT ALEX. BROWN INCORPORATED
BT Alex. Brown has delivered its written opinion to the Mariner Board, dated
April 13, 1998, that, as of such date, based upon the facts and circumstances
as they existed at that time, and subject to certain assumptions and factors
set forth in such opinion, the Exchange Ratio was fair from a financial point
of view to the holders of Mariner Common Stock. See "The Merger--Opinion of BT
Alex. Brown Incorporated." BT Alex. Brown's written opinion is attached as
Annex VII to this Proxy Statement/Prospectus. Holders of Mariner Common Stock
are urged to read the written opinion of BT Alex. Brown carefully and in its
entirety. See "The Merger--Opinion of BT Alex. Brown Incorporated."
THE MERGER AGREEMENT
Paragon, Mariner and Merger Sub have entered into the Merger Agreement
(attached hereto as Annex I), which provides that Merger Sub will merge with
and into Mariner, with Mariner surviving and continuing as a wholly-owned
subsidiary of Paragon.
Each share of Mariner Common Stock outstanding as of the Effective Time of
the Merger will be converted into the right to receive one share of Paragon
Common Stock.
CONDITIONS TO THE CONSUMMATION OF THE MERGER. The respective obligations of
each party to effect the Merger are subject to the satisfaction or, in certain
cases, waiver, of numerous conditions, including the following: (i) the
respective Merger Proposals shall have been approved by the requisite vote of
the holders of Paragon Common Stock and Mariner Common Stock; (ii) no statute,
rule, regulation, executive order, decree or
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injunction shall have been enacted by any court or governmental authority
against Paragon, Merger Sub or Mariner that prohibits, restricts or makes
illegal the Merger; (iii) the Registration Statement shall have become
effective and any required post-effective amendment shall have become effective
under the Securities Act and other state securities laws applicable to the
registration of Paragon Common Stock shall have been complied with; (iv) the
waiting period applicable to the consummation of the Merger under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
shall have expired or been terminated, and all material filings required to be
made with, and all material consents, approvals, authorizations and permits
required to be obtained from, any governmental authority prior to the Effective
Time of the Merger in connection with the consummation of the Merger shall have
been made or obtained; and (v) each of Paragon and Mariner shall have received
an opinion from its respective counsel to the effect that the Merger will
qualify as a reorganization pursuant to Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), and that Paragon, Mariner, and Merger
Sub will each be a "party to a reorganization" within the meaning of Section
368(b) of the Code.
The obligation of Mariner to effect the Merger also is subject to the
satisfaction, or waiver by Mariner, 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 Merger or render Mariner unable to effect the Merger and 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 foregoing consequences; (ii)
since April 13, 1998, no change shall have occurred that would constitute an
Omnibus Parent Material Adverse Event (as defined in the Merger Agreement);
(iii) there shall be no proceeding or other action pending or threatened
against Paragon or its subsidiaries which is reasonably likely to have a
Material Adverse Effect (as defined in the Merger Agreement); and (iv) Paragon
shall have entered into definitive financing agreements to refinance all
indebtedness of Mariner, Paragon and their respective subsidiaries that may
become due and payable as a result of the Merger. See "The Merger Agreement--
Conditions to the Consummation of the Merger."
The obligations of Paragon and Merger Sub to effect the Merger are subject to
the satisfaction, or waiver by Paragon and Merger Sub, 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 Merger or render Paragon or Merger Sub unable to effect
the Merger and 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
foregoing consequences; (ii) there shall be no proceeding or other action
pending or threatened against Mariner or its subsidiaries which is reasonably
likely to have a Material Adverse Effect; and (iii) since April 13, 1998, no
change shall have occurred that would constitute an Omnibus Company Material
Adverse Event (as defined in the Merger Agreement). See "The Merger Agreement--
Conditions to the Consummation of the Merger."
MARINER STOCK OPTIONS. In order to: (i) reduce the potential dilutive effect
of the outstanding options to purchase shares of Mariner Common Stock which
would otherwise be converted into options to purchase Paragon Common Stock; and
(ii) better align the option grants of Mariner executives and other Mariner
employees continuing with the combined company with those of Paragon officers
and other Paragon employees with similar positions, the Paragon Board wanted to
terminate all options to purchase Mariner Common Stock and, to the extent the
Paragon Board deemed appropriate, grant options to purchase Paragon Common
Stock to Mariner executives continuing with the combined company. Accordingly,
Paragon requested that the outstanding options to purchase shares of Mariner
Common Stock be terminated in connection with the Merger in exchange for cash
payments. As part of the comprehensive proposal to resolve all the then
outstanding issues made by the Paragon Board to the Mariner Board on April 12,
1998, the Paragon Board required as a term of the Merger that the Mariner Board
exercise its authority to terminate the outstanding options granted under
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Mariner's 1992 Stock Option Plan and 1994 Stock Plan in exchange for the cash
payments described below, and that only options that the Mariner Board could
not terminate would be assumed by Paragon in the Merger. In the context of
resolving all the then outstanding issues, the Mariner Board accepted the
comprehensive proposal, including the proposal regarding the treatment of the
outstanding options to purchase shares of Mariner Common Stock. At the
Effective Time of the Merger, each option to purchase shares of Mariner Common
Stock issued pursuant to Mariner's 1992 Stock Option Plan and the 1994 Stock
Plan (the "Cash Payment Options"), whether or not vested, shall constitute the
right to receive a cash payment equal to the product of: (i) the average of the
last reported sales prices per share of Paragon Common Stock for the five
trading days ending on the day immediately preceding the Closing Date (as
defined in the Merger Agreement) less the per share exercise price required by
such Cash Payment Option; provided, however, that in the event such average
price is (X) less than $20, then such average price shall be deemed to be $20
or (Y) more than $22 then such average price shall be deemed to be $22; and
(ii) the number of shares subject to such Cash Payment Option. Options issued
pursuant to the 1995 Non-Employee Director Stock Option Plan, as well as
options and warrants to purchase Mariner Common Stock assumed or granted by
Mariner in connection with historical transactions or otherwise (collectively,
the "Assumed Options") will be assumed by Paragon and will constitute options
to acquire, on the same terms and conditions as were applicable under such
Assumed Options, the number of shares of Paragon Common Stock equal to the
number of shares of Mariner Common Stock subject to such Assumed Option at a
price per share equal to the per share exercise price of such Assumed Option.
See "The Merger Agreement--Mariner Stock Options."
NO SOLICITATION OF ACQUISITION TRANSACTIONS. Paragon and Mariner have each
agreed not to initiate, solicit or encourage, directly or indirectly, any
discussions or negotiations with respect to a Paragon Acquisition Transaction
(as defined below in "The Merger Agreement--No Solicitation of Acquisition
Transactions") or a Mariner Acquisition Transaction (as defined below in "The
Merger Agreement--No Solicitation of Acquisition Transactions"), respectively.
See "The Merger Agreement--No Solicitation of Acquisition Transactions."
TERMINATION. The Merger Agreement may be terminated either: (i) by the mutual
consent of the Paragon Board and the Mariner Board; (ii) by either party if the
Merger is not consummated on or before December 31, 1998; (iii) by either party
if any court of competent jurisdiction in the United States or other
governmental body in the United States shall have issued an order (other than a
temporary restraining order), decree, judgment, or ruling or taken any other
action restraining, enjoining or otherwise prohibiting the Merger that has
become final and non-appealable; or (iv) by either party if the approval of the
Merger Proposals by Paragon stockholders or Mariner stockholders is not
obtained.
In addition, Mariner may terminate the Merger Agreement if any of the
following occurs: (i) at any time prior to the Closing Date an Omnibus Parent
Material Adverse Event shall have occurred or Paragon or Merger Sub shall have
breached or failed to comply in any material respect with any of their
obligations under the Merger Agreement and, in each case, such Omnibus Parent
Material Adverse Event or such breach or failure shall continue unremedied for
10 days after Paragon or Merger Sub has received written notice from Mariner of
the occurrence of such breach or failure; (ii) prior to the approval of the
Stock Issuance Proposal by the stockholders of Paragon, the Paragon Board
withdraws or modifies its favorable recommendation of the Merger or recommends
that Paragon enter into a definitive agreement with respect to a Paragon
Acquisition Transaction with a party other than Mariner; or (iii) prior to the
Effective Time of the Merger, Mariner receives a written offer with respect to
a Mariner Acquisition Transaction with a party other than Paragon or its
affiliates or such other party has commenced a tender offer which, in either
case, the Mariner Board determines in good faith is more favorable to Mariner's
stockholders than the Merger. See "The Merger Agreement--Termination."
Paragon may terminate the Merger Agreement if any of the following occurs:
(i) at any time prior to the Closing Date an Omnibus Company Material Adverse
Event shall have occurred or Mariner shall have breached or failed to comply in
any material respect with any of its obligations under the Merger Agreement
and, in each case, such Omnibus Company Material Adverse Event or such breach
or failure shall continue unremedied for 10 days after Mariner has received
written notice from Paragon or Merger Sub of the occurrence of such breach
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or failure; (ii) prior to the approval of the Mariner Merger Proposal by the
stockholders of Mariner, the Mariner Board withdraws or modifies its favorable
recommendation of the Merger or recommends that Mariner enter into a definitive
agreement with respect to a Mariner Acquisition Transaction with a party other
than Paragon; or (iii) prior to the Effective Time of the Merger, Paragon
receives a written offer with respect to a Paragon Acquisition Transaction with
a party other than Mariner or its affiliates or such other party has commenced
a tender offer which, in either case, the Paragon Board determines in good
faith is more favorable to Paragon's stockholders than the Merger. See "The
Merger Agreement--Termination."
ACCOUNTING TREATMENT. The Merger will be treated by Paragon for accounting
purposes in accordance with the rules for purchase accounting. Accordingly, the
assets and liabilities of Mariner 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 Paragon Health Network, Inc. Pro Forma
Condensed Consolidated Financial Statements," included elsewhere in this Proxy
Statement/Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. Powell, Goldstein, Frazer & Murphy
LLP, counsel to Paragon, and Testa, Hurwitz & Thibeault, LLP, counsel to
Mariner, have delivered to Paragon and Mariner, respectively, their opinions,
based upon customary representations of Paragon and Mariner, respectively,
that: (i) the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code; and (ii) Paragon, Mariner, and Merger Sub will each
be a "party to a reorganization" within the meaning of Section 368(b) of the
Code with respect to the Merger. Accordingly, no gain or loss will be
recognized by Paragon, Mariner, and Merger Sub, or by the holders of Mariner
Common Stock. See "The Merger Agreement--Certain Federal Income Tax
Consequences."
AMENDMENT AND WAIVER. At any time prior to the Effective Time of the Merger,
each of the parties to the Merger Agreement may by action taken by their
respective Boards of Directors: (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 Merger Agreement may be amended
by the parties at any time by action taken by their respective Boards of
Directors before or after approval of the Merger Proposals by the stockholders
of Paragon or Mariner; provided that no amendment may be made after such
stockholder approval that decreases the Exchange Ratio or that otherwise
adversely affects the rights of the Mariner stockholders, without the approval
by the affirmative vote of the holders of a majority of the issued and
outstanding shares of Mariner Common Stock. 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 Mariner stockholders, and proxies
will be resolicited. If, following stockholder approval, any waiver is
contemplated, the Paragon Board or the Mariner 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 Merger
Agreement--Amendment and Waiver."
CERTAIN OTHER AGREEMENTS
PARAGON VOTING AGREEMENT AND MARINER VOTING AGREEMENT. Apollo has entered
into a Voting Agreement, dated as of April 13, 1998, with Mariner (the "Paragon
Voting Agreement"), under which Apollo has agreed to vote all shares of Paragon
Common Stock beneficially owned by the Apollo Investors in favor of the Stock
Issuance Proposal and against transactions that may be deemed competitive or an
impediment to the Merger. Under the terms of the Paragon Voting Agreement,
Apollo has agreed to: (i) certain restrictions on the transfer of the shares of
Paragon Common Stock held by the Apollo Investors and on their ability to enter
into voting trusts or voting agreements with respect to such shares; and (ii)
refrain from directly or indirectly facilitating or encouraging any transaction
which may be deemed competitive with the Merger. See "Certain Other
Agreements--Paragon Voting Agreement." The Kellett Group and Dr. Stratton have
entered into a Voting
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Agreement, dated as of April 13, 1998, with Paragon (the "Mariner Voting
Agreement") containing terms similar to those described with respect to the
Paragon Voting Agreement. See "Certain Other Agreements--Mariner Voting
Agreement."
PARAGON OPTION AGREEMENT AND MARINER OPTION AGREEMENT. In connection with the
Merger Agreement, Paragon and Mariner entered into the Paragon Option Agreement
and the Mariner Option Agreement under which each has granted the other an
option to purchase shares of its common stock equal to 19.9% of the total
number of shares of its common stock issued and outstanding as of April 13,
1998, at an exercise price of $19.75 per share. Each such option becomes
exercisable in the event the Merger Agreement is terminated under circumstances
where the party granting the option is required to pay a Termination Fee (as
defined in the Merger Agreement) and within 12 months of such termination, a
Purchase Event (as defined in the Paragon Option Agreement and Mariner Option
Agreement) occurs. Upon becoming exercisable, the relevant option will remain
exercisable for a period of 12 months following the occurrence of the Purchase
Event. In the event the option granted to either Paragon or Mariner becomes
exercisable, Paragon or Mariner, as the case may be, is granted the right to
make up to two demands for registration pursuant to which the other party will
be required to promptly prepare, file and keep current a registration statement
under the Securities Act, covering shares issuable pursuant to the applicable
option agreement. See "Certain Other Agreements--Paragon Option Agreement" and
"--Mariner Option Agreement."
DESCRIPTION OF FINANCING ARRANGEMENTS
PARAGON AND MARINER SENIOR CREDIT ARRANGEMENTS. Consummation of the Merger
will require the consent of the lenders under (i) the Credit Agreement, dated
as of November 4, 1997 (as amended, the "Paragon Credit Agreement"), by and
among Paragon, the lenders signatory thereto (the "Paragon Lenders"), The Chase
Manhattan Bank, as administrative agent (the "Paragon Administrative Agent"),
swing line lender and letter of credit bank, and NationsBank, N.A., as
documentation agent, and (ii) the Credit Agreement, dated as of May 18, 1994
(as amended and restated through and including Amendment No. 16 thereto dated
as of January 2, 1998, the "Mariner Credit Agreement"), by and among Mariner,
the lenders signatory thereto (the "Mariner Lenders"), and PNC Bank, National
Association, as agent for the Mariner Lenders (the "Mariner Agent"). In
connection with obtaining such consents, Paragon intends to structure the
financing arrangements of Paragon and Mariner such that Mariner and its
subsidiaries would not guarantee Paragon's obligations under the Paragon Credit
Agreement or pledge their assets to secure such obligations. In addition,
Mariner and its subsidiaries would not be subject to the covenants contained in
the Paragon Credit Agreement and the covenants contained in the Mariner Credit
Agreement would not be binding on Paragon and its non-Mariner subsidiaries.
Furthermore, Paragon intends to seek additional amendments to permit Paragon to
make investments in Mariner and to permit Mariner to pay dividends and make
other restricted payments to Paragon. Paragon is also discussing with the
Paragon Administrative Agent the possibility of either providing an additional
$100 million credit facility or increasing the credit facility commitment under
the Paragon Credit Agreement to fund Paragon's investment in Mariner and to
permit payments to be made to the holders of the Cash Payment Options, as well
as providing additional liquidity to Paragon for general corporate purposes.
See "Description of Financing Arrangements."
MARINER 9 1/2% SENIOR SUBORDINATED NOTES. Pursuant to the terms of the
Indenture dated as of April 4, 1996, by and between Mariner and State Street
Bank and Trust Company, as trustee (the "Mariner Indenture"), pertaining to
$150 million aggregate principal amount of Mariner's 9 1/2% Senior Subordinated
Notes Due 2006 (the "Mariner Notes"), Mariner is required to give written
notice to the holders of the Mariner Notes of the occurrence of a "change of
control" of Mariner. The Merger will constitute a "change of control" under the
Mariner Indenture. As a result, the holders of the Mariner Notes have the right
to require Mariner to repurchase the outstanding Mariner Notes at a purchase
price in cash equal to 101% of the principal amount of the outstanding Mariner
Notes plus accrued and unpaid interest, if any, to the date of repurchase.
Paragon is in the process of arranging a committed facility to provide
liquidity to cover the maximum amount of this contingent obligation. See
"Description of Financing Arrangements."
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OTHER APPROVALS AND CONSENTS
In certain instances, the Merger will require the consent of third-parties.
The inability of Paragon or Mariner to obtain certain of such consents could
adversely affect Paragon's or Mariner's ability to consummate the Merger. For
further information, see "Description of Financing Arrangements."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Mariner's and Paragon's management and the Mariner Board
and Paragon Board may be deemed to have interests in the Merger, in addition to
their interests as Mariner or Paragon stockholders generally, including: (i)
the acceleration of the vesting of currently unvested Assumed Options as a
result of the consummation of the Mergers as described under "The Merger
Agreement--Mariner Stock Options;" (ii) the right of holders of Cash Payment
Options, whether or not vested, to receive a cash payment at a price that may
be greater or less than the price received by other stockholders upon
cancellation of such options as of the Effective Time of the Merger (see "The
Merger Agreement--Mariner Stock Options" and "Interests of Certain Persons in
the Merger--Options"); (iii) the indemnification provisions of the Merger
Agreement regarding indemnification of, and the obligation of Paragon to
maintain directors' and officers' liability insurance for, current Mariner
directors and officers and certain other persons as described under "The Merger
Agreement--Effect on Mariner Employee Benefit Plans and Employee Agreements;"
(iv) the right of certain officers to receive certain payments under their
employment agreements with Mariner if no longer employed following the
Effective Time of the Merger as described under "Interests of Certain Persons
in the Merger--Mariner Executive Employment Agreements with Messrs. Hansen and
Diaz;" (v) certain amendments to certain of the arrangements, and the
resolution of certain disputes, between Mariner (or Mariner affiliates) and
certain members of the Kellett Group and their affiliates as described under
"Interests of Certain Persons in the Merger--Certain Agreements with the
Kelletts and Their Affiliates;" (vi) the benefits to be received by Dr.
Stratton under the terms of his new employment agreement with Paragon and the
conforming changes to Mr. Pitts' employment agreement with Paragon, dated as of
November 4, 1997, contemplated in order to bring Mr. Pitts' compensation into
parity with Dr. Stratton's compensation, as described under "Interests of
Certain Persons in the Merger--Stratton Employment Agreement" and "--Amendment
to Pitts' Employment Agreement;" (vii) Paragon's intention to enter into
arrangements with certain other of Mariner's executives that provide for their
continued employment and benefits by Paragon (see "Interests of Certain Persons
in the Merger--Continued Employment"); (viii) two members of the Mariner Board
will become members of the Paragon Board (see "Directors and Executive Officers
of the Combined Company Following the Merger"); and (ix) the extension of time
in which Apollo can designate five nominees for election to the Paragon Board
as described under "Interests of Certain Persons in the Merger--Agreements with
Apollo." In addition to the foregoing, Keith B. Pitts, Paragon's Chairman,
President and Chief Executive Officer, is a party to certain stockholder and
proxy and voting agreements with the Apollo Investors, which agreements grant
Apollo an irrevocable proxy and certain other rights with respect to all shares
of Paragon Common Stock beneficially owned by Mr. Pitts. Mr. Pitts will be
released from his rights and obligations under these agreements as of the
Effective Time of the Merger. See "Interests of Certain Persons in the Merger--
Agreements with Apollo."
STRATTON EMPLOYMENT AGREEMENT. Paragon has entered into an employment
agreement with Dr. Stratton which becomes effective upon the consummation of
the Merger. Under the employment agreement, Dr. Stratton will serve as the
Vice-Chairman of the Board, Chief Operating Officer and President of the
combined company, reporting to the Chief Executive Officer of the combined
company. Dr. Stratton, who is currently expected to relocate his office to the
principal executive offices of the combined company in Atlanta, Georgia, will
have responsibility and authority to oversee the general operations of the
combined company and to assist the Chief Executive Officer in the formulation
of strategic policies, management and leadership of the combined company. The
employment agreement is for a four-year term, with annual automatic extensions
of the term for additional one-year periods unless Dr. Stratton or Paragon
elects not to have the term so extended. The employment
10
<PAGE>
agreement provides Dr. Stratton with a base salary of $850,000 per year,
subject to annual adjustment in the discretion of the Paragon Board, and
permits Dr. Stratton to earn a bonus of up to 150% of his annual base salary if
Paragon achieves certain financial targets established pursuant to an annual
bonus plan. In addition, immediately following the consummation of the Merger,
Paragon has agreed to award Dr. Stratton an option under the Long-Term
Incentive Plan to purchase 1,000,000 shares of Paragon Common Stock at an
exercise price per share equal to the fair market value of a share of Paragon
Common Stock as of the Effective Time of the Merger. In connection with the
termination of Dr. Stratton's employment agreement with Mariner, Paragon has
agreed to pay Dr. Stratton approximately $9.9 million plus a payment to cover
any excise taxes imposed by Section 4999 of the Code (plus any taxes thereon)
imposed on such payments. See "Interests of Certain Persons in the Merger--
Stratton Employment Agreement."
AMENDMENT TO PITTS' EMPLOYMENT AGREEMENT. Paragon intends to amend certain
terms of Mr. Pitts' current employment agreement with Paragon, dated as of
November 4, 1997, to provide for terms comparable to those discussed above in
connection with Dr. Stratton's employment agreement with Paragon with regard
to, among other things, base salary and term of the agreement.
AGREEMENTS WITH APOLLO. In connection with the Merger Agreement, certain of
the Apollo Investors and Paragon entered into an amendment to a Stockholders
Agreement, dated as of November 4, 1997, which amendment will become effective
at the Effective Time of the Merger. The amendment has the effect of reducing
from six to five the number of individuals Apollo is entitled to designate for
election as Paragon directors and extending the time during which Apollo can
designate such members to the Paragon Board, without regard to its pro rata
ownership of the issued and outstanding Paragon Common Stock, from November 4,
2000 to five years following the Effective Time of the Merger. See "Interests
of Certain Persons in the Merger--Agreements with Apollo."
CERTAIN AGREEMENTS WITH THE KELLETTS AND THEIR AFFILIATES. In connection with
the Kelletts' execution and delivery of the Mariner Voting Agreement, the
Kelletts, Mariner and Paragon agreed to use commercially reasonable best
efforts to resolve certain previously existing issues between the Kelletts and
Mariner. Subsequently, they have agreed to the following actions, which will
become effective as of the Effective Time of the Merger: (i) the existing
stockholders agreement among Mariner and the Kellett Group will be terminated;
(ii) certain issues relating to Mariner's contractual indemnification claims
against the Kelletts and certain of their affiliates will be resolved in favor
of the Kelletts and their affiliates; (iii) Mariner will agree to terminate
certain fixed-price options to purchase skilled nursing facilities it currently
leases from partnerships controlled by the Kelletts, if, at any time after the
Effective Time of the Merger, Mariner defaults under the applicable lease by
failing to pay any rent or other amounts due thereunder and, as a result of
such default, the lessor of the facility leased under such lease terminates
such lease in accordance with its terms; (iv) Mariner will extend the terms of
the leases on three of the 14 facilities it currently leases from partnerships
controlled by the Kelletts and the periods during which the fixed-price
purchase options thereon may be exercised; and (v) after the Mariner Credit
Agreement has been terminated and the indebtedness thereunder has been repaid
in full, Paragon will assume Mariner's obligations under the existing lease
payment guarantees and will provide similar lease payment guarantees to future
mortgage lenders to the partnerships controlled by the Kelletts that lease the
facilities to Mariner. See "Interests of Certain Persons in the Merger--Certain
Arrangements with the Kelletts and Their Affiliates."
PARAGON BOARD FOLLOWING THE MERGER
Following consummation of the Merger, the Paragon Board will be comprised of
11 members, including nine members from among the current members of the
Paragon Board and Dr. Stratton and Samuel B. Kellett, who are currently members
of the Mariner Board. In addition, pursuant to certain amendments to its rights
under the Apollo Stockholders Agreement (as defined herein), which will become
effective at the Effective Time of the Merger, Apollo's current right to
designate nominees for election as members of the Paragon Board will be reduced
to five nominees. See "Interests of Certain Persons in the Merger--Agreements
with Apollo." In addition, pursuant to the Merger Agreement, at the Effective
Time of the Merger, certain amendments to
11
<PAGE>
Paragon's Amended and Restated Bylaws (the "Paragon Bylaws") will become
effective. The amendments to the Paragon Bylaws will exempt from existing
supermajority voting requirements actions taken by the Paragon Board in
connection with certain transactions sponsored by a third party that would
constitute a change of control of Paragon and in which the sole consideration
offered by such third party is cash. See "Comparison of Stockholder Rights."
NO STOCKHOLDERS' RIGHTS OF APPRAISAL
Mariner stockholders will not have the right to an appraisal of the value of
their shares in connection with the Merger under the provisions of Section 262
of the General Corporation Law of the State of Delaware ("DGCL"). All of the
Paragon Common Stock issued and outstanding immediately prior to the Effective
Time of the Merger will remain outstanding following the Merger. Accordingly,
the stockholders of Paragon will not be entitled to appraisal rights under
Section 262 of the DGCL. See "Mariner Special Meeting."
STOCK EXCHANGE LISTING
Paragon has agreed to use commercially reasonable efforts to cause the
Paragon Common Stock that will be issued in connection with the Merger to be
listed for trading on the NYSE following the Effective Time of the Merger. If
the Name Change Proposal is approved by the Paragon stockholders,
simultaneously with the Effective Time of the Merger, Paragon will change its
name to "Mariner Post-Acute Network, Inc." and it is expected that the
outstanding common stock of the combined company will be listed for trading on
the NYSE under the symbol "MPN."
COMPARISON OF STOCKHOLDER RIGHTS
Upon consummation of the Merger, Mariner stockholders will become Paragon
stockholders, and their rights will be governed by the Paragon Charter and the
Paragon Bylaws, which differ in certain respects from the Mariner Charter and
Mariner Bylaws, including: (i) the Paragon Charter and the Paragon Bylaws do
not provide for a classified Board of Directors; (ii) the Paragon Charter and
Paragon Bylaws permit stockholder action by written consent; and (iii) the
Paragon Bylaws require the super-majority vote of the Paragon Board on certain
issues. Following consummation of the Merger, current holders of Paragon Common
Stock will continue as stockholders in Paragon, which will continue to operate
under the Paragon Charter and the Paragon Bylaws (with the exception of: (i)
the proposed amendments of the Paragon Charter providing for the new name and
the increase in the number of authorized shares of Paragon Common Stock; and
(ii) the contemplated amendments to the Paragon Bylaws). For a more detailed
discussion of the material differences between the rights of holders of Mariner
Common Stock and holders of Paragon Common Stock, see "Comparison of
Stockholder Rights."
12
<PAGE>
PARAGON HEALTH NETWORK, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial information of
Paragon, with respect to each year in the five-year period ended September 30,
1997, is derived from the consolidated financial statements of Paragon. Such
consolidated financial statements have been audited by Ernst & Young LLP,
independent auditors, but do not give effect to the operations of GranCare as
the LCA/GranCare/Apollo Mergers occurred subsequent to September 30, 1997 and
are not indicative of the financial position of Paragon following the
LCA/GranCare/Apollo Mergers. The financial information of Paragon for the six
months ended March 31, 1998 and 1997 has been derived from unaudited
consolidated financial statements contained in the Quarterly Report on Form 10-
Q for the periods ended March 31, 1998 and 1997 and is qualified in its
entirety by such documents, which, in the opinion of Paragon'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 March 31, 1998 are not
necessarily indicative of results for the full fiscal year and do not include
the operations of GranCare from October 1, 1997 through October 31, 1997. This
information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations of Paragon and the
Consolidated Financial Statements of Paragon and the Notes thereto incorporated
by reference into this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
------------------ ----------------------------------------------------
1998(1) 1997 1997 1996 1995 1994 1993
-------- -------- ---------- ---------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues............ $908,767 $565,520 $1,140,288 $1,114,491 $893,869 $708,873 $576,140
Costs and expenses:
Operating expenses,
excluding items shown
below.................. 772,908 476,857 960,794 943,498 756,356 601,458 486,932
Rent.................... 39,142 21,071 42,489 44,185 36,876 31,875 29,727
Depreciation and
amortization........... 33,326 20,066 39,309 39,214 31,158 26,072 21,017
Impairment of long-lived
assets (2)............. -- -- -- 20,489 -- -- --
(Gain) on sale of assets
(3).................... -- -- -- (22,451) -- -- --
Merger and related costs
(4).................... 80,687 -- 2,588 -- 12,474 -- --
-------- -------- ---------- ---------- -------- -------- --------
Total expenses.......... 926,063 517,994 1,045,180 1,024,935 836,864 659,405 537,676
-------- -------- ---------- ---------- -------- -------- --------
Income (loss) from
operations............. (17,296) 47,526 95,108 89,556 57,005 49,468 38,464
Interest expense........ 52,034 10,625 21,492 20,128 18,322 16,043 12,458
Interest and dividend
income................. (4,744) (2,189) (4,640) (7,667) (7,505) (5,149) (3,460)
-------- -------- ---------- ---------- -------- -------- --------
Income (loss) before
income taxes and
equity earnings/minority
interest............... (64,586) 39,090 78,256 77,095 46,188 38,574 29,466
Provision (benefit) for
income taxes........... (13,951) 16,369 33,604 33,759 21,750 13,561 10,149
Equity earnings/minority
interest............... (299) (182) (735) (156) (204) 1,603 1,582
-------- -------- ---------- ---------- -------- -------- --------
Income (loss) before
extraordinary item..... (50,934) 22,539 43,917 43,180 24,234 26,616 20,899
Extraordinary loss on
early extinguishment of
debt (5)............... (11,275) -- -- -- -- -- --
-------- -------- ---------- ---------- -------- -------- --------
Net income (loss)....... ($62,209) $ 22,539 $ 43,917 $ 43,180 $ 24,234 $ 26,616 $ 20,899
======== ======== ========== ========== ======== ======== ========
PRO FORMA INCOME TAX
DATA:
Income before income
taxes and equity
earnings/minority
interest............... N/A N/A N/A N/A $ 46,188 $ 38,574 $ 29,466
Pro forma taxes (6)..... N/A N/A N/A N/A 22,349 14,460 11,048
Equity earnings/minority
interest............... N/A N/A N/A N/A (204) 1,603 1,582
-------- -------- --------
Pro forma net income
(6).................... N/A N/A N/A N/A $ 23,635 $ 25,717 $ 20,000
======== ======== ========
EARNINGS (LOSS) PER
SHARE: (7)
Basic earnings (loss)
per share:
Net income (loss) before
extraordinary item..... ($1.15) $ 0.38 $ 0.75 $ 0.72 $ 0.43 $ 0.85 $ 0.75
Extraordinary item...... (0.25) -- -- -- -- -- --
-------- -------- ---------- ---------- -------- -------- --------
Net income (loss) per
common share........... ($1.40) $ 0.38 $ 0.75 $ 0.72 $ 0.43 $ 0.85 $ 0.75
-------- -------- ---------- ---------- -------- -------- --------
Diluted earnings (loss)
per share:
Net income (loss) before
extraordinary item..... ($1.15) $ 0.38 $ 0.73 $ 0.71 $ 0.42 $ 0.83 $ 0.74
Extraordinary item...... (0.25) -- -- -- -- -- --
-------- -------- ---------- ---------- -------- -------- --------
Net income (loss) per
common share........... ($1.40) $ 0.38 $ 0.73 $ 0.71 $ 0.42 $ 0.83 $ 0.74
======== ======== ========== ========== ======== ======== ========
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, YEAR ENDED SEPTEMBER 30,
------------------- ---------------------------------------------
1998(1) 1997 1997 1996 1995 1994 1993
--------- -------- -------- -------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA EARNINGS
(LOSS) PER SHARE: (6)
Basic.................. N/A N/A N/A N/A $ 0.42 $ 0.82 $ 0.72
Diluted................ N/A N/A N/A N/A $ 0.41 $ 0.80 $ 0.71
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING: (7)
Basic.................. 44,434 58,561 58,613 60,372 56,553 31,345 27,696
Diluted................ 44,434 59,423 59,808 60,946 57,134 31,972 28,059
STATISTICAL DATA:
Number of centers (end
of period)............ 329 200 202 206 294 288 267
Weighted average
licensed beds......... 34,987 23,211 23,028 25,498 26,355 26,617 24,341
Average occupancy
rate.................. 83.8% 83.0% 82.9% 83.9% 85.1% 85.2% 84.3%
Percentage of revenues
from:
Private................ 28.3% 33.7% 33.4% 31.9% 25.5% 23.7% 24.0%
Medicare............... 33.1% 25.3% 25.7% 25.5% 23.9% 17.5% 13.6%
Medicaid............... 38.6% 41.0% 40.9% 42.6% 50.6% 58.8% 62.4%
<CAPTION>
MARCH 31, SEPTEMBER 30,
------------------- ---------------------------------------------
1998 (1) 1997 1997 1996 1995 1994 1993
--------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $ 274,890 $147,106 $102,104 $101,091 $34,631 $14,955 $15,960
Total assets........... 1,780,216 866,260 874,367 809,612 730,708 525,639 376,248
Long term debt,
including current
portion............... 1,295,818 327,228 295,959 276,448 216,910 206,097 135,409
Stockholders' equity... 71,178 352,809 375,283 329,315 303,596 172,018 119,432
Total capitalization... 1,366,996 680,037 671,242 605,763 520,506 378,115 254,841
</TABLE>
- -------
(1) See Management's Discussion and Analysis of Financial Condition and Results
of Operations included in Form 10-Q for the quarters ended December 31,
1997 and March 31, 1998 for an explanation of LCA/GranCare/Apollo Mergers.
The GranCare merger was accounted for under the purchase method and is
reflected in Paragon's historical operating results and balance sheet since
November 1, 1997.
(2) The $20.5 million charge relates to impairment of long-lived assets from
the adoption of SFAS 121. See Notes to Consolidated Financial Statements.
(3) The $(22.5) million gain relates to the sale of Living Centers-DevCon, Inc.
See Notes to Consolidated Financial Statements.
(4) The six months ended March 31, 1998 include $80.7 million of
recapitalization, indirect merger, and transition costs related to the
LCA/GranCare/Apollo Mergers. Fiscal 1997 includes $2.6 million of merger
costs related to the LCA/GranCare/Apollo Mergers. Fiscal 1995 includes
$12.5 million of merger, acquisition, and related costs associated with the
combination with The Brian Center Corporation. See Notes to Consolidated
Financial Statements.
(5) The extraordinary charge resulted from prepayment penalties incurred on the
early extinguishment of debt and the write-off of certain deferred
financing fees in conjunction with the LCA/GranCare/Apollo Mergers. See
Notes to Consolidated Financial Statements.
(6) A pro forma income tax provision has been provided to reflect the estimated
federal and state income taxes as if all The Brian Center Corporation
S corporations were taxable entities. See Notes to Consolidated Financial
Statements.
(7) Earnings per share and number of shares outstanding have been adjusted to
reflect the three-for-one stock split in the form of a stock dividend paid
on December 30, 1997. Paragon adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" in the six months ended March 31,
1998 and, accordingly, earnings per share and weighted average common
shares outstanding for all prior periods have been restated to conform to
the requirements of this new standard. See Notes to Consolidated Financial
Statements.
14
<PAGE>
MARINER HEALTH GROUP, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial information of
Mariner with respect to each year in the five-year period ended December 31,
1997, has been derived from the consolidated financial statements of Mariner.
Such consolidated financial statements have been audited by Coopers & Lybrand
L.L.P., independent auditors. The financial information of Mariner for the
three months ended March 31, 1998 and 1997 has been derived from unaudited
consolidated financial statements contained in Mariner's Quarterly Report on
Form 10-Q for the period ended March 31, 1998 and is qualified in its entirety
by such report, which, in the opinion of Mariner's management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information for the unaudited interim periods. The
operating results for the three months ended March 31, 1998 are not necessarily
indicative of results for the full fiscal year. This information should be read
in conjunction with Mariner's Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Consolidated Financial Statements
of Mariner and the Notes thereto incorporated by reference into this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net patient service
revenue (1)........... $ 195,405 $ 170,824 $714,623 $578,755 $337,635 $260,357 $209,238
Other income........... 6,971 3,589 18,853 12,054 17,171 3,787 1,568
--------- --------- -------- -------- -------- -------- --------
Total operating
revenue............... 202,376 174,413 733,476 590,809 354,806 264,144 210,806
Operating expenses:
Facility operating
costs (2)............. 152,430 133,698 563,646 465,226 276,633 208,691 167,785
Corporate general and
administrative
expenses (3).......... 14,484 11,808 62,052 46,401 39,830 30,935 34,902
Depreciation and
amortization expense.. 7,911 6,546 27,499 21,376 11,397 8,091 6,843
Interest expense, net.. 12,275 9,190 39,952 26,256 3,598 1,819 7,379
Facility rent expense,
net................... 1,144 1,112 4,421 3,727 1,830 1,739 1,079
Asset impairment loss.. -- -- 10,486 -- -- -- --
--------- --------- -------- -------- -------- -------- --------
Total operating
expenses.............. 188,244 162,354 708,056 562,986 333,288 251,275 217,988
--------- --------- -------- -------- -------- -------- --------
Operating income
(loss)................ 14,132 12,059 25,420 27,823 21,518 12,869 (7,182)
Net gain (loss) on sale
of assets............. -- -- (2,920) (826) (6) 932 364
--------- --------- -------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item.... 14,132 12,059 22,500 26,997 21,512 13,801 (6,818)
Net provision for
income taxes.......... (6,218) (5,306) (10,913) (10,799) (7,892) (5,848) (3,220)
--------- --------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item.... 7,914 6,753 11,587 16,198 13,620 7,953 (10,038)
Extraordinary item..... -- -- -- -- (1,138) (86) (5,882)
--------- --------- -------- -------- -------- -------- --------
Net income (loss)...... $ 7,914 $ 6,753 $ 11,587 $ 16,198 $ 12,482 $ 7,867 ($15,920)
========= ========= ======== ======== ======== ======== ========
EARNINGS (LOSS) PER
SHARE:
Basic earnings (loss)
per share:
Net income (loss)
before extraordinary
item.................. $ 0.27 $ 0.23 $ 0.40 $ 0.56 $ 0.60 $ 0.42 ($0.90)
Extraordinary item..... -- -- -- -- (0.05) -- (0.53)
--------- --------- -------- -------- -------- -------- --------
Net income (loss) per
common share.......... $ 0.27 $ 0.23 $ 0.40 $ 0.56 $ 0.55 $ 0.42 ($1.43)
========= ========= ======== ======== ======== ======== ========
Diluted earnings (loss)
per share:
Net income (loss)
before extraordinary
item.................. $ 0.26 $ 0.23 $ 0.39 $ 0.55 $ 0.60 $ 0.41 ($0.90)
Extraordinary item..... -- -- -- -- (0.05) -- (0.53)
--------- --------- -------- -------- -------- -------- --------
Net income (loss) per
common share.......... $ 0.26 $ 0.23 $ 0.39 $ 0.55 $ 0.55 $ 0.41 ($1.43)
========= ========= ======== ======== ======== ======== ========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
---------------- -------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
Basic.................. 29,500 29,018 29,226 28,721 22,502 18,911 11,106
Diluted................ 30,473 29,174 29,885 29,210 22,755 19,251 11,106
STATISTICAL DATA:
Number of centers (end
of period)............ 94 79 93 78 58 27 26
Licensed beds (end of
period)............... 12,593 10,545 12,540 10,544 7,635 3,114 2,883
Average occupancy
rate.................. 89% 91% 90% 88% 88% 89% 91%
Percentage of revenues
from:
Private................ 31% 33% 34% 37% 50% 54% 55%
Medicare............... 40% 37% 35% 37% 29% 26% 23%
Medicaid............... 29% 30% 31% 26% 21% 20% 22%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $ 116,097 $ 102,253 $ 68,154 $ 74,148 $ 71,217 $ 55,348
Total assets........... 1,085,160 1,075,769 881,233 411,526 296,933 208,467
Long term debt and
capital lease
obligations, including
current portion....... 449,201 434,670 273,575 113,066 26,700 40,361
Subordinated debt...... 149,732 149,724 149,691 1,356 1,694 2,611
Convertible redeemable
preferred stock (4)... -- -- -- 1,030 891 790
Stockholders' equity... 349,796 340,818 324,788 242,392 228,148 127,229
</TABLE>
- --------
(1) Includes a charge of $10.0 million in 1996 related to additional reserves
on Medicare receivables.
(2) Includes $4.3 million related to a significant change in business focus at
Mariner's Baltimore facility in 1995. Includes approximately $7.2 million
in 1997 for office closings, abandonment of certain furniture and equipment
and other expenses related to the consolidation of Mariner's rehabilitation
business. See Mariner's Management's Discussion and Analysis of Financial
Condition and Results of Operations in Mariner's Form 10-K for the year
ended December 31, 1997.
(3) During 1994 Mariner recorded a charge of $9.3 million, of which $7.9
million related to the merger with Pinnacle Care Corporation, which was
accounted for as a pooling of interests, and $1.4 million related to the
accelerated vesting of certain stock options. Of the merger costs,
approximately $4.6 million was reserved for employee severance, payroll and
relocation, $2.9 million was reserved for transaction costs including
investment bankers', legal, and accounting fees, $0.2 million was reserved
for customer relations, $0.1 million for operations relocation, and $0.1
million for investor and employee relations.
During 1995, Mariner accrued costs totaling $8.1 million related to the
acquisition of Convalescent Services, Inc. and the consolidation of various
regional and satellite offices to the New London, Connecticut office. Of
this total charge, approximately $3.7 million related to severance and
related payroll costs and approximately $4.4 million related to expenses
incurred to close Mariner's regional offices.
In 1997, corporate, general and administrative expense included
approximately $5.7 million for severance, payroll and relocation, $2.1
million for office closings and related expenses and $1.5 million related
to bank fees incurred for certain transactions.
(4) Converted into shares of Mariner common stock upon the closing of Mariner's
initial public offering in 1993 and the acquisition of MedRehab, Inc. in
1996.
16
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited pro forma consolidated
financial data for Paragon as of and for the fiscal year ended September 30,
1997 and the six-month period ended March 31, 1998 and reflects the pro forma
effect of the Merger.
The selected statement of income data gives pro forma effect to the Merger as
if it had occurred on October 1, 1996. The selected balance sheet data gives
pro forma effect to the Merger as if it had occurred on March 31, 1998. The
selected unaudited pro forma consolidated financial data do not purport to be
indicative of the results of operations or financial position of Paragon that
would have actually been obtained had the 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 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
Paragon and Mariner and the notes thereto, and Management's Discussion and
Analysis of Results of Operations and Financial Condition of each of Paragon
and Mariner incorporated by reference into this Proxy Statement/Prospectus.
17
<PAGE>
PARAGON HEALTH NETWORK, INC.
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
PRO FORMA PRO FORMA
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1997(1) MARCH 31, 1998(1)
--------------------- -----------------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Net revenues......................... $2,669,917 $1,389,818
Depreciation and amortization........ 108,639 57,953
Income (loss) from operations........ 133,972 (19,727)
Interest expense, net................ 159,465 83,070
Loss before extraordinary charge..... (36,367) (78,394)
Loss per share before extraordinary
charge.............................. $ (0.52) $ (1.06)
<CAPTION>
CONSOLIDATED
PRO FORMA
MARCH 31, 1998(1)
-----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 24,224
Working capital...................... 387,945
Total assets......................... 3,213,818
Long-term debt, including current
portion............................. 1,984,751
Stockholders' equity................. 662,416
<CAPTION>
CONSOLIDATED CONSOLIDATED
PRO FORMA PRO FORMA
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1997(1) MARCH 31, 1998(1)
--------------------- -----------------
<S> <C> <C>
OTHER OPERATING DATA:
EBITDA(2)............................ $ 296,229 $ 160,643
EBITDAR(3)........................... $ 385,241 $ 205,451
</TABLE>
- --------
(1) Adjusted to reflect the effects of the Merger as if it occurred on October
1, 1996 for the Statement of Income Data and on March 31, 1998 for the
Balance Sheet Data.
(2) 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 Paragon 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, equity earnings/minority
interest, recapitalization, merger and related costs, loss on sale of
assets and impairment of long-lived assets. Management does not believe it
is appropriate to include recapitalization, merger and related costs 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
Paragon's operating performance, financial position and cash flows.
(3) As calculated herein EBITDAR represents the sum of EBITDA and rent.
18
<PAGE>
EBITDA/EBITDAR COMPUTATION TABLE
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
PRO FORMA PRO FORMA
YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, 1997 MARCH 31, 1998
------------------ -----------------
<S> <C> <C>
Loss before extraordinary charge......... $(36,367) $(78,394)
Equity earnings/minority interest........ 735 299
Provision (benefit) for income taxes..... 10,139 (24,702)
Interest and dividend income............. (11,174) (5,732)
Interest expense......................... 170,639 88,802
Recapitalization, merger and related
costs................................... 40,212 109,011
Loss on sale of assets................... 2,920 2,920
Impairment of long-lived assets.......... 10,486 10,486
Depreciation and amortization............ 108,639 57,953
-------- --------
EBITDA................................... 296,229 160,643
Rent..................................... 89,012 44,808
-------- --------
EBITDAR.................................. $385,241 $205,451
======== ========
</TABLE>
19
<PAGE>
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
Paragon Common Stock is traded on the NYSE under the symbol "PGN." Mariner
Common Stock is quoted on Nasdaq under the symbol "MRNR." The following table
sets forth the high and low sale prices of Paragon Common Stock (after giving
effect to a three-for-one stock split effected in the form of a stock dividend
on December 30, 1997) and Mariner Common Stock as reported on NYSE Composite
Tape and Nasdaq, respectively, for the quarterly periods ending on the dates
indicated.
<TABLE>
<CAPTION>
PARAGON(1) MARINER
-------------- --------------
HIGH LOW HIGH LOW
------- ------ ------- ------
<S> <C> <C> <C> <C>
PARAGON FISCAL YEAR 1996
December 31, 1995............................... $11.667 $8.50 $17.000 $8.625
March 31, 1996.................................. 13.667 10.50 20.125 14.875
June 30, 1996................................... 13.083 10.875 20.125 15.000
September 30, 1996.............................. 9.375 6.917 19.750 13.625
PARAGON FISCAL YEAR 1997
December 31, 1996............................... 9.833 7.292 15.250 6.750
March 31, 1997.................................. 12.083 8.875 10.250 8.125
June 30, 1997................................... 13.250 10.833 15.625 7.750
September 30, 1997.............................. 13.667 12.521 16.000 12.125
PARAGON FISCAL YEAR 1998
December 31, 1997............................... 20.750 13.083 17.125 13.875
March 31, 1998.................................. 21.500 17.063 17.500 13.750
</TABLE>
- --------
(1) The periods presented prior to November 4, 1997 reflect the prices of the
common stock of LCA, which changed its name to Paragon in connection with
the LCA/GranCare/Apollo Mergers on November 4, 1997. The prices reflected
herein have been adjusted to reflect a three-for-one stock split effected
in the form of a stock dividend on December 30, 1997.
On April 9, 1998, the last full day of trading prior to the announcement of
the execution of the Merger Agreement, the high and low reported sale prices
for Paragon Common Stock on the NYSE Composite Tape was $20.00 and $19.25 and
for Mariner Common Stock on Nasdaq was $18.75 and $17.50. On June 18, 1998, the
last trading day prior to the date of this Proxy Statement/Prospectus, the last
reported sale price for Paragon Common Stock on the NYSE Composite Tape was
$15.0625 and for Mariner Common Stock on Nasdaq was $14.6875. The market prices
of Paragon Common Stock and Mariner Common Stock prior to the Merger may not be
indicative of the market price for Paragon Common Stock following the Merger.
Stockholders are encouraged to obtain current information about the market
price of both Paragon Common Stock and Mariner Common Stock. On the Paragon
Record Date and the Mariner Record Date, there were approximately 414 holders
of record of Paragon Common Stock and approximately 874 holders of record of
Mariner Common Stock, respectively, entitled to notice of and to vote at the
Special Meetings.
It is presently contemplated that no dividends will be paid on shares of
Paragon Common Stock following the Merger for the foreseeable future. The
combined company intends to retain any earnings to provide funds for the
operation and expansion of its business. Certain covenants in the Paragon
Credit Agreement (as defined herein) and the Senior Subordinated Notes (as
defined herein) restrict Paragon's ability to pay dividends on its common
stock.
Mariner has not paid dividends on its common stock. In addition, certain
provisions in the Mariner Credit Agreement and the Mariner Indenture restrict
or prohibit Mariner's payment of cash dividends.
20
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical and pro forma combined per
share data, giving effect to the Merger on a purchase accounting basis as
described more fully in the notes to the "Paragon Health Network, Inc. Pro
Forma Condensed Consolidated Financial Statements." The data should be read in
conjunction with the selected historical consolidated financial statements of
Paragon and Mariner and notes thereto incorporated by reference in this Proxy
Statement/Prospectus, as well as the information set forth herein under
"Paragon Health Network, 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 Merger been completed at the beginning of the periods presented and
should not be considered indicative of future operations.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA COMBINED
-------------------------- -------------------------
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
SEPTEMBER 30, MARCH 31, SEPTEMBER 30, MARCH 31,
1997 1998 1997 1998
------------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
PARAGON PER SHARE DATA(1)
Net income (loss) from
continuing operations
Basic.................. $0.75 ($1.40) ($0.52) ($1.06)
Diluted................ 0.73 (1.40) (0.52) (1.06)
Book value at period
end..................... 6.17 1.72 N/A 9.33
<CAPTION>
HISTORICAL PRO FORMA EQUIVALENT
-------------------------- -------------------------
THREE MONTHS SIX MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, MARCH 31, SEPTEMBER 30, MARCH 31,
1997 1998 1997 1998
------------- ------------ -------------- ----------
<S> <C> <C> <C> <C>
MARINER PER SHARE DATA
Net income (loss) from
continuing operations
Basic.................. $0.40 $ 0.27 ($0.52) ($1.06)
Diluted................ 0.39 0.26 (0.52) (1.06)
Book value at period
end..................... 11.57 11.83 N/A 9.33
</TABLE>
- --------
(1) After giving effect to a three-for-one stock split effected in the form of
a stock dividend on December 30, 1997.
Neither Paragon nor Mariner declared any cash dividends on Paragon Common
Stock or Mariner Common Stock, respectively, for the periods presented.
21
<PAGE>
RISK FACTORS
In considering whether to approve the Merger Proposals, the stockholders of
Paragon and Mariner 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
As of March 31, 1998, Paragon's and Mariner's consolidated indebtedness
(including capitalized leases) was approximately $1.296 billion and $599
million, respectively. As of March 31, 1998, on a pro forma basis after giving
effect to the Merger, Paragon's consolidated indebtedness would be
approximately $1.985 billion. The substantial indebtedness and debt-to-equity
ratio of Paragon following the Merger may reduce the financial flexibility of
Paragon and impact its ability to respond to changing business and economic
conditions, as well as limit capital expenditures and acquisitions by Paragon.
The definitive terms of the various debt instruments that govern Paragon's and
Mariner's borrowing arrangements, that will remain outstanding following the
Merger 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 Paragon's indebtedness will continue 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. Any
increase in the interest rates on Paragon's indebtedness following the Merger
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 following
the Merger, 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 expected 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 expected 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 indebtedness will depend, in part, upon
Paragon's ability to manage its cash flows and working capital, particularly
its collection of accounts receivable. The amount and timing of accounts
receivable collection are dependent on many factors including the timeliness
of the filing of cost reports, the approval of interim rate increases and the
effectiveness of Paragon's systems and policies, all of which have contributed
to longer collection cycles in the past.
Any inability of Paragon to service its indebtedness or obtain additional
financing, as needed, or to comply with the financial covenants contained in
certain debt instruments, 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 Paragon and Mariner will
require the integration of each company's administrative, finance, sales and
marketing organizations, the coordination of each company's marketing efforts
and the implementation of appropriate operational, financial and management
systems and controls in order to realize the efficiencies and the cost
reductions that are expected to result from the Merger. Potential obstacles to
successful integration include, but are not limited to: (i) the ongoing
integration of Paragon's existing businesses following the completion of the
LCA/GranCare/Apollo Mergers in November 1997; (ii) implementation of cost
containment measures; (iii) elimination of redundancies, primarily at the
corporate level; (iv) consolidation of financial and managerial reporting
functions; (v) coordination of field
22
<PAGE>
managerial activities with corporate management; (vi) achievement of
purchasing efficiencies; (vii) retention and expansion of the customer base;
(viii) introduction of new products and services to new customers; and (ix)
the addition and integration of key personnel. There can be no assurance that
the Merger or any other business combination will result in revenue gains,
cost reductions or earnings levels that would justify the investment therein
or the expenses related thereto or that operational synergies will develop as
projected or that anticipated synergies between the companies will be realized
or, if realized, the timing thereof.
RISKS RELATED TO GROWTH STRATEGY
The combined company's growth strategy will be in part 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, the combined
company 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. The combined company's expected growth
may place significant demands on the combined company's financial resources
and management. In addition, there can be no assurance that the combined
company will be successful in its efforts to make such acquisitions since
certain competitors, some of which possess greater financial resources than
the combined company, will likely be pursuing the same available opportunities
as the combined company.
RELATIONSHIPS WITH SIGNIFICANT STOCKHOLDERS
Currently, approximately 42% of the outstanding shares of Paragon Common
Stock is beneficially owned by the Apollo Investors and approximately 21% of
the outstanding shares of Mariner Common Stock is beneficially owned by the
Kellett Group. As of June 15, 1998, on a pro forma basis after giving effect
to the Merger, the Apollo Investors would own approximately 24.6% and the
Kellett Group would own approximately 8.4% of the outstanding shares of
Paragon Common Stock, respectively. Pursuant to a Proxy and Voting Agreement,
dated as of November 4, 1997, entered into by the Apollo Investors, voting
control of all of the shares of Paragon Common Stock beneficially owned by the
Apollo Investors is held by Apollo for the period ending on November 4, 2000.
In addition, Paragon has entered into an amendment to the Stockholder
Agreement, dated as of November 4, 1997 (as amended, the "Apollo Stockholders
Agreement") with the Apollo Investors, which will become effective at the
Effective Time of the Merger which provides, among other things, that so long
as the Apollo Investors continue to beneficially own at least 66 2/3% of the
shares of Paragon Common Stock they acquired on November 4, 1997, Apollo will
have the right to designate five of the eleven nominees for election as
members of the Paragon Board, provided that no more than four of such nominees
may be Associates (as defined in the Apollo Stockholders Agreement) of Apollo;
provided that if at any time after the fifth anniversary of the Effective Time
of the Merger, the Apollo Investors beneficially own less than 40% of the
outstanding shares of Paragon's Common Stock, Apollo will have the right to
designate such number of nominees as is equal to its pro rata ownership of the
issued and outstanding shares of Paragon Common Stock. Prior to this
amendment, Apollo had the right to designate six of the eleven nominees for
election as directors of Paragon (no more than four of which could be
Associates of Apollo), so long as the Apollo Investors continued to
beneficially own at least 66 2/3% of the shares of Paragon Common Stock they
acquired on November 4, 1997; provided that if at any time after November 4,
2000, the Apollo Investors beneficially own less than 40% of the outstanding
shares of Paragon Common Stock, Apollo would have the right to designate such
number of nominees as is equal to its pro rata ownership of the issued and
outstanding shares of Paragon Common Stock. Accordingly, assuming that such
nominees are elected as members of the Paragon Board and notwithstanding the
reduction in the number of Apollo designated nominees, Apollo will have
significant influence on the management and policies of Paragon. In addition,
as a result of certain provisions in the Paragon Bylaws that require the
affirmative vote of two-thirds of the members of the Paragon Board in order to
take certain actions, Apollo may be able to prevent certain actions from being
taken that require such a super-majority vote.
23
<PAGE>
GOVERNMENT REGULATION
The federal government and all states in which the combined company operates
regulate various aspects of the combined company's business including skilled
nursing facility services, rehabilitation therapy, home health services and
institutional pharmacy services. In particular, the operation of long-term
care facilities and the provision of health care services are subject to
federal, state and local laws relating to the adequacy of medical care,
resident rights, equipment, personnel, distribution of pharmaceuticals,
operating policies, fire prevention, rate-setting and compliance with building
codes and environmental and other laws. The facilities operated by Paragon and
Mariner are subject to periodic inspection by governmental and other
regulatory authorities to assure continued compliance with various standards
and to provide for their continued licensing under state law and certification
under the Medicare and Medicaid programs and participation in the Veterans
Administration Program and other third party payor agreements. In the past,
from time to time such facilities have received statements of deficiencies
from regulatory agencies. Should Paragon or Mariner receive any such
statements of deficiency in the future, they expect to implement plans of
correction with respect to any such statement to address any alleged
deficiencies. While the combined company 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, licenses or certifications could have a material adverse
effect on the combined company's operations.
The combined company 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 (the "Anti-Kickback Law") and the expanded physician
self-referral provisions of the Omnibus Budget Reconciliation Act of 1993
(commonly referred to as "Stark II"). The Anti-Kickback Law prohibits, among
other things, the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral, or for arranging for the referral, of
items or services paid for by Medicare and Medicaid or other federal health
care programs. Violation of this statute is a felony punishable by up to five
years imprisonment and/or $25,000 per violation in fines. In addition,
violators are subject to civil money penalties and exclusion from the
Medicare, Medicaid and other federal health care programs. Stark II prohibits,
with limited exceptions, 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.
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 per violation, plus treble
damages, for each claim filed. These false claims statutes include the Federal
False Claims Act, which allows any person to bring a suit, known as a qui tam
action, alleging false or fraudulent Medicare and Medicaid claims or other
violations of the statute and to share in any amounts paid by the entity to
the government in fines or settlement. State and federal governments are
devoting increasing attention and resources to anti-fraud initiatives against
healthcare providers. The Health Insurance Portability and Accountability Act
of 1996 (the "Accountability Act") and the Balanced Budget Act of 1997 (the
"Balanced Budget Act") expanded the scope and penalties for health care fraud,
including broader provisions for the exclusion of providers from the Medicare,
Medicaid and other federal health care programs.
Additionally, the Accountability Act granted expanded enforcement authority
to the U. S. Department of Health and Human Services ("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") and
DOJ. The Balanced Budget Act also includes numerous health fraud provisions,
including new civil monetary penalties for contracting with an excluded
provider; new surety bond and information disclosure requirements for certain
providers and supporters; expansion of the mandatory and permissive exclusions
added by the Accountability Act to any federal health care program (other than
the Federal Employees Health Benefits Program); and an
24
<PAGE>
expansion to the ability of individuals to bring "qui tam" actions against
health care providers. 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.
Each of Paragon and Mariner has in the past received inquiries, and each has
been a party to litigation, alleging violations of fraud and abuse laws. While
Paragon and Mariner believe that their business arrangements and billing
practices are consistent with applicable laws, there can be no assurance that
substantial amounts will not be expended in connection with the investigation
or defense of any such matters, that aggressive anti-fraud enforcement action
will not adversely affect the business of Paragon, or that federal and state
fraud and abuse laws will ultimately be interpreted in a matter consistent
with the practices of, and business transactions by, Paragon and Mariner. If
Paragon or Mariner are found to be, or have been, in violation of any of the
aforementioned laws, criminal penalties, civil money penalties, and exclusion
from the Medicare, Medicaid and other federal health care programs could be
imposed, any of which could have a material adverse effect on Paragon.
FIXED EXCHANGE RATIO
The Merger Agreement provides that upon consummation of the Merger, each
outstanding share of Mariner Common Stock will be exchanged for one share of
Paragon Common Stock. Since the price of the Paragon Common Stock or the
Mariner Common Stock at the Effective Time of the Merger may vary from the
price as of the date on which the Merger Agreement was executed due to the
changes in the business, operations and prospects of Paragon or Mariner,
general market and economic conditions, and other factors, the market value of
the shares of Paragon Common Stock which holders of the Mariner Common Stock
will receive in the Merger may be greater or less than the market value of
such Paragon or Mariner Common Stock as of the date of the Special Meetings.
UNCERTAINTY ASSOCIATED WITH HEALTH CARE LEGISLATION
In addition to extensive government health care regulation, there are
numerous initiatives on the federal and state levels for 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
health care legislation and budget reduction measures may contribute to the
volatility of prices of securities of companies in health care and related
industries, including Paragon and Mariner, and may similarly affect the price
of Paragon Common Stock in the future.
RISK INVOLVED WITH REIMBURSEMENT BY THIRD PARTY PAYORS
For the year ended September 30, 1997, on a pro forma basis after giving
effect to the Merger, Paragon derived approximately 34% and 36% 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. PPS will be phased in over
three cost reporting periods, starting with cost
25
<PAGE>
reporting periods beginning on or after July 1, 1998. During the first three
years, skilled nursing facilities will be paid a per diem rate based on a
blend of facility-specific costs and federal costs. The blended rate for the
first year of transition will take 75% of the facility-specific per diem rate
and 25% of the federal per diem rate. In each subsequent transition year, the
facility-specific per diem rate component will decrease by 25% and the federal
per diem rate component will increase by 25%, ultimately resulting in a 100%
federal per diem rate. The facility-specific per diem rate is based upon a
facility's 1995 cost report for routine, ancillary and capital services,
updated using a skilled nursing market basket index. The federal per diem is
calculated by the weighted average of each facility's standardized costs,
based upon the historical national average per diem for free-standing
facilities. The rates for such services were published in the Federal Register
on May 12, 1998. The payment rate will cover all routine, ancillary and
capital costs and most nursing facility services, including therapy services
and certain covered drugs. This change will require that the combined company
manage the costs of its services effectively and efficiently as the transition
to PPS occurs. If it is unable to do so, the combined company may experience
an adverse effect. Also, delays in the reimbursement of health care providers
by governmental and state intermediary providers are possible as such agencies
adjust to PPS and could materially adversely affect the combined company.
The Balanced Budget Act also institutes consolidated billing for skilled
nursing facility services, under which payments for most non-physician Part B
services for beneficiaries no longer eligible for Part A skilled 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. In a recent Medicare Program Memorandum (the "Program
Memorandum"), the Health Care Financing Administration ("HCFA") established a
transition period for skilled nursing facility consolidated billing. Under the
Program Memorandum, skilled nursing facilities are not obligated to begin
consolidated billing until January 1, 1999 except for Part A residents where
the skilled nursing facility begins on PPS before January 1, 1999. This is
because the PPS rate will include payment for the ancillary services subject
to consolidated billing.
A similar PPS is required to be established for home health services for
cost reporting periods beginning on or after October 1, 1999. Until PPS takes
effect, the Balanced Budget Act establishes an interim payment system ("IPS")
that provides for lowering reimbursement limits for home health visits. Cost
limit increases for fiscal 1995 and 1996 have been eliminated. In addition,
for cost reporting periods beginning on October 1, 1997, home health agencies'
cost limits will be determined at the lesser of (1) their actual costs; (2)
cost limits based on 105% of the median costs of free-standing home health
agencies; or (3) an agency-specific per-patient cost cap, based on 98 percent
of fiscal 1994 costs, adjusted for inflation. A reduction in the cost limits
applicable to Paragon's and Mariner's home health agencies could have an
adverse effect on Paragon's and Mariner's results of operations, with a
corresponding adverse effect on Paragon's and Mariner's growth strategy. The
inability of Paragon and Mariner to provide home health care services at a
cost below the established Medicare payment amounts could have a material
adverse effect on Paragon's and Mariner's home health care operations and its
post-acute care network. In addition, the law contains provisions affecting
rehabilitation services, including a 10% reduction in operating and capital
costs for 1998, a fee schedule for Medicare Part B therapy services beginning
January 1, 1999, and the application of per beneficiary therapy caps currently
applicable to independent therapists to all outpatient rehabilitation
services, beginning in 1999. In addition, HCFA has established salary
equivalency guidelines for speech and occupational therapy services and made
adjustments to the salary equivalency guidelines for physical therapy and
respiratory therapy services covered under Medicare Part A. The limits are
based on a blend of data from wage rates from hospitals and nursing
facilities, and including salary, fringe benefits and expense factors. Rates
are defined by specific geographic market areas, based upon a modified version
of the hospital wage index. These salary equivalency guidelines are effective
for services provided on or after April 10, 1998, and are expected to have a
negative impact on Paragon's and Mariner's operating results. These new
payment guidelines will be in effect until the client skilled nursing facility
transitions to PPS, at which time payment for therapy services will be
included in the PPS rate.
The Balanced Budget Act contains numerous other changes that will adversely
affect payments to Medicare and Medicaid providers. Under the Medicare and
Medicaid programs, hospices receive a per diem payment for
26
<PAGE>
beneficiaries based on four different levels of care. For hospice patients
eligible for Medicaid residing in nursing facilities, hospices are paid the
hospice per diem amount and an amount to cover room and board in the facility,
which the hospice pays to the facility. The Balanced Budget Act reduces annual
increases in the market basket inflation rate to the Medicare per diem rate
amount by one percentage point for federal fiscal years 1998 through 2002, and
requires hospices to submit claims based on the location where a service is
actually furnished.
Following the Merger, a portion of Paragon's pharmacy services revenues will
be derived from government sponsored programs, such as Medicaid and to a
lesser extent Medicare. The remainder is paid or reimbursed by individual
residents, nursing centers, and other third-party payors, including private
insurers. Medicaid payment for drugs and biologicals generally is based on an
average wholesale price ("AWP") plus an allowance for a dispensing fee. For
outpatient drugs, Medicare uses a similar system. Under the Balanced Budget
Act, payment for certain drugs and biologicals is reduced to AWP minus five
percent. For drugs furnished to Medicare Part A eligible residents, payment is
covered under the skilled nursing facility payment rate, and, therefore, will
be part of the PPS rate. Additionally, because Paragon's pharmacy subsidiary
provides a substantial amount of its services to inpatient facilities that
will be subject to PPS, the pharmacy division may encounter efforts by such
inpatient facilities to lower their pharmacy costs, thereby potentially
impacting the Paragon pharmacy services revenues. In the Conference Report
accompanying the PPS legislation, the conferees specifically note that, to
ensure that the frail elderly residing in skilled nursing facilities receive
needed and appropriate medication therapy, HHS is to consider, as part of PPS
for skilled nursing facilities, the results of studies conducted by
independent organizations, including those which examine appropriate payment
mechanism and payment rates for medication therapy, and to develop case mix
adjustments that reflect the needs of such residents.
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 by repealing the so-called Boren Amendment, 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 "Information
Concerning Paragon" and "Information Concerning Mariner."
In addition, several states have enacted or are considering various health
care reforms, including reforms through Medicaid managed care demonstration
projects. Several states in which the combined company will operate have
applied for, or received, approval from HHS 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 the combined company's business. The business prospects
of the combined company will be significantly affected by general economic
factors affecting many states' health care industries and by the laws and
regulatory environment in these states, including Medicaid reimbursement
rates.
Paragon and Mariner have in the past had fiscal intermediaries deliver
notice that they intend to disallow, and have disallowed, certain costs for
which Paragon and Mariner have requested reimbursement. If Paragon and Mariner
do not prevail on such matters, these disallowances or future disallowances
could have a material adverse effect on Paragon after the Effective Time of
the Merger.
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
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decrease the rates paid to the combined company for its future services or the
services for which the combined company will be able to seek reimbursement.
Neither Paragon nor Mariner can predict whether any of these additional
proposals will be adopted or, if adopted and implemented, what effect such
proposals would have on the combined company. 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 operated by
the combined company and the services and supplies provided by the combined
company will meet or continue to meet the requirements for participation in
such programs.
COMPETITION
The long-term care industry is highly competitive. The combined company 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. The
combined company will also compete with other providers in the acquisition and
development of additional facilities and businesses. The combined company'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, assisted living
facilities, community home health agencies and similar institutions and
pharmaceutical businesses, some of which have significantly greater financial
and other resources than the combined company. In addition, the combined
company 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 the combined company. There
can be no assurance that the combined company will not encounter increased
competition which could adversely affect its business, results of operations
or financial condition.
LIABILITY AND INSURANCE
The provision of skilled nursing care entails an inherent risk of liability.
In recent years, participants in the skilled nursing care industry have become
subject to an increasing number of lawsuits alleging malpractice or related
legal theories, many of which involve large claims and result in the
incurrence of significant damage awards and defense costs. Paragon and Mariner
currently maintain liability insurance in amounts intended to cover such
claims which they believe is adequate based on the nature of the risks, the
companies' respective historical experience and industry standards. There can
be no assurance, however, that claims in excess of such insurance or claims
not covered by insurance, such as claims for punitive damages, will not arise.
In addition, the industry has experienced a significant increase in liability
actions in the states in which Mariner and Paragon operate. Certain of these
states, including, without limitation, Florida, with respect to Mariner, and
California, with respect to Paragon, do not permit insurance to protect
against the award of punitive damages in such actions. A successful claim
against Paragon or Mariner not covered by, or in excess of, its insurance
policy limits could have a material adverse effect upon Paragon's and
Mariner's financial condition and results of operations. Claims against
Paragon or Mariner, regardless of their merit or eventual outcome, may also
have a material adverse effect upon Paragon's or Mariner's ability to attract
or retain residents or patients or expand its business and may require
management to devote substantial time to matters unrelated to day-to-day
operations. There can be no assurance that Paragon will be able to obtain
sufficient liability insurance coverage in the future or that, if such
insurance coverage is available, it will be available on acceptable economic
terms.
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PARAGON SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of Paragon
Common Stock as of the Paragon Record Date in connection with the solicitation
of proxies by the Paragon Board for use at the Paragon Special Meeting to be
held on Tuesday, July 28, 1998 at 10:00 a.m., local time at the Crowne Plaza
Ravinia, 4355 Ashford Dunwoody Road N.E., Atlanta, Georgia 30346 and at any
adjournment or postponement thereof.
At the Paragon Special Meeting, holders of Paragon Common Stock as of the
Paragon Record Date will be asked to consider and vote upon: (i) the Stock
Issuance Proposal; (ii) the Name Change Proposal; (iii) the Amendment
Proposal; (iv) the Paragon Plan Proposal; and (v) such other matters as may be
properly brought before the Paragon Special Meeting.
The Paragon Board has: (i) approved the issuance of the Paragon Common Stock
pursuant to the Merger Agreement and has determined that the proposed Merger
is fair to and in the best interests of Paragon and its stockholders; (ii)
approved the amendment to the Paragon Charter to change the corporate name
from "Paragon Health Network, Inc." to "Mariner Post-Acute Network, Inc.;"
(iii) approved the amendment to the Paragon Charter to increase the number of
shares of Paragon Common Stock authorized to be issued to 500 million shares;
and (iv) approved the increase in number of shares available for awards under
the Long-Term Incentive Plan from 6 million shares to 10 million shares. THE
PARAGON BOARD, BY ACTION OF THE DIRECTORS PRESENT, UNANIMOUSLY RECOMMENDS THAT
THE PARAGON STOCKHOLDERS VOTE FOR EACH OF THE PROPOSALS SET FORTH ABOVE.
RECORD DATE, VOTING RIGHTS AND VOTE REQUIRED
The Paragon Board has fixed the close of business on June 15, 1998 as the
Paragon Record Date. Only holders of record of Paragon Common Stock at the
close of business on the Paragon Record Date will be entitled to notice of,
and to vote at, the Paragon Special Meeting. Paragon Common Stock was the only
issued and outstanding class of voting securities of Paragon on the Paragon
Record Date, and each share of Paragon Common Stock is entitled to one vote on
each matter to be acted upon or which may come before the Paragon Special
Meeting. Votes may be cast at the Paragon Special Meeting in person or by
properly executed proxy. See "--Proxies; Revocation of Proxies."
On the Paragon Record Date, 42,626,980 shares of Paragon Common Stock were
issued and outstanding each of which is entitled to vote at the Paragon
Special Meeting, except with respect to 52,227 of such shares issuable in
exchange for shares of common stock of corporations acquired by Paragon in
previous acquisitions and not yet submitted for exchange. The 42,574,753
shares outstanding as of the Paragon Record Date and entitled to notice of and
to vote at the Paragon Special Meeting were held by 414 holders of record. On
the Paragon Record Date, 17,777,778 shares of Paragon Common Stock, or
approximately 42% of the issued and outstanding shares of Paragon Common
Stock, were beneficially owned by the Apollo Investors and 950,577 shares of
Paragon Common Stock, or approximately 2.2% of the issued and outstanding
shares of Paragon Common Stock, were beneficially owned by Paragon directors
and executive officers (excluding the shares of Paragon Common Stock
beneficially owned by the Apollo Investors). Apollo has agreed to vote all
shares of Paragon Common Stock beneficially owned by the Apollo Investors in
favor of the Stock Issuance Proposal and has indicated that it intends to vote
such shares in favor of the other Paragon Proposals. The directors of Paragon,
who, as of the Paragon Record Date, owned approximately 2.2% of the issued and
outstanding shares of Paragon Common Stock (excluding shares of Paragon Common
Stock beneficially owned by the Apollo Investors), have indicated to Paragon
that they intend to vote their shares in favor of the Stock Issuance Proposal
as well as the other Paragon Proposals. See "Certain Other Agreements--Paragon
Voting Agreement."
The presence at the Paragon Special Meeting, either in person or by proxy,
of the holders of a majority of the issued and outstanding shares of Paragon
Common Stock is necessary to constitute a quorum to transact business at the
Paragon Special Meeting. Abstentions of shares that are present at the Paragon
Special Meeting and broker
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non-votes (i.e., shares held by brokers in street name that are not entitled
to a vote at the Paragon Special Meeting on a proposal due to the absence of
voting instructions from the beneficial owners of such shares but which vote
on other proposals) 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
Paragon Special Meeting, the stockholders who are present and entitled to vote
at the Paragon Special Meeting may, by majority vote of the shares of Paragon
Common Stock present, adjourn the Paragon Special Meeting from time to time
without notice, other than announcement at the Paragon Special Meeting, until
a quorum is present.
Approval of the Stock Issuance Proposal and the Paragon Plan Proposal
require the affirmative vote of a majority of the shares of Paragon Common
Stock represented in person or by proxy and entitled to vote at the Paragon
Special Meeting. Approval of the Name Change Proposal and the Amendment
Proposal requires the affirmative vote of a majority of the issued and
outstanding shares of Paragon Common Stock. THE PARAGON BOARD RECOMMENDS THAT
PARAGON STOCKHOLDERS VOTE FOR APPROVAL OF THE STOCK ISSUANCE PROPOSAL, THE
NAME CHANGE PROPOSAL, THE AMENDMENT PROPOSAL AND THE PARAGON PLAN PROPOSAL BY
SIGNING AND RETURNING THE ENCLOSED PROXY CARD, WHETHER OR NOT STOCKHOLDERS
PLAN TO ATTEND THE PARAGON SPECIAL MEETING.
PROXIES; REVOCATION OF PROXIES
Shares of Paragon Common Stock represented by properly executed proxies
received prior to or at the Paragon 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 Paragon Special Meeting, such stockholder's shares will not be
voted, which will have the same effect as a vote against the Name Change
Proposal and the Amendment Proposal. Abstentions and broker non-votes (which
are included in the determination of the size of the quorum) will have the
effect of a vote against any proposal to which the abstention or non-vote
relates. 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 Paragon
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 STOCK
ISSUANCE PROPOSAL, THE NAME CHANGE PROPOSAL, THE AMENDMENT PROPOSAL AND THE
PARAGON PLAN PROPOSAL.
Any Paragon stockholder who executes and returns a Proxy Card may revoke it
at any time before it is voted at the Paragon Special Meeting by: (i)
delivering to the Secretary of Paragon at Paragon's principal offices before
the Paragon 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 Paragon Special
Meeting. A stockholder's attendance at the Paragon Special Meeting will not by
itself revoke a proxy given by such stockholder.
The Paragon Board does not know of any matters other than those described in
the notice of the Paragon Special Meeting that are to come before the Paragon
Special Meeting. If any other matters are properly brought before the Paragon
Special Meeting, including, among other things, a motion to adjourn or
postpone the Paragon Special Meeting to another time and/or place for the
purpose of soliciting additional proxies in favor of the Paragon Proposals or
to permit the dissemination of information regarding material developments
relating to the Paragon Proposals or otherwise germane to the Paragon Special
Meeting, one or more persons named in the Paragon form of proxy will vote the
shares represented by such proxy upon such matter in accordance with the
instructions indicated in such proxies or, if no instructions are so
indicated, as determined in their discretion; provided, however, that no proxy
that is voted against the Stock Issuance 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 Paragon 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).
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The cost of soliciting proxies from Paragon stockholders will be borne
entirely by Paragon. In addition to soliciting proxies by mail, proxies may be
solicited by Paragon'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.
Paragon 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.
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MARINER SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of Mariner
Common Stock as of the Mariner Record Date in connection with the solicitation
of proxies by the Mariner Board for use at the Mariner Special Meeting to be
held on Tuesday, July 28, 1998 at 10:00 a.m., local time at State Street Bank
& Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, and at any
adjournment or postponement thereof.
At the Mariner Special Meeting, holders of Mariner Common Stock as of the
Mariner Record Date will be asked to consider and vote upon: (i) the Mariner
Merger Proposal; and (ii) such other matters as may be properly brought before
the Mariner Special Meeting.
The Mariner Board has unanimously approved the Merger Agreement and has
further determined that the proposed transactions are fair to and in the best
interests of Mariner and its stockholders. THE MARINER BOARD UNANIMOUSLY
RECOMMENDS THAT THE MARINER STOCKHOLDERS VOTE FOR THE MARINER MERGER PROPOSAL.
RECORD DATE, VOTING RIGHTS AND VOTE REQUIRED
The Mariner Board has fixed the close of business on June 15, 1998 as the
Mariner Record Date. Only holders of record of Mariner Common Stock at the
close of business on the Mariner Record Date will be entitled to notice of,
and to vote at, the Mariner Special Meeting. Mariner Common Stock is the only
outstanding class of voting securities of Mariner, and each share of Mariner
Common Stock is entitled to one vote on each matter to be acted upon or which
may come before the Mariner Special Meeting. Votes may be cast at the Mariner
Special Meeting in person or by properly executed proxy. See "--Proxies;
Revocation of Proxies."
On the Mariner Record Date, 29,574,385 shares of Mariner Common Stock were
issued and outstanding and were held by 874 holders of record. On the Mariner
Record Date, 5,486,843 shares of Mariner Common Stock, or approximately 19% of
the issued and outstanding shares of Mariner Common Stock, were beneficially
owned by Mariner directors and executive officers (which includes shares of
Mariner Common Stock beneficially owned by certain members of the Kellett
Group), all of whom have agreed to vote, or indicated that they intend to
vote, their shares of Mariner Common Stock in favor of the Mariner Merger
Proposal.
The presence at the Mariner Special Meeting, either in person or by proxy,
of the holders of a majority of the issued and outstanding shares of Mariner
Common Stock is necessary to constitute a quorum to transact business at the
Mariner Special Meeting. Abstentions and broker non-votes of shares that are
present or represented at the Mariner Special Meeting 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 Mariner Special Meeting, the
stockholders who are present and entitled to vote at the Mariner Special
Meeting may, by majority vote of the shares of Mariner Common Stock present,
adjourn the Mariner Special Meeting from time to time without notice, other
than announcement at the Mariner Special Meeting, until a quorum is present.
Approval of the Mariner Merger Proposal requires the affirmative vote of the
holders of a majority of the issued and outstanding shares of Mariner Common
Stock. The failure to vote, including by abstention or non-vote (including
broker non-votes), will have the same effect as a vote against approval of the
Mariner Merger Proposal. THE MARINER BOARD UNANIMOUSLY RECOMMENDS THAT MARINER
STOCKHOLDERS VOTE FOR APPROVAL OF THE MARINER MERGER PROPOSAL BY SIGNING AND
RETURNING THE ENCLOSED PROXY CARD, WHETHER OR NOT STOCKHOLDERS PLAN TO ATTEND
THE MARINER SPECIAL MEETING.
Under the DGCL, holders of Mariner Common Stock are not entitled to
dissenters' rights of appraisal with respect to the Merger.
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PROXIES; REVOCATION OF PROXIES
Shares of Mariner Common Stock represented by properly executed proxies
received prior to or at the Mariner 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 Mariner Special Meeting, such stockholder's shares will not be
voted, which will have the same effect as a vote against approval of the
Mariner 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 Mariner 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 MARINER MERGER PROPOSAL.
Any Mariner stockholder who executes and returns a proxy may revoke it at
any time before it is voted at the Mariner Special Meeting by: (i) delivering
to the Secretary of Mariner at Mariner's principal offices before the Mariner
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 Mariner Special Meeting. A
stockholder's attendance at the Mariner Special Meeting will not by itself
revoke a proxy given by such stockholder.
The Mariner Board does not know of any matters other than those described in
the notice of the Mariner Special Meeting that are to come before the Mariner
Special Meeting. If any other matters are properly brought before the Mariner
Special Meeting, including, among other things, a motion to adjourn or
postpone the Mariner Special Meeting to another time and/or place for the
purpose of soliciting additional proxies in favor of the Mariner Merger
Proposal or to permit the dissemination of information regarding material
developments relating to the Mariner Merger Proposal or otherwise germane to
the Mariner Special Meeting, one or more persons named in the Mariner form of
proxy will vote the shares represented by such proxy upon such matter in
accordance with the instructions indicated in such proxies or, if no
instructions are so indicated, as determined in their discretion. At any
subsequent reconvening of the Mariner 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).
The cost of soliciting proxies from Mariner stockholders will be borne
entirely by Mariner. Mariner has retained Morrow & Co. to aid in the
solicitation of proxies from its stockholders. The fees of Morrow & Co. to be
paid by Mariner are estimated to be approximately $20,000 plus reimbursement
of out-of-pocket expenses. In addition to soliciting proxies by mail, proxies
may be solicited by Mariner'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. Mariner 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 materials to and obtain proxies from such beneficial
owners.
MARINER STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF MARINER
STOCK CERTIFICATES WILL BE MAILED TO MARINER STOCKHOLDERS SHORTLY AFTER THE
EFFECTIVE TIME OF THE MERGER.
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THE MERGER
GENERAL
The following is a brief summary of certain aspects of the Merger. This
summary does not purport to be complete and is qualified in its entirety by
reference to the complete text of the Merger Agreement, which is attached to
this Proxy Statement/Prospectus as Annex I and is incorporated herein by
reference.
At the Effective Time of the Merger, Merger Sub will be merged with and into
Mariner, and Merger Sub will cease to exist as a separate corporation. Mariner
will be the surviving corporation in the Merger and will become a direct,
wholly-owned subsidiary of Paragon.
At the Effective Time of the Merger, each then issued and outstanding share
of Mariner Common Stock will be converted into the right to receive, and
become exchangeable for, one share of Paragon Common Stock. For a description
of the treatment of the Mariner employee stock option plans and other rights
to acquire Mariner Common Stock in the Merger, see "The Merger Agreement--
Mariner Stock Options."
None of the shares of Paragon Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger will be converted or
otherwise modified in the Merger, and such shares will continue to be
outstanding capital stock of Paragon after the Effective Time.
A description of the relative rights, privileges and preferences of Paragon
Common Stock, including certain differences between Paragon Common Stock and
Mariner Common Stock, is set forth under "Comparison of Stockholder Rights"
and "Description of Paragon Common Stock."
CLOSING; EFFECTIVE TIME
The Merger will become effective at the time a duly executed certificate of
merger (the "Certificate of Merger") in the form required under the terms of
the DGCL is filed with the Secretary of State of the State of Delaware and is
effective under law.
EXCHANGE OF STOCK CERTIFICATES
From and after the Effective Time of the Merger, holders of Mariner Common
Stock will be entitled to receive one share of Paragon Common Stock in
exchange for each share of Mariner Common Stock held immediately prior to the
Effective Time of the Merger (the "Exchange Ratio"). As soon as practicable
after the Effective Time of the Merger, American Stock Transfer & Trust
Company (the "Exchange Agent") will mail transmittal instructions in the form
of a letter of transmittal to each person who was a Mariner stockholder of
record immediately prior to the Effective Time of the Merger. The transmittal
instructions contained in such letter will describe the procedures for
surrendering the certificates that immediately prior to the Effective Time of
the Merger represented issued and outstanding shares of Mariner Common Stock
(the "Mariner Certificates") in exchange for the certificates representing the
Paragon Common Stock (the "Paragon Certificates"). The form of letter of
transmittal will specify that delivery shall be effective, and risk of loss as
to the Mariner Certificates shall pass, only upon actual delivery of the
Mariner Certificates to the Exchange Agent. Upon surrender to the Exchange
Agent of the Mariner Certificates for cancellation together with a duly
executed letter of transmittal and such other documents as the Exchange Agent
may reasonably require, such Mariner Certificates will be cancelled, and the
holder of such Mariner Certificates will receive a Paragon Certificate
representing the number of shares of Paragon Common Stock to which the former
Mariner stockholder is entitled pursuant to the provisions of the Merger
Agreement. Mariner stockholders should not submit their Mariner Certificates
for exchange unless and until they have received the transmittal instructions
and a form of letter of transmittal from the Exchange Agent. Until surrendered
as contemplated by the Merger Agreement, each Mariner Certificate shall be
deemed at any time after the Effective Time of the Merger to represent only
the right to receive upon surrender a Paragon Certificate for the number of
shares formerly represented by the Mariner Certificate.
Mariner stockholders will not be entitled to receive any dividends or other
distributions on Paragon Common Stock until the Merger has been consummated
and they have exchanged their Mariner Certificates for
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Paragon Certificates. Subject to applicable laws, any such dividends and
distributions after the Effective Time of the Merger, if any, will be
accumulated and, at the time a former Mariner stockholder surrenders his or
her Mariner Certificates to the Exchange Agent, will be paid without interest.
If any Paragon Certificate is to be issued in a name other than that in
which the corresponding Mariner Certificate is registered, it is a condition
to the exchange of the Mariner Certificate that the former Mariner stockholder
requesting such exchange comply with the applicable transfer requirements and
pay any applicable transfer or other taxes, or establish to the satisfaction
of Paragon that such tax has been paid or is not applicable. No transfers of
Mariner Common Stock will be made on the stock transfer books of Mariner after
the close of business on the day of the Effective Time of the Merger.
Neither the Exchange Agent nor any party to the Merger Agreement will be
liable to any former Mariner stockholder for any shares of Paragon Common
Stock delivered to state authorities pursuant to the applicable abandoned
property, escheat or other similar laws. At any time following six months
after the Effective Time of the Merger, Paragon may require the Exchange Agent
to return all Paragon Common Stock and cash, if any, deposited with the
Exchange Agent which has not been distributed to former Mariner stockholders
and thereafter any such holders that have not remitted their Mariner
Certificates to the Exchange Agent may look to Paragon only as a general
creditor with respect thereto.
BACKGROUND OF THE MERGER
During February 24-26, 1998 at a health care industry conference sponsored
by Morgan Stanley, Keith B. Pitts, Paragon's Chairman, President and Chief
Executive Officer, met and had several conversations with Arthur W. Stratton,
Jr., M.D., Chairman, President and Chief Executive Officer of Mariner. During
these preliminary meetings, Mr. Pitts and Dr. Stratton discussed the
respective strategic objectives for the growth of Paragon and Mariner as well
as the potential impact of the impending changes in Medicare reimbursement to
a prospective payment system ("PPS"). In addition, Mr. Pitts and Dr. Stratton
discussed generally the possibility of a business combination of Paragon and
Mariner and the strategic and other benefits that might result from such a
combination.
Mr. Pitts and Dr. Stratton met again on March 12, 1998, at a corporate
finance conference and discussed further a possible business combination. Also
participating in this meeting were Peter P. Copses and Laurence M. Berg,
directors of Paragon, and David N. Hansen, Mariner's Chief Financial Officer,
who were also attending the conference. During the course of this meeting, the
parties also discussed strategies to address the changing regulatory and
reimbursement environments as well as several areas in which synergies from
such a combination could be achieved, principally with respect to the
institutional pharmacy and rehabilitation businesses of both companies, and
cost savings.
Mr. Pitts and R. Jeffrey Taylor, Paragon's Senior Vice President--
Development, met with Dr. Stratton and Mr. Hansen on March 20-21, 1998. During
the course of these meetings, the parties reviewed the respective operations
of Paragon and Mariner and further discussed the areas in which they believed
that potential synergies from such a combination could be achieved. The
parties discussed the fact that Mariner was well positioned to provide
rehabilitation services in a number of Paragon's inpatient facilities, where
such services are currently provided by third parties. The parties also
discussed that the location of each company's institutional pharmacy
operations would allow in some cases the provision of services to the other
company's inpatient facilities or, in other cases, the consolidation of
pharmacies that serve the same geographic areas. Finally, the parties also
considered the location of certain Paragon and Mariner inpatient facilities
and ancillary service operations that were in close geographic proximity and
discussed the opportunities the combined company could have to offer a broader
scope of services in several geographic regions.
During the week of March 23, 1998, Mr. Pitts and Dr. Stratton had several
telephone conversations and met once in person on March 26, 1998 to discuss,
among other matters, the complementary qualities of the companies' respective
senior management teams as well as the geographic proximity of the companies'
facilities and operations. Mr. Pitts and Dr. Stratton further discussed the
fact that the combined company would be better positioned to provide a more
comprehensive continuum of post-acute care (skilled nursing, rehabilitation
therapy,
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pharmacy, and specialty services) across a broader geographic area and would
have enhanced clinical capabilities in both post-acute and sub-acute care. Mr.
Pitts and Dr. Stratton also discussed the broad-based network with local
market scale that the combined company would possess and the opportunity for
increased managed care contracting. The combined company's scale of operations
would also be augmented in several important markets such as Florida, Texas
(particularly with the combination of Paragon's more rural focus with
Mariner's more urban focus) and Maryland. Also discussed during the March 26,
1998 meeting was Dr. Stratton's role in the combined company.
On April 1, 1998, the Paragon Board met and received a presentation from Mr.
Pitts regarding his discussions to date with Dr. Stratton. In addition, Mr.
Taylor provided an overview of Mariner's operations and financial condition.
During the course of this meeting, the Paragon Board considered a number of
factors such as Mariner's stockholder base, litigation profile and
opportunities for potential synergies from a combination. At the conclusion of
this meeting, the Paragon Board authorized management to engage in substantive
due diligence with Mariner and, in connection therewith, to enter into a
confidentiality agreement with Mariner for the purpose of facilitating the
exchange of financial and legal due diligence materials. The Paragon Board
also authorized management to engage Morgan Stanley as Paragon's financial
advisor for purposes of the contemplated transaction. Following the meeting,
Paragon and Mariner entered into a customary confidentiality agreement prior
to the commencement of due diligence.
On April 1, 1998, Mariner engaged BT Alex. Brown to serve as Mariner's
financial advisor in connection with the contemplated transaction. From
Thursday, April 2, 1998, through Saturday, April 4, 1998, Dr. Stratton, Mr.
Hansen, Paul Diaz, Mariner's Chief Operating Officer, Alison Gilligan,
Mariner's Chief Legal Officer and General Counsel, Brian Grazzini, Mariner's
Vice President--Inpatient Finance, and Mariner's legal and financial advisors
met in Atlanta, Georgia at the offices of Paragon's outside counsel with Mr.
Pitts, Mr. Taylor, Charles B. Carden, Paragon's Chief Financial Officer, L. D.
Williams, Executive Vice President and President of Paragon's inpatient
operations, Susan T. Whittle, Paragon's Senior Vice President and General
Counsel, Todd Andrews, Paragon's Vice President--Development, and Paragon's
legal and financial advisors. The purpose of this extended meeting was to
accomplish a significant portion of the legal and financial due diligence that
was necessary for each party to assess the merits of the contemplated
transaction. During the course of these meetings, both Paragon and Mariner
made presentations regarding their respective operations and financial
condition.
On Friday, April 3, and Sunday, April 5, 1998, the Paragon Board convened
telephonic meetings to receive updates from management and Paragon's legal and
financial advisors regarding the status of the contemplated transaction. At
the April 3rd meeting, Messrs. Pitts and Taylor reported on the status of the
due diligence efforts to date, and Mr. Williams reported on the opportunities
that he perceived existed in the combination of the inpatient operations of
the two companies. Paragon's legal counsel reviewed with the Paragon Board the
principal terms of the draft merger agreement and advised the directors that
the draft merger agreement contemplated voting agreements by Paragon's and
Mariner's significant stockholders to support the transaction as well as the
grant by each company to the other of a stock option to purchase up to 19.9%
of the granting company's common stock, which options would become exercisable
upon the occurrence of certain circumstances. Morgan Stanley reported on the
status of the financial due diligence and related analysis that it was
conducting. At the conclusion of the meeting the Paragon Board instructed
management to continue with the due diligence investigation of Mariner and the
negotiation of the material terms of the proposed combination.
At the April 5th meeting, Messrs. Pitts and Taylor reported further on the
results of the due diligence investigation which was then largely completed.
In addition, Morgan Stanley reported on the status of its preliminary
financial analysis regarding the proposed transaction and the expected
accretion to Paragon's earnings per share based on the achievement of targeted
synergies. Paragon's counsel also reported on the proposed terms of the draft
merger agreement and the proposed terms of the draft employment agreement
between Dr. Stratton and Paragon, which agreement would become effective at
the Effective Time of the Merger. See "Interests of Certain Persons in the
Merger--Stratton Employment Agreement."
From April 5th through Sunday, April 12th, counsel for Paragon and Mariner
engaged in multiple conferences during which the terms of the draft merger
agreement, the draft voting agreements, the draft stock
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option agreements and the manner in which the transaction should be effected
were discussed extensively. In connection with these discussions, Mariner
requested that certain provisions of Paragon's Bylaws be amended to provide
that the supermajority voting provisions contained in the Paragon Bylaws would
not apply to actions by the Paragon Board regarding certain transactions
proposed by an unaffiliated third party that would constitute a change of
control of Paragon. See "Comparison of Stockholder Rights." In addition,
Mariner requested that Apollo agree to certain amendments to the Stockholders
Agreement and the Proxy and Voting Agreement that would have the effect of (i)
reducing the number of nominees for election to the Paragon Board that Apollo
currently has the right to designate from six to five, which would constitute
less than a majority of the members of the Paragon Board, and (ii) releasing
Mr. Pitts from his rights and obligations under these agreements. During the
course of these discussions, Apollo agreed to the requested modifications on
the condition that the provision of the Stockholders Agreement that provided
for Apollo's right to designate such number of nominees for election to the
Paragon Board that, as a percentage of the total number of Paragon directors,
exceeded the aggregate percentage ownership by the Apollo Investors of the
outstanding Paragon Common Stock, be extended through the fifth anniversary of
the Effective Time of the Merger. The Stockholders Agreement presently
provides that if at any time after November 4, 2000, the Apollo Investors in
the aggregate beneficially own less than 40% of the issued and outstanding
shares of Paragon Common Stock, then Apollo will be entitled to designate such
number of nominees as is equal to its pro rata ownership of the total number
of shares of issued and outstanding Paragon Common Stock. Paragon indicated
that it was willing to make the changes requested by Mariner and Apollo. See
"Interests of Certain Persons--Agreements with Apollo."
On April 7, 1998, Mr. Pitts and Dr. Stratton met again to discuss the
management structure of a combined company.
Throughout the course of the discussions between Paragon and Mariner, Dr.
Stratton periodically advised Mariner's directors of the status of such
discussions. On April 7, 1998, the Mariner Board convened a telephonic meeting
at which Dr. Stratton provided the directors with an overview of Mariner,
Paragon, certain factors affecting the health care services industry, the
proposed terms of the combination, the anticipated management structure of the
combined company (including Dr. Statton's role) and the status of the due
diligence reviews and negotiations. In addition, representatives of BT Alex.
Brown provided the Mariner Board with a financial overview of Paragon on a
stand-alone basis as well as on a combined basis with Mariner.
On Wednesday, April 8, 1998, the Paragon Board convened an in-person meeting
at the offices of Paragon's outside counsel in Atlanta, Georgia. At this
meeting, the Paragon Board received detailed presentations from Paragon's
management and Paragon's legal and financial advisors regarding the status of
the transaction generally and the related negotiations of the draft merger
agreement and the ancillary documentation in particular, as well as the
financial analyses including the preliminary analysis of certain pro forma
effects of the Merger on Paragon, after giving effect to the proposed Exchange
Ratio. The Paragon Board considered the various presentations and the issues
presented regarding the negotiation of the terms of the draft merger agreement
and discussed with counsel alternatives to resolve the then outstanding issues
and provided management with further direction regarding the negotiation of
the draft merger agreement.
The Mariner Board convened an in-person meeting in Orlando, Florida on
Thursday, April 9, 1998. At this meeting, the Mariner Board was provided
detailed information regarding Mariner, Paragon, certain factors affecting the
healthcare service industry, the proposed terms of the combination and related
transactions, the anticipated management structure of the combined company
(including Dr. Stratton's role) and the status of the due diligence reviews
and negotiations. In addition, BT Alex. Brown made a detailed presentation
regarding the financial aspects of the transaction, and Mariner's legal
counsel reviewed with the Mariner Board the principal terms of the draft
merger agreement, the ancillary documentation and the status of the
negotiations. The Mariner Board requested that Dr. Stratton ask Mr. Pitts to
make a presentation to the Mariner Board regarding Paragon and Paragon's
strategy for the growth and management of the combined company following the
Effective Time of the Merger. The Mariner Board also provided management and
Mariner's legal counsel with further direction regarding the negotiation of
the terms of the proposed transaction.
In a telephonic meeting on Friday, April 10, 1998, Mr. Pitts advised the
Paragon Board that the Mariner Board had requested that he make a presentation
regarding Paragon and its plans for the growth and management
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of the combined company. The Paragon Board also received a general update on
the status of the transaction and authorized Mr. Pitts to make a presentation
to the Mariner Board.
At an in-person meeting of the Mariner Board held on April 11, 1998 in
Atlanta, Georgia, Dr. Stratton, Mr. Hansen and Mr. Diaz made further
presentations regarding Mariner, Paragon and the proposed transaction. During
the course of this meeting, Mr. Pitts reviewed for the Mariner Board Paragon,
Paragon's strategy for the growth and management of the combined company and
Paragon's analysis of the potential synergies that could be achieved.
Mariner's counsel and BT Alex. Brown also advised the Mariner Board regarding
the status of the negotiations of the terms of the draft merger agreement.
Conversations between counsel for Paragon and counsel for Mariner continued
on April 11-13, 1998, regarding the terms of the draft merger agreement as
well as the ancillary agreements. At a meeting of the Paragon Board on April
12, 1998, Mr. Pitts advised the directors as to the status of the negotiations
and the material unresolved issues that remained outstanding. After consulting
with counsel, the Paragon Board determined that a comprehensive proposal to
resolve all outstanding issues was appropriate and, with the assistance of
counsel, the Paragon Board formulated a comprehensive resolution. The Paragon
Board temporarily adjourned its meeting so that counsel could relay the
Paragon Board's position to Mariner's counsel prior to the convening of a
scheduled telephonic Mariner Board meeting.
At a telephonic meeting held on April 12, 1998, the Mariner Board reviewed
the status of the negotiations and considered the comprehensive proposal of
the Paragon Board. The Mariner Board indicated that Mariner's management and
legal counsel and BT Alex. Brown should work with Paragon's management and
financial advisors to finalize the documentation on the basis of Paragon's
proposal.
Later on April 12, 1998, the Paragon Board reconvened its meeting and
received a presentation from counsel regarding the final terms of the Merger
Agreement and the ancillary documentation. In addition, the Paragon Board
received a presentation from Morgan Stanley regarding certain of the financial
aspects of the transaction. After considering the advice of counsel regarding
the final terms of such agreements and receiving Morgan Stanley's oral opinion
that as of April 12, 1998, and subject to the considerations set forth in such
opinion, the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to Paragon, the Paragon Board unanimously approved the
Merger Agreement, each of the ancillary agreements to which Paragon was a
party and the various transactions contemplated thereby. Morgan Stanley
confirmed its oral opinion in writing on April 13, 1998. See "--Opinion of
Morgan Stanley & Co. Incorporated."
On April 13, 1998 the Mariner Board held a telephonic meeting and received a
presentation from counsel regarding the final terms of the Merger Agreement
and the ancillary documents. In addition, BT Alex. Brown rendered its opinion
that as of April 13, 1998, the Exchange Ratio was fair, from a financial point
of view to the holders of Mariner Common Stock. After considering the advice
of counsel regarding the final terms of such agreements and the opinion of BT
Alex. Brown, the Mariner Board unanimously approved the Merger Agreement, each
of the ancillary agreements to which Mariner is a party and the various
transactions contemplated thereby. BT Alex. Brown confirmed its opinion in a
written opinion dated April 13, 1998. See "--Opinion of BT Alex. Brown
Incorporated."
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
Paragon Board Recommendations; Paragon Reasons for the Merger. The Paragon
Board has unanimously determined that the Merger is fair to and in the best
interests of Paragon and its stockholders and has unanimously approved the
Merger Agreement and the transactions contemplated thereby. The Paragon Board
unanimously recommends that holders of Paragon Common Stock vote FOR approval
of the Stock Issuance Proposal for the reasons set forth below.
In its deliberations and in making its determination and recommendation and
in authorizing the Merger Agreement on April 12, 1998, the Paragon Board
consulted with Morgan Stanley and Paragon's outside counsel, and considered a
number of factors including, among others, the following principal factors:
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(i) The Paragon Board's knowledge of the business, operations,
properties, assets, financial condition, operating results and prospects of
Mariner.
(ii) The Paragon Board's assessment of certain impending changes in the
health care industry, including increasing government regulation, the
impact of PPS under Medicare, changes in the litigation environment and the
ability of Paragon and the ability of the combined company to adapt to such
changes. In assessing developments in the litigation environment, the
Paragon Board considered Mariner's potential litigation exposure in certain
jurisdictions in particular.
(iii) The complementary geographic location of Paragon's and Mariner's
inpatient facilities and the resulting broader continuum of care that
Paragon would be able to offer in certain areas following the Merger.
(iv) The opportunity to achieve significant potential synergies in terms
of both revenue enhancement and cost savings upon a combination of
Paragon's and Mariner's businesses in general and their respective
institutional pharmacy and rehabilitation businesses in particular. At the
same time, the Paragon Board was aware that the achievement of synergies
could prove to be difficult given the large scope of the combined company's
operations and the recent completion of the LCA/GranCare/Apollo Mergers and
the continuing integration of the operations of LCA and GranCare.
(v) The various strategic alternatives available to Paragon, including
continuing without any extraordinary transaction.
(vi) The Paragon Board's belief that the increased number of shares of
Paragon Common Stock that would be outstanding following the consummation
of the Merger will provide Paragon stockholders with enhanced liquidity. In
reaching this assessment, the Paragon Board recognized that the issuance of
shares of Paragon Common Stock in the Merger would significantly increase
the number of shares available for further sale in the public markets,
which could adversely affect the market price for shares of Paragon Common
Stock.
(vii) The presentation of Morgan Stanley regarding the anticipated
accretive pro forma effect of the Merger on Paragon's earnings per share
(assuming achievement of targeted synergies) as well as the deleveraging
effect of the Merger on Paragon's pro forma balance sheet as measured by
certain stand alone and combined credit ratios.
(viii) The presentation of Morgan Stanley and its oral opinion that,
based upon and subject to the assumptions made, procedures followed,
matters considered and limitations on the review undertaken as set forth
therein, as of the date of such opinion, the Exchange Ratio pursuant to the
Merger Agreement is fair from a financial point of view to Paragon. See "--
Opinion of Morgan Stanley & Co. Incorporated" for a discussion of the
factors considered in rendering such opinion.
(ix) The terms and conditions of the Merger Agreement, including the fact
that consummation of the Merger is subject, among other things, to the
affirmative vote of the holders of a majority of the shares of Paragon
Common Stock represented in person or by proxy at the Paragon Special
Meeting (as well as the affirmative vote of the holders of a majority of
the issued and outstanding shares of Mariner Common Stock). The Paragon
Board also considered the provisions of the Merger Agreement that restrict
the ability of Paragon and Mariner to solicit acquisition proposals from
third parties but that permit either to respond to, or negotiate with, a
third party if the Paragon Board or the Mariner Board, as applicable, based
on the advice of outside counsel and subject to the satisfaction of certain
other requirements, concludes that failure to do so would be inconsistent
with its fiduciary duties. In this regard, the Paragon Board also
considered the provisions of the Merger Agreement that would require
Mariner to pay Paragon a $12 million fee if the Mariner Board accepts a
third party offer or withdraws its recommendation of the Merger or if the
Mariner stockholders do not approve the Merger after a third party makes an
offer to acquire Mariner and Mariner is thereafter acquired under certain
circumstances. The Paragon Board also considered the reciprocal requirement
in the Merger Agreement that would require Paragon to pay Mariner a similar
termination fee if the Merger Agreement is terminated under similar
circumstances relating to Paragon. See "The Merger Agreement--Termination
Fees; Expenses." The Paragon Board also considered the provisions of the
Merger Agreement that provide for the termination of certain outstanding
options to acquire Mariner
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Common Stock in exchange for cash payments, thereby (a) reducing the
potential dilutive effect of such options, which would otherwise be
converted into options to purchase Paragon Common Stock and (b) improving
the alignment of option grants of Mariner executives and other Mariner
employees continuing with the combined company with those of Paragon
executives and other Paragon employees in similar positions. See "The
Merger Agreement--Mariner Stock Options."
(x) The terms and conditions of the Mariner Voting Agreement in which Dr.
Stratton and the Kellett Group agree to vote the shares of Mariner Common
Stock beneficially owned by them (representing approximately 21% of the
issued and outstanding Mariner Common Stock) in favor of the Mariner Merger
Proposal and to refrain from making certain transfers of the shares of
Mariner Common Stock held by them and from facilitating or encouraging any
transaction which could be deemed competitive with the Mariner Merger
Proposal. See "Certain Other Agreements--Mariner Voting Agreement."
(xi) The terms and conditions of the Paragon Voting Agreement in which
Apollo agrees to vote the shares of Paragon Common Stock beneficially owned
by the Apollo Investors (representing approximately 42% of the issued and
outstanding Paragon Common Stock) in favor of the Stock Issuance Proposal
and to refrain from making certain transfers of the shares of Paragon
Common Stock held by them and from facilitating or encouraging any
transaction which could be deemed competitive with the Merger. See "Certain
Other Agreements--Paragon Voting Agreement."
(xii) The terms and conditions of the Mariner Option Agreement, which
provides Paragon with an option to purchase such number of shares of
Mariner Common Stock as represents 19.9% of the total number of shares of
Mariner Common Stock issued and outstanding as of April 13, 1998 (subject
to certain adjustments) in the event (A) the Merger Agreement is terminated
prior to the Effective Time of the Merger and a termination fee is payable
by Mariner pursuant to the terms of the Merger Agreement and (B) an
acquisition of Mariner is consummated within 12 months of the termination
of the Merger Agreement. See "Certain Other Agreements--Mariner Option
Agreement."
(xiii) The terms and conditions of the Paragon Option Agreement, which
provides Mariner with an option to purchase such number of shares of
Paragon Common Stock as represents 19.9% of the total number of shares of
Paragon Common Stock issued and outstanding as of April 13, 1998 (subject
to certain adjustments) in the event (A) the Merger Agreement is terminated
prior to the Effective Time of the Merger and a termination fee is payable
by Paragon pursuant to the terms of the Merger Agreement and (B) an
acquisition of Paragon is consummated within 12 months of the termination
of the Merger Agreement. See "Certain Other Agreements--Paragon Option
Agreement."
(xiv) The provisions of certain amendments to Paragon's Bylaws that would
have the effect of limiting the ability of the Apollo nominees on the
Paragon Board to prevent the Paragon Board from approving a transaction
following the Effective Time of the Merger between Paragon and a third
party in which the sole consideration offered by such third party is cash
and as a result of which, a change of control of Paragon occurs. The
Paragon Board further took into account Apollo's agreement to reduce the
number of nominees for election as members of the Paragon Board that Apollo
is currently entitled to designate from six to five as well as Apollo's
agreement to release the shares of Paragon Common Stock beneficially owned
by Mr. Pitts from the terms and conditions of the Stockholders Agreement
and the Proxy and Voting Agreement. See "Interests of Certain Persons in
the Merger--Agreements with Apollo" and "Comparison of Stockholder Rights."
(xv) The experience of Mariner's management team and the benefits that
will be available following the Merger with a significant number of
Mariner's managers continuing with the combined company. In particular, the
Paragon Board considered the contribution to the combined company that
could be made by Dr. Stratton who was the founder of Mariner and who will
continue as the Vice Chairman, President and Chief Operating Officer of
Paragon following the Merger.
(xvi) The interests of certain persons in the Merger, including, but not
limited to, the following: (a) Apollo in connection with an amendment to an
existing stockholders agreement; (b) the Kelletts in connection with
certain amendments to existing lease agreements; (c) Dr. Stratton with
respect to his current employment agreement with Mariner and his employment
agreement with Paragon; and (d) certain
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employees of Mariner with respect to option agreements and employment
agreements, as applicable. See "Interest of Certain Persons in the Merger."
The foregoing discussion of the information and factors considered by the
Paragon Board is not intended to be exhaustive but includes all material
factors considered by the Paragon Board. In view of the variety of factors
considered in connection with its evaluation of the Merger, the Paragon 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 Paragon Board may have
given different weights to different factors.
Mariner Board Recommendation; Mariner Reasons for the Merger. The Mariner
Board has unanimously determined that the Merger is fair to and in the best
interests of Mariner and its stockholders and has unanimously approved the
Merger Agreement and the transactions contemplated thereby. THE MARINER BOARD
UNANIMOUSLY RECOMMENDS THAT HOLDERS OF MARINER COMMON STOCK VOTE FOR APPROVAL
OF THE MARINER MERGER PROPOSAL FOR THE REASONS SET FORTH BELOW.
In evaluating the proposed Merger, deciding to approve the Merger and the
Merger Agreement and recommending that the holders of Mariner Common Stock
vote FOR the Mariner Merger Proposal, the Mariner Board consulted with the BT
Alex. Brown and Mariner's legal counsel, and considered a number of factors
including, among others, the following principal factors:
(i) The Mariner Board's knowledge of the business, operations,
properties, assets, financial condition, operating results and prospects of
Mariner.
(ii) The Mariner Board's knowledge of the business, operations,
properties, assets, financial condition, operating results and prospects of
Paragon. In particular, the Mariner Board focused on the presentation to
the Mariner Board by Mr. Pitts regarding Paragon, Paragon's view regarding
the growth and management of the combined company and Paragon's analysis of
the potential synergies that could be achieved from such a combination.
(iii) The Mariner Board's assessment of changes in the health care
industry, including increasing government regulation, the impact of PPS and
the imposition of salary equivalency for certain rehabilitation services
under Medicare, developments in the litigation environment, and the ability
of Mariner and the combined company to adapt to such changes. In assessing
developments in the litigation environment, the Mariner Board considered
Paragon's potential litigation exposure in certain jurisdictions in
particular.
(iv) The complementary geographic location of Paragon's and Mariner's
inpatient facilities and ancillary service operations, the complementary
strengths of their respective ancillary services operations and the
potential for the combined company to offer a broader continuum of care in
many markets following the Merger.
(v) The opportunity to achieve significant potential synergies in terms
of both revenue enhancement and cost savings upon a combination of
Paragon's and Mariner's businesses in general and their respective
institutional pharmacy and rehabilitation businesses in particular. The
scope of the combined company offers opportunities for (A) reductions of
overhead costs as a percentage of revenues as operating efficiencies and
economies of scale are realized, and (B) the sharing of investments in the
lines of business of the combined company. The Merger also provides
enhanced opportunities for the combined company to provide directly to its
inpatient facilities services that are currently provided by third parties.
At the same time, the Mariner Board was aware that the potential benefits
of the Merger may not be fully realized and that the achievement of
significant synergies could prove difficult given the scope of the combined
company's operations, the recent completion of the LCA/GranCare/Apollo
Mergers, the ongoing integration of the operations of LCA and GranCare, and
the challenges involved in integrating Paragon's and Mariner's operations.
(vi) The Merger provides opportunities for furthering Mariner's strategic
objectives of adding inpatient facilities in which MarinerCare(R) programs
and other short-stay subacute services can be implemented and providing
directly a broad portion of the continuum of care required to treat post-
acute patients from the
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onset of illness through recovery. The Mariner Board believes that these
are strategic objectives the combined company intends to pursue. The
payment of Paragon Common Stock as the consideration in the Merger provides
the Mariner stockholders with the opportunity to continue to participate in
the benefits resulting from the implementation of these strategic
objectives.
(vii) The leveraged financial model of the combined company, which holds
the potential for favorable earnings per share growth comparisons,
principally as a result of the earnings per share impact of the expected
repayment over time of the combined company's debt. The Mariner Board
considered the anticipated earnings per share of Mariner and the combined
company on a pro forma basis, and noted that the combined company has the
potential for a higher long-term earnings per share growth rate than
Mariner as a result of the combined company's greater financial leverage
than Mariner's. Also, unlike many other recent transactions in the health
care services industry, the stock-for-stock merger of Paragon and Mariner
would not involve the incurrence of a significant amount of additional debt
and would produce a combined company with a significantly larger equity
base than either Paragon or Mariner.
(viii) The Mariner Board expressed concern about whether the management
of Paragon had sufficient depth and experience to manage the combined
company. These concerns were mitigated by the inclusion in the management
of the combined company of Dr. Stratton, who will serve as the Vice
Chairman, President and Chief Operating Officer of the combined company,
and a significant number of Mariner's other managers.
(ix) The various strategic alternatives available to Mariner, including
continuing without any extraordinary transaction.
(x) The opinion of BT Alex. Brown, dated April 13, 1998, that, as of such
date, based upon the facts and circumstances as they existed at that time,
and subject to certain assumptions and factors set forth in such opinion,
the Exchange Ratio was fair to the holders of Mariner Common Stock from a
financial point of view. See "Opinion of BT Alex. Brown Incorporated" for a
discussion of the factors BT Alex. Brown considered in rendering such
opinion.
(xi) The terms and conditions of the Merger Agreement, including the form
and amount of the consideration to be received by the Mariner stockholders
in the Merger, the reciprocal representations, warranties and covenants of
the parties in the Merger Agreement, the relatively limited conditions to
the consummation of the Merger, and the fact that consummation of the
Merger is subject to the affirmative vote of the holders of a majority of
the issued and outstanding shares of Mariner Common Stock. The Mariner
Board also considered the provisions of the Merger Agreement that restrict
the ability of Paragon and Mariner from soliciting acquisition proposals
from third parties but that permit either to respond to, or negotiate with,
a third party if the Paragon Board or the Mariner Board, as applicable,
based on the advice of their respective outside counsel, concludes that
failure to do so would be inconsistent with its fiduciary duties and
certain other requirements are met. In this regard, the Mariner Board also
considered the provisions of the Merger Agreement that would require
Paragon to pay Mariner a $12 million fee if the Paragon Board accepts a
third party offer or withdraws its recommendation of the Merger or if the
Paragon stockholders do not approve the Merger after a third party makes an
offer to acquire Paragon and Paragon is thereafter acquired under certain
circumstances. The Mariner Board also considered the reciprocal requirement
in the Merger Agreement that would require Mariner to pay Paragon a similar
termination fee if the Merger Agreement is terminated under similar
circumstances relating to Mariner. See "The Merger Agreement--Termination
Fees, Expenses."
(xii) The terms and conditions of the Mariner Voting Agreement in which
Dr. Stratton and the Kellett Group have agreed to vote the shares of
Mariner Common Stock beneficially owned by them in favor of the Mariner
Merger Proposal and to refrain from making certain transfers of the shares
of Mariner Common Stock held by them and from facilitating or encouraging
any transaction which could be deemed competitive with the Merger. See
"Certain Other Agreements--Mariner Voting Agreement."
(xiii) The terms and conditions of the Paragon Voting Agreement in which
Apollo has agreed to vote the shares of Paragon Common Stock beneficially
owned by the Apollo Investors, which represent approximately 42% of the
issued and outstanding shares of Paragon Common Stock, in favor of the
Stock
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Issuance Proposal and to refrain from making certain transfers of the
shares of Paragon Common Stock held by them and from facilitating or
encouraging any transaction which could be deemed competitive with the
Merger. See "Certain Other Agreements--Paragon Voting Agreement."
(xiv) The terms and conditions of the Mariner Option Agreement, which
provides Paragon with an option to purchase shares of Mariner Common Stock
representing 19.9% of the total number of shares of Mariner Common Stock
issued and outstanding as of April 13, 1998, in the event (A) the Merger
Agreement is terminated prior to the Effective Time of the Merger and a
termination fee is paid by Mariner pursuant to the terms of the Merger
Agreement and (B) an alternative acquisition of Mariner is consummated
within 12 months of the termination of the Merger Agreement. See "Certain
Other Agreements--Mariner Option Agreement." The Mariner Board authorized
Mariner to enter into the Mariner Option Agreement recognizing that doing
so would preclude Mariner's ability to enter into an alternative
transaction structured as a pooling of interests for accounting purposes
during the 12 months following the termination of the Merger Agreement.
(xv) The terms and conditions of the Paragon Option Agreement, which
provides Mariner with an option to purchase shares of Paragon Common Stock
representing 19.9% of the total number of shares of Paragon Common Stock
issued and outstanding as of April 13, 1998, in the event (A) the Merger
Agreement is terminated prior to the Effective Time of the Merger and a
termination payment is made by Paragon pursuant to the terms of the Merger
Agreement and (B) an alternative acquisition of Paragon is consummated
within 12 months of the termination of the Merger Agreement. See "Certain
Other Agreements--Paragon Option Agreement."
(xvi) The tax-free nature of the Merger to the holders of Mariner Common
Stock.
(xvii) The market capitalization of the combined company is expected to
be considerably larger than either Paragon's or Mariner's current market
capitalization. The Mariner Board believes that the increase in the number
of shares of Paragon Common Stock outstanding, and in the aggregate market
value thereof, will provide Mariner's stockholders with enhanced liquidity.
(xviii) The interests of certain persons in the Merger, including, but
not limited to, the following: (a) the Kelletts in connection with certain
amendments to certain arrangements and the resolution of certain disputes;
(b) Dr. Stratton with respect to his to his current employment agreement
with Mariner and his employment with Paragon; and (c) certain other
employees of Mariner with respect to their respective option agreements and
employment agreements, as applicable. See "Interests of Certain Persons in
the Merger."
OPINION OF MORGAN STANLEY & CO. INCORPORATED
Paragon retained Morgan Stanley to act as Paragon's financial advisor in
connection with the Merger and related matters based upon Morgan Stanley's
qualifications, expertise and reputation. At the April 12, 1998 telephonic
meeting of the Paragon Board, Morgan Stanley rendered an oral opinion to the
Paragon Board that, as of such date, and subject to the considerations set
forth in such opinion, the Exchange Ratio pursuant to the Merger Agreement is
fair from a financial point of view to Paragon. Morgan Stanley subsequently
confirmed its oral opinion by delivery of a written opinion dated April 13,
1998 (the "Morgan Stanley Opinion").
THE FULL TEXT OF THE MORGAN STANLEY OPINION, WHICH SETS FORTH THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON
THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX VI TO THIS PROXY
STATEMENT/PROSPECTUS. THE MORGAN STANLEY OPINION IS DIRECTED ONLY TO THE
FAIRNESS OF THE EXCHANGE RATIO FROM A FINANCIAL POINT OF VIEW AND DOES NOT
ADDRESS ANY OTHER ASPECT OF THE MERGER, NOR DOES IT CONSTITUTE A
RECOMMENDATION TO ANY PARAGON STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE PARAGON SPECIAL MEETING. THE SUMMARY OF THE MORGAN STANLEY OPINION
SET FORTH IN THIS PROXY STATEMENT/ PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE MORGAN STANLEY OPINION
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ATTACHED AS ANNEX VI HERETO. STOCKHOLDERS OF PARAGON ARE URGED TO, AND SHOULD,
READ THE MORGAN STANLEY OPINION CAREFULLY AND IN ITS ENTIRETY.
In arriving at the Morgan Stanley Opinion, Morgan Stanley, among other
things: (i) reviewed certain publicly available financial statements and other
information of Paragon and Mariner, respectively; (ii) reviewed certain
internal financial statements and other financial and operating data
concerning Paragon and Mariner prepared by the managements of Paragon and
Mariner, respectively; (iii) analyzed certain financial projections prepared
by the managements of Paragon and Mariner, respectively; (iv) discussed the
past and current operations and financial condition and the prospects of
Mariner with senior executives of Mariner; (v) discussed the past and current
operations and financial condition and the prospects of Paragon with senior
executives of Paragon; (vi) analyzed the pro forma impact of the Merger on
Paragon's earnings per share, cash flows, capitalization and financial ratios;
(vii) reviewed the reported prices and trading activity for the Paragon Common
Stock and the Mariner Common Stock; (viii) compared the financial performance
of Paragon and Mariner and the prices and trading activity of the Paragon
Common Stock and the Mariner Common Stock with that of certain other
comparable publicly-traded companies and their securities; (ix) reviewed the
financial terms, to the extent publicly available, of certain comparable
acquisition transactions; (x) discussed with senior management of Paragon
their estimates of the synergies and cost savings anticipated from the Merger;
(xi) participated in discussions and negotiations among representatives of
Paragon, Mariner and their financial and legal advisors; (xii) reviewed the
Merger Agreement and certain related documents; and (xiii) performed such
other analyses and considered such other factors as it deemed appropriate.
In arriving at the Morgan Stanley Opinion, Morgan Stanley assumed and relied
upon, without independent verification, the accuracy and completeness of the
information reviewed by it for the purpose of the Morgan Stanley Opinion. With
respect to the financial projections, including the estimates of synergies and
cost savings anticipated from the Merger, Morgan Stanley assumed that they
were reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of Paragon and
Mariner, respectively. Morgan Stanley did not make any independent valuation
or appraisal of the assets or liabilities of Paragon or of Mariner, nor was
Morgan Stanley furnished with any such valuations or appraisals. Morgan
Stanley also assumed that the transaction described in the Merger Agreement
will be consummated on the terms set forth in the Merger Agreement. The Morgan
Stanley Opinion is necessarily based on economic, market and other conditions
as in effect on, and the information made available to, Morgan Stanley as of
the date of the Morgan Stanley Opinion.
The following is a summary of the financial analyses presented by Morgan
Stanley to the Paragon Board during the various Paragon Board meetings held on
April 8, 1998, April 10, 1998, and April 12, 1998.
Comparative Stock Price Performance. As part of its analysis, Morgan Stanley
reviewed the recent stock market performance of Paragon and Mariner and
compared such performance to that of a group of companies in the long-term
care industry, which group was comprised of Beverly Enterprises, Inc.,
Integrated Health Services, Inc., Sun Healthcare Group, Inc., Genesis Health
Ventures, Inc. and Harborside Healthcare Corp. Morgan Stanley also reviewed
the ratio of Mariner's to Paragon's stock prices over various time periods
ending April 9, 1998 (the last trading date prior to announcement of the
Merger), and computed the premium of the Exchange Ratio in relation to the
aforementioned ratios. The ratio of closing stock prices of Mariner to Paragon
for the various periods ending April 9, 1998 were as follows: 0.8215 for the
previous 3 months; 0.8135 for the previous 2 months; 0.8182 for the previous
month; and 0.8808 for the previous 10 days. Morgan Stanley observed that the
Exchange Ratio represented a premium of approximately 21.7%, 22.9%, 22.2%, and
13.5%, respectively, over the aforementioned ratios of Mariner's stock prices
to Paragon's stock prices for the aforementioned periods.
Precedent Transactions Analysis. Morgan Stanley reviewed certain publicly
available information regarding 13 selected business combinations in the long-
term care industry announced since January 4, 1994 (the "Comparable
Transactions"). The Comparable Transactions included the acquisition of The
Mediplex Group, Inc. by Sun Healthcare Group, Inc.; the acquisition of
Convalescent Services, Inc. by Mariner Health Group, Inc.; the acquisition of
Brian Center Corp. by Living Centers of America, Inc.; the acquisition of The
Hillhaven Corp. by Vencor, Inc.; the acquisition of Allegis Health Services,
Inc. by Mariner Health Group, Inc.; the
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acquisition of Horizon/CMS Healthcare Corp. by HEALTHSOUTH Corp.; the pending
acquisition of Retirement Care Associates, Inc. by Sun Healthcare Group, Inc.;
the acquisition of GranCare, Inc. by Living Centers of America, Inc. and
affiliates of Apollo Advisors, L.P.; the acquisition of The Multicare
Companies, Inc. by Genesis Health Ventures, Inc., The Cypress Group L.L.C. and
Texas Pacific Group; the acquisition of Regency Health Services, Inc. by Sun
Healthcare Group, Inc.; the acquisition of Arbor Health Care Co. by
Extendicare Inc.; the acquisition of certain assets of Horizon/CMS Healthcare
Corp. by Integrated Health Services, Inc.; and the acquisition of Summit Care
Corp. by Fountain View, Inc. For each of the Comparable Transactions, Morgan
Stanley reviewed, among other things: (i) aggregate value (equity value, plus
total debt, minority interest and the book value of preferred stock, less cash
and cash equivalents) ("Aggregate Value") paid for the acquired company as a
multiple of, among other things, latest twelve months earnings before
interest, taxes, depreciation and amortization ("EBITDA"), latest quarter
annualized EBITDA, and selected research analysts' estimates for next twelve
months EBITDA; (ii) adjusted aggregate value (Aggregate Value plus annual rent
expense capitalized at 12.5%) ("Adjusted Aggregate Value") paid for the
acquired company as a multiple of, among other things, latest twelve months
earnings before interest, taxes, depreciation, amortization, and rent expense
("EBITDAR"), latest quarter annualized EBITDAR, and selected research
analysts' estimates for next twelve months EBITDAR; and (iii) equity value
paid for the acquired company as a multiple of, among other things, latest
twelve months net income, and next fiscal year net income (based on First Call
Corporation ("First Call") estimates). Applying these multiples to
corresponding financial data for Mariner (based on the Mariner Financial
Forecast, as defined below) resulted in per share equity values of $18.87 to
$27.53 for the Mariner Common Stock. Morgan Stanley further observed that a
similar analysis utilizing the Sensitivity Case, as defined below, resulted in
per share equity values of $16.75 to $24.75 for the Mariner Common Stock.
No transaction utilized in the Comparable Transactions analysis is identical
to the Merger. In evaluating Comparable Transactions, Morgan Stanley made
judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Paragon and Mariner, such as the impact of
competition on the business of Paragon and Mariner and the industry generally,
industry growth and the absence of any adverse material change in the
financial condition and prospects of Paragon or Mariner or the industry or in
the financial markets in general. Mathematical analysis (such as determining
the average or median) is not in itself a meaningful method of using
comparable transaction data.
Discounted Cash Flow Analysis. Morgan Stanley performed discounted cash flow
analyses of Mariner to determine a range of present values per share of
Mariner Common Stock based on certain financial projections prepared by the
management of Mariner (the "Mariner Financial Forecast") and based on a
sensitivity case prepared by the management of Paragon (the "Sensitivity
Case"). Unlevered free cash flow was calculated as the after-tax operating
earnings of the Company (excluding any interest income, interest expense and
rent expense) plus depreciation and amortization, plus (or minus) net changes
in non-cash working capital, minus projected capital expenditures. Morgan
Stanley calculated terminal value by applying a range of multiples to EBITDAR
in fiscal 2003 from 8.0x to 10.0x. The unlevered free cash flows and terminal
value were then discounted to the present value using a range of discount
rates from 12.5% to 13.5%. Based on this analysis and the assumptions set
forth above, Morgan Stanley calculated per share equity values for the Mariner
Common Stock ranging from $17.00 to $26.04 for the Mariner Financial Forecast
and $16.07 to $24.92 for the Sensitivity Case.
Comparable Companies Trading Analysis. As part of its analysis, Morgan
Stanley compared certain financial information of Paragon and Mariner with the
corresponding publicly available financial information of 14 other long-term
care companies similar to Paragon and Mariner (the "Comparable Companies"),
including Advocat Inc., Beverly Enterprises, Inc., Centennial HealthCare
Corp., Extendicare Inc., Genesis Health Ventures, Inc., Harborside Healthcare
Corp., Health Care and Retirement Corporation, Manor Care, Inc., National
HealthCare Corp., Sun Healthcare Group, Inc., Integrated Health Services,
Inc., NovaCare, Inc., Rehabcare Group, Inc. and Vencor, Inc. For each of the
Comparable Companies, Morgan Stanley calculated (based on market information
as of April 9, 1998, the latest publicly available 10-Ks and 10-Qs, and
estimates of earnings per share and five-year projected growth rates based on
First Call estimates as of April 9, 1998), among other
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things: (i) Aggregate Value as a multiple of latest twelve months EBITDA and
latest quarter annualized EBITDA; (ii) Adjusted Aggregate Value as a multiple
of latest twelve months EBITDAR and latest quarter annualized EBITDAR; (iii)
price to next twelve months earnings ratio; (iv) price to estimated calendar
year 1998 earnings ratio; and (v) price to estimated calendar year 1999
earnings ratio. Applying these multiples to corresponding financial data for
Mariner (based on the Mariner Financial Forecast) resulted in per share equity
values of $15.51 to $23.54 for the Mariner Common Stock. Morgan Stanley
further observed that a similar analysis utilizing the Sensitivity Case
resulted in per share equity values of $13.50 to $20.50 for the Mariner Common
Stock.
With respect to Paragon, Morgan Stanley compared as of April 9, 1998, among
other things, Paragon's Adjusted Aggregate Value as a multiple of latest
twelve months revenue and EBITDAR, Paragon's Aggregate Value as a multiple of
latest twelve months EBITDA, Paragon's price to earnings ratios for latest
twelve months net income and estimated fiscal 1998 and fiscal 1999 net income
(based on First Call), and Paragon's ratio of estimated next twelve months
earnings (based on First Call) to its mean First Call five-year earnings
growth rate estimate to similar statistics for the Comparable Companies. A
comparison of margins and growth rates included, among other things, margins
for latest twelve months EBITDAR, latest twelve months EBITDA, latest twelve
months net income and the mean First Call five-year earnings growth rate
estimate. Morgan Stanley observed that, with the exception of the margin for
latest twelve months net income and the projected net income growth rate, the
margins for Paragon were slightly below the median of similar statistics for
the Comparable Companies. Morgan Stanley further observed that the multiples
of Paragon's Aggregate Value, Adjusted Aggregate Value and Equity Value to the
respective aforementioned operating statistics were generally near the median
or at the high end of the range of similar multiples for the Comparable
Companies.
No company utilized in the Comparable Companies analysis is identical to
Paragon or Mariner. In evaluating Comparable Companies, Morgan Stanley made
judgments and assumptions with regard to industry performance, general
business, economic, market and financial conditions and other matters, many of
which are beyond the control of Paragon and Mariner, such as the impact of
competition on the business of Paragon and Mariner and the industry generally,
industry growth and the absence of any adverse material change in the
financial condition and prospects of Paragon or Mariner or the industry or in
the financial markets in general. Mathematical analysis (such as determining
the average or median) is not in itself a meaningful method of using
comparable transaction data.
Contribution Analysis. Morgan Stanley analyzed the pro forma contribution of
each of Paragon and Mariner to the combined company. Such analysis included
relative contributions of revenues, EBITDAR, EBITDA, and net income at various
time periods. All financial information relating to Mariner was adjusted to
reflect Paragon's September 30 fiscal year end. Such analysis showed that,
based on the Mariner Financial Forecast and a financial forecast for Paragon
provided by Paragon management (the "Paragon Financial Forecast"), Paragon's
fiscal 1998 contribution would be approximately 70.2% of projected revenues,
67.4% of projected EBITDAR, 60.8% of projected EBITDA, and 40.6% of projected
net income. These contribution percentages did not take into account any
estimates by management of the synergies or cost savings anticipated from the
Merger. Morgan Stanley observed that the aforementioned contribution
percentages for Paragon compared to Paragon's pro forma common stock ownership
of approximately 56.4%.
Pro Forma Analysis of the Merger. Morgan Stanley analyzed certain pro forma
effects of the Merger on the earnings per share, capitalization and other
financial ratios of the combined company, as compared to similar ratios for
Paragon, after giving effect to the Exchange Ratio. These analyses were based
on the Mariner Financial Forecast, the Paragon Financial Forecast and
estimated synergies provided by Paragon management. Morgan Stanley observed
that, after taking into account such estimates of earnings and synergies, the
Merger would be accretive to Paragon's standalone earnings per share estimates
in fiscal 1999 and fiscal 2000. Morgan Stanley further observed that a similar
analysis utilizing the Sensitivity Case rather than the Mariner Financial
Forecast also indicated that the Merger would be accretive to Paragon's
standalone earnings per share estimates in fiscal 1999 and fiscal 2000.
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The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all of its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, selecting any
portion of Morgan Stanley's analyses, without considering all analyses, would
create an incomplete view of the process underlying the Morgan Stanley
Opinion. In addition, Morgan Stanley may have deemed various assumptions more
or less probable than other assumptions, so that the ranges of valuations
resulting from any particular analysis described above should not be taken to
be Morgan Stanley's view of the actual value of Paragon or Mariner.
In performing its analysis, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Paragon and Mariner.
The analyses performed by Morgan Stanley are not necessarily indicative of
actual values, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as a part of
Morgan Stanley's analysis of the fairness of the Exchange Ratio from a
financial point of view to Paragon and were provided to the Paragon Board in
connection with the delivery of the Morgan Stanley Opinion. The analyses do
not purport to be appraisals or to reflect the prices at which Paragon or
Mariner might actually be sold. In addition, as described above, the Morgan
Stanley Opinion, including Morgan Stanley's presentation to the Paragon Board,
was one of many factors taken into consideration by the Paragon Board in
making its determination to approve the Merger.
Paragon retained Morgan Stanley based upon its experience and expertise.
Morgan Stanley is an internationally recognized investment banking and
advisory firm. Morgan Stanley, as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate, estate and other
purposes. Morgan Stanley makes a market in Paragon Common Stock, Paragon's
debt securities and Mariner's debt securities and may continue to provide
investment banking services to the combined entity in the future. In the
course of its market-making and other trading activities, Morgan Stanley may,
from time to time, have a long or short position in, and buy and sell the
securities and senior loans of, Paragon and Mariner. Morgan Stanley and its
affiliates have, in the past, provided financial advisory services to Paragon
and have received customary fees for the rendering of such services.
Pursuant to a letter agreement dated April 1, 1998 between Paragon and
Morgan Stanley, Paragon has agreed to pay Morgan Stanley a fee for its
financial advisory services in connection with the business combination.
Paragon has agreed to pay Morgan Stanley: (i) a transaction fee of $5.4
million to be paid if the Merger is successfully completed and (ii) an
advisory fee and/or an exposure fee of up to $1.2 million to be paid in
certain circumstances if the Merger is not completed. In addition, Paragon has
agreed to reimburse Morgan Stanley for its out-of-pocket expenses related to
the engagement and to indemnify Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees and each person, if any,
controlling Morgan Stanley or any of its affiliates against certain
liabilities, including liabilities under federal securities laws, and
expenses, related to Morgan Stanley's engagement.
OPINION OF BT ALEX. BROWN INCORPORATED
The Mariner Board retained BT Alex. Brown to act as its financial advisor in
connection with the Merger based on BT Alex. Brown's long-standing
relationship with Mariner and its reputation, expertise and experience in
similar transactions. On April 13, 1998, BT Alex. Brown rendered to the
Mariner Board its oral opinion, which was subsequently confirmed in writing,
that, as of such date, based upon the facts and circumstances as they existed
at the time, and subject to certain assumptions and factors set forth in such
opinion, the Exchange Ratio was fair from a financial point of view to the
holders of Mariner Common Stock. No limitations were imposed by the Mariner
Board upon BT Alex. Brown with respect to the investigations made or
procedures followed by it in rendering its opinion.
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THE FULL TEXT OF THE WRITTEN OPINION OF BT ALEX. BROWN, DATED APRIL 13, 1998
(THE "BT ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS,
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN,
IS ATTACHED HERETO AS ANNEX VII AND IS INCORPORATED HEREIN BY REFERENCE.
MARINER STOCKHOLDERS ARE URGED TO READ THE BT ALEX. BROWN OPINION IN ITS
ENTIRETY. THE BT ALEX. BROWN OPINION IS DIRECTED TO THE MARINER BOARD,
ADDRESSES ONLY THE FAIRNESS OF THE EXCHANGE RATIO TO THE HOLDERS OF MARINER
COMMON STOCK FROM A FINANCIAL POINT OF VIEW AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY HOLDER OF MARINER COMMON STOCK AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE MARINER SPECIAL MEETING. THE BT ALEX. BROWN
OPINION WAS RENDERED TO THE MARINER BOARD FOR ITS CONSIDERATION IN DETERMINING
WHETHER TO APPROVE THE MERGER AND THE MERGER AGREEMENT. THE DISCUSSION OF THE
BT ALEX. BROWN OPINION IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE BT ALEX. BROWN OPINION.
In connection with the BT Alex. Brown Opinion, BT Alex. Brown reviewed
certain publicly available financial information and other information
concerning Mariner and Paragon and certain internal analyses and other
information furnished to it by Mariner and Paragon. BT Alex. Brown also held
discussions with the members of the senior management of Mariner and Paragon
regarding the business and prospects of their respective companies and the
joint prospects of a combined company. In addition, BT Alex. Brown (i)
reviewed the reported prices and trading activity for the common stock of both
Mariner and Paragon, (ii) compared certain financial and stock market
information for Mariner and Paragon with similar information for other
companies whose securities are publicly traded, (iii) reviewed the financial
terms of certain recent business combinations which it deemed comparable to
the Merger in whole or in part, (iv) reviewed the terms of the Merger
Agreement and certain related documents, and (v) performed such other studies
and analyses and considered such other factors as it deemed appropriate. In
conducting its review and arriving at its opinion, BT Alex. Brown assumed and
relied upon, without independent verification, the accuracy, completeness and
fairness of the information furnished to or otherwise reviewed by or discussed
with it for purposes of rendering its opinion. With respect to the financial
projections of Mariner and Paragon and other information relating to the
prospects of Mariner and Paragon provided to BT Alex. Brown by each company,
BT Alex. Brown assumed that such projections and other information were
reasonably prepared and reflected the best currently available judgments and
estimates of the respective management of Mariner and Paragon as to the likely
future financial performance of their respective companies and of the combined
entity. BT Alex. Brown assumed, with the consent of Mariner, that the Merger
will qualify as a tax-free transaction for federal income tax purposes for the
stockholders of Mariner. BT Alex. Brown did not make an independent evaluation
or appraisal of the assets of Mariner or Paragon, nor has BT Alex. Brown been
furnished with any such evaluation or appraisal. The BT Alex. Brown Opinion is
based on market, economic and other conditions as they existed and could be
evaluated as of the date of the opinion letter.
In arriving at its opinion, BT Alex. Brown was not authorized to solicit,
and did not solicit, interest from any party with respect to the acquisition
of Mariner or any of its assets.
The following is a summary of the presentation BT Alex. Brown made to the
Mariner Board on April 9, 1998 in connection with the rendering of the BT
Alex. Brown Opinion on April 13, 1998:
Historical Stock Price Performance. BT Alex. Brown reviewed and analyzed the
daily closing per share market prices for Mariner Common Stock, from April 7,
1995 to April 9, 1998 and, for Paragon Common Stock, from November 5, 1997
(the closing date of the LCA/GranCare/Apollo Mergers) to April 9, 1998. BT
Alex. Brown also reviewed the daily closing per share market prices of the
Mariner Common Stock and compared the movement of such daily closing prices
with the movement of the S&P 500 and a composite index of certain long-term
care companies which included: Beverly Enterprises, Inc., Centennial
Healthcare Corp., Genesis Health Ventures, Inc., Harborside Healthcare Corp.,
Health Care & Retirement Corporation, Integrated Health
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Services, Inc., Manor Care, Inc., Paragon, Sun Healthcare Group, Inc., and
Vencor, Inc. (together, the "Long-term Care Index Excluding Mariner") for the
periods from April 7, 1995 to April 9, 1998. BT Alex. Brown also reviewed the
daily closing per share market prices of the Paragon Common Stock and compared
the movement of such daily closing prices with the movement of the S&P 500 and
certain long-term care companies which included: Beverly Enterprises, Inc.,
Centennial Healthcare Corp., Genesis Health Ventures, Inc., Harborside
Healthcare Corp., Health Care & Retirement Corporation, Integrated Health
Services, Inc., Manor Care, Inc., Mariner, Sun Healthcare Group, Inc., and
Vencor, Inc. (together, the "Long-term Care Index Excluding Paragon") for the
periods from November 5, 1997 to April 9, 1998.
Analysis of Certain Other Publicly Traded Companies. BT Alex. Brown compared
certain financial information relating to Mariner and Paragon to certain
corresponding information from a group of nine publicly traded long-term care
companies (consisting of Beverly Enterprises, Inc., Centennial Healthcare
Corp., Genesis Health Ventures, Inc., Harborside Healthcare Corp., Health Care
& Retirement Corporation, Integrated Health Services, Inc., Manor Care, Inc.,
Sun Healthcare Group, Inc., and Vencor, Inc. (together, the "Selected
Companies")). Such financial information included, among other things, (i)
capitalization ratios; (ii) ratios of common equity market value as adjusted
for debt, cash and capitalized operating leases ("Lease Adjusted Value") to
revenues and earnings before interest expense, income taxes, depreciation,
amortization, and operating rents ("EBITDAR"); (iii) ratios of common equity
market value as adjusted for debt and cash ("Adjusted Value") to earnings
before interest expense, income taxes, depreciation and amortization
("EBITDA"), each for the latest twelve months ending December 31, 1997 as
derived from publicly available information ("LTM"); and (iv) ratios of common
equity market prices per share ("Equity Value") to earnings per share ("EPS")
for the LTM period and as reported by the Institutional Brokers Estimating
System ("IBES") for the 1998 and 1999 calendar years. BT Alex. Brown noted
that, the multiple of Lease Adjusted Value to LTM revenues was 1.6x for
Mariner and 1.4x for Paragon, compared to a range of 1.0x to 2.8x, with a mean
of 1.8x, for the Selected Companies; the multiple of Lease Adjusted Value to
LTM EBITDAR was 9.7x for Mariner and 9.5x for Paragon, compared to a range of
6.8x to 15.1x, with a mean of 9.9x, for the Selected Companies. BT Alex. Brown
further noted that the multiple of Adjusted Value to LTM EBITDA was 9.8x for
Mariner and 10.1x for Paragon, compared to a range of 6.4x to 15.7x, with a
mean of 10.5x, for the Selected Companies. BT Alex. Brown noted that the
multiple of Equity Value to calendar year 1998 EPS was 16.8x for Mariner and
not meaningful for Paragon, compared to a range of 11.5x to 24.3x, with a mean
of 17.2x, for the Selected Companies; and the multiple of Equity Value to
calendar year 1999 EPS was 14.6x for Mariner and 15.9x for Paragon, compared
to a range of 10.0x to 20.4x, with a mean of 14.4x, for the Selected
Companies.
Analysis of Selected Mergers and Acquisitions. BT Alex. Brown reviewed the
financial terms, to the extent publicly available, of 13 pending or completed
mergers and acquisitions in the long-term care industry since January 1, 1995
(the "Selected Transactions"). BT Alex. Brown calculated various financial
multiples based on certain publicly available information for each of the
Selected Transactions and compared them to corresponding financial multiples
for the Merger, based on the Exchange Ratio of 1.0x. The 13 long-term care
transactions reviewed, in reverse chronological order of public announcement,
were: the Heritage Partners acquisition of Summit Care Corporation; the
Extendicare Health Services acquisition of Arbor Health Care Company; the Sun
Healthcare Group, Inc. acquisition of Regency Health Services; the Genesis
Health Ventures, Inc. acquisition of Multicare Companies, Inc.; the
LCA/GranCare/Apollo Mergers; the Sun Healthcare Group, Inc. acquisition of
Retirement Care Associates, Inc.; the HEALTHSOUTH Corporation acquisition of
Horizon/CMS Healthcare Corporation; the Vencor, Inc. acquisition of TheraTx,
Incorporated; the GranCare, Inc. acquisition of Evergreen Health Care, Inc.;
the Vencor, Inc. acquisition of The Hillhaven Corporation; the Living Centers
of America, Inc. acquisition of The Brian Center Corporation; the Hillhaven
Corporation acquisition of Nationwide Care, Inc.; and the Mariner Health
Group, Inc. acquisition of Convalescent Services, Inc. BT Alex. Brown noted
that the multiple of value of consideration paid for common equity adjusted
for debt, capitalized operating leases and cash ("Lease Adjusted Purchase
Price") to trailing twelve month revenues was 1.7x for the Merger versus a
range of 1.3x to 2.7x, with a mean of 1.7x, for the Selected Transactions and
the multiple of Lease Adjusted Purchase Price to trailing twelve month EBITDAR
was 10.0x for the Merger versus a range of 8.0x to 13.2x, with a mean of 9.6x,
for the Selected Transactions. BT Alex. Brown further noted that the multiple
of value of
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consideration paid for common equity adjusted for debt and cash ("Adjusted
Purchase Price") to trailing twelve month EBITDA was 10.1x for the Merger
versus a range of 8.1x to 14.0x, with a mean of 10.5x, for the Selected
Transactions. BT Alex. Brown further noted that the multiple of value of
consideration paid for common equity ("Equity Purchase Price") to trailing
twelve month net income was 21.4x for the Merger versus a range of 16.1x to
40.6x, with a mean of 24.5x, for the Selected Transactions and the multiple of
Equity Purchase Price to forward twelve month net income was 16.5x for the
Merger versus a range of 12.5x to 23.6x, with a mean of 17.2x, for the
Selected Transactions. BT Alex. Brown also noted that the Merger was effected
at a 27.4% premium to Mariner's per share market price of $15.50 one month
prior to announcement. All multiples for the Selected Transactions were based
on public information available at the time of announcement of such
transaction, without taking into account differing market and other conditions
during the over three year period during which the Selected Transactions
occurred.
Historical Exchange Ratio Analysis. BT Alex. Brown reviewed and analyzed the
historical ratio of the daily per share market closing prices of Paragon
Common Stock divided by the corresponding prices of the Mariner Common Stock
("Exchange Ratios") one day prior to announcement, one month prior to
announcement and the highest Exchange Ratio since November 5, 1997. Such
Exchange Ratios were 0.943x, 0.740x and 0.948x, respectively. The Exchange
Ratio of 1.0x represented premiums of 6.0%, 35.1% and 5.5% to these Exchange
Ratios, respectively. BT Alex. Brown also reviewed the average Exchange Ratios
for the 30 days and 90 days ending April 9, 1998. Such Exchange Ratios were
0.816x and 0.821x, respectively, and the Exchange Ratio of 1.0x represented
premiums of 22.6% and 21.8% to such Exchange Ratios, respectively.
Contribution Analysis. BT Alex. Brown reviewed the relative contributions of
Mariner and Paragon compared to Mariner's relative ownership of approximately
42.9% of the outstanding equity capital of the combined company to the pro
forma income statement of the combined company, based on managements'
projections for their respective companies for calendar years 1998 and 1999.
This analysis showed that on a pro forma combined basis, Mariner and Paragon
would account for approximately 54.9% and 45.1%, respectively, of the combined
company's pro forma 1998 net income and approximately 44.3% and 55.7%,
respectively, of the combined company's pro forma 1999 net income. This
analysis excluded the effects of any synergies or purchase accounting
adjustments from the Merger.
Discounted Cash Flow Analysis. BT Alex. Brown performed discounted cash flow
analyses for Mariner, Paragon and the pro forma combined company. BT Alex.
Brown used estimates of projected financial performance for Mariner, Paragon
and the pro forma combined company for the years 1998 through 2003 prepared by
their respective managements. For each company and the pro forma combined
company, BT Alex. Brown aggregated the present value of the cash flows through
2003 with the present value of a range of terminal values. BT Alex. Brown
discounted these cash flows at discount rates ranging from 11.0% to 15.0%. The
terminal value was computed based on projected EBITDAR in calendar year 2003
and a range of terminal multiples of 8.0x to 10.0x. BT Alex. Brown arrived at
such discount rates based on its judgment of the weighted average cost of
capital of publicly traded long-term care companies, and arrived at such
terminal values based on its review of the trading characteristics of the
common stock of the Selected Companies. This analysis indicated a range of per
share values of $16.27 to $29.73 per share for Mariner, $11.41 to $33.26 for
Paragon, and $16.20 to $35.18 for the pro forma combined company.
Pro Forma Merger Analysis. BT Alex. Brown analyzed certain pro forma effects
of the Merger. Based on such analysis, BT Alex. Brown computed the resulting
accretion to the combined company's EPS estimate for the calendar years 1999
and 2000 after taking into account potential cost savings and other synergies
estimated by the managements of Mariner and Paragon. BT Alex. Brown noted that
after taking into account potential cost savings and other synergies for the
calendar years ending 1999 and 2000, and before nonrecurring costs relating to
the Merger, the Merger would be approximately 10.4% accretive to Paragon's EPS
and approximately 3.7% accretive to Mariner's EPS for the calendar year 1999
and approximately 10.5% accretive to Paragon's EPS and approximately 7.4%
accretive to Mariner's EPS for the calendar year 2000.
BT Alex. Brown also computed the accretion to the combined company's cash
flow per share ("CPS") for the calendar years 1999 and 2000 after taking into
account the same potential cost savings and other synergies.
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BT Alex. Brown noted that after taking into account potential cost savings and
other synergies for the calendar years 1999 and 2000, and before nonrecurring
costs relating to the Merger, the Merger would be approximately 1.4% accretive
to Paragon's CPS and 28.4% accretive to Mariner's CPS for the calendar year
1999 and approximately 2.1% accretive to Paragon's CPS and 27.4% accretive to
Mariner's CPS for the calendar year 2000. There can be no assurance that the
combined company will be able to realize savings and synergies in the amounts
identified, or at all, following the Merger.
No company used in the analysis of other publicly traded companies nor any
transaction used in the analysis of selected mergers and acquisitions
summarized above is identical to Mariner, Paragon or the Merger. Accordingly,
such analyses must take into account differences in the financial and
operating characteristics of the Selected Companies and the companies in the
Selected Transactions and other factors that would affect the public trading
value and acquisition value of the Selected Companies and the Selected
Transactions, respectively.
While the foregoing summary describes all analyses and factors that BT Alex.
Brown deemed material in its presentation to the Mariner Board, it is not a
comprehensive description of all analyses and factors considered by BT Alex.
Brown. The preparation of a fairness opinion is a complex process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the applications of these methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. BT Alex. Brown believes that its analyses must be
considered as a whole and that selecting portions of its analyses and of the
factors considered by it, without considering all analyses and factors, would
create an incomplete view of the evaluation process underlying the BT Alex.
Brown Opinion. In performing its analyses, BT Alex. Brown considered general
economic, market and financial conditions and other matters, many of which are
beyond the control of Mariner and Paragon. The analyses performed by BT Alex.
Brown are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than those suggested by such
analyses. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty. Additionally, analyses relating to the value of a
business do not purport to be appraisals or to reflect the prices at which the
business actually may be sold. Furthermore, no opinion is being expressed as
to the prices at which shares of Paragon Common Stock may trade at any future
time.
Pursuant to a letter agreement dated April 1, 1998 between Mariner and BT
Alex. Brown, Mariner has agreed to pay BT Alex. Brown $1.25 million for
rendering the BT Alex. Brown Opinion which amount will be credited against a
transaction fee of $5.4 million, payable upon consummation of the Merger. In
addition, Mariner has agreed to reimburse BT Alex. Brown for its reasonable
out-of-pocket expenses incurred in connection with rendering financial
advisory services, including fees and disbursements of its legal counsel.
Mariner has agreed to indemnify BT Alex. Brown and its directors, officers,
agents, employees and controlling persons, for certain costs, expenses,
losses, claims, damages and liabilities related to or arising out of its
rendering of services under its engagement as financial advisor.
The Mariner Board retained BT Alex. Brown to act as its advisor based upon
BT Alex. Brown's longstanding relationship with Mariner, and based upon BT
Alex. Brown's qualifications, reputation and experience with similar
transactions. BT Alex. Brown is an internationally recognized investment
banking firm and, as a customary part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, private placements and
valuations for corporate and other purposes. BT Alex. Brown may actively trade
the debt and equity securities of Mariner and Paragon for its own account and
for the account of its customers and accordingly may at any time hold a long
or short position in such securities. BT Alex. Brown maintains a market in the
Mariner Common Stock and regularly publishes research reports regarding the
long-term care industry and the businesses and securities of Mariner and other
publicly traded companies in the long-term care industry.
DELISTING AND DEREGISTRATION OF MARINER COMMON STOCK
Following the consummation of the Merger, the Mariner Common Stock will be
delisted from Nasdaq and deregistered under the Exchange Act.
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THE MERGER AGREEMENT
GENERAL
Paragon, Mariner and Merger Sub have entered into the Merger Agreement which
provides that, subject to the satisfaction of the conditions thereof (see
"Conditions to the Consummation of the Merger"), Merger Sub will be merged
with and into Mariner, with Mariner 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 and the legal effectiveness
thereof will be the Effective Time of the Merger.
THE DESCRIPTION OF THE MERGER AGREEMENT CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE 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.
MERGER CONSIDERATION
Each share of Mariner Common Stock issued and outstanding as of the
Effective Time of the Merger shall be converted into the right to receive one
share of Paragon Common Stock. Paragon is also obligated to make cash payments
with respect to certain outstanding Mariner options and to assume certain
other Mariner options. See "--Mariner Stock Options."
EXCHANGE OF CERTIFICATES
As soon as reasonably practicable after the Effective Time of the Merger,
the Exchange Agent will mail to each holder of record of a Mariner Certificate
that immediately prior to the Effective Time of the Merger represented issued
and outstanding shares of Mariner Common Stock: (i) a letter of transmittal;
and(ii) instructions for use in effecting the surrender of the Mariner
Certificates in exchange for Paragon Certificates representing shares of
Paragon Common Stock. Upon surrender of a Mariner 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 Paragon, together with
such letter of transmittal, duly executed, and any other required documents,
the holder of such Mariner Certificate will be entitled to receive in exchange
therefor a Paragon Certificate representing a number of shares equivalent to
the number of shares represented by the surrendered Mariner Certificate, and
the Mariner Certificate so surrendered shall thereafter be cancelled.
No dividends or other distributions with respect to Paragon Common Stock
declared or made after the Effective Time of the Merger with a record date
after the Effective Time of the Merger will be paid to the holder of any
unsurrendered Mariner Certificate possessing the right to receive shares of
Paragon Common Stock upon the surrender thereof until the holder of such
Mariner Certificate surrenders such Mariner Certificate.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of each party to effect the Merger are subject to
the satisfaction or waiver at or prior to the Effective Time of the Merger of
the following conditions: (i) the Merger Proposals shall have been approved by
the requisite vote of the holders of Mariner Common Stock and Paragon 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 Paragon, Mariner or Merger Sub and be
in effect that prohibits or restricts the consummation of the Merger or makes
such consummation illegal (each party agreeing to use all commercially
reasonable efforts to have any such prohibition lifted); (iii) the
Registration Statement of which this Proxy Statement/Prospectus is a part
shall have become effective, and any required post-effective amendment shall
have become effective under the Securities Act and such Registration Statement
shall not be
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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 to be issued in connection with the
Merger shall have been complied with; (iv) the applicable waiting periods
under the HSR Act shall have expired or been earlier terminated; (v) 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 of the Merger from, any governmental authority in
connection with the consummation of the 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 Merger Agreement) on Paragon,
Mariner or Merger Sub or materially adversely affect the consummation of the
Merger; and (vi) Mariner and Paragon shall have received an opinion from their
respective counsel to the effect that the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Code and that
Mariner, Paragon and Merger Sub will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code with respect to the Merger.
The obligations of Mariner to effect the Merger also are subject to the
satisfaction, or waiver by Mariner, prior to the Effective Time of the 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, promulgated,
entered, enforced or deemed applicable to the Merger that would make illegal
or prohibit the consummation of the Merger or render Mariner unable to effect
the 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 Merger
illegal or prohibit the consummation of the Merger or render Mariner unable to
effect the Merger, and there shall be no proceeding or other action pending or
threatened against Paragon or its subsidiaries that is reasonably likely to
have a Material Adverse Effect; (iii) (A) Paragon and Merger Sub shall have
performed in all material respects their agreements and covenants contained in
the Merger Agreement required to be performed at or prior to the Effective
Time of the Merger and (B) the representations and warranties of Paragon and
Merger Sub contained in the Merger Agreement (without regard to any
materiality exceptions or provisos contained therein) shall be true and
correct in all material respects as of the Effective Time of the Merger as
though made on and as of such time, except for such breaches, untruths or
inaccuracies which would not, singly or in the aggregate, reasonably be
expected to constitute an Omnibus Parent Material Adverse Event; and (iv)
Paragon shall have entered into the Definitive Financing Arrangements (as
defined in the Merger Agreement).
The obligations of Paragon and Merger Sub to effect the Merger are subject
to the satisfaction, or waiver by Paragon and Merger Sub, prior to the
Effective Time of the 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, promulgated, entered, enforced or deemed applicable to the
Merger that would make illegal or prohibit the consummation of the Merger or
render Paragon unable to effect the 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 Merger illegal or prohibit the consummation of the Merger
or render Paragon or Merger Sub unable to effect the Merger, and there shall
be no proceeding or other action pending or threatened against Mariner 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 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; (iv) (A) Mariner shall have performed in all material respects its
agreements and covenants contained in the Merger Agreement required to be
performed at or prior to the Effective Time of the Merger and (B) the
representations and warranties of Mariner contained in the Merger Agreement
(without regard to any materiality exceptions or provisos contained therein)
shall be true and correct in all material respects as of the Effective Time of
the Merger as though made on and as of such time, except for such breaches,
untruths or inaccuracies which would not, singly or in the aggregate,
reasonably be expected to constitute an Omnibus Company Material Adverse
Event.
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The Merger Agreement provides that the effect of the following events,
circumstances or occurrences will be disregarded when determining the
continuing accuracy of each parties representations and warranties as of the
Effective Time of the Merger, which determination is a reciprocal condition to
each party's obligation to consummate the Merger:
(i) Economic conditions affecting the U.S. economy or the health care
industry generally;
(ii) The proposal, adoption or implementation after April 13, 1998 of any
law, statute, rule or regulation relating to health care, Medicaid or
Medicare, including, without limitation, the proposal, adoption or
implementation of prospective payment systems and "salary equivalency"
rates (including amendments to any salary equivalency rates currently in
effect);
(iii) The Merger or the announcement thereof, including without
limitation, resignations of key employees;
(iv) Any action or event permitted by Section 5.01 of the Merger Agreement
which contains the provisions regarding the conduct by Mariner and Paragon
of their respective businesses pending the consummation of the Merger; or
(v) Any matter identified in Sections 3.04 and 4.04 of Mariner's and
Paragon's respective Disclosure Letters, which sections set forth
circumstances that could give rise to a Material Adverse Effect.
The existence or occurrence of a Material Adverse Effect notwithstanding the
exclusions referred to in the immediately preceding sentence will give rise to
an "Omnibus Parent Material Adverse Event," in the case of Paragon and Merger
Sub, or an "Omnibus Company Material Adverse Event," in the case of Mariner.
ACCOUNTING TREATMENT
The Merger will be treated for accounting purposes in accordance with the
rules for purchase accounting. Accordingly, the assets and liabilities of
Mariner will be recorded on Paragon's books at their estimated fair market
values with any remaining purchase price reflected as goodwill. See the "Notes
to the Paragon Health Network, Inc. Pro Forma Condensed Consolidated Financial
Statements" appearing elsewhere herein.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinions of Powell, Goldstein, Frazer & Murphy LLP, counsel to
Paragon, and Testa, Hurwitz & Thibeault, LLP, counsel to Mariner, the
following are the material federal income tax consequences of the Merger. An
opinion of counsel is based on such counsel's analysis of the facts and law,
and expresses what such 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. Opinions of counsel 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 Merger and does not discuss
state or local tax consequences. Moreover, the tax treatment applicable to a
stockholder may vary depending upon his or her 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
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DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE. ANY SUCH CHANGE MAY OR
MAY NOT BE RETROACTIVE AND 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 MARINER STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS
TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGER, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND THE
POSSIBLE EFFECTS OF CHANGES TO APPLICABLE TAX LAWS.
TAX OPINIONS. Paragon and Mariner will receive opinions of Powell,
Goldstein, Frazer & Murphy LLP and Testa, Hurwitz & Thibeault, LLP,
respectively, dated immediately prior to the Effective Time of the Merger,
that:
(i) the Merger qualifies as a "reorganization" within the meaning of
Section 368(a) of the Code; and
(ii) Paragon, Mariner and Merger Sub are each a "party to a
reorganization" within the meaning of Section 368(b) of the Code with
respect to the Merger.
An opinion of counsel is not binding on the IRS or the courts. Moreover, the
tax opinions are based upon, among other things, certain representations as to
factual matters made by Paragon and Mariner which, if incorrect or incomplete
in any material respect, would change the conclusions reached in the opinions.
THE MERGER. If the Merger qualifies as a reorganization within the meaning
of Section 368(a) of the Code, the following will be the federal income tax
consequences to Mariner stockholders who receive solely Paragon Common Stock
as a result of the Merger: (i) Mariner stockholders will not recognize gain or
loss upon the receipt of Paragon Common Stock in exchange for their shares of
Mariner Common Stock pursuant to the Merger; (ii) each holder of Mariner
Common Stock will have a basis in the Paragon Common Stock equal to his or her
tax basis in the Mariner Common Stock; and (iii) each Mariner stockholder's
holding period for his or her Paragon Common Stock will include the holding
period of his or her Mariner Common Stock, provided that the Mariner Common
Stock is held as a capital asset immediately prior to the Effective Time of
the Merger.
Neither Paragon, Mariner nor Merger Sub will recognize any gain or loss as a
result of the Merger, and Mariner's basis and holding period with respect to
each of its assets after the Merger will be the same as the basis and holding
period of those assets immediately prior to the Effective Time of the Merger.
If the Merger does not qualify as a reorganization within the meaning of
Section 368(a) of the Code, the Mariner stockholders will recognize gain or
loss upon the receipt of the Paragon Common Stock in exchange for their
Mariner Common Stock equal to the difference between the fair market value of
the Paragon Common Stock and their respective basis in their Mariner Common
Stock.
BACK-UP WITHHOLDING REQUIREMENTS. The information reporting requirements of
the Code 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 Mariner Common Stock, unless the stockholder: (i) is a
corporation or comes within certain other exempt categories and, when
required, so demonstrates; 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 his or her 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 advisors 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.
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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 Merger is subject to the requirements of the HSR Act. The HSR Act
requires, among other things, that certain information regarding the Merger be
furnished to the Antitrust Division of the Department of Justice and the
Federal Trade Commission. The required waiting period expired on June 18,
1998. The Merger is subject to applicable local, state and federal
requirements for notice and/or review of the transaction, or the post-merger
review of the operations of Paragon and/or Mariner 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 Paragon nor Mariner is
aware of any other governmental or regulatory approvals required for the
consummation of the Merger. Neither Paragon nor Mariner believe that
satisfying such requirements will prevent or delay the consummation of the
Merger.
OTHER APPROVALS AND CONSENTS
In certain instances, the Merger will require the consent of third-parties.
Paragon and Mariner are in the process of contacting such third-parties with
regard to obtaining any necessary consents, but have 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 thereof. The inability
of Paragon or Mariner to obtain certain of such consents could adversely
affect Paragon's or Mariner's ability to consummate the Merger. For further
information regarding consents being sought in connection with certain
outstanding Paragon and Mariner indebtedness, see "Description of Financing
Arrangements."
EFFECT ON MARINER EMPLOYEE BENEFIT PLANS AND EMPLOYEE AGREEMENTS
BENEFIT MAINTENANCE. The Merger Agreement provides that from and after the
Effective Time of the Merger, Paragon and its subsidiaries will honor in
accordance with their terms all existing employment, severance, consulting and
salary continuation agreements between Mariner or any of its subsidiaries and
any current or former officer, director, employee or consultant of Mariner or
any of its subsidiaries or group of such officers, directors, employees or
consultants. In addition, certain officers of Mariner may be entitled to
certain change in control payments under their employment agreements. See
"Interests of Certain Persons in the Merger."
SERVICE CREDIT. To the extent permitted under applicable law, each employee
of Mariner or its subsidiaries will be given credit for all service with
Mariner or its subsidiaries (or service credited by Mariner or its
subsidiaries) in accordance with the customary practices of Paragon and its
subsidiaries under all employee benefit plans, programs, policies and
arrangements maintained by Paragon in which such employees may 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
Paragon and Merger Sub have agreed that all rights to indemnification
existing in favor of the present or former directors, officers and employees
of Mariner (as such) or any of its subsidiaries or present or former directors
of Mariner or any of its subsidiaries serving or who have served at Mariner'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 Mariner Charter or Mariner
Bylaws, or the articles of
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incorporation, bylaws or similar documents of any of Mariner's subsidiaries
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
limitation applicable to such matters, and that Paragon shall comply fully
with its obligations with respect thereto. Without limiting the foregoing,
after the Effective Time of the Merger, Paragon 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 shall provide an
undertaking to repay such advance if it is ultimately determined that such
person is not entitled to indemnification. For a period of six years after the
Effective Time of the Merger, Mariner will maintain directors' and officers'
liability insurance and fiduciary liability insurance for the individuals
described above (whether or not they are entitled to indemnification
thereunder) who are presently covered by Mariner's existing directors' and
officers' or fiduciary liability insurance policies on terms no less
advantageous to such indemnified parties than such existing insurance.
MARINER STOCK OPTIONS
In order to: (i) reduce the potential dilutive effect of the outstanding
options to purchase shares of Mariner Common Stock which would otherwise be
converted into options to purchase Paragon Common Stock; and (ii) better align
the option grants of Mariner executives and other Mariner employees continuing
with the combined company with those of Paragon executives and other Paragon
employees with similar positions, the Paragon Board wanted to terminate all
options to purchase Mariner Common Stock and, to the extent the Paragon Board
deemed appropriate, grant options to purchase Paragon Common Stock to Mariner
executives continuing with the combined company. Accordingly, Paragon
requested that the outstanding options to purchase shares of Mariner Common
Stock be terminated in connection with the Merger in exchange for cash
payments. Pursuant to Mariner's 1992 Stock Option Plan and 1994 Stock Plan,
the Mariner Board has the authority to terminate the options granted under
those plans in exchange for a specified cash payment in connection with an
acquisition of Mariner in a merger without the approval of the option holders.
Under the plans and instruments governing the outstanding options to purchase
shares of Mariner Common Stock that were not granted under Mariner's 1992
Stock Option Plan and 1994 Stock Plan, the Mariner Board does not have
authority to terminate options in exchange for a cash payment without the
approval of the option holders. As part of the comprehensive proposal to
resolve all the then outstanding issues made by the Paragon Board to the
Mariner Board on April 12, 1998, the Paragon Board required as a term of the
Merger that the Mariner Board exercise its authority to terminate the
outstanding options granted under Mariner's 1992 Stock Option Plan and 1994
Stock Plan in exchange for the cash payments described below, and that only
options that the Mariner Board could not so terminate would be assumed by
Paragon in the Merger. In the context of resolving all the then outstanding
issues, the Mariner Board accepted the comprehensive proposal, including the
proposal regarding the treatment of the outstanding options to purchase shares
of Mariner Common Stock.
Pursuant to the Merger Agreement, each option to purchase shares of Mariner
Common Stock issued pursuant to Mariner's 1992 Stock Option Plan and the 1994
Stock Plan ("Cash Payment Options") will, at the Effective Time of the Merger,
whether or not vested, constitute the right to receive, subject to required
withholding, a cash payment equal to the product of (i) the average of the
last reported sale prices per share of Paragon Common Stock for the last five
days ending on the day immediately preceding the Closing Date (as defined in
the Merger Agreement); provided, however, that in the event such average price
is less than $20 or more than $22, then such average price shall be deemed to
be (X) $20 (when such average price is less than $20) or (Y) $22 (when such
average price is more than $22), less the per share exercise price required by
such Cash Payment Option and (ii) the number of shares subject to such Cash
Payment Option. Each option issued pursuant to the 1995 Non-Employee Director
Stock Option Plan, rights to acquire shares of Mariner Common Stock pursuant
to the 1993 Employee Stock Purchase Plan, as well as options and warrants to
purchase Mariner Common Stock granted or assumed in connection with certain
historical transactions (collectively, the "Assumed Options"), will, at the
Effective Time of the Merger, whether or not vested, be assumed by Paragon and
will constitute an option or right to acquire, on the same terms and
conditions as were applicable under such Assumed Options, such number of
shares of Paragon Common Stock equal to the number of shares of Mariner Common
Stock subject to such Assumed Option, at a per share price equal to the
exercise price of such Assumed Option. As soon as practicable following the
Effective Time of the Merger, Paragon will deliver to holders of Assumed
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Options appropriate option agreements representing the right to acquire shares
of Paragon Common Stock on substantially the same terms and conditions as
pertain to the outstanding Assumed Options. Paragon has agreed to take all
corporate action necessary to reserve for issuance a sufficient number of
shares of Paragon Common Stock for delivery upon exercise of Assumed Options
and to file and cause to be effective as of the Effective Time of the Merger
this Registration Statement with respect to shares of Paragon Common Stock
that will be subject to the Assumed 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 Assumed Options remain outstanding. As of June 15, 1998, there were
outstanding Assumed Options to purchase 733,550 shares of Mariner Common Stock
(the exercise prices of which ranged from $3.0964 to $46.4454 per share) that
upon consummation of the Merger will be assumed by Paragon. As of June 15,
1998, there were outstanding Cash Payment Options to purchase 4,253,823 shares
of Mariner Common Stock, which are expected to result in cash payments by
Paragon of between $38.5 million (assuming the average per share closing price
of Paragon Common Stock is $20 or less) and $47.1 million (assuming the
average per share closing price of Paragon Common Stock is $22 or more).
RESTRICTIONS ON RESALES BY AFFILIATES
Paragon is registering hereby the shares of Paragon Common Stock that the
stockholders of Mariner will be entitled to receive upon consummation of the
Merger. As a result, those Mariner stockholders who are not deemed to be
"affiliates" of Mariner may freely sell the shares of Paragon Common Stock
that they receive in the Merger. Stockholders of Mariner who are deemed to be
"affiliates" of Mariner as of the date of the Mariner Special Meeting may only
resell the shares of Paragon Common Stock received in the Merger in
transactions complying with Rule 145 under the Securities Act, pursuant to an
effective registration statement under the Securities Act or in transactions
exempt from registration thereunder, 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 Mariner 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, Mariner at the time the Merger
is submitted to a vote of the stockholders of Mariner. Certain executive
officers and directors of Mariner will be deemed "affiliates" of Mariner for
purposes of the Securities Act. Mariner has, pursuant to the Merger Agreement,
agreed to use commercially reasonable efforts to cause each such person to
deliver to Paragon on or prior to the Effective Time of the Merger an
affiliate's agreement in a form to be approved by the parties to the Merger
Agreement.
CONDUCT OF BUSINESS OF MARINER PRIOR TO THE MERGER
Mariner has agreed that, prior to the Effective Time of the Merger, Mariner
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 their current business organizations, keep
available the services of their current officers and key employees and to
maintain their existing relationships with those having significant business
relationships with them, in each case in all material respects. In addition,
Mariner has agreed that, prior to the Effective Time of the Merger, subject to
certain exceptions, except as expressly contemplated by the Merger Agreement
or with the prior written consent of Paragon (which consent will not be
unreasonably withheld), neither Mariner nor any of its subsidiaries, as the
case may be, will: (i) except for issuances of capital stock of Mariner's
subsidiaries to Mariner or a wholly-owned subsidiary of Mariner, issue, sell
or pledge, or authorize or propose the issuance, sale or pledge of (A) Company
Securities or Subsidiary Securities (as both terms are defined in the Merger
Agreement), in each case, other than Mariner Common Stock issuable upon
exercise of rights under any employee benefit plan or agreement, or (B) any
other securities in respect of, in lieu of or in substitution for Mariner
Common Stock outstanding on the date of the Merger Agreement; (ii) otherwise
acquire or redeem, directly or indirectly, any Company Securities or
Subsidiary Securities (including Mariner Common Stock);
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(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 Mariner or any of its subsidiaries (other
than cash dividends paid to Mariner 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 $20 million or more (excluding any
assumed indebtedness), 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 other than debt incurred in the ordinary course of business consistent
in all material respects with past practice in a principal amount not to
exceed $15 million; (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 Mariner,
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
Mariner); (viii) change any of the accounting methods, 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 Mariner Charter or Mariner Bylaws or the Certificates of
Incorporation or Bylaws (or similar document) of any subsidiary; except as may
be required in order to consummate the Merger and the transactions
contemplated by the Merger Agreement; (x) except as may be required by any
previously existing agreement or employee benefit plan, grant any stock
options or stock related awards; (xi) except as may be required by applicable
law or as contemplated by the Merger Agreement, enter into any new, or amend
in any material respect any existing, employee benefit, pension or other plan
(whether or not subject to the Employee Retirement Income Security Act of 1974
("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 of Mariner or its subsidiaries; (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 it assets to another
corporation or other business entity or individual (other than mergers,
consolidations or transfers involving wholly-owned subsidiaries of Mariner);
(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 PARAGON PRIOR TO THE MERGER
Paragon has agreed that, prior to the Effective Time of the Merger, Paragon
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 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,
Paragon has agreed that, prior to the Effective Time of the Merger, subject to
certain exceptions, except as expressly contemplated by the Merger Agreement
or with the prior written consent of Mariner (which consent will not be
unreasonably withheld), neither Paragon nor any of its subsidiaries, as the
case may be, will: (i) except for issuances of capital stock of Paragon's
subsidiaries to Paragon or a wholly-owned subsidiary of Paragon, issue, sell
or pledge, or authorize or propose the issuance, sale or pledge of (A) Parent
Securities or Subsidiary Securities (as both terms are defined in the Merger
Agreement), in each case, other than Paragon Common Stock issuable upon the
exercise of rights or under any employee benefit plan or agreement, or (B) any
other securities in respect of, in lieu of or in substitution for Paragon
Common Stock outstanding on the date of the Merger Agreement; (ii) otherwise
acquire or redeem, directly or indirectly, any Parent Securities or Subsidiary
Securities (including Paragon 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 Paragon or any of its subsidiaries (other
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than cash dividends paid to Paragon 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 $40 million or more (excluding any
assumed indebtedness) 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 in
an aggregate principal amount not to exceed $30 million; (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 Paragon, 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 Paragon); (viii) change any of the
accounting methods, 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 Paragon Charter or the Paragon Bylaws or the Certificate of Incorporation
or Bylaws (or similar documents) of any subsidiary except as may be required
to consummate the Merger and the transactions contemplated by the Merger
Agreement; (x) except as may be required under any previously existing
agreement or employee benefit plan, grant any stock options or stock related
awards; (xi) except as may be required by applicable law or as contemplated by
the Merger Agreement, 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 (other than mergers, consolidations or transfers
involving wholly-owned subsidiaries of Paragon); (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 MARINER. Immediately following the execution of the
Merger Agreement, Mariner terminated all existing activities, arrangements,
discussions and negotiations with third parties (other than Paragon) with
respect to any possible merger, consolidation or other business combination
involving Mariner or its subsidiaries, or the acquisition, sale, lease,
exchange, mortgage, pledge, transfer or other disposition of, or tender offer
for, all or a substantial portion of the assets or capital stock of Mariner or
any of its material subsidiaries or inquiries or proposals concerning, or
which may be reasonably expected to lead to, any of the foregoing (each a
"Mariner Acquisition Transaction"). Mariner has also agreed not to, and not to
authorize or permit any of its subsidiaries or any of its or its subsidiaries'
directors, officers, employees, agents and representatives to, directly or
indirectly, solicit, initiate, facilitate or encourage (including by way of
furnishing or disclosing information) any Mariner Acquisition Transaction, or
negotiate, explore or otherwise enter into discussions in any way with any
third party (other than Paragon and its affiliates) with respect to any
Mariner Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transaction contemplated by the Merger Agreement.
Notwithstanding the foregoing, in the event that Mariner receives an
unsolicited bona fide written proposal for a Mariner Acquisition Transaction
from a third party, Mariner may furnish non-public information to, and
negotiate with, such third party only if: (i) prior written notice is given to
Paragon; (ii) such third party enters into a confidentiality agreement having
terms (including a standstill agreement) no more favorable to such third party
than the terms of the Confidentiality Agreement entered into by Paragon and
Mariner in connection with
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the Merger (the "Confidentiality Agreement"); and (iii) (A) the Mariner Board
has concluded in good faith based on the advise of its investment banker that
such Mariner Acquisition Transaction may reasonably be expected, if
consummated, to result in a transaction more favorable to Mariner and its
stockholders than the Merger and such third party is financially capable of
consummating such Mariner Acquisition Transaction and (B) the Mariner Board
has concluded in good faith, based on the advice of outside counsel that any
failure to provide non-public information to, or negotiate with, such third
party would be inconsistent with the Mariner Board's fiduciary duties to
stockholders of Mariner.
NO SOLICITATION BY PARAGON. Immediately following the execution of the
Merger Agreement, Paragon terminated all existing activities, arrangements,
discussions and negotiations with third parties (other than Mariner and
certain third parties previously disclosed to Mariner) with respect to any
possible merger, consolidation or other business combination involving Paragon
or its subsidiaries, or the acquisition, sale, lease, exchange, mortgage,
pledge, transfer or other disposition of, or tender offer for, of all or a
substantial portion of the assets or capital stock of Paragon or any of its
material subsidiaries or inquiries or proposals concerning, or which may be
reasonably expected to lead to, any of the foregoing (each a "Paragon
Acquisition Transaction"). Paragon has also agreed not to, and not to
authorize or permit any of its subsidiaries or any of its or its subsidiaries'
directors, officers, employees, agents and representatives to, directly or
indirectly, solicit, initiate, facilitate or encourage (including by way of
furnishing or disclosing information) any Paragon Acquisition Transaction or
negotiate, explore or otherwise enter into discussions in any way with any
third party (other than Mariner and its affiliates) with respect to any
Paragon Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by the Merger Agreement.
Notwithstanding the foregoing, in the event that Paragon receives an
unsolicited bona fide written proposal for a Paragon Acquisition Transaction
from a third party, Paragon may furnish non-public information to, and
negotiate with, such third party only if: (i) prior written notice is given to
Mariner; (ii) such third party enters into a confidentiality agreement having
terms (including a standstill agreement) no more favorable to such third party
than the terms of the Confidentiality Agreement; and (iii) (A) the Paragon
Board has concluded in good faith based on the advice of its investment banker
that such Paragon Acquisition Transaction may reasonably be expected, if
consummated, to result in a transaction more favorable to Paragon and its
stockholders than the Merger and such third party is financially capable of
consummating such Paragon Acquisition Transaction and (B) the Paragon Board
has concluded in good faith, based on the advice of outside counsel, that any
failure to provide non-public information to, or negotiate with, such party
would be inconsistent with the Paragon Board's fiduciary duties to the
stockholders of Paragon.
TERMINATION
The Merger Agreement may be terminated at any time notwithstanding the
approval of the Merger by the stockholders of Paragon and Mariner: (i) by
mutual written consent of the Paragon Board and the Mariner Board; (ii) by
either Paragon or Mariner if the Merger shall not have been consummated on or
before December 31, 1998 (provided that such right will not be available to
any party whose failure to fulfill any obligation under the Merger Agreement
has been the cause of or resulted in the failure of the Merger to occur on or
before such date); (iii) by either Paragon or Mariner if any court of
competent jurisdiction in the United States or other United States
governmental body shall have issued an order (other than a temporary
restraining order), decree, judgment or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such judgment,
order, decree, ruling or other action shall have become final and non-
appealable; (iv) by Mariner if (a) at any time prior to the Closing Date an
Omnibus Paragon Material Adverse Event shall have occurred or (b) Paragon or
Merger Sub has breached or failed to comply in any material respect with any
of its obligations under the Merger Agreement and such Omnibus Paragon
Material Adverse Event or such breach or failure continues unremedied for 10
days after Paragon or Merger Sub has received written notice from Mariner of
the occurrence of such Omnibus Paragon Material Adverse Effect or such breach
or failure; (v) prior to obtaining Paragon stockholder approval of the Paragon
Merger Proposal, by Mariner if the Paragon Board fails to make, withdraws or
modifies in a manner adverse to Mariner its favorable recommendation of the
Merger or has recommended or entered into a definitive agreement with respect
to a Paragon Acquisition
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Transaction with a party other than Mariner or any of its affiliates; (vi)
prior to the Effective Time of the Merger by Paragon if Paragon receives a
written offer with respect to any Paragon Acquisition Transaction with a party
other than Mariner or its affiliates or such third party has commenced a
tender offer which, in either case, the Paragon Board believes in good faith
is more favorable to Paragon's stockholders than the transactions contemplated
by the Merger Agreement; (vii) by Paragon if (a) at any time prior to the
Closing Date, an Omnibus Mariner Material Adverse Event shall have occurred or
(b) Mariner has breached or failed to comply in any material respect with any
of its obligations under the Merger Agreement and such Omnibus Mariner
Material Adverse Event or such breach or failure shall continue unremedied for
10 days after Mariner has received written notice from Paragon or Merger Sub
of the occurrence of such Omnibus Mariner Material Adverse Event or such
breach or failure; (viii) prior to obtaining Mariner stockholder approval of
the Mariner Merger Proposal, by Paragon if the Mariner Board fails to make,
withdraws or modifies in a manner adverse to Paragon its favorable
recommendation of the Merger or has recommended or entered into a definitive
agreement with respect to a Mariner Acquisition Transaction with a party other
than Paragon or any of its affiliates; (ix) prior to the Effective Time of the
Merger, by Mariner if Mariner receives a written offer with respect to any
Mariner Acquisition Transaction with a party other than Paragon or its
affiliates or such third party has commenced a tender offer which, in either
case, the Mariner Board believes in good faith is more favorable to Mariner's
stockholders than the transactions contemplated by the Merger Agreement; or
(x) (a) by Paragon if Mariner fails to obtain its stockholders' approval of
the Mariner Merger Proposal or (b) by Mariner if Paragon fails to obtain its
stockholders' approval of the Stock Issuance Proposal.
TERMINATION FEES; EXPENSES
Except as provided in paragraphs (a) through (f) below, whether or not the
Merger is consummated, all costs and expenses incurred in connection with the
Merger, the Merger Agreement and the transactions contemplated thereby will be
paid by the party incurring such cost or expense.
(a) If (i) Mariner terminates the Merger Agreement as described in clause
(v) of "Termination" above or (ii) Paragon terminates the Merger Agreement
as described in clause (vi) of "Termination" above, Paragon will promptly,
but in no event later than one business day after termination of the Merger
Agreement, pay to Mariner a fee (the "Termination Fee") equal to $12
million in same day funds in respect of the fees and expenses of Mariner
incurred in connection with pursuing the transactions contemplated by the
Merger Agreement.
(b) If (i) Paragon terminates the Merger Agreement as described in clause
(viii) of "Termination" above or (ii) Mariner terminates the Merger
Agreement as described in clause (ix) of "Termination" above, Mariner will
promptly, but in no event later than one business day after termination of
the Merger Agreement, pay the Termination Fee to Paragon.
(c) If Paragon terminates the Merger Agreement as described in clause
(x)(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 Mariner Acquisition Transaction,
and within 12 months after such termination a Mariner Acquisition
Transaction shall be consummated, then Mariner will promptly (but in no
event later than one business day) after such consummation, pay the
Termination Fee to Paragon.
(d) If Mariner terminates the Merger Agreement as described in clause
(x)(b) 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 Paragon Acquisition Transaction,
and within 12 months after such termination a Paragon Acquisition
Transaction shall be consummated, then Paragon will promptly (but in no
event later than one business day) after such consummation, pay the
Termination Fee to Mariner.
(e) If Paragon terminates the Merger Agreement as described in clause
(ii) of "Termination" above and at December 31, 1998 any person has made
(or publicly disclosed an intention to make) a proposal to effect a Mariner
Acquisition Transaction and within 12 months after such termination a
Mariner Acquisition Transaction shall be consummated, then Mariner will
promptly (but in no event later than one business day) after such
consummation, pay the Termination Fee to Paragon.
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(f) If Mariner terminates the Merger Agreement as described in clause
(ii) of "Termination" above, and at December 31, 1998 any person has made
(or publicly disclosed an intention to make) a proposal to effect a Paragon
Acquisition Transaction and within 12 months after such termination a
Paragon Acquisition Transaction shall be consummated, then Paragon will
promptly (but in no event later than one business day) after such
consummation, pay the Termination Fee to Mariner.
AMENDMENT AND WAIVER
To the extent permitted by applicable law, the Merger Agreement may be
amended by action taken by or on behalf of the Paragon Board, the Mariner
Board and the Board of Directors of Merger Sub ("Merger Sub Board") at any
time before or after the approval of the Merger Proposals by the stockholders
of each of Paragon and Mariner, but after such stockholder approval, no
amendment may be made which decreases the Exchange Ratio or adversely affects
the rights of Mariner stockholders in any material respect, without the
approval of the stockholders of Mariner that beneficially own a majority of
the shares of Mariner Common Stock. The Merger Agreement may not be amended
except by an instrument in writing signed on behalf of all of the parties. At
any time prior to the Effective Time of the Merger, each of the parties to the
Merger Agreement, by action taken by or on behalf of the Paragon Board,
Mariner Board and Merger Sub Board may: (i) extend the time for 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 by any other applicable party or in any document,
certificate or writing delivered pursuant thereto by any other applicable
party; or (iii) waive compliance with any of the agreements or conditions
contained therein. 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.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations and warranties of
Paragon and Mariner relating to, among other things: (i) organization, good
standing, qualification to do business and other corporate matters; (ii)
capitalization; (iii) the authorization, execution, delivery and
enforceability of the Merger Agreement, the actions taken by the Paragon Board
and Mariner Board with respect thereto and related matters including the
required vote of stockholders; (iv) the absence of certain changes or events
since the end of each company's most recently completed fiscal year; (v)
reports filed by each company with the Commission and the financial statements
included therein; (vi) information supplied by each company for inclusion in
the registration statement of which this Proxy Statement/Prospectus is a part;
(vii) required consents and approvals; (viii) brokers; (ix) employee benefit
matters; (x) the absence of certain litigation; (xi) tax matters; (xii)
compliance with law; (xiii) environmental compliance; (xiv) the receipt by
each company of the opinions discussed above under "The Merger--Opinion of
Morgan Stanley & Co. Incorporated" and "The Merger--Opinion of BT Alex. Brown
Incorporated;" (xv) insurance; and (xvi) state takeover laws.
CERTAIN OTHER AGREEMENTS
MARINER VOTING AGREEMENT
The Kellett Group and Dr. Stratton, as stockholders of Mariner, have
entered into a voting agreement, dated as of April 13, 1998, with Paragon (the
"Mariner Voting Agreement"), under which each of the aforementioned
individuals or entities has agreed to: (i) appear or otherwise take
appropriate action to ensure that the shares of Mariner Common Stock
beneficially owned by each of them are present at any meeting of the
stockholders of Mariner called for the purpose of voting upon the Mariner
Merger Proposal or at any adjournment thereof for the purpose of obtaining a
quorum; (ii) vote (or cause to be voted) or execute a written consent with
respect to the shares of Mariner Common Stock beneficially owned by each of
them in favor of the Mariner Merger Proposal and each of the other
transactions contemplated by or in any way related to the Merger Agreement;
and (iii) vote (or cause to be voted) or execute a written consent in
connection with the shares of Mariner Common Stock beneficially owned by each
of them against (A) any merger agreement or merger (other than the Merger
Agreement and the Merger), consolidation, combination, sale of substantial
assets, reorganization,
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recapitalization, dissolution, liquidation or winding up of or by Mariner or
(B) any action or agreement, including any proposed amendment of the Mariner
Charter or Mariner Bylaws or other proposal or transaction involving Mariner
or any of its subsidiaries, which action, agreement, amendment or other
proposal or transaction is intended, or can reasonably be expected, to impede,
interfere with, delay, or attempt to frustrate, prevent or nullify the Merger,
the Merger Agreement or any of the other transactions contemplated thereby
(each of the foregoing clauses (A) or (B) above, is referred herein as a
"Competing Transaction").
Under the Mariner Voting Agreement, each of the parties thereto further
agrees and covenants not to: (i) Transfer (as such term is defined in the
Mariner Voting Agreement), or consent to any Transfer of, any or all of the
shares of Mariner Common Stock beneficially owned by each of them or any
interest therein, except pursuant to the Merger; (ii) or enter into any
contract, option or other agreement or understanding with respect to any
Transfer of any or all of the shares of Mariner Common Stock beneficially
owned by each of them or any interest therein; (iii) grant any proxy, power of
attorney or other authorization in or with respect to the shares of Mariner
Common Stock beneficially owned by each of them, except pursuant to the
Mariner Voting Agreement and any proxy voted in connection with any meeting of
stockholders of Mariner called to vote upon the Mariner Merger Proposal which
contains voting instructions consistent with the obligations of each of the
parties to the Mariner Voting Agreement; or (iv) deposit the shares of Mariner
Common Stock beneficially owned by each of them into a voting trust or enter
into a voting agreement or any other arrangement with respect to such shares;
provided that, any party to the Mariner Voting Agreement may, subject to
certain limitations, Transfer such party's shares to any other party to the
Mariner Voting Agreement or to family members, charitable institutions and
affiliates which, prior to any Transfer, become parties to the Mariner Voting
Agreement. Each of the parties to the Mariner Voting Agreement further
acknowledges that they will receive the merger consideration as provided for
under the terms of the Merger Agreement. Finally, each of the parties to the
Mariner Voting Agreement agrees not to directly or indirectly: (i) solicit,
initiate, facilitate or encourage any Competing Transaction; or (ii)
participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes, or may be
reasonably be expected to be, a Competing Transaction.
Under the terms of the Mariner Voting Agreement, it is agreed that each of
the Mariner Stockholders who executed such agreement did so solely in his or
its capacity as the record and beneficial owner of the applicable shares of
Mariner Common Stock. It is further agreed that in the event any Mariner
stockholder executing the agreement is or becomes a director or officer of
Mariner during the term of such agreement, that no agreement or understanding
of any kind exists with respect to how such a stockholder may vote in his
capacity as a director, and that none of the provisions set forth in the
Mariner Voting Agreement shall be deemed to restrict or limit any fiduciary
duty that any stockholder executing the Mariner Voting Agreement may have as a
member of the Mariner Board or as an executive officer of Mariner.
The Mariner Voting Agreement terminates automatically upon the termination
of the Merger Agreement. As of the Mariner Record Date, the Kellett Group and
Dr. Stratton held 6,052,771 and 186,944 shares of Mariner Common Stock,
respectively, or approximately 20.4% and less than 1.0%, respectively, in the
aggregate of the then issued and outstanding shares of Mariner Common Stock.
In connection with the execution and delivery of the Mariner Voting Agreement,
the Kelletts required that each of Mariner and Paragon agree to use its
commercially reasonable best efforts to resolve certain matters between
Mariner and the Kelletts in a manner favorable to the Kelletts (and/or certain
of their affiliates). See "Interests of Certain Persons In the Merger--Certain
Arrangements with the Kellett Group and Their Affiliates."
PARAGON VOTING AGREEMENT
Apollo has entered into a voting agreement, dated as of April 13, 1998,
with Mariner (the "Paragon Voting Agreement"), under which it has agreed to:
(i) appear or otherwise take appropriate action to ensure that the shares
beneficially owned by the Apollo Investors are present at any meeting of
stockholders of Paragon called for the purpose of voting upon the Stock
Issuance Proposal or at any adjournment thereof for the purpose of
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obtaining a quorum; and (ii) vote (or cause to be voted) or execute a written
consent with respect to the shares of Paragon Common Stock beneficially owned
or voted by them in a manner similar to that described above with respect to
the Mariner Voting Agreement. Furthermore, Apollo also agrees not to: (i)
Transfer (as defined in the Paragon Voting Agreement) shares of Paragon Common
Stock beneficially owned by each of them, except pursuant to the Merger; (ii)
enter into any contract, option or other agreement or understanding with
respect to any Transfer of any or all of the shares beneficially owned by
Apollo; or (iii) directly or indirectly, facilitate or encourage Competing
Transactions, in each case on substantially the same terms as are described
above in connection with the Mariner Voting Agreement. Finally, the terms
governing the conduct of Apollo and its affiliates in their capacities as
stockholders, directors and executive officers are substantially the same as
those described above with respect to the Mariner Voting Agreement. The
Paragon Voting Agreement is terminable upon the same terms as described above
with respect to the Mariner Voting Agreement. As of the Paragon Record Date,
on an aggregate basis, Apollo had the right to vote 17,777,778 shares of
Paragon Common Stock or approximately 42% in the aggregate of the then
outstanding shares of Paragon Common Stock.
MARINER OPTION AGREEMENT
Concurrently with the execution and delivery of the Merger Agreement,
Paragon and Mariner entered into an option agreement, dated as of April 13,
1998 (the "Mariner Option Agreement"). Under the terms of the Mariner Option
Agreement, Mariner granted Paragon an irrevocable option to purchase a number
of shares of Mariner Common Stock equal to 19.9% of the total number of shares
of Mariner Common Stock (the "Mariner Option") issued and outstanding as of
the date of the Mariner Option Agreement, subject to adjustment in the event
of changes in Mariner's capitalization as more fully set forth in the Mariner
Option Agreement. Under the terms of the Mariner Option Agreement, the
exercise price of the Mariner Option is $19.75 per share. The Mariner Option
becomes exercisable at any time or from time to time after the occurrence of a
"Purchase Event" which is defined as the consummation of any transaction, the
proposal of which would constitute a Mariner Acquisition Transaction within 12
months following the occurrence of a Trigger Event. A "Trigger Event" is
defined as a termination of the Merger Agreement under circumstances that
causes a Termination Fee (as defined in the Merger Agreement) to become
payable by Mariner to Paragon pursuant to Section 7.02(b) of the Merger
Agreement or that would cause a Termination Fee to become payable if certain
conditions were satisfied. Paragon's right to exercise the Mariner Option
terminates upon the earliest to occur of: (i) the Effective Time of the
Merger; (ii) the termination of the Merger Agreement (other than under
circumstances which also constitute or may lead to a Trigger Event under the
Mariner Option Agreement); or (iii) 12 months following the occurrence of a
Trigger Event, unless a Purchase Event shall have occurred prior thereto in
which case the right to exercise the Mariner Option shall terminate 12 months
following the occurrence of a Purchase Event. The time for Paragon to exercise
the Mariner Option may be extended as set forth in the Mariner Option
Agreement, under circumstances where a judgment, decree, order or law prevents
the exercise of the Mariner Option as of the date the Mariner Option would
have otherwise terminated. Under the terms of the Mariner Option Agreement,
Mariner granted Paragon certain registration rights to the shares issuable
upon the exercise of the Mariner Option. Subject to adjustment upon the
occurrence of certain specified events, Paragon is granted the right to make
two demands for registration pursuant to which Mariner is required to promptly
prepare, file and keep current a registration statement under the Securities
Act covering any shares issuable pursuant to the Mariner Option Agreement. In
the event the Mariner Option Agreement becomes exercisable, the transaction
that gives rise to the existence of a Purchase Event will not be eligible for
pooling of interests accounting treatment.
PARAGON OPTION AGREEMENT
Concurrently with the execution and delivery of the Merger Agreement,
Paragon and Mariner entered into an option agreement, dated as of April 13,
1998 (the "Paragon Option Agreement"). Under the terms of the Paragon Option
Agreement, Paragon granted Mariner an irrevocable option to purchase a number
of shares of Paragon Common Stock equal to 19.9% of the total number of shares
of Paragon Common Stock (the "Paragon Option") issued and outstanding as of
the date of the Paragon Option Agreement, subject to
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adjustment in the event of changes in Paragon's capitalization as more fully
set forth in the Paragon Option Agreement. Under the terms of the Paragon
Option Agreement, the exercise price of the Paragon Option is $19.75 per
share. The terms of the Paragon Option Agreement with respect to: (i)
Mariner's right to exercise the Paragon Option; (ii) Mariner's registration
rights with respect to shares issued upon the exercise of the Paragon Option
Agreement; and (iii) an extension of the exercise period and termination of
Mariner's rights under the Paragon Option Agreement are substantially similar
to the terms of the Mariner Option Agreement. The exercisability of the
Paragon Option Agreement upon the occurrence of a Purchase Event will have no
effect on Paragon's eligibility for pooling of interest accounting treatment
since as a result of the recapitalization of LCA that occurred on November 4,
1997, Paragon is not currently eligible for pooling of interests accounting
treatment.
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DESCRIPTION OF FINANCING ARRANGEMENTS
Paragon is the borrower under the Credit Agreement, dated as of November 4,
1997 (as amended, the "Paragon Credit Agreement"), by and among Paragon, the
lenders signatory thereto (the "Paragon Lenders"), The Chase Manhattan Bank,
as administrative agent (the "Paragon Administrative Agent"), swing line
lender and letter of credit bank, and NationsBank, N.A., as documentation
agent, establishing a senior, secured term and revolving credit facility (the
"Paragon Senior Credit Facility") in the maximum aggregate principal amount of
$890 million. Paragon's obligations under the Paragon Senior Credit Facility
are guaranteed by substantially all of its subsidiaries and are secured (along
with the guarantee obligations of such subsidiaries) by liens on all or
substantially all of the assets of such entities, including mortgages on
owned, unencumbered real property, security interests in personal property and
pledges of the capital stock of substantially all of Paragon's subsidiaries.
Mariner is the borrower under a $460 million senior secured revolving loan
facility (the "Mariner Senior Credit Facility") established pursuant to the
Credit Agreement, dated as of May 18, 1994 (as amended and restated through
and including Amendment No. 16 thereto, dated as of January 2, 1998, the
"Mariner Credit Agreement"), by and among Mariner, the lenders signatory
thereto (the "Mariner Lenders"), and PNC Bank, National Association, as agent
for the Mariner Lenders (the "Mariner Agent"). Mariner's obligations under the
Mariner Senior Credit Facility are collateralized by a pledge of the stock of
substantially all of its subsidiaries and are guaranteed by substantially all
of its subsidiaries. In addition, the Mariner Senior Credit Facility is
collateralized by mortgages on certain inpatient facilities of Mariner and its
subsidiaries, by leasehold mortgages on certain inpatient facilities leased by
Mariner or its subsidiaries, and by security interests in certain other
property and assets of Mariner and its subsidiaries.
Consummation of the transactions contemplated in the Merger Agreement will
require the consent of the Paragon Lenders and the Mariner Lenders,
respectively, to permit the Merger to occur, and to permit the Mariner Senior
Credit Facility to remain outstanding following the Effective Time of the
Merger. By enabling Paragon to defer a refinancing of such credit facilities
until after the Merger, Paragon will have greater flexibility to optimize the
timing and terms of any such refinancing. However, such consents would not
impair Paragon's right to consummate such a refinancing contemporaneously with
the closing of the Merger, if management considers that course of action to be
preferable.
The general terms that the Paragon Lenders and the Mariner Lenders have been
requested to consent to are set forth hereafter. Mariner and its subsidiaries
would not guarantee Paragon's obligations under the Paragon Senior Credit
Facility or pledge their assets to secure such obligations. Correspondingly,
neither Paragon nor any of its subsidiaries (other than Mariner and its direct
and indirect subsidiaries) would guarantee or pledge any of their assets to
secure any obligations under the Mariner Senior Credit Facility. The Paragon
Credit Agreement would be amended to provide that Mariner and its subsidiaries
would not be subject to the covenants contained in the Paragon Credit
Agreement. The covenants contained in the Mariner Credit Agreement would not
be binding on Paragon and its subsidiaries (other than Mariner and its direct
and indirect subsidiaries). Mariner and its subsidiaries would be obligated to
continue to comply with the covenants contained in the Mariner Credit
Agreement without taking into account the revenues, expenses, net income,
assets or liabilities of Paragon and its non-Mariner subsidiaries. The
converse would be true with respect to Paragon, which (together with its non-
Mariner subsidiaries) would need to continue to comply with the covenants
contained in the Paragon Credit Agreement without taking into account the
revenues, expenses, net income, assets or liabilities of Mariner and its
subsidiaries (except that the consolidated net income of Mariner and its
subsidiaries may be included in consolidated EBITDA of Paragon to the extent
of (a) cash actually distributed by Mariner to Paragon, minus (b) certain
amounts invested by Paragon in Mariner).
PARAGON INVESTMENTS IN MARINER; MARINER DIVIDENDS TO PARAGON; OTHER
MISCELLANEOUS AMENDMENTS. In addition to changes described above, Paragon and
Mariner have requested that the Paragon Lenders and the Mariner Lenders agree
that the terms of the two senior credit facilities would be waived or amended
as follows:
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PARAGON SENIOR CREDIT FACILITY. Paragon is in discussions with the Paragon
Administrative Agent to either provide an additional $100.0 million credit
facility or increase the credit facility commitment under the Paragon Senior
Credit Agreement. This incremental commitment would be available pay expenses
in connection with the Merger and for general corporate purposes. The Paragon
Lenders would also waive or amend any limitations in the Paragon Credit
Agreement as necessary to permit required payments to be made to the holders
of Cash Payment Options. Also, new events of default would be added such that
a Mariner bankruptcy event, and the acceleration of the Mariner Senior Credit
Facility or the Mariner Notes would constitute Events of Default under the
Paragon Credit Agreement.
MARINER SENIOR CREDIT FACILITY. Mariner's right to pay dividends and make
other restricted payments to Paragon, if permitted, would be limited by
certain covenants. To provide a portion of the liquidity necessary to fund the
repurchase of any of the Mariner Notes that may be put back to Mariner in
connection with the change of control provisions of the Mariner Indenture,
Mariner may be allowed to purchase up to $25 million of such Mariner Notes
with advances under the Mariner Senior Credit Facility. Any obligations of
Mariner to repay loans by Paragon would be subordinated to the obligations of
Mariner under the Mariner Senior Credit Facility. The payment of dividends and
the transfer of assets by Mariner and its subsidiaries to Paragon or any non-
Mariner subsidiaries would be restricted, and a new event of default would be
added to provide that a Paragon bankruptcy would be an Event of Default under
the Mariner Credit Agreement. A cross-acceleration provision to the Paragon
Senior Credit Facility and the Paragon Senior Subordinated Notes would be
added to the Mariner Senior Credit Facility. Also, Mariner's fiscal year end
would be conformed to Paragon's (i.e., September 30), and the expiration date
of the Mariner Senior Credit Facility may be shortened from January 2, 2003 to
no earlier than January 3, 2000.
The proposed waivers under the Paragon Credit Agreement will require the
consent of Paragon Lenders having more than 50% in the aggregate of the
outstanding loans and commitments thereunder. Mariner Lenders having at least
51% in the aggregate of the outstanding revolving loan commitments under the
Mariner Credit Agreement must consent to the waivers and amendments pertaining
to the Mariner Senior Credit Facility. No assurance can be given that the
requisite lender approvals will be obtained. If the requisite lender approvals
of the proposed waivers and amendments are not received with respect to either
the Paragon Senior Credit Facility or the Mariner Senior Credit Facility,
Paragon would be required to refinance both such credit facilities (or to
increase and otherwise amend the Paragon Senior Credit Facility in order to
pay off the Mariner Senior Credit Facility) contemporaneously with
consummation of the Merger.
PARAGON AND MARINER SENIOR SUBORDINATED DEBT. Paragon is the issuer of: (i)
certain 9 1/2% Senior Subordinated Notes due 2007; and (ii) certain 10 1/2%
Senior Subordinated Discount Notes due 2007 (collectively, the "Paragon Senior
Subordinated Notes"), all of which are issued pursuant to that certain
Indenture dated November 4, 1997 (the "Paragon Indenture") with Paragon as
issuer and IBJ Schroder Bank & Trust Company as trustee.
Mariner is the issuer of certain 9 1/2% Senior Subordinated Notes due 2006
which are issued pursuant to the Mariner Indenture.
The transactions contemplated in the Merger Agreement would not violate any
covenants contained in the Paragon Indenture or the Mariner Indenture. Paragon
expects that Mariner and its subsidiaries would be designated as restricted
subsidiaries pursuant to the Paragon Indenture.
The holders of the Mariner Notes (the "Mariner Bondholders") have the right
to put their Mariner Notes back to Mariner for repurchase (the "Change of
Control Purchase") as a consequence of the consummation of the Merger. Any
Change of Control Purchase is currently expected to be concluded within ninety
(90) days following the Effective Time of the Merger, and will be at a price
equal to 101% of the outstanding principal amount of any Mariner Notes that
are put to Mariner. Pursuant to its obligations under the Merger Agreement to
have committed financing available, Paragon is in the process of arranging a
committed facility to cover the maximum amount of this contingent obligation,
which is approximately $152 million. If Paragon and Mariner
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are not successful in arranging for an adequate committed facility, Paragon
would be required to provide the necessary liquidity through an amendment or
refinancing of the Paragon Senior Credit Facility or the Mariner Senior Credit
Facility.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
STRATTON EMPLOYMENT AGREEMENT
Paragon has entered into an employment agreement with Arthur W. Stratton,
Jr., M.D. which becomes effective upon the consummation of the Merger (the
"Stratton Employment Agreement"). Under the Stratton Employment Agreement, Dr.
Stratton will serve as the Vice-Chairman of the Board, Chief Operating Officer
and President of Paragon, reporting to the Chief Executive Officer of Paragon.
Dr. Stratton, who is currently expected to relocate his office to the
principal executive offices of Paragon in Atlanta, Georgia, will have
responsibility and authority to oversee the general operations of Paragon and
to assist the Chief Executive Officer in the formulation of strategic
policies, management and leadership of Paragon. The Stratton Employment
Agreement is for a four-year term, with annual automatic extensions of the
term for additional one-year periods unless Dr. Stratton or Paragon elects not
to have the term so extended. The Stratton Employment Agreement provides an
initial base salary to Dr. Stratton of $850,000 per year, with annual
adjustments as determined by the compensation committee (the "Compensation
Committee") of the Paragon Board and permits Dr. Stratton to earn an annual
bonus of up to 150% of his annual base salary if Paragon achieves certain
financial targets established by the Compensation Committee pursuant to an
annual bonus plan. In addition, the Paragon Board has agreed that Dr. Stratton
will be granted, on the date the Merger is consummated, options to purchase
one million shares of Paragon Common Stock at a price equal to the fair market
value per share on the date the options are granted.
Pursuant to the Stratton Employment Agreement, Dr. Stratton's employment
under his employment agreement with Mariner (the "Mariner Stratton Employment
Agreement") shall be deemed terminated without cause as of the Effective Time
of the Merger. As a result, Dr. Stratton is entitled to receive a payment of
approximately $9.9 million. Further, if it is determined that any payment or
distribution paid or deemed paid to Dr. Stratton would be subject to the
excise tax imposed by Section 4999 of the Code, or any interest or penalties
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the
"Excise Tax"), Dr. Stratton is entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by Dr. Stratton of
all taxes (including any interest or penalties imposed with respect to any
such taxes), including any Excise Tax imposed upon the Gross-Up Payment, Dr.
Stratton retains an amount of the Gross-Up Payment equal to the Excise Tax
imposed upon the payments. Paragon currently estimates that the Gross-Up
Payment will be approximately $7.1 million. In addition, Mariner is required
to pay Dr. Stratton's normal post-termination benefits and to provide coverage
for Dr. Stratton and his dependents under its health benefit plans and
arrangements until the seventh anniversary of such termination.
AMENDMENT TO PITTS' EMPLOYMENT AGREEMENT
Paragon intends to amend certain terms of Mr. Pitts' current employment
agreement with Paragon, dated as of November 4, 1997, to provide for terms
comparable to those discussed in connection with Dr. Stratton's employment
agreement with Paragon with regard to, among other things, base salary and
term of the agreement.
MARINER EXECUTIVE EMPLOYMENT AGREEMENTS WITH MESSRS. HANSEN AND DIAZ
Under their employment agreements with Mariner (the "Mariner Executive
Employment Agreements") if Mr. Hansen or Mr. Diaz terminates his employment
with Mariner for "Good Reason" (as defined in the Mariner Executive Employment
Agreements) at any time during a period commencing with a Change in Control
(as defined in the Mariner Executive Employment Agreements) and ending one
year from such Change in Control,
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he will receive an aggregate severance benefit, payable in equal installments
until the third anniversary of such termination, equal to three times the sum
of the base salary being paid to him immediately prior to such termination
plus the bonus paid to him with respect to the fiscal year most recently
completed prior to such termination (the "Severance Benefit"). In addition, he
will receive normal post-termination benefits in accordance with Mariner's
retirement, insurance and other benefit plans and arrangements and Mariner
will provide coverage for him under its health benefit plans and arrangements
until the third anniversary of such termination. Furthermore, in such a
termination situation he will have 60 days after such termination to elect to
receive an amount equal to the present value of the Severance Benefit. If it
is determined that any payment or distribution paid or deemed paid to him
would be subject to the Excise Tax, he is entitled to receive a Gross-Up
Payment in an amount such that after payment by him of all taxes imposed upon
the Gross-Up Payment (including any Excise Tax or interest or penalties
imposed with respect to any such taxes), he retains the amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the payments.
As a result of the Merger, Mr. Hansen and Mr. Diaz are each entitled to
receive payments of approximately $1.8 million under their Mariner Executive
Employment Agreements which will be paid at the Effective Time of the Merger.
In addition Paragon currently estimates that the Gross-Up Payments to Messrs.
Hansen and Diaz will be approximately $1.3 million each.
CONTINUING INDEMNIFICATION OF MARINER'S DIRECTORS AND OFFICERS
Under the terms of the Merger Agreement, Paragon agrees to continue all
rights to indemnification existing in favor of present or former directors,
officers and employees of Mariner pursuant to the current Mariner Charter and
Mariner Bylaws, or the articles of incorporation, bylaws or similar documents
of Mariner's subsidiaries for a period of time not less than the statute of
limitations applicable to any matters which may give rise to a claim or other
liability against any of the foregoing individuals. In the event Paragon is
required to provide indemnification pursuant to the aforementioned provision
of the Merger Agreement, Paragon agrees to periodically advance expenses as
incurred by individuals entitled to indemnification to the fullest extent
permitted under applicable law; provided, however, that the person to whom the
expenses are advanced must provide an undertaking to repay any advances
received if it is ultimately determined that such person is not entitled to
indemnification. Paragon is also required for a period of six years following
the Effective Time of the Merger to maintain directors' and officers'
liability insurance covering former Mariner directors and officers on terms no
less advantageous to such indemnified persons than existing at the time of the
execution of the Merger Agreement. See "The Merger Agreement--Indemnification
and Insurance."
CONTINUED EMPLOYMENT AND OTHER RELATIONSHIPS
Following the Merger, certain executives of Mariner will become employees of
Paragon. It is expected that such executives will be employed on the standard
terms of Paragon's employment agreements. To the extent that employees of
Mariner have employment agreements with Mariner and are not offered employment
by Paragon, the Merger Agreement provides that Paragon will honor such
employees' existing agreements. It is also anticipated that former Mariner
employees who will become officers of Paragon will receive options to purchase
shares of Paragon Common Stock and will participate in Paragon's other
incentive plans following the Merger.
Following his resignation from the Paragon Board, the Paragon Board intends
to engage Baltej S. Maini, M.D. as a senior advisor on terms to be agreed upon
prior to the consummation of the Merger. Dr. Maini will advise the Paragon
Board on, among other things, quality of care matters.
OPTIONS
In order to: (i) reduce the potential dilutive effect of the outstanding
options to purchase shares of Mariner Common Stock which would otherwise be
converted into options to purchase Paragon Common Stock; and (ii) better align
the option grants of Mariner executives and other Mariner employees continuing
with the combined company with those of Paragon executives and other Paragon
employees with similar positions, the Paragon Board wanted to terminate all
options to purchase Mariner Common Stock and, to the extent the Paragon Board
deemed appropriate, grant options to purchase Paragon Common Stock to Mariner
executives continuing with the combined company. Accordingly, Paragon
requested that the outstanding options to purchase shares of
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Mariner Common Stock be terminated in connection with the Merger in exchange
for cash payments. Pursuant to Mariner's 1992 Stock Option Plan and 1994 Stock
Plan, the Mariner Board has the authority to terminate the options granted
under those plans in exchange for a specified cash payment in connection with
an acquisition of Mariner in a merger without the approval of the option
holders. Under the plans and instruments governing the outstanding options to
purchase shares of Mariner Common Stock that were not granted under Mariner's
1992 Stock Option Plan and 1994 Stock Plan, the Mariner Board does not have
authority to terminate options in exchange for a cash payment without the
approval of the option holders. As part of the comprehensive proposal made by
the Paragon Board to the Mariner Board on April 12, 1998 to resolve all the
then outstanding issues, the Paragon Board required as a term of the Merger
that the Mariner Board exercise its authority to terminate the outstanding
options granted under Mariner's 1992 Stock Option Plan and 1994 Stock Plan in
exchange for the cash payments described below, and that only options that the
Mariner Board could not so terminate would be assumed by Paragon in the
Merger. In the context of resolving all the then outstanding issues, the
Mariner Board accepted the comprehensive proposal, including the proposal
regarding the treatment of the outstanding options to purchase shares of
Mariner Common Stock.
The Merger Agreement provides that at the Effective Time of the Merger, each
Cash Payment Option will constitute the right to receive a cash payment equal
to the product of (i) the average of the last reported sale prices per share
of Paragon Common Stock for the five trading days immediately preceding the
Closing Date; provided, however, that in the event such average price is less
than $20 or more than $22, then such average price shall be deemed to be (X)
$20 (when such average price is less than $20) or (Y) $22 (when such average
price is greater than $22), less the per share exercise price required by such
Cash Payment Option and (ii) the number of shares subject to such Cash Payment
Option. In addition, each Assumed Option to purchase shares of Mariner Common
Stock will, at the Effective Time of the Merger, be assumed by Paragon and
shall constitute an option to acquire, a number of shares of Paragon Common
Stock equal to the number of shares of Mariner Common Stock subject to the
applicable Assumed Option on the same terms and conditions as are applicable
under such option. See "The Merger Agreement--Mariner Stock Options."
As of the Mariner Record Date, the number of shares of Mariner Common Stock
subject to Mariner options held by each executive officer and director of
Mariner were as follows: Arthur W. Stratton, Jr., M.D. (411,666 vested;
1,313,334 unvested), David N. Hansen (186,667 vested; 313,333 unvested), Paul
Diaz (81,666 vested; 418,334 unvested), David C. Fries (10,000 vested; 0
unvested), Samuel B. Kellett (5,000 vested; 0 unvested), Stiles A. Kellett,
Jr. (10,000 vested; 0 unvested), Christopher Grant, Jr. (10,000 vested; 0
unvested), and John F. Robenalt, Jr. (11,000 vested; 0 unvested). All of the
unvested options to acquire Mariner Common Stock will vest in connection with
the Merger. At the Effective Time of the Merger, all options held by David
Fries, Stiles A. Kellett, Jr., Samuel B. Kellett and Christopher Grant, Jr.
and options to purchase 10,000 shares of Mariner Common Stock held by John F.
Robenalt will be Assumed Options, and all of options held by Arthur W.
Stratton, Jr., David N. Hansen, and Paul Diaz, and options to purchase 1,000
shares of Mariner Common Stock held by John F. Robenalt will be Cash Payment
Options, resulting in payments to these individuals of approximately
$17,259,500, $5,970,000, $2,974,500, and $18,000, respectively (assuming such
options are cashed out at $20 per share).
MANAGEMENT AND SHARE OWNERSHIP
For information regarding the directors and executive officers of the
combined company following the Merger, see "Directors and Officers of Paragon
Following the Merger."
As of the Mariner Record Date, the executive officers and directors of
Mariner (8 persons) beneficially owned (excluding shares subject to
outstanding stock options) an aggregate of 5,486,843 shares, or approximately
18.5%, of the issued and outstanding shares of Mariner Common Stock. All such
shares will be treated in the Merger in the same manner as shares of Mariner
Common Stock held by other stockholders of Mariner.
AGREEMENTS WITH APOLLO
In connection with the LCA/GranCare/Apollo Mergers, Paragon and the Apollo
Investors entered into a Stockholders Agreement, dated as of November 4, 1997,
which, among other things, provided Apollo with the right to designate six of
the eleven nominees for election to the board of directors of Paragon (no more
than
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four of whom may be Associates of Apollo), so long as the Apollo Investors
continued to beneficially own at least 66 2/3% of the shares of Paragon Common
Stock acquired by them on November 4, 1997; provided that if at any time after
November 4, 2000, the Apollo Investors beneficially owned less than 40% of the
outstanding shares of Paragon Common Stock, Apollo would only have the right
to designate such number of nominees as would be equal to its pro rata
ownership of the issued and outstanding shares of Paragon Common Stock. In
addition, pursuant to a Proxy and Voting Agreement, dated as of November 4,
1997, entered into by the Apollo Investors, voting control of all of the
shares of Paragon Common Stock beneficially owned by the Apollo Investors is
held by Apollo for the period ending on November 4, 2000. In connection with
the negotiation of the Merger Agreement: (i) Apollo and Paragon have entered
into an amendment to the Stockholders Agreement dated as of November 4, 1997
(as amended, the "Apollo Stockholders Agreement"), which amendment will become
effective at the Effective Time of the Merger and provide, among other things,
that, so long as the Apollo Investors continue to beneficially own at least 66
2/3% of the shares of Paragon Common Stock they acquired on November 4, 1997,
Apollo will have the right to designate five of the eleven nominees for
election to the Paragon Board, provided that no more than four of such
nominees may be Associates of Apollo; provided further that if at any time
after the fifth anniversary of the Effective Time of the Merger, the Apollo
Investors beneficially own less than 40% of the then issued and outstanding
shares of Paragon Common Stock, Apollo will only have the right to designate
such number of nominees as is equal to its pro rata ownership of the issued
and outstanding shares of Paragon Common Stock; and (ii) the Apollo Investors
and Mr. Pitts entered into a termination and release of the Proxy and Voting
Agreement, which termination will become effective at the Effective Time of
the Merger and will terminate the irrevocable proxy granted by Mr. Pitts in
favor of Apollo and release Mr. Pitts from his rights and obligations under
such agreement.
CERTAIN ARRANGEMENTS WITH THE KELLETTS AND THEIR AFFILIATES
In connection with the Kelletts' execution and delivery of the Mariner
Voting Agreement, the Kelletts, Mariner and Paragon agreed to use commercially
reasonable best efforts to resolve certain previously existing issues between
the Kelletts and Mariner. Subsequently, they have agreed to the following
actions, which will become effective as of the Effective Time of the Merger:
(i) The existing stockholders agreement among Mariner and the Kellett Group,
relating, among other things, to the voting and disposition of shares of
Mariner Common Stock by the Kellett Group, will be terminated.
(ii) Mariner is currently seeking contractual indemnification from the
Kelletts and certain of their affiliates arising from certain litigation
matters that are not covered by insurance. The Kelletts and their affiliates
have disputed certain aspects of Mariner's claims, and the matter has been
submitted to arbitration. The issues to be arbitrated will be resolved in
favor of the Kelletts and their affiliates.
(iii) Mariner has fixed-price options to purchase 12 of the 14 skilled
nursing facilities it currently leases through its subsidiaries from
partnerships controlled by the Kelletts. Currently, the aggregate purchase
price for the 12 leased facilities is approximately $59,764,000, and Mariner
has previously made deposits of approximately $13,155,000 with the lessors of
such facilities in respect of such options. Each of these options currently
continues in full force and effect, regardless of whether Mariner continues to
lease the facility through the exercise date of the option. Mariner has agreed
that if, at any time after the Effective Time of the Merger, Mariner defaults
under a lease by failing to pay any rent or other amounts due under such lease
and, as a result of such default, the lessor of the facility leased under such
lease terminates such lease in accordance with it terms, then the option to
purchase such facility will automatically terminate. The termination of any
such option, however, will not effect in any way any of the other options.
(iv) Mariner will extend the terms of the leases on three of the 14
facilities it currently leases from partnerships controlled by the Kelletts.
The lease for one facility will be extended for 10 years, and the leases for
each of the other two facilities will be extended for five years. In addition,
the exercise periods for the fixed-price options to purchase these facilities
will be delayed by a corresponding amount of time, and the aggregate purchase
price for these three facilities pursuant to the related options will be
reduced from approximately $14,685,000 to approximately $8,155,000.
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(v) Effective as of the later of (a) the Effective Time of the Merger or (b)
the date on which the Mariner Senior Credit Facility is terminated and the
indebtedness thereunder is repaid in full, the obligations of the partnerships
controlled by the Kelletts that lease the facilities to Mariner to provide an
intercreditor agreement to the Mariner Lenders will be eased to require an
intercreditor agreement reasonably agreeable to the mortgage lender.
(vi) Effective as of the later of (a) the Effective Time of the Merger or
(b) the date on which the Mariner Senior Credit Facility is terminated and the
indebtedness thereunder is repaid in full, Paragon will (A) assume Mariner's
obligations under the existing lease payment guarantees that Mariner has
entered into to support the obligations of its subsidiaries that lease skilled
nursing facilities from partnerships controlled by the Kelletts, and (B) if
requested by any mortgage lender to the partnerships controlled by the
Kelletts that lease the facilities to Mariner, provide a guaranty of the
lessee's obligations to pay rent under the applicable lease.
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INFORMATION CONCERNING PARAGON
Paragon's growth strategy is in part to acquire inpatient 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. In this regard,
Paragon continuously evaluates each of its lines of business in its existing
markets and targeted new markets to identify opportunities to expand and
improve its service offerings by means of start-up operations, strategic
alliances and acquisitions. In assessing strategic opportunities, Paragon
management emphasizes the scope and scale of services provided by the
acquisition candidate, locations of the candidate's operations (including
overlaps with Paragon's operations), Paragon's ability to provide ancillary
services to the acquisition candidate's operations or the candidate's ability
to provide such services to Paragon operations and potential operational
efficiencies that can be achieved in a business combination. These criteria
are factored into the assessment of the earnings contribution that would
result from the business combination.
Paragon, through its various operating subsidiaries, is one of the nation's
leading providers of post-acute care. Paragon's continuum of post-acute
services encompasses skilled nursing, sub-acute and medically complex care as
well as a variety of related ancillary services. These ancillary services
include pharmacy, rehabilitation and hospital program management. Paragon
operates in 36 states with significant concentrations of facilities and beds
in its key markets. On a pro forma basis for the 12 months ended September 30,
1997, Paragon generated revenues of approximately $1.9 billion.
Paragon's operations are organized into four divisions: (i) post-acute care;
(ii) pharmaceutical services; (iii) rehabilitation services; and (iv) hospital
services. Paragon operates 336 skilled nursing and assisted living facilities
containing over 38,000 beds, as well as 34 institutional pharmacies servicing
more than 100,000 beds. Paragon also operates over 150 outpatient
rehabilitation clinics and manages specialty medical programs in acute care
hospitals pursuant to more than 100 management contracts. In addition, Paragon
provides sub-acute care, home health, hospice and private duty nursing
services.
Paragon was formed on November 4, 1997, through the recapitalization of LCA
pursuant to a merger of an Affiliate of Apollo Management, L.P., with and into
LCA (in connection with which LCA changed its name to "Paragon Health Network,
Inc.") and the subsequent merger of GranCare with a wholly-owned subsidiary of
Paragon (collectively, the "LCA/GranCare/Apollo Mergers"). Accordingly,
Paragon is the successor by reason of a name change to LCA and following the
LCA/GranCare/Apollo Mergers, operates GranCare as a wholly-owned subsidiary.
On May 18, 1998, a class action complaint was asserted against Paragon,
certain of its predecessor entities and affiliates and certain other parties
in the Tampa, Florida Circuit Court, Wilson, et al, v. Paragon Health Network,
Inc., et al., case no. 98-03779, asserting 7 claims for relief, including
breach of contract, breach of fiduciary duty, unjust enrichment, violation of
Florida Civil Remedies for Criminal Practices Act, violation of Florida
Racketeer and Corrupt Organization Act, false advertising and common-law
conspiracy arising out of quality of care issues at a health care facility
formerly operated by Brian Center Health and Rehabilitation/Tampa, Inc. and
later by a subsidiary of LCA as a result of Brian Center Corporation merger.
Since the complaint has only been recently filed and the information available
to Paragon is very limited, Paragon is unable to assess at this point the
magnitude of the allegations. Paragon intends to vigorously contest the
request for class certification as well as all alleged claims made.
Other information concerning Paragon's business, operations, products,
management and certain other matters is incorporated by reference herein. See
"Incorporation of Documents by Reference."
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INFORMATION CONCERNING MARINER
Mariner is a leading provider of outcomes-oriented, post-acute healthcare
services in selected markets, with a particular clinical expertise in the
treatment of short-stay sub-acute patients in cost-effective alternate sites.
Mariner's services and products include pre-acute care, inpatient care,
comprehensive inpatient and outpatient rehabilitation services, medical
services and products (including institutional and home pharmacy services,
respiratory and infusion therapy and durable medical equipment), home care and
physician services, hospital unit management and rehabilitation staffing. By
providing this continuum of care in selected markets, Mariner believes that it
is better able to maintain quality of care and to control costs while
coordinating the treatment of patients from the onset of illness to recovery.
Mariner seeks to cluster facilities and other post-acute health care services
around large metropolitan areas and major medical centers with large acute
care hospitals from which to generate post-acute admissions. Mariner currently
operates or manages 93 inpatient facilities and 32 hospital skilled nursing
facilities or units with an aggregate of approximately 13,043 beds, 43
outpatient rehabilitation clinics and, as of April 30, 1998, provides contract
rehabilitation services within 460 skilled nursing facilities.
Mariner has established standardized clinical programs based on defined
protocols to address the medical requirements of large groups of patients with
similar diagnoses in a high-quality cost-effective manner. Mariner's
MarinerCare(R) clinical programs such as orthopedic recovery, cardiac recovery
and pulmonary management programs, are short-stay regimens based on defined
protocols that address the needs of sub-acute patients. Sub-acute patients are
medically stable and generally require three to six hours of skilled nursing
care per day. MarinerCare(R) programs typically involve 20 to 45 days of
inpatient care and utilize Mariner's nursing, rehabilitation pharmacy and
other ancillary medical services, with patients generally discharged directly
to their homes. Mariner is also developing standardized clinical home care
programs. Mariner believes that careful adherence to its clinical programs
enables it to produce consistent and measurable clinical and financial
outcomes for patients and payors and to conduct clinical programs consistently
in all of its sites. Using a case management approach, patients' progress is
carefully monitored so that the appropriate level of care is being delivered
at the right time and in the appropriate setting under the applicable clinical
program. Mariner believes that its standardized approaches to delivering care
and measuring outcomes are particularly attractive to managed care
organizations and large payors and positions Mariner to contract with payors
on a case rate or capitated bases.
Other information concerning Mariner's business, operations, products,
management and certain other matters is incorporated by reference herein. See
"Incorporation of Documents by Reference."
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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED
COMPANY FOLLOWING THE MERGER
Immediately following the consummation of the Merger, the initial directors
and executive officers of the combined company, to the extent determined as of
the date of this Proxy Statement/Prospectus, will be as set forth below.
Directors of the combined company 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 Apollo
Stockholders Agreement, the Apollo Investors have agreed to vote their shares
of Paragon Common Stock so that the Paragon Board will consist of eleven
members, of whom five members will be designees of Apollo and of whom six
members will be nominated by the nominating committee of the Paragon Board
(two of whom will initially be designees of Mariner and one of whom will be
the Chief Executive Officer of Paragon). See "Interests of Certain Persons in
the Merger--Agreements with Apollo."
<TABLE>
<CAPTION>
NAME AGE POSITION WITH PARAGON
---- --- ---------------------
<S> <C> <C>
Keith B. Pitts.......... 40 Chairman of the Board, Chief Executive Officer
and Director
Arthur W. Stratton, 52 Vice Chairman of the Board, President,
Jr., M.D............... Chief Operating Officer and Director
Thomas P. Dixon......... 50 President--Rehabilitation Services Division
William R. Korslin...... 48 President--Pharmaceutical Services Division
Charles B. Carden....... 53 Executive Vice President and Chief Financial Officer
R. Jeffrey Taylor....... 49 Senior Vice President, Development
Susan Thomas Whittle.... 50 Senior Vice President, General Counsel and Secretary
Laurence M. Berg........ 32 Director
Gene E. Burleson........ 57 Director
Peter P. Copses......... 39 Director
Jay H. Gellert.......... 43 Director
Joel S. Kanter.......... 41 Director
Samuel B. Kellett....... 53 Director
John H. Kissick......... 56 Director
William G. Petty, Jr. .. 52 Director
Robert L. Rosen......... 56 Director
</TABLE>
Keith B. Pitts will serve as Chairman of the Board and Chief Executive
Officer of Paragon following the Merger. Mr. Pitts currently serves as
Chairman of the Board, President and Chief Executive Officer of Paragon and
has served in such capacity since November 4, 1997. From August 1997 to
November 4, 1997 Mr. Pitts served as a consultant to Apollo in connection with
the transactions pursuant to which it acquired its interest in Paragon. From
February 1997 to August 1997 Mr. Pitts was a consultant to Tenant Healthcare
Corp. 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 Sunburst Hospitality Corporation, a publicly
traded corporation engaged in the hotel business, as well as several private
corporations.
Arthur W. Stratton, Jr., M.D. will be appointed Vice Chairman of the Paragon
Board, President and Chief Operating Officer of the combined company following
the Effective Time of the Merger. Dr. Stratton is currently
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Chairman of the Mariner Board and Chief Executive Officer of Mariner and has
served in such capacities since 1988. He also served as President of Mariner
since its inception until May 1994 and from February 1995 through the present.
Thomas P. Dixon will serve as President of the Rehabilitation Services
Division of the combined company following the Effective Time of the Merger.
Mr. Dixon is currently President of Prism Rehab Systems, Inc., a wholly-owned
subsidiary of Mariner, and has served in such capacity since Mariner's
acquisition of Prism Health Group, Inc. ("Prism") in October 1997. From
January 1996 until October 1997, Mr. Dixon served as Chief Operating Officer
of Prism. Prior to January 1996, Mr. Dixon served as Senior Vice President of
Prism, and President of Prism's rehabilitation division, and served in such
capacities since co-founding Prism in September 1992.
William R. Korslin was appointed President--Pharmaceutical Services Division
of Paragon on November 4, 1997. Prior to this, Mr. Korslin served as a Vice
President of LCA since September 1995 and as President of American
Pharmaceutical Services, Inc. ("APS"), LCA's pharmaceutical services
subsidiary from May 1994 until April 1998. 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.
Charles B. Carden was appointed Executive Vice President and Chief Financial
Officer of Paragon on November 4, 1997. Prior to this, Mr. Carden served as
Executive Vice President and Chief Financial Officer of LCA since October
1996. Before joining LCA, Mr. Carden 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.
R. Jeffrey Taylor was appointed Senior Vice President, Development of
Paragon on November 19, 1997. Prior to this, Mr. Taylor served as Senior Vice
President of GranCare since January 1997, as President of GranCare's ancillary
services division from November 1996 through January 1997, and as President of
GCI Renal Care, Inc., a subsidiary of GranCare, from February 1996 through
November 1996. Before joining GranCare, Mr. Taylor was Chief Executive Officer
of American Outpatient Services Corporation, a dialysis company, from July
1995 to February 1996. From January 1992 to June 1994 he was President of
Weisman, Taylor, Simpson & Sabatino, a health care merchant banking firm based
in California. From 1982 through 1992 Mr. Taylor served in several executive
capacities with American Medical International, Inc. including General Counsel
and Executive Vice President, Chief Administrative Officer.
Susan Thomas Whittle was appointed Senior Vice President, General Counsel
and Secretary of Paragon on November 4, 1997. Prior to this, Ms. Whittle
served as Vice President, General Counsel and Secretary of LCA since September
1993. Before joining LCA, Ms. Whittle was a partner with the law firms of
Clark, Thomas & Winters of Austin, Texas since February 1992 and Wood,
Lucksinger & Epstein, a national healthcare law firm, from May 1981 through
February 1992.
Laurence M. Berg has served as a director of Paragon since November 4, 1997.
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 serves as one of Apollo's designees on the Paragon Board.
Gene E. Burleson has served as a director of Paragon since November 4, 1997.
Mr. Burleson served as the Chairman of the Board of GranCare and its
predecessor, GranCare, Inc., a California corporation ("GranCare-California")
from 1988 to November 4, 1997. Additionally, Mr. Burleson served as President
and Chief Executive Officer of GranCare-California from December 1990 to
February 1997. Upon completion of the merger between GranCare-California and
Vitalink Pharmacy Services, Inc. in February 1997, Mr. Burleson
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became Chief Executive Officer and a director of Vitalink. Mr. Burleson
resigned as the Chief Executive Officer and a director of Vitalink in August
1997. Mr. Burleson currently serves on the boards of directors of three other
public companies: Alternative Living Services, Inc. ("ALS"), a developer and
manager of assisted living facilities; Decker Outdoor Corp., a footwear
manufacturer; and Walnut Financial Services, Inc., a provider of small
business financial and consulting services. Mr. Burleson serves as one of
GranCare's designees on the Paragon Board.
Peter P. Copses has served as a director of Paragon since November 4, 1997.
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 with 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
Finer Foods, Inc., Family Restaurants, Inc., and Zale Corporation. Mr. Copses
serves as one of Apollo's designees on the Paragon Board.
Jay M. Gellert has served as a director of Paragon since November 19, 1997.
Mr. Gellert is currently President and Chief Operating Officer of Foundation
Health Systems, Inc., a company engaged in the healthcare business. Prior to
this, Mr. Gellert served as Vice President of Shattuck Hammond Partners Inc.,
where he directed strategic advisory engagements in the area of integrated
delivery systems development, managed care network formation and physician
groups practice integration from 1994 to 1996. From 1991 through 1994,
Mr. Gellert was an independent consultant in the healthcare industry and from
1988 through 1991, he served as Chief Executive Officer of Bay Pacific
Corporation, an HMO located in Northern California. From 1985 through 1988,
Mr. Gellert was a Senior Vice President and Chief Operating Officer for the
California Healthcare System. Mr. Gellert is one of Apollo's designees to the
Paragon Board.
Joel S. Kanter has served as a director of Paragon since November 4, 1997.
From 1986 to the present, Mr. Kanter has been the President of Windy City,
Inc., a private investment company, and from 1988 to February 1995, he served
as a consultant to Walnut Capital Corporation, a closely held investment
management and advisory firm. From February 1995 to the present, Mr. Kanter
has served as Chief Executive Officer of Walnut Financial Services, Inc., a
provider of small business financial and consulting services, including
venture capital and other financial services. Mr. Kanter also serves on the
boards of directors of four other publicly held companies: I-Flow Corporation,
a home infusion pump manufacturer; Encore Medical Corporation, a manufacturer
of implant devices; Greystone Medical Group, Inc., a manufacturer of orthotic
and wound care products; and Walnut Financial Services, Inc. Mr. Kanter serves
as one of GranCare's designees on the Paragon Board.
Samuel B. Kellett will serve as a director of Paragon following the
Effective Time of the Merger. Mr. Kellett currently serves as a director of
Mariner and has served in such capacity since 1997. Mr. Kellett has been owner
and president of Samuel B. Kellett Investments since January 1996. Mr. Kellett
was president of Convalescent Services, Inc. from 1978 to January 1996. Mr.
Kellett will serve as one of Mariner's designees on the Paragon Board.
John H. Kissick has served as a director of Paragon since November 4, 1997.
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 with 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. and Florsheim Group, Inc. Mr. Kissick serves as one of Apollo's designees
on the Paragon Board.
William G. Petty, Jr. has served as a director of Paragon since November 4,
1997. Mr. Petty served as a director of GranCare from July 1995 to November 4,
1997 by virtue of GranCare's merger with Evergreen Healthcare, Inc.
("Evergreen"). Since July 1996, Mr. Petty has been a principal of Beecken,
Petty & Company
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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 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 healthcare investment fund, since
1986. Mr. Petty has been the Chairman of the Board of ALS since 1993. Mr.
Petty also served as the Chief Executive Officer of ALS from 1993 until
February 1996. Mr. Petty serves as one of GranCare's designees on the Paragon
Board.
Robert L. Rosen served as a director of Paragon since November 4, 1997. 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., Culligan Water Technologies, Inc., Samsonite
Corporation, AFP Imaging Corporation and WMC Mortgage Corp. Mr. Rosen serves
as one of Apollo's designees on the Paragon Board.
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PROPOSAL TO AMEND THE PARAGON CHARTER
TO CHANGE PARAGON'S NAME
The Paragon Board, by unanimous action of the directors present at the
meeting, has adopted a proposal to amend the Paragon Charter to change
Paragon's name to "Mariner Post-Acute Network, Inc." The Paragon Board
believes that the proposed name change is appropriate because following the
Merger, the combined company will have a significantly greater national market
presence and the new name recognizes the breadth of the network that will
exist following the consummation of the Merger.
If the proposed amendment to the Paragon Charter is approved by the
stockholders at the Paragon Special Meeting, the name change will become
effective upon the filing of a certificate of amendment to the Paragon Charter
with the Secretary of State of Delaware immediately following the Effective
Time of the Merger. See the "Second Amended and Restated Certificate of
Incorporation of Mariner Post-Acute Network, Inc." attached as Annex VIII
hereto. Upon the effectiveness of the name change, the symbol for Paragon
Common Stock on NYSE will be changed from "PGN" to "MPN."
The change in Paragon's name will not affect the validity or transferability
of Paragon's outstanding capital stock or debt securities or affect Paragon's
capital or corporate structure. Paragon stockholders will not be required to
exchange any certificates representing any Paragon securities held by them.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of a majority of the shares of Paragon
Common Stock issued and outstanding as of the Paragon Record Date will be
required to approve the Name Change Proposal.
PARAGON BOARD RECOMMENDATION
The Paragon Board, by unanimous action of the directors present at the
meeting, recommends a vote FOR the proposal to amend the Paragon Charter to
change Paragon's name to "Mariner Post-Acute Network, Inc."
PROPOSAL TO AMEND THE PARAGON CHARTER TO INCREASE
THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
The Paragon Board has adopted, by unanimous action of the directors present
at the meeting, a resolution approving and recommending to Paragon
stockholders the approval of an amendment to the Paragon Charter increasing
the number of authorized shares of Paragon Common Stock from 75 million shares
to 500 million shares.
As of the Paragon Record Date, approximately 42,626,980 shares of Paragon
Common Stock were issued and outstanding (including 52,227 shares issuable in
exchange for shares and common stock of corporations acquired by Paragon in
previous acquisitions and not yet submitted for exchange), options to purchase
3,710,000 shares of Paragon Common Stock had been granted under the Long-Term
Incentive Plan (none of which were vested) and options to purchase 822,419
shares of Paragon Common Stock had been granted under certain incentive plans
of GranCare that were assumed by Paragon in connection with the
LCA/GranCare/Apollo Mergers (all of which are vested). Furthermore, in
connection with the consummation of the Merger, Paragon will issue to holders
of Mariner Common Stock up to 31,784,707 shares of Paragon Common Stock and
will reserve up to 733,550 shares of Paragon Common Stock for issuance upon
exercise of the Assumed Options. See "The Merger Agreement--Mariner Stock
Options." In addition, Paragon anticipates issuing options to purchase
approximately 1.7 million shares of Paragon Common Stock under the Long-Term
Stock Incentive Plan to certain Mariner executives who become executives of
the combined company following the Merger (including one million shares to be
granted to Dr. Stratton). The Paragon Board and Paragon's stockholders also
approved an employee stock purchase plan at Paragon's 1998 Annual Meeting of
Stockholders (the "Employee Stock
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Purchase Plan"). Although not yet implemented, four million shares of Paragon
Common Stock have been reserved for issuance under the Employee Stock Purchase
Plan. Paragon also is currently negotiating the purchase of a business in
which Paragon contemplates issuing approximately one million shares of Paragon
Common Stock as part of the purchase price. Accordingly, while Paragon will
have sufficient shares available in order to effectuate the Merger, Paragon
will not have sufficient shares available to satisfy all of its commitments to
issue Paragon Common Stock following the Effective Time of the Merger without
the approval of the Amendment Proposal.
The Paragon Board recommends the increase in the number of shares of
authorized Paragon Common Stock to enable Paragon to have: (i) additional
shares of Paragon Common Stock available in light of Paragon's current
obligations to issue shares, including those arising in connection with the
Merger; (ii) shares available to reserve for issuance pursuant to the Long-
Term Stock Incentive Plan (assuming the Paragon Plan Proposal is approved by
Paragon stockholders); and (iii) additional shares available for issuance in
connection with future acquisitions, public or private financings involving
the sale of Paragon Common Stock or securities convertible into Paragon Common
Stock, employee benefit plans and other purposes. If the proposal to amend the
Paragon Charter to increase the number of authorized shares of Paragon Common
Stock is approved, the Paragon Board will have greater flexibility to issue
additional shares of Paragon Common Stock without the expense and delay of a
stockholders' meeting, unless stockholder approval is otherwise required.
The Paragon Board has the authority to authorize the issuance of additional
authorized but unissued shares of Paragon Common Stock without stockholder
approval unless such approval is otherwise required by applicable law or NYSE
rules. The issuance of additional shares of Paragon Common Stock could, under
certain circumstances, render more difficult or discourage an attempt by a
third party to obtain control of Paragon making it potentially less likely
that stockholders of Paragon will realize the change of control premium
sometimes realized in connection with change of control transactions. For
example, the issuance of shares of Paragon Common Stock in a public or private
sale, merger or similar transaction would increase the number of Paragon's
outstanding shares, thereby diluting the interest of a party seeking to
acquire control of Paragon and increasing the cost of such transaction.
In addition, the Paragon Charter as currently in effect allows Paragon to
issue one or more series of preferred stock having such voting rights,
conversion features and other characteristics as the Paragon Board deems
appropriate. Consequently, Paragon could issue a series of preferred stock
that could be converted into Paragon Common Stock and have a further dilutive
effect on the interest of a party seeking to acquire control of Paragon or
that has rights and characteristics that may otherwise defeat or discourage an
attempt by a third party to obtain control of Paragon. Management is not aware
of any intent or plan on the part of any person or entity to gain control of
Paragon.
Issuances of additional shares of Paragon Common Stock, depending upon the
timing and circumstances, could dilute earnings per share and decrease the
book value per share of the shares of Paragon Common Stock theretofore
outstanding and each stockholder's percentage ownership of Paragon may be
proportionately reduced.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of at least a majority of the issued and
outstanding shares of Paragon Common Stock is needed for the approval of the
Amendment Proposal.
PARAGON BOARD RECOMMENDATION
The Paragon Board, by unanimous action of the directors present at the
meeting, recommends a vote FOR the proposal to amend the Paragon Charter to
increase the number of authorized shares of Paragon Common Stock.
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PROPOSAL TO AMEND THE PARAGON 1997 LONG-TERM INCENTIVE PLAN
The Paragon Health Network, Inc. 1997 Long-Term Incentive Plan (the "Long-
Term Incentive Plan") was approved by the Paragon Board, effective November 4,
1997 and approved by its stockholders on February 19, 1998. The Paragon Board
adopted, by unanimous action of the directors present at the meeting, a
proposal to amend the Long-Term Incentive Plan, which amends Section 1.5 of
the Long-Term Incentive Plan to increase the number of shares of Paragon
Common Stock reserved and available for issuance pursuant to stock options and
awards granted thereunder from 6 million to 10 million shares (the "Long-Term
Incentive Plan Amendment"). As of the Paragon Record Date, approximately 2.3
million shares were available for future grants under the Long-Term Incentive
Plan.
Upon consummation of the Merger, the business and operations of Paragon and
Mariner will be conducted under a management team that includes executives of
both companies. Following the Merger, Arthur W. Stratton, Jr., M.D., Mariner's
Chairman, President and Chief Executive Officer, will be employed as Paragon's
Vice Chairman, President and Chief Operating Officer. In connection therewith,
Paragon and Dr. Stratton have executed an employment agreement that will
become effective upon consummation of the Merger and such agreement provides
that Dr. Stratton will be granted an option under the Long-Term Incentive Plan
to purchase one million shares of Paragon Common Stock. See "Interests of
Certain Persons in the Merger--Stratton Employment Agreement." In addition,
Paragon anticipates granting approximately 700,000 additional options to
purchase shares of Paragon Common Stock to certain other members of Mariner's
management team that Paragon expects to employ following the Merger in
positions that entitle them to participate in the Long-Term Incentive Plan. As
of the Paragon Record Date, shares of Paragon Common Stock subject to option
and restricted stock granted under the Long-Term Incentive Plan aggregated
approximately 3.7 million shares. As a result, following the Effective Time of
the Merger, it is expected that approximately 590,000 shares of Paragon Common
Stock will be available for grants under the Long-Term Incentive Plan assuming
the Paragon Plan Proposal is not approved by stockholders. In such a case,
Paragon would not have sufficient shares available under the Long-Term
Incentive Plan following the Effective Time of the Merger to enable Paragon to
continue to utilize the Long-Term Incentive Plan as a component of
compensation for qualified officers, key employees and consultants.
Accordingly, the Paragon Board has approved, and recommends to the Paragon
stockholders, the adoption of the Long-Term Incentive Plan Amendment to
increase the number of shares of Paragon Common Stock available for issuance
under the Long-Term Incentive Plan to a total of 10 million shares.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of the holders of at least a majority of the shares of
Paragon Common Stock present in person or represented by proxy at the Paragon
Special Meeting is needed for the approval of the Paragon Plan Proposal.
PARAGON BOARD RECOMMENDATION
The Paragon Board, by unanimous action of the directors present at the
meeting, recommends a vote FOR the proposal to increase the number of shares
of Paragon Common Stock available for grants pursuant to the Long-Term
Incentive Plan.
82
<PAGE>
PARAGON HEALTH NETWORK, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Paragon, Mariner and Merger Sub have entered into the Merger Agreement,
which provides that Merger Sub will be merged with and into Mariner with
Mariner as the surviving corporation and continuing as a wholly-owned
subsidiary of Paragon. Except for shares owned by Paragon or any subsidiary of
Paragon (which will be cancelled at the Effective Time of the Merger) each
share of Mariner Common Stock will be converted into the right to receive one
share of Paragon Common Stock.
The accompanying unaudited pro forma statements of income for the year ended
September 30, 1997 and for the six months ended March 31, 1998 give effect to
the transaction as if it occurred on October 1, 1996. The accompanying
unaudited pro forma balance sheet gives effect to the transaction as if it
occurred on March 31, 1998. The unaudited pro forma financial statements are
not necessarily indicative of the operating results that would have been
achieved had the Merger 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 following
information incorporated by reference herein: (i) the consolidated financial
statements of Paragon and Mariner and the related notes thereto; (ii) the
Paragon Pro Forma Condensed Consolidated Financial Statements included in
Paragon's Form 8-K/A filed January 20, 1998; and (iii) Management's Discussion
and Analysis of Results of Operations and Financial Condition of each of
Paragon and Mariner.
83
<PAGE>
PARAGON HEALTH NETWORK, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PARAGON MARINER PRO FORMA CONSOLIDATED
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.. $ 19,464 $ 4,760 $ -- $ 24,224
Receivables, less allowance
for doubtful accounts..... 427,910 188,727 -- 616,637
Supplies................... 30,205 4,888 -- 35,093
Deferred income taxes...... 83,421 9,048 5,301 (2) 106,427
8,657 (3)
Prepaid expenses and other
current assets............ 31,687 11,490 -- 43,177
---------- ---------- -------- ----------
Total current assets....... 592,687 218,913 13,958 825,558
Property and Equipment...... 731,753 485,915 -- 1,217,668
Less accumulated
depreciation.............. (229,063) (64,090) -- (293,153)
---------- ---------- -------- ----------
502,690 421,825 -- 924,515
Goodwill, net............... 468,508 389,438 236,141 (1) 1,192,430
42,604 (2)
55,739 (3)
Restricted Investments...... 96,241 2,987 -- 99,228
Notes Receivable, net....... 31,482 -- -- 31,482
Other Assets................ 88,608 51,997 -- 140,605
---------- ---------- -------- ----------
$1,780,216 $1,085,160 $348,442 $3,213,818
========== ========== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current
maturities of long-term
debt...................... $ 17,330 $ 13,600 $ -- $ 30,930
Accounts payable........... 128,814 19,277 -- 148,091
Accrued payroll and related
expenses.................. 88,181 25,820 -- 114,001
Accrued interest........... 30,282 10,170 -- 40,452
Other accrued expenses..... 53,190 33,949 17,000 (3) 104,139
---------- ---------- -------- ----------
Total current liabilities.. 317,797 102,816 17,000 437,613
Long-Term Debt, net of
current maturities......... 1,278,488 585,333 42,604 (2) 1,953,821
47,396 (3)
Long-Term Insurance
Reserves................... 42,583 -- -- 42,583
Deferred Income Taxes and
Other Noncurrent
Liabilities................ 70,170 47,215 -- 117,385
Commitments and
Contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, par value
$0.01..................... -- -- -- --
Series A--Junior
participating preferred
stock, par value $0.01.... -- -- -- --
Common stock, par value
$0.01..................... 414 296 -- 710
Capital surplus............ 505,085 318,279 267,362 (1) 1,096,027
5,301 (2)
Retained earnings
(deficit)................. (435,668) 31,221 (31,221)(1) (435,668)
Unrealized gain on
securities available-for-
sale...................... 1,347 -- -- 1,347
---------- ---------- -------- ----------
Total stockholders'
equity.................... 71,178 349,796 241,442 662,416
---------- ---------- -------- ----------
$1,780,216 $1,085,160 $348,442 $3,213,818
========== ========== ======== ==========
</TABLE>
84
<PAGE>
- --------
Pro Forma Adjustments:
Adjustments affecting assets, liabilities and stockholders' equity to reflect
the Merger with Mariner are as follows:
(1) Merger of Merger Sub into Mariner pursuant to the Merger Agreement:
Exchange and retirement of Mariner Common Stock for Paragon Common Stock
valued at $585.9 million (29,578,704 shares of Paragon Common Stock to be
received by Mariner stockholders), and resulting elimination of Mariner
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 Mariner's assets and liabilities to
fair value or to assign value to identifiable intangible assets, if any.
Such adjustment will occur upon consummation of the Merger. Pro forma
goodwill represents 37% 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 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.
(2) Cash payment for options to purchase approximately 5.1 million shares of
Mariner Common Stock. For purposes of pro forma presentation, all options
to purchase Mariner Common Stock are reflected as Cash Payment Options;
however, options to purchase up to 733,500 shares of Mariner Common Stock
may be Assumed Options and management does not believe the assumption of
such options would have a material impact on the pro-forma presentation.
(3) Estimated costs totaling $64.4 million, net of estimated tax benefits of
$8.7 million, related to change of control and severance, advisory, and
other related merger expenses are to be paid in connection with the
Merger. $47.4 million of these costs are expected to be paid upon
consummation of the Merger and the remaining $17.0 paid subsequent to
closing.
85
<PAGE>
PARAGON HEALTH NETWORK, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PARAGON MARINER PRO FORMA CONSOLIDATED
PRO FORMA(1) HISTORICAL(2) ADJUSTMENTS PRO FORMA(3)
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues............ $1,936,441 $733,476 $ -- $2,669,917
Costs and expenses:
Operating expenses,
excluding items shown
below................. 1,668,302(4) 616,374 (6) -- 2,284,676
Rent................... 84,591 4,421 -- 89,012
Depreciation and
amortization.......... 65,041 27,499 16,099 (8) 108,639
Impairment of long-
lived assets.......... -- 10,486 -- 10,486
Loss on sale of
assets................ -- 2,920 -- 2,920
Merger and related
costs................. 30,888(5) 9,324 (7) -- 40,212
---------- -------- -------- ----------
1,848,822 671,024 16,099 2,535,945
---------- -------- -------- ----------
Income (loss) from
operations............ 87,619 62,452 (16,099) 133,972
Other income and
expense:
Interest expense....... 123,455 40,327 6,857 (9) 170,639
Interest and dividend
income................ (10,799) (375) -- (11,174)
---------- -------- -------- ----------
112,656 39,952 6,857 159,465
---------- -------- -------- ----------
Income (loss) before
income taxes and
equity
earnings/minority
interest.............. (25,037) 22,500 (22,956) (25,493)
Provision (benefit) for
income taxes.......... 1,763 10,913 (2,537)(10) 10,139
---------- -------- -------- ----------
Income before equity
earnings/minority
interest.............. (26,800) 11,587 (20,419) (35,632)
Equity
earnings/minority
interest.............. (735) -- -- (735)
---------- -------- -------- ----------
Net income (loss)...... $ (27,535) $ 11,587 $(20,419) $ (36,367)
========== ======== ======== ==========
Earnings (loss) per
share:
Basic.................. $ (0.67) $ 0.40 $ (0.52)
========== ======== ==========
Diluted................ $ (0.67) $ 0.39 $ (0.52)
========== ======== ==========
Weighted average common
shares outstanding:
Basic.................. 40,856 29,226 70,435
========== ======== ==========
Diluted................ 40,856 29,885 70,435
========== ======== ==========
</TABLE>
- --------
(1) Represents the Paragon Health Network, Inc. Unaudited Pro Forma Condensed
Consolidated Statement of Income for the year ended September 30, 1997 as
reported in the Paragon Form 8-K/A incorporated by reference herein. This
pro forma information gives effect to the LCA/GranCare/Apollo Mergers as
if they occurred on October 1, 1996.
(2) Reflects twelve month period ended December 31, 1997. Excludes Prism
Health Group, Inc. prior to the effective date of acquisition (October
1997). See Mariner's Notes to Consolidated Financial Statements.
(3) Upon consummation of the Merger, management anticipates achieving annual
cost savings as a result of elimination of duplicative overhead costs and
revenue enhancements of approximately $35.0 million. 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.
(4) Includes $8.0 million pre-tax charge, recorded by GranCare in the quarter
ended June 30, 1997, associated with a change in accounting estimate
related to allowance for doubtful accounts. Also includes $18.5 million
pre-tax charge, recorded by GranCare in the quarter ended September 30,
1997, for an additional provision for doubtful accounts.
(5) Includes $28.3 million merger and other related charges for the spin-off
of GranCare's institutional pharmacy business in February 1997. This
amount excludes a $4.8 million extraordinary debt extinguishment charge,
net of tax, which resulted from debt repayments associated with the spin-
off of GranCare's institutional pharmacy business and merger with Vitalink
Pharmacy Services, Inc. The tax provision is affected by $19.0 million of
these merger expenses that are not tax deductible. Also includes $2.6
million of pre-tax merger and acquisition costs incurred by LCA related to
the LCA/GranCare/Apollo Mergers, substantially all of which are not tax
deductible.
(6) Includes $7.2 million of costs related to office closings, abandonment of
certain furniture and equipment and other expenses related to
consolidation of Mariner's rehabilitation operations.
86
<PAGE>
(7) Includes $5.7 million for severance, payroll, and relocation, $2.1 million
for office closings and related expenses, and $1.5 million related to bank
fees incurred for certain transactions.
(8) Depreciation and amortization--Pro Forma Adjustments for depreciation and
amortization are as follows:
<TABLE>
<S> <C>
Goodwill amortization on transaction goodwill based on a 30-year
period.............................................................. $24,131
Elimination of Mariner historical goodwill amortization.............. (8,032)
-------
$16,099
=======
(9) Interest expense--Pro Forma Adjustment for interest expense is as
follows:
Interest expense on $90.0 million of new debt at an average
estimated interest rate of 7.62%.................................. $ 6,857
=======
</TABLE>
(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 37%.
87
<PAGE>
PARAGON HEALTH NETWORK, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PARAGON MARINER PRO FORMA CONSOLIDATED
PRO FORMA (1) HISTORICAL ADJUSTMENTS PRO FORMA (2)
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Net revenues............ $ 977,059 $412,759 $ -- $1,389,818
Costs and expenses:
Operating expenses,
excluding items shown
below................. 835,232 349,135 (4) -- 1,184,367
Rent................... 42,517 2,291 -- 44,808
Depreciation and
amortization.......... 35,846 15,641 6,466 (6) 57,953
Impairment of long-
lived assets.......... -- 10,486 -- 10,486
Loss on sale of
assets................ -- 2,920 -- 2,920
Recapitalization,
merger and related
costs................. 99,687 (3) 9,324 (5) -- 109,011
---------- -------- ------- ----------
1,013,282 389,797 6,466 1,409,545
---------- -------- ------- ----------
Income (loss) from
operations............. (36,223) 22,962 (6,466) (19,727)
Other income and
expense:
Interest expense....... 60,116 25,257 3,429 (7) 88,802
Interest and dividend
income................ (5,117) (615) -- (5,732)
---------- -------- ------- ----------
54,999 24,642 3,429 83,070
---------- -------- ------- ----------
Loss before income
taxes, equity
earnings/minority
interest, and
extraordinary loss..... (91,222) (1,680) (9,895) (102,797)
Provision (benefit) for
income taxes........... (23,706) 273 (1,269) (8) (24,702)
---------- -------- ------- ----------
Loss before equity
earnings/minority
interest and
extraordinary loss..... (67,516) (1,953) (8,626) (78,095)
Equity earnings/minority
interest............... (299) -- -- (299)
---------- -------- ------- ----------
Net loss before
extraordinary loss..... $ (67,815) $ (1,953) $(8,626) $ (78,394)
========== ======== ======= ==========
Loss per share before
extraordinary loss:
Basic.................. $ (1.53) $ (0.07) $ (1.06)
========== ======== ==========
Diluted................ $ (1.53) $ (0.07) $ (1.06)
========== ======== ==========
Weighted average common
shares outstanding:
Basic.................. 44,434 29,473 74,013
========== ======== ==========
Diluted................ 44,434 29,473 74,013
========== ======== ==========
</TABLE>
- --------
(1) See Pro Forma Condensed Consolidated Statement of Income Reflecting the
Merger of Living Centers of America, Inc. and GranCare, Inc.
(2) Upon consummation of the Merger, management anticipates achieving annual
cost savings as a result of elimination of duplicative overhead costs and
revenue enhancements of approximately $35.0 million. 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.
(3) Includes $80.7 million of recapitalization, indirect merger, and
transition costs related to the LCA/GranCare/Apollo Mergers of which an
estimated $22.4 million is not tax deductible. Also includes $19.0 million
charge related to termination fees paid by GranCare to Vitalink Pharmacy
Services, Inc. and Manor Care, Inc. in conjunction with the
LCA/GranCare/Apollo Mergers.
(4) Includes $7.2 million of costs related to office closings, abandonment of
certain furniture and equipment and other expenses related to
consolidation of Mariner's rehabilitation operations.
(5) Includes $5.7 million for severance, payroll, and relocation, $2.1 million
for office closings and related expenses, and $1.5 million related to bank
fees incurred for certain transactions.
(6) Depreciation and amortization--Pro Forma Adjustments for depreciation and
amortization are as follows:
Goodwill amortization on transaction goodwill based on a 30-year
period......................................................... $12,066
Elimination of historical Mariner goodwill amortization......... (5,600)
-------
$ 6,466
=======
(7) Interest expense--Pro Forma Adjustment for interest expense is as
follows:
Interest expense on $90.0 million of new debt at an average esti-
mated interest rate of 7.62%................................... $ 3,429
=======
(8) Income taxes are adjusted to reflect tax provision effect of pro forma
adjustments, less non-deductible goodwill, at an estimated effective tax
rate of 37%.
88
<PAGE>
PARAGON HEALTH NETWORK, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
REFLECTING THE MERGER OF
LIVING CENTERS OF AMERICA, INC. AND GRANCARE, INC.
SIX MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PARAGON GRANCARE PRO FORMA PARAGON
HISTORICAL HISTORICAL(1) ADJUSTMENTS(2) PRO FORMA
---------- ------------- -------------- ---------
<S> <C> <C> <C> <C>
Net revenues............ $908,767 $ 68,292 $ -- $ 977,059
Costs and expenses:
Operating expenses,
excluding items shown
below................. 772,908 62,324 -- 835,232
Rent................... 39,142 3,333 42 (5) 42,517
Depreciation and
amortization.......... 33,326 1,820 700 (6) 35,846
Recapitalization,
merger and related
costs................. 80,687 (3) 19,000 (4) -- 99,687
-------- -------- ------- ---------
926,063 86,477 742 1,013,282
-------- -------- ------- ---------
Loss from operations.... (17,296) (18,185) (742) (36,223)
Other income and
expense:
Interest expense....... 52,034 1,834 6,248 (7) 60,116
Interest and dividend
income................ (4,744) (373) -- (5,117)
-------- -------- ------- ---------
47,290 1,461 6,248 54,999
-------- -------- ------- ---------
Loss before income
taxes, equity
earnings/minority
interest and
extraordinary loss..... (64,586) (19,646) (6,990) (91,222)
Income tax benefit...... (13,951) (7,239) (2,516)(8) (23,706)
-------- -------- ------- ---------
Loss before equity
earnings/minority
interest and
extraordinary loss..... (50,635) (12,407) (4,474) (67,516)
Equity earnings/minority
interest............... (299) -- -- (299)
-------- -------- ------- ---------
Net loss before
extraordinary loss..... $(50,934) $(12,407) $(4,474) $ (67,815)
======== ======== ======= =========
Loss per share before
extraordinary loss:
Basic.................. $ (1.15) $ (0.51) $ (1.53)
======== ======== =========
Diluted................ $ (1.15) $ (0.51) $ (1.53)
======== ======== =========
Weighted average common
shares outstanding:
Basic.................. 44,434 24,394 44,434
======== ======== =========
Diluted................ 44,434 24,394 44,434
======== ======== =========
</TABLE>
- --------
(1) Reflects GranCare's historical results of operations for the one month
(October 1997) prior to the effective date of the LCA/GranCare/Apollo
Mergers.
(2) Pro Forma Adjustments are for the one month (October 1997) prior to the
effective date of the LCA/GranCare/Apollo Mergers.
(3) Recapitalization, indirect merger, and transition costs related to the
LCA/GranCare/Apollo Mergers of which an estimated $22.4 million is not tax
deductible.
(4) The $19.0 million charge relates to termination fees paid by GranCare to
Vitalink Pharmacy Services, Inc. and Manor Care, Inc. in conjunction with
the LCA/GranCare/Apollo Mergers.
(5) Represents incremental rent on lease restructuring.
(6) Represents goodwill amortization on transaction goodwill based on a 30-
year period.
(7) Interest expense--Pro Forma Adjustments for interest expense are as
follows:
Elimination of amortization of deferred financing fees included in
historical amounts................................................ $ (62)
Amortization of deferred financing fees on new debt over a weighted
average 8.1-year period........................................... 327
Elimination of historical interest expense on debt replaced with
new debt.......................................................... (2,967)
Commitment fees on unused portion of revolving credit facility
under the Paragon Credit Agreement................................ 63
Interest expense on $1.19 billion new debt at an average estimated
interest rate of 8.95%............................................ 8,887
------
$6,248
======
(8) 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%.
89
<PAGE>
DESCRIPTION OF PARAGON CAPITAL STOCK
The following descriptions of certain provisions of the Paragon Charter and
the Paragon Bylaws are necessarily general and do not purport to be complete
and are qualified in their entirety by reference to the Paragon Charter and
Paragon Bylaws, which are included hereto as Annexes VIII and IX,
respectively.
PARAGON COMMON STOCK
The authorized capital stock of Paragon consists of 75 million shares of
common stock, par value $0.01 per share. As of the Paragon Record Date, there
were 42,626,980 shares of Paragon Common Stock issued and outstanding and
42,574,753 shares held by approximately 414 holders of record entitled to
notice of and to vote at the Paragon Special Meeting. The holders of Paragon
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 Paragon Common
Stock are entitled to such dividends as may be declared from time to time by
the Paragon Board out of funds legally available therefor, subject to the
dividend and liquidation rights of any preferred stock of Paragon that may be
issued, and subject to the dividend restrictions in certain Paragon credit
facilities and various other note agreements. See "--Preferred Stock." In the
event of the liquidation, dissolution or winding-up of Paragon, the holders of
Paragon Common Stock are entitled to share equally and ratably in the assets
of Paragon, if any, remaining after provision for payment of all debts and
liabilities of Paragon and satisfaction of the liquidation preference of any
shares of preferred stock of Paragon that may be outstanding. The holders of
Paragon Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Paragon Common Stock are fully
paid and nonassessable.
PREFERRED STOCK
Paragon is authorized to issue five million shares of preferred stock, par
value $.01 per share ("Paragon Preferred Stock"). No shares of Paragon
Preferred Stock were outstanding at the date of this Proxy
Statement/Prospectus. The Paragon Board has authority, without stockholder
approval, to issue shares of Paragon 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 Paragon Preferred Stock, while
providing desired flexibility in connection with possible acquisitions and
other corporate purposes, could adversely affect the voting power of holders
of Paragon 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 Paragon. There are no
present plans for any issuance of Paragon Preferred Stock.
COMPARISON OF STOCKHOLDER RIGHTS
GENERAL
The following is a summary of certain material differences between the
rights of holders of Paragon Common Stock and Mariner Common Stock before the
consummation of Merger. The Paragon Charter is proposed to be amended pursuant
to the Name Change Proposal and the Amendment Proposal as described under
"Proposal to Amend the Paragon Charter to Change Paragon's Name" and "Proposal
to Amend the Paragon Charter to Increase the Number of Authorized Shares of
Common Stock." The Paragon Board will amend and restate the current Paragon
Bylaws to become effective at the Effective Time of the Merger pursuant to the
provisions of the Merger Agreement. Because Mariner and Paragon are both
organized under the laws of the State of Delaware, the differences arise
solely from the differences between various provisions of their respective
certificates of incorporation and bylaws and the provision of the Apollo
Stockholders Agreement. Each company's certificate of incorporation and bylaws
are similar except to the extent described below under "Classified Board of
Directors," "Number of Directors; Removal of Directors; Filling Vacancies of
the Board of Directors," "Adjournment and Notice of Stockholder Meetings,"
"Call of Special Stockholder Meetings," "Stockholder Consent in Lieu of
Meeting," "Business Combinations," "Super-Majority Vote Requirements,"
"Director Liability," and "Amendments to Bylaws."
90
<PAGE>
The following summary, which does not purport to be a complete statement of
the differences between the certificate of incorporation of Mariner (the
"Mariner Charter") and Mariner's bylaws (the "Mariner Bylaws"), on the one
hand, and the Paragon Charter and Paragon Bylaws, on the other hand, is
qualified in its entirety by reference to the full text of each of such
documents and the DGCL. The Paragon Charter and Paragon Bylaws as proposed to
be amended and in effect following the consummation of the Merger are attached
hereto as Annex VIII and Annex IX, respectively. For information as to how the
Mariner Charter and Mariner Bylaws may be obtained, see "Available
Information" and "Incorporation of Documents by Reference."
The total number of shares of capital stock that Paragon will have the
authority to issue (assuming approval of the Amendment Proposal) will be 505
million consisting of 500 million shares of Paragon Common Stock and five
million shares of Paragon Preferred Stock. Presently, the total number of
shares of capital stock that Paragon has the authority to issue is 80 million
consisting of 75 million shares of Paragon Common Stock and five million
shares of Paragon Preferred Stock. The total number of shares of capital stock
Mariner has the authority to issue is 50 million shares of Mariner Common
Stock and one million shares of preferred stock, par value $.01 per share.
CLASSIFIED BOARD OF DIRECTORS
Unlike the Paragon Charter and Paragon Bylaws, which do not provide for a
classified board, the Mariner Charter and Mariner Bylaws provide that the
Mariner 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
of directors 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
Mariner's directors, if confronted by an entity attempting to force a proxy
contest, a tender or exchange offer or other extraordinary corporate
transaction, would have sufficient time to review the transaction as well as
any available alternative to the transaction 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 Mariner, even though such a transaction could be beneficial to Mariner and
its stockholders. Because the Paragon Charter and Paragon Bylaws do not
provide for a classified board of directors and provide for directors to be
elected annually for one-year terms, stockholders may be able to change
composition of the Paragon Board or Paragon may be more susceptible to a third
party take-over.
NUMBER OF DIRECTORS; REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF
DIRECTORS
The Mariner Charter and Mariner Bylaws provide that the Mariner Board will
set the number of directors by resolution of a majority of the Mariner Board,
but in no event shall the number of directors be less than three. The number
of directors of the Mariner Board is currently 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 (rounded to the nearest whole number), which number is currently
set at 11. The Paragon Bylaws provide for all nominations to be made by the
nominating committee of the Paragon Board.
The Mariner Charter provides 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, even
if less than a quorum or by a sole remaining director. Any director elected to
fill a vacancy shall hold office for a term expiring at the annual meeting of
stockholders of Mariner at which the term of office of the class to which he
has been elected expires, or until his earlier death, resignation or removal.
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. Pursuant to the Apollo Stockholders Agreement, Apollo
presently has the right to designate up to six nominees for election
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as directors; provided that not more than four of such nominees can be
Associates (as defined in the Apollo Stockholders Agreement) of Apollo. Upon
consummation of the Merger, Apollo has agreed to certain amendments to its
rights under the Apollo Stockholder Agreement such that immediately following
the Effective Time, Apollo will have the right to designate up to five
nominees for election as Paragon directors, up to four of whom may be
Associates of Apollo. 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 may designate a
person to fill such vacancy. Apollo will be able to designate such number of
additional nominees for election as directors as will cause its percentage of
the directors to be not less than its percentage ownership of Paragon Common
Stock outstanding. See "Interests of Certain Persons in the Merger--Agreements
with Apollo."
The Paragon Bylaws provide that any transaction whereby Apollo will transfer
its rights under the Apollo Stockholders Agreement to another person (who
would thereby become an "interested stockholder") must be approved by both a
two-thirds vote of the entire Paragon Board (rounded to the nearest whole
number) and by a majority of the directors not having, directly or indirectly,
a material financial interest in the transaction, and any such approval will
be deemed approval under Section 203 of the DGCL.
The Mariner Bylaws and the Mariner Charter provide that directors elected by
the Mariner stockholders, or by the Mariner Board to fill a vacancy, may be
removed only for cause by the affirmative vote of the holders of at least a
majority of the combined voting power of the issued and outstanding shares of
capital stock then entitled to vote for the election of directors. The Paragon
Charter provides 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 issued and 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 Mariner Bylaws provide that any meeting of stockholders may be adjourned
to any other time and to any other place at which the meeting of Mariner
stockholders may be held under the Mariner Bylaws by majority vote of
stockholders present or represented at the meeting and entitled to vote,
although less than a quorum, or, if no stockholder is present, by any officer
entitled to preside at or to act as secretary of such meeting. The Paragon
Bylaws provide that if a quorum is not present or represented at any meeting
of the Paragon stockholders, the Paragon stockholders entitled to vote,
present in person or represented by proxy, have the power by majority vote to
adjourn the meeting from time to time without notice other than announcement
at the meeting, until a quorum is present or represented.
The Mariner 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 Mariner
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 Mariner 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 the persons and business specified in
Mariner's notice of meeting, by, or at the direction of, the Mariner Board or
by a Mariner stockholder who has given timely prior written notice to the
Secretary of Mariner 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 Mariner at the principal executive offices of Mariner not later
than the close of business on the 120th day and not earlier than the close of
business on the 150th day prior to the first anniversary of the preceding
year's annual meeting; provided, however, that if no annual meeting was held
in the preceding year or the date of the annual meeting has been changed by
more than 30 days from the date contemplated at the time of such preceding
year's proxy statement, notice by the stockholder to be timely must be so
delivered not earlier than the close of business on the 90th day prior to such
annual meeting and not later than the close of business on the later of the
60th day
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prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made by Mariner. The notice
must contain certain information specified in the Mariner Bylaws.
The Paragon Bylaws establish advance notice procedures with regard to the
nomination, other than by or at the direction of the Paragon Board, of
candidates for election as directors and with regard to certain matters to be
brought before an annual meeting of Paragon 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 Paragon 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 Paragon Board or by a Paragon
stockholder who has given timely prior written notice to the Secretary of
Paragon 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 Paragon 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 Paragon for the meeting
as originally scheduled. The notice must contain certain information specified
in the Paragon Bylaws.
CALL OF SPECIAL STOCKHOLDER MEETINGS
The Mariner Charter provides that special meetings of Mariner stockholders
may be called only by the President of Mariner, Chairman of the Mariner Board
or the Mariner Board and business transacted at any special meeting of Mariner
stockholders shall be limited to matters relating to the purpose or purposes
stated in the notice of the meeting. The Paragon Bylaws provide that special
meetings of Paragon stockholders may be called at any time by the Paragon
Board or by a committee of the Paragon Board that has been duly designated by
the Paragon Board and whose power and authority, as provided in a resolution
of the Paragon Board or in the Paragon Bylaws, as the case may be, include the
power to call such meetings. Special meetings of the Paragon stockholders may
also be called by one or more Paragon stockholders holding in the aggregate no
less than 25% of the then outstanding shares of the Paragon Common Stock.
Special meetings of the Paragon stockholders may not be called by any other
person or persons. Business transacted at any special meeting of the Paragon
stockholders shall be limited to the purposes stated in the notice.
STOCKHOLDER CONSENT IN LIEU OF MEETING
The Mariner Charter provides that Mariner stockholders may not take any
action by written consent in lieu of a meeting of Mariner stockholders. 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 Paragon stockholders may be taken by written
consent if such consent is signed by the holders of issued and 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
The Paragon Bylaws provide that any approval given under Section 203(a) of
the DGCL with respect to a proposed transaction must be approved by a two-
thirds vote of the entire Paragon Board (rounded to the nearest whole number)
and, if such transaction involves Apollo or any affiliate of Apollo and would
be deemed a "business combination" under the provisions of Section
203(c)(3)(i)-(iv) of the DGCL, a majority of the directors not having,
directly or indirectly, a material financial interest in the transaction must
approve the transaction. As described below, following the Effective Time of
the Merger, the two-thirds vote with respect to approval under Section 203 of
the DGCL will no longer apply to certain types of transactions. See "--Super-
Majority Vote Requirements."
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SUPER-MAJORITY VOTE REQUIREMENTS
The Mariner 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;
provided, however, that the affirmative vote of the holders of shares of
voting stock of Mariner representing at least 75 percent of the voting power
of the capital stock of Mariner entitled to vote generally in the election of
directors, voting together as a single class, is required to: (i) reduce or
eliminate the number of authorized shares of Mariner Common Stock or the
number of authorized Mariner Preferred Stock; or (ii) amend or repeal, or
adopt, any provision inconsistent with the provisions of the Mariner Charter
involving capital stock of Mariner, the Mariner Bylaws, stockholder action,
directors, stockholder meetings, indemnification, fiduciary duties, tender
offers and business combinations, and amendments.
The Paragon 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 removal of directors, liability of directors,
the alteration of the Paragon 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 or
acquisitions or dispositions of assets; (ii) certain investments in lines of
business other than those operated by Paragon, its predecessors or any of
their subsidiaries 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 Paragon Board; (v) amendments to the Paragon Charter or
the Paragon Bylaws; (vi) the designation of committees of the Paragon Board;
(vii) the dissolution or liquidation of Paragon (or the filing of a 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 Paragon Board to a committee which does not include such
officer or director as a member; and (xi) any amendments or supplements to the
Apollo Stockholders Agreement. Paragon and Mariner have agreed that certain
amendments to certain of the provisions of the Paragon Bylaws regarding super
majority voting will become effective immediately prior to the Effective Time
of the Merger. In particular, the two-thirds vote requirement will not apply
to any action taken by the Paragon Board in connection with the merger,
consolidation or tender offer involving or commenced by a third party in which
the sole consideration is cash and which will result in a change of control of
Paragon (an "Exempted Transaction") and such action may be taken by the
affirmative vote of a majority of the Paragon Board. In addition, any approval
of an Exempted Transaction under DGCL Section 203 shall also be accomplished
with the affirmative vote of a majority of the Paragon Board.
AMENDMENTS TO BYLAWS
The Mariner Charter and the Mariner Bylaws provide that the Mariner Bylaws
may be amended or repealed or new bylaws may be adopted at any annual or
special meeting of the Mariner stockholders by affirmative vote of at least 75
percent of the shares of capital stock then issued, outstanding and entitled
to vote, or by vote of a majority of directors then in office at any regular
or special meeting of the Mariner Board at which a quorum is present, provided
notice of the proposed amendment, repeal or adoption of the new bylaws is
given in the notice of the meeting. The Paragon Charter provides that the
Paragon 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 Paragon Board
(rounded to the nearest whole number).
LEGAL OPINIONS
Powell, Goldstein, Frazer & Murphy LLP, counsel to Paragon, has passed on
the validity of the Paragon Common Stock to be issued pursuant to the Merger
Agreement. Powell, Goldstein, Frazer & Murphy LLP and Testa, Hurwitz &
Thibeault, LLP, counsel to Mariner, have delivered opinions concerning certain
federal income tax consequences of the Merger.
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EXPERTS
The consolidated financial statements and schedules of Paragon Health
Network, Inc. and GranCare, Inc. 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 incorporated
herein by reference, which with respect to the report pertaining to the
financial statements of GranCare for the year ended December 31, 1994, is
based in part on the report of KPMG Peat Marwick LLP, independent auditors.
The consolidated financial statements and schedules of Mariner Health Group,
Inc. incorporated by reference in this Proxy Statement/Prospectus have been
audited by Coopers & Lybrand L.L.P., independent auditors, to the extent
indicated in their report thereon also incorporated herein by reference. Such
consolidated financial statements and schedules have been 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 Merger is consummated, any proposal intended to be
presented at Paragon's 1999 annual meeting of stockholders must have been
received by Paragon by November 22, 1998, in order to be included in Paragon's
proxy statement. If the Merger is not consummated, any Mariner stockholder
proposal to be presented at Mariner's 1998 annual meeting must be received by
Mariner by September 18, 1998 in order to be included in Mariner's proxy
statement.
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GLOSSARY OF SELECT TERMS
<TABLE>
<CAPTION>
TERM DEFINED AS (PART OF PROXY STATEMENT/PROSPECTUS)
- ---- -----------------------------------------------
<S> <C>
Accountability Act The Health Insurance Portability and Accountability Act
of 1996 (Risk Factors)
Amendment Proposal Proposal to amend the Paragon Charter to increase the
number of shares of Paragon Common Stock authorized to
be issued (Prospectus Cover Pages)
Anti-Kickback Law Medicare and Medicaid Patient and Program Protection Act
of 1987 (Risk Factors)
Apollo Collectively, Apollo Management, L.P., Apollo Investment
Fund III, L.P., Apollo UK Partners III, L.P. and Apollo
Overseas Partners III, L.P. (Summary)
Apollo Investors Apollo and certain other purchasers of Paragon Common
Stock (Summary)
Apollo Stockholders The stockholder agreement, dated as of November 4, 1997,
Agreement as amended, among the Apollo Investors and Paragon with
respect to the governance of Paragon (Risk Factors)
Assumed Options Options to purchase Mariner Common Stock issued pursuant
to the 1995 Non-Employee Director Stock Option Plan, the
rights to acquire shares of Mariner Common Stock
pursuant to 1993 Employee Stock Purchase Plan, and
options and warrants to purchase Mariner Common Stock
assumed or granted by Mariner in connection with
historical transactions or otherwise (Summary)
Balanced Budget Act The Balanced Budget Act of 1997 (Risk Factors)
BT Alex. Brown BT Alex. Brown Incorporated (Summary)
Cash Payment Options Options to purchase Mariner Common Stock issued pursuant
to the Mariner 1992 Stock Option Plan and Mariner 1994
Stock Plan (Summary)
Certificate of Merger A duly executed Certificate of Merger as filed with the
Secretary of State of Delaware (Summary)
Code The Internal Revenue Code of 1986, as amended (Summary)
Commission Securities and Exchange Commission (Prospectus Cover
Pages)
Competing Transactions Any merger agreement or merger, consolidation,
combination, sale of substantial assets, reorganization,
dissolution, liquidation or winding up of or by Mariner
or any action or agreement, including any proposed
amendment of the Mariner Charter or Mariner Bylaws or
other proposal or transaction including Mariner or any
of its subsidiaries, which action, agreement, amendment
or other proposal or transaction is intended to impede,
interfere with, delay or attempt to frustrate, prevent
or nullify the Merger, the Merger Agreement or any of
the other transactions contemplated thereby (The Merger
Agreement)
Confidentiality The Confidentiality Agreement entered into by Paragon
Agreement and Mariner (The Merger Agreement)
DGCL The General Corporation Law of the State of Delaware
(Prospectus Cover Pages)
Effective Time The time that the Merger becomes effective as specified
in the Certificate of Merger. (Summary)
ERISA Employee Retirement Income Security Act of 1974 (The
Merger Agreement)
</TABLE>
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<TABLE>
<CAPTION>
TERM DEFINED AS (PART OF PROXY STATEMENT/PROSPECTUS)
- ---- -----------------------------------------------
<S> <C>
Exchange Act Securities Exchange Act of 1934, as amended (Available
Information)
Exchange Agent American Stock Transfer & Trust Company (The Merger)
Exchange Ratio The exchange ratio at which a share of Mariner Common
Stock will be converted into one share of Paragon Stock
in the Merger (Prospectus Cover Pages)
GranCare GranCare, Inc., a Delaware corporation and a wholly-
owned subsidiary of Paragon (Summary)
HCFA Health Care Financing Administration (Risk Factors)
HHS United States Department of Health and Human Services
(Risk Factors)
HSR Act The Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (Summary)
IRS Internal Revenue Service (The Merger Agreement)
Kelletts Stiles A. Kellett and Samuel B. Kellett (Summary)
Kellett Group Stiles A. Kellett, Samuel B. Kellett and certain other
related entities (Summary)
LCA Living Centers of America, Inc. (Summary)
LCA/GranCare/Apollo Merger between LCA and an affiliate of Apollo to
Mergers accomplish the recapitalization of LCA (which was
renamed Paragon) and the subsequent merger of a wholly-
owned subsidiary of Paragon with and into GranCare that
occurred on November 4, 1997. (Summary)
Long-Term Incentive Plan Paragon Health Network, Inc. 1997 Long-Term Incentive
Plan (Prospectus Cover Pages)
Long-Term Incentive Plan The amendment to the Long-Term Incentive Plan, which
Amendment amends Section 1.5 of the Long-Term Incentive Plan to
increase shares available thereunder (The Merger
Agreement)
Mariner Mariner Health Group, Inc. (Prospectus Cover Pages)
Mariner Acquisition Any merger, consolidation, business combination,
Transaction liquidation, reorganization, sale of substantial assets,
sale of shares of capital stock or similar transactions
involving Mariner or any material subsidiary of Mariner
(The Merger Agreement)
Mariner Board Board of Directors of Mariner (Prospectus Cover Pages)
Mariner Bylaws Mariner's Bylaws (Comparison of Stockholder Rights)
Mariner Certificates Certificates representing outstanding shares of Mariner
Common Stock (The Merger)
Mariner Charter Mariner's certificate of incorporation, as amended
(Comparison of Stockholder Rights)
Mariner Common Stock Common stock of Mariner, par value $.01 per share
(Prospectus Cover Pages)
Mariner Indenture The Indenture pertaining to Mariner's 9 1/2% Senior
Subordinated Notes Due 2006 (Summary)
</TABLE>
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<CAPTION>
TERM DEFINED AS (PART OF PROXY STATEMENT/PROSPECTUS)
- ---- -----------------------------------------------
<S> <C>
Mariner Merger Proposal Proposal to approve and adopt the Merger and the Merger
Agreement (Prospectus Cover Pages)
Mariner Notes Mariner's 9 1/2% Senior Subordinated Notes Due 2006
(Summary)
Mariner Option Option to purchase approximately 19.9% of the total
number of shares of Mariner Common Stock issued and
outstanding as of April 13, 1998 (The Merger Agreement)
Mariner Option Agreement Mariner Stock Option Agreement, dated as of April 13,
1998, between Mariner and Paragon (Summary)
Mariner Record Date Close of business on June 15, 1998 (Prospectus Cover
Pages)
Mariner Special Meeting Special meeting of stockholders of Mariner to be held at
State Street Bank & Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 on Tuesday, July 28, 1998 at
10:00 a.m., local time, and any and all adjournments or
postponements thereof (Prospectus Cover Pages)
Mariner Voting Agreement Voting Agreement, dated as of April 13, 1998, by and
among Paragon and certain stockholders of Mariner
(Summary)
Merger The merger of Merger Sub with and into Mariner, with
Mariner surviving as a wholly-owned subsidiary of
Paragon (Prospectus Cover Pages)
Merger Agreement Agreement and Plan of Merger, dated as of April 13,
1998, by and among Paragon, Mariner and Merger Sub.
(Prospectus Cover Pages)
Merger Proposals The Stock Issuance Proposal and the Mariner Merger
Proposal (Prospectus Cover Pages)
Merger Sub Paragon Acquisition Sub, Inc., a Delaware corporation
and a wholly- owned subsidiary of Paragon (Prospectus
Cover Pages)
Merger Sub Board The Board of Directors of Merger Sub (The Merger
Agreement)
Morgan Stanley Morgan Stanley & Co. Incorporated (Summary)
Name Change Proposal Proposal to amend the Paragon Charter to change the
corporate name from "Paragon Health Network, Inc." to
"Mariner Post-Acute Network, Inc." (Prospectus Cover
Pages)
Nasdaq The Nasdaq National Market (Prospectus Cover Pages)
NYSE New York Stock Exchange (Prospectus Cover Pages)
Paragon Paragon Health Network, Inc. (Prospectus Cover Pages)
Paragon Acquisition Any merger, consolidation, business combination,
Transaction liquidation, reorganization, sale of substantial assets,
sale of shares of capital stock or similar transactions
involving Paragon or any material subsidiary of Paragon
(The Merger Agreement)
Paragon Board Board of Directors of Paragon (Prospectus Cover Pages)
Paragon Bylaws The Amended and Restated Bylaws of Paragon (Summary)
Paragon Certificates Certificates representing outstanding shares of Paragon
Common Stock (The Merger)
Paragon Charter The Amended and Restated Certificate of Incorporation of
Paragon (Prospectus Cover Pages)
</TABLE>
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<TABLE>
<CAPTION>
TERM DEFINED AS (PART OF PROXY STATEMENT/PROSPECTUS)
- ---- -----------------------------------------------
<S> <C>
Paragon Common Stock Common stock of Paragon, par value $.01 per share
(Prospectus Cover Pages)
Paragon Option Option to purchase approximately 19.9% of the total
number of shares of Paragon Common Stock issued and
outstanding as of April 13, 1998 (The Merger Agreement)
Paragon Option Agreement Paragon Stock Option Agreement, dated as of April 13,
1998, between Paragon and Mariner (Summary)
Paragon Plan Proposal Proposal to amend the Long-Term Incentive Plan to
increase the number of shares of Paragon Common Stock
available for issuance thereunder (Prospectus Cover
Pages)
Paragon Preferred Stock 5,000,000 shares of preferred stock, par value $.01 per
share, of Paragon (Description Of Paragon's Capital
Stock)
Paragon Proposals Collectively, the Stock Issuance Proposal, the Name
Change Proposal, the Amendment Proposal and the Paragon
Plan Proposal (Prospectus Summary Pages)
PPS Prospective Payment System (Summary)
Paragon Record Date Close of business on June 15, 1998 (Prospectus Cover
Pages)
Paragon Special Meeting Special meeting of stockholders of Paragon to be held at
the Crowne Plaza Ravinia, 4355 Ashford Dunwoody Road
N.E., Atlanta, Georgia 30346 on Tuesday, July 28, 1998
at 10:00 a.m., local time, and any or all adjournments
or postponements thereof (Prospectus Cover Pages)
Paragon Voting Agreement Voting Agreement, dated as of April 13, 1998, by and
among Mariner and certain stockholders of Paragon
(Summary)
Proxy This Joint Proxy Statement/Prospectus of Paragon and
Statement/Prospectus Mariner (Prospectus Cover Pages)
Registration Statement The Registration Statement on Form S-4/S-8 of which this
Proxy Statement/Prospectus is a part (Prospectus Cover
Pages)
Section 262 Section 262 of the DGCL (Stockholders' Rights Of
Appraisal)
Securities Act Securities Act of 1933, as amended (Prospectus Cover
Pages)
Special Meetings Mariner Special Meeting together with the Paragon
Special Meeting (Prospectus Cover Pages)
Stark II Omnibus Budget Reconciliation Act as expanded in 1993
(Risk Factors)
Stock Issuance Proposal Proposal to approve the issuance of shares of Paragon
Common Stock to the stockholders of Mariner pursuant to
the Merger Agreement (Prospectus Cover Pages)
Termination Fee A fee payable to Paragon or Mariner by the other party
upon termination of the Merger Agreement under certain
circumstances (The Merger Agreement)
</TABLE>
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ANNEX I
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AGREEMENT AND PLAN OF MERGER
DATED AS OF APRIL 13, 1998
AMONG
PARAGON HEALTH NETWORK, INC.
PARAGON ACQUISITION SUB, INC.
AND
MARINER HEALTH GROUP, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
ARTICLE I CERTAIN DEFINITIONS............................................... I-2
Section 1.01 Certain Definitions........................................... I-2
ARTICLE II THE MERGER....................................................... I-3
Section 2.01 The Merger.................................................... I-3
Section 2.02 Consummation of the Merger.................................... I-3
Section 2.03 Effects of the Merger......................................... I-3
Section 2.04 Certificate of Incorporation and Bylaws....................... I-3
Section 2.05 Directors and Officers........................................ I-3
Section 2.06 Conversion of Shares.......................................... I-3
Section 2.07 Conversion of Common Stock of Sub............................. I-3
Section 2.08 Further Assurances............................................ I-4
Section 2.09 Stockholders' Meetings........................................ I-4
Section 2.10 Rights Under Stock Plans...................................... I-4
Section 2.11 Exchange of Certificates...................................... I-5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................... I-7
Section 3.01 Organization and Qualification................................ I-7
Section 3.02 Capitalization................................................ I-7
Section 3.03 Authority..................................................... I-9
Section 3.04 Absence of Certain Changes.................................... I-9
Section 3.05 Reports....................................................... I-9
Section 3.06 Information Supplied.......................................... I-10
Section 3.07 Consents and Approvals; No Violations......................... I-10
Section 3.08 Brokers....................................................... I-11
Section 3.09 Employee Benefit Matters...................................... I-11
Section 3.10 Litigation, etc............................................... I-13
Section 3.11 Tax Matters................................................... I-13
Section 3.12 Compliance with Law........................................... I-14
Section 3.13 Environmental Compliance...................................... I-14
Section 3.14 Insurance..................................................... I-14
Section 3.15 Opinion of Financial Advisor.................................. I-15
Section 3.16 State Takeover Laws........................................... I-15
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SUB......... I-15
Section 4.01 Organization and Qualification................................ I-15
Section 4.02 Capitalization................................................ I-15
Section 4.03 Authority..................................................... I-16
Section 4.04 Absence of Certain Changes.................................... I-16
Section 4.05 Reports....................................................... I-17
Section 4.06 Information Supplied.......................................... I-17
Section 4.07 Consents and Approvals; No Violation.......................... I-18
Section 4.08 Brokers....................................................... I-18
Section 4.09 Employee Benefit Matters...................................... I-18
Section 4.10 Litigation, etc............................................... I-20
Section 4.11 Tax Matters................................................... I-21
Section 4.12 Compliance with Law........................................... I-21
Section 4.13 Environmental Compliance...................................... I-21
Section 4.14 Insurance..................................................... I-21
</TABLE>
I-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 4.15 Opinion of Financial Advisor................................ I-22
Section 4.16 State Takeover Law.......................................... I-22
ARTICLE V COVENANTS....................................................... I-22
Section 5.01 Conduct of Business......................................... I-22
Section 5.02 No Solicitation by the Company.............................. I-24
Section 5.03 No Solicitation by Parent................................... I-25
Section 5.04 Access to Information....................................... I-26
Section 5.05 Commercially Reasonable Efforts; Other Actions.............. I-26
Section 5.06 Indemnification and Insurance............................... I-27
Section 5.07 Employee Plans and Benefits and Employment Contracts........ I-28
Section 5.08 Proxy Statement and S-4..................................... I-29
Section 5.09 Notification of Certain Matters............................. I-29
Section 5.10 Agreements of Rule 145 Affiliates........................... I-29
Section 5.11 Stock Exchange Listings..................................... I-29
Section 5.12 Rights Agreement............................................ I-29
Section 5.13 Takeover Laws............................................... I-30
Section 5.14 Employee Stock Purchase Plan................................ I-30
Section 5.15 Financing................................................... I-30
Section 5.16 Board of Designees.......................................... I-30
Section 5.17 Parent By-laws.............................................. I-30
Section 5.18 No Amendments............................................... I-31
ARTICLE VI CONDITIONS TO CONSUMMATION OF THE MERGER....................... I-31
Section 6.01 Conditions to Each Party's Obligation to Effect the Merger.. I-31
Section 6.02 Additional Conditions to the Company's Obligation to Effect
the Merger.............................................................. I-31
Section 6.03 Additional Conditions to the Parent's and the Sub's
Obligations to Effect the Merger........................................ I-32
ARTICLE VII TERMINATION; AMENDMENT; WAIVER................................ I-33
Section 7.01 Termination................................................. I-33
Section 7.02 Effect of Termination....................................... I-34
Section 7.03 Amendment................................................... I-35
Section 7.04 Extension; Waiver........................................... I-35
ARTICLE VIII MISCELLANEOUS................................................ I-35
Section 8.01 Survival of Representations and Warranties.................. I-35
Section 8.02 Entire Agreement; Assignment................................ I-35
Section 8.03 Enforcement of the Agreement; Jurisdiction.................. I-35
Section 8.04 Validity.................................................... I-35
Section 8.05 Notices..................................................... I-36
Section 8.06 Governing Law............................................... I-36
Section 8.07 Descriptive Headings........................................ I-36
Section 8.08 Parties in Interest......................................... I-37
Section 8.09 Counterparts................................................ I-37
Section 8.10 Fees and Expenses........................................... I-37
Section 8.11 Press Releases.............................................. I-37
Section 8.12 Obligation of the Parent.................................... I-37
Section 8.13 Facsimile Signatures........................................ I-37
</TABLE>
EXHIBITS
Exhibit A--Company Option Agreement
Exhibit B--Parent Option Agreement
Exhibit C--Company Voting Agreement
Exhibit D--Parent Voting Agreement
Exhibit E--Rights Agreement Amendment
Exhibit F--Form of Bylaw Amendment
I-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of April 13, 1998,
among Paragon Health Network, Inc., a Delaware corporation (the "Parent"),
Mariner Health Group, Inc., a Delaware corporation (the "Company"), and
Paragon Acquisition Sub, Inc., a Delaware corporation wholly owned by Parent
(the "Sub").
RECITALS
WHEREAS, the Board of Directors of each of Parent and the Company have
determined that it is in the best interests of their respective stockholders
for 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 Parent and the Company has
adopted resolutions approving the Merger of Sub with and into the Company, in
accordance with applicable Delaware law upon the terms and subject to the
conditions set forth herein, and Parent's Board of Directors has agreed to
recommend that Parent's stockholders approve the issuance of Parent Common
Stock (as defined below) pursuant to 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, 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 Parent, to effect the Merger as more
fully described herein;
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 Board of Directors of the Company has determined that it is
appropriate, simultaneously with the execution and delivery of this Agreement,
to grant Parent an option (the "Company Option Agreement") and the Board of
Directors of the Parent has determined that it is appropriate, simultaneously
with the execution and delivery of this Agreement, to grant the Company an
option (the "Parent Option Agreement," and together with the Company Option
Agreement, the "Option Agreements") copies of which are attached hereto as
Exhibits A and B, to acquire such number of shares of Company Common Stock (in
the case of the Company Option Agreement) and Parent Common Stock (in the case
of the Parent Option Agreement), as equals 19.9% of the total number of shares
of Company Common Stock or Parent Common Stock issued and outstanding as of
the time of exercise of the rights set forth in such agreements;
WHEREAS, concurrent with the execution of this Agreement, Parent, Sub and
certain stockholders of the Company have executed and delivered the Company
Stockholder Voting Agreement attached as Exhibit C hereto (the "Company Voting
Agreement") providing for the voting of all Company Common Stock beneficially
owned by such stockholders in favor of the Merger, this Agreement and the
transactions contemplated hereby;
WHEREAS, concurrent with the execution of this Agreement, the Company and
certain stockholders of Parent have executed and delivered the Parent
Stockholder Voting Agreement attached as Exhibit D hereto (the "Parent Voting
Agreement", and, together with the Company Voting Agreement, the "Voting
Agreements") providing for the voting of all Parent Common Stock beneficially
owned by such stockholders in favor of the issuance of Parent Common Stock in
connection with the Merger;
WHEREAS, concurrent with the execution of this Agreement, Parent and certain
stockholders of Parent (the "Apollo Stockholders") have executed and delivered
that certain Amendment No. 1 to Stockholders Agreement ("Amendment to
Stockholders Agreement") providing, inter alia, for certain changes in the
rights of the Apollo Stockholders to nominate certain individuals for election
to Parent's Board of Directors pursuant to that certain Stockholders Agreement
(the "Stockholders Agreement") dated as of November 4, 1997 by and among
Parent, the Apollo Stockholders and the other parties named therein;
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WHEREAS, concurrent with the execution of this Agreement, Apollo Management,
L.P. ("Apollo Management") and certain stockholders of Parent have executed
and delivered that certain Termination and Release of Proxy and Voting
Agreement (the "Termination Agreement"), providing for the release of the
shares of Parent Common Stock beneficially owned by Keith B. Pitts from the
rights and obligations imposed by the Proxy and Voting Agreement, dated as of
November 4, 1997, by and among Apollo Management and the Other Stockholders
(as defined in the Stockholders Agreement); and
WHEREAS, Parent, 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, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally
bound, the parties hereto agree as follows:
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;
"Closing Date" shall mean the date of the Closing pursuant to Section 2.02
hereof.
"Company Plans" shall mean the Company's 1992 Stock Option Plan, 1994 Stock
Plan, 1995 Non-Employee Director Stock Option Plan and 1993 Employee Stock
Purchase Plan.
"Environmental Law" means any law, regulation, decree, judgment, permit or
authorization relating to worker safety or the environment, including, without
limitation, environmental pollution, contamination, cleanup, regulation and
protection of the air, water or soils;
"Environmental Liabilities and Costs" means all damages, penalties,
obligations or clean-up costs assessed or levied pursuant to any Environmental
Law;
"Exchange Act" means the Securities Exchange Act of 1934, as amended and in
effect from time to time;
"Material Adverse Effect" means, with respect to Parent or the Company, as
the case may be, (i) with respect to any event, occurrence, failure of event
or occurrence, change, effect, state of affairs, breach, default, violation,
fine, penalty or failure to comply (each, a "circumstance"), individually or
taken together with all other circumstances contemplated by or in connection
with any or all of the representations and warranties made in this Agreement,
a material adverse effect on the business, financial condition, results of
operations or prospects of either the Company or Parent, as appropriate, and
its respective Subsidiaries, taken as a whole;
"Parent Plans" shall mean the New GranCare Replacement Plan, the New
GranCare Stock Incentive Plan, the New GranCare Outside Directors Plan and the
Paragon 1997 Incentive Plan.
"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 a majority of the outstanding voting securities or other ownership
interests having ordinary voting power to elect a majority of the members of
the board of directors or other governing body performing similar functions,
are owned directly or indirectly by such former entity.
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<PAGE>
"Transaction Documents" means this Agreement, the Option Agreements, the
Voting Agreements, Amendment No. 1 to Stockholders Agreement and the Rights
Agreement Amendment.
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, 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 Mariner Health Group, 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 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
Sidley & Austin, 875 Third Avenue, New York, New York 10022 (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 as set forth herein.
Section 2.04 CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation and the Bylaws of 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.
Section 2.05 DIRECTORS AND OFFICERS. The directors of 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 $.01 per share, of the Company
("Company Common Stock"):
(a) Subject to Section 2.06(b), each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger, be converted into, exchanged for and represent the right
to receive (without interest) one (1) (the "Exchange Ratio") share of
common stock, par value $.0l per share, of Parent (the "Parent Common
Stock"; hereinafter sometimes referred to as the "Merger
Consideration").
(b) Each share of Company Common Stock held in the treasury of the Company
and each share of Company Common Stock 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 and cease to
exist without any conversion or other consideration with respect
thereto.
Section 2.07 CONVERSION OF COMMON STOCK OF SUB. Each share of common stock
of 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.
I-3
<PAGE>
Section 2.08 FURTHER ASSURANCES. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills
of sale, assignments, assurances or any other actions or things are necessary
or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of the Company or Sub acquired or to be
acquired by the Surviving Corporation as a result of, or in connection with,
the Merger or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of each of the Company and Sub or
otherwise, all such deeds, bills of sale, assignments and assurances and to
take and do, in the name and on behalf of each of the Company and the Sub or
otherwise, all such other actions and things as may be necessary or desirable
to vest, perfect or confirm any and all right, title and interest in, to and
under such rights, properties or assets in the Surviving Corporation or
otherwise to carry out this Agreement.
Section 2.09 STOCKHOLDERS' MEETINGS. Subject to applicable law, each of
Parent and the Company, acting through its respective Board of Directors,
shall, in accordance with applicable law 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: (i) 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 Parent) for the purpose of approving
the issuance of the Parent Common Stock in connection with the Merger (the
"Parent Stockholder Approval" and together with the Company Stockholder
Approval, the "Stockholder Approvals"), and (ii) include in the Proxy
Statement (as defined in Section 5.07) of each of the Company and Parent for
use in connection with the Special Meeting of each of the Company and Parent,
the recommendation of their respective Board of Directors that stockholders
vote in favor of the Company Stockholder Approval or the Parent Stockholder
Approval, as the case may be. Parent, Sub and the Company will use
commercially reasonable efforts to cause the Special Meetings to occur within
forty-five (45) days after Parent and the Company have obtained from the
Securities and Exchange Commission ("SEC") an order declaring effective a
registration statement on Form S-4 registering under the Securities Act, the
Parent Common Stock to be issued in the Merger.
Section 2.10 RIGHTS UNDER STOCK PLANS.
(a) Each option to purchase shares of Company Common Stock issued pursuant
to the Company's 1992 Stock Option Plan and the 1994 Stock Plan ("Cash
Payment Options"), all of which issued and outstanding Cash Payment
Options are set forth on Section 3.02(a) of the Company Disclosure
Letter, shall, at the Effective Time, whether or not vested, constitute
the right to receive, subject to required withholding, a cash payment
equal to the product of (i) the average of the last reported sale prices
per share of Parent Common Stock for the five trading days immediately
preceding the Closing Date; provided, however, that in the event such
average price is less than $20 or more than $22 then such average price
shall be deemed to be (A) $20 (when such average price is less than $20)
or (B) $22 (when such average price is more than $22) (the "Trailing
Company Stock Price"), less the per share exercise price required by
such Cash Payment Option and (ii) the number of shares subject to such
Company Plan Option. Parent shall, within five business days following
the Closing Date, mail to each holder of a Cash Payment Option (a "Cash
Payment Optionee") a statement setting forth in reasonable detail the
calculation of the amount of the payment (the "Option Settlement
Payment") to be received by such Cash Payment Optionee and a form of
general release pursuant to which such Cash Payment Optionee shall
forever release any and all claims he or she may have against the
Company, Parent or any of their respective current or former affiliates
or control persons arising out of or in connection with such Cash
Payment Option, which release shall be effective upon receipt by the
Cash Payment Optionee of the Option Settlement Payment. Within five
business days following the return of any such general release, Parent
shall mail to the relevant Cash Payment Optionee a check in the amount
of Option Settlement Payment to be received by such Cash Payment
Optionee.
I-4
<PAGE>
(b) Each option to purchase shares of Company Common Stock issued pursuant
to the 1995 Non-Employee Director Stock Option Plan (the "Director
Options"), the Employee Stock Purchase Plan, (the "Stock Purchase Plan
Options") as well as options to purchase shares of Company Common Stock
granted or assumed in connection with certain historical transactions or
otherwise (the "Non-Plan Options"), all of which issued and outstanding
Directors Options, Stock Purchase Plan Options and Non-Plan Options
(collectively, the "Assumed Options" and, together with the Cash Payment
Options, the "Company Options") are set forth on Section 3.02(a) of the
Company Disclosure Letter, shall, at the Effective Time, whether or not
vested, be assumed by Parent and shall constitute an option to acquire,
on the same terms and conditions as were applicable under such Assumed
Options, such number of shares of Parent Common Stock as is equal to the
product of the Exchange Ratio and the number of shares of Company Common
Stock subject to such Assumed Options, at a price per share equal to the
amount obtained by dividing the per share exercise price of such Assumed
Options, by the Exchange Ratio. As soon as practicable following the
Effective Time, Parent shall deliver to holders of Director Options and
Non-Plan Options appropriate option agreements representing the right to
acquire shares of Parent Common Stock on substantially the same terms
and conditions as pertain to the outstanding Assumed Options.
(c) (i) At the Effective Time, Parent shall assume the obligations of the
Company under each warrant to purchase Company Common Stock outstanding
at the Effective Time and set forth on Section 3.02(a) of the Company
Disclosure Letter and thereafter, the exercise price of such warrants
shall be adjusted by dividing the per share exercise price in effect
prior to the Effective Time of the Merger by the Exchange Ratio (or, if
the exercise price of such warrant is not specified or otherwise
determinable as of the Effective Time, by making or providing for an
appropriate adjustment to the exercise price at the time the exercise
price shall become final in accordance with the terms of such warrant)
and, upon exercise, the holder of each such warrant shall receive the
number of shares of Parent Common Stock as would have been issued or
delivered to the holder thereof if such holder had exercised the warrant
and had received the number of shares of Company Common Stock to which
such holder would have been entitled immediately prior to the Merger;
(ii) prior to the Effective Time of the Merger, Parent shall deliver to
the holders of such warrants an appropriate notice setting forth such
holders' rights pursuant to the applicable warrant agreements with
respect thereto to the extent required by the terms of the warrant
agreements with respect thereto; and (iii) Parent shall take all
corporate action necessary to reserve for issuance a sufficient number
of shares of Parent Common Stock for delivery upon exercise of the
warrants.
(d) Parent shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of its Parent Common Stock for delivery
upon exercise of the Assumed 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 Assumed 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
any Assumed Options remain outstanding.
Section 2.11 EXCHANGE OF CERTIFICATES.
(a) As of 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.
I-5
<PAGE>
(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
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,
there shall be paid to the holder of the certificate representing whole
shares of Parent Common Stock issued in connection therewith, without
interest at the time of such surrender the amount of any cash payable in
lieu of a fractional share to which such holder is entitled pursuant to
Section 2.11(e) and the appropriate amount of any dividends or other
distributions with a record date after the Effective Time theretofore
paid with respect to 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 so exchanged.
(e) Notwithstanding any other provision of this Agreement, each holder of
shares of Company Common Stock who would otherwise have been entitled to
receive 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 average price of the last reported sale
prices per share of Parent Common Stock for the five trading days
immediately preceding the Closing Date.
(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 Parent and any
holders of shares of
I-6
<PAGE>
Company Common Stock prior to the Effective Time who have not theretofore
complied with this Article II shall thereafter look only to Parent for
payment of their claim for shares of Parent Common Stock, any cash in
lieu of fractional shares of Parent Common Stock, and any dividends or
distributions with respect to Parent Common Stock.
(g) None of Sub or the Company or 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.
(h) The Paying Agent shall invest any cash included in the Exchange Fund for
payments in lieu of fractional shares, as directed by Parent, on a daily
basis. Any interest and other income resulting from such investments
shall be paid to Parent. 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 the payments contemplated
hereby, 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) Parent shall pay all charges and expenses of the Paying Agent.
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 Parent and 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, except for those jurisdictions where the
failure to be so qualified would not, individually or in the aggregate, have a
Material Adverse Effect on the Company. The Company has heretofore made
available to the Parent accurate and complete copies of the Certificate of
Incorporation and Bylaws as currently in effect of the Company. Except as set
forth in Section 3.01 of the Company Disclosure Letter, there are no
provisions in the certificate of incorporations or bylaws of any Subsidiary of
the Company or any agreement to which the Company or any of its Subsidiaries
is bound that would limit or restrict the ability of the Company to name or
remove the directors and officers of any Subsidiary of the Company following
the Effective Time.
Section 3.02 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 50,000,000
shares of Company Common Stock and 1,000,000 shares of preferred stock,
par value $.01 per share, of which 500,000 have been designated as
Series A Junior Participating Preferred Stock. As of the close of
business on April 1, 1998 (the "Capitalization Date"): 29,578,704 shares
of Company Common Stock were issued and outstanding; no shares of
Preferred Stock were issued and outstanding; and no shares of Company
Common Stock were held in the Company's treasury. As of the
Capitalization Date, the outstanding options to acquire Company Common
Stock and all other outstanding warrants or exchangeable or convertible
securities or other rights to acquire Company Common Stock were 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 the date hereof setting
forth certain matters referred to in this Agreement (the "Company
Disclosure Letter"), and there were outstanding rights (the "Rights
Agreement Rights") under the Rights
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Agreement dated October 31, 1995 between the Company and State Street Bank
and Trust Company (the "Rights Agreement"). A list of all outstanding
options (other than the option to be granted pursuant to the Company
Option Agreement), warrants, or other rights to acquire common stock of
the Company as of the date hereof (including the name of each optionee and
the number of shares subject to each such option) and the form of each
option agreement that will be utilized to document those option grants
that have not been documented as of the date hereof is included in Section
3.02(a) of 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
April 1, 1998, the Company (i) has not issued any Company Common Stock
other than the issuance of shares of Company Common Stock (A) upon the
exercise of options granted pursuant to the Company Plans prior to the
Capitalization Date and listed on Section 3.02(a) of the Company
Disclosure Letter, (B) upon the exercise of warrants or the conversion of
convertible securities outstanding as of the Capitalization Date and
listed on Section 3.02(a) of the Company Disclosure Letter or (C) pursuant
to the Company's 1993 Employee Stock Purchase Plan, (ii) has not granted
any options or rights to purchase or acquire Company Common Stock (under
the Company's employee benefit plans or otherwise) other than the Company
Option Agreement, 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 for the
Company Option Agreement or 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 April 1, 1998, 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 (including preemptive 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. Except as set forth in Section 3.02(a) of the Company
Disclosure Letter, 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 April 1, 1998, 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 April 1, 1998, 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, warrants, rights, (including preemptive
rights) or other agreements or commitments 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, option, 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"). Except as set forth in Section 3.02(b) of the Company
Disclosure Letter, there are no outstanding obligations of the Company
or any of its Subsidiaries to repurchase, redeem or otherwise acquire
any outstanding Subsidiary Securities.
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Section 3.03 AUTHORITY. The Company has the requisite corporate power and
authority to execute and deliver the Transaction Documents to which it is a
party and to consummate the transactions contemplated by such agreements. The
execution and delivery of the Transaction Documents to which it is a party by
the Company and the consummation by the Company of the transactions
contemplated by such agreements 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 such documents 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. The Transaction
Documents to which the Company is a party have been duly and validly executed
and delivered by the Company and, assuming such documents constitute a valid
and binding obligation of each of the other parties thereto, each such
Transaction Document to which the Company is a party 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 April 1, 1998 or in Section 3.04 of the Company
Disclosure Letter, since December 31, 1997 (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 the Transaction Documents to which the Company is a party 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 April 1, 1998 or in Section 3.04 of the Company
Disclosure Letter, since December 31, 1997, there has not been any change by
the Company in accounting methods, principles or practices, except to the
extent required by the SEC or United States generally accepted accounting
principles.
Section 3.05 REPORTS.
(a) Except as disclosed in Section 3.05 of the Company Disclosure Letter,
since January 1, 1996, 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. Since January 1, 1996, 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 would not have a Material Adverse
Effect.
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(c) As of December 31, 1997, to the knowledge of the Company or its
Subsidiaries, 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
Company SEC Reports filed prior to April 1, 1998 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
(the "S-4") will, at the time the S-4 becomes effective under the Securities
Act, 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 VIOLATIONS. Except as set forth in
Section 3.07 of the Company Disclosure Schedule, the execution and delivery of
the Transaction Documents to which the Company is a party and the consummation
by the Company of the transactions contemplated by such Transaction Documents
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 Company or its Subsidiaries; (ii) require the 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 or the Exchange Act, (C) in connection
with the consummation of the 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 Company or
have a material adverse effect on the ability of the Company to consummate the
transactions contemplated by such Transaction Documents; (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 or
any of its 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 Company or have a material adverse effect on the ability of the Company
to consummate the transactions contemplated by the Transaction Documents to
which the Company is a party; (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, individually or
in the aggregate, would have a Material Adverse Effect on the Company or have
a material adverse effect on the ability of the Company to consummate the
transactions contemplated by such Transaction Documents; or (v) assuming the
Company obtains or makes such consents, approvals, acknowledgments, permits or
filings as the case may be referenced in Section 3.07(ii), violate any order,
writ, injunction, decree, statutes (including,
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<PAGE>
without limitation, state laws governing "business combinations,"
"moratorium," "control share" or other state antitakeover statute or
regulations) rule or regulation applicable to the Company or any of its
Subsidiaries or any of their respective assets, except for violations which
would not in the aggregate have a Material Adverse Effect on the Company or
have a material adverse effect on the ability of the Company to consummate the
transactions contemplated by the Transaction Documents.
Section 3.08 BROKERS. No broker, finder or investment banker (other than BT
Alex. Brown Incorporated) is entitled to receive any brokerage, finder's or
other fee or commission in connection with this Agreement or such 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, Parent, the Sub or any of their
Subsidiaries or any of their respective ERISA Affiliates (as defined
below), or with respect to which the Company, the Parent, the Sub or any
of their 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
between a person and the Company or any of its Subsidiaries (other than
an employment agreement terminable without liability on no more than
sixty (60) days' notice).
(b) Except as set forth in Section 3.09(b) of the Company Disclosure Letter
or in the Company SEC Reports filed prior to April 1, 1998, none of the
Company, its Subsidiaries nor any of their respective ERISA Affiliates
maintains or contributes to, nor since January 1, 1992 have they
maintained or contributed to any:
(A) defined benefit plan subject to Title IV of ERISA;
(B) any other material employee benefits plan as defined in Section 3(3)
of ERISA; or
(C) "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, would
be subject to any liability under ERISA, the Code or any other law,
regulation or governmental order applicable to any Plan which would have
a Material Adverse Effect.
(d) Except as disclosed in the Company Disclosure Letter or in the Company
SEC Reports filed prior to April 1, 1998, the Company does not maintain,
nor has it at any time established or maintained, nor has it at any time
been obligated to make, or made, contributions to or under any plan that
provides post-retirement medical or health benefits with respect to
former or current employees or former or current directors of the
Company, except as required by Section 4980B of the Code.
(e) 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
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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.
(f) Except as Section 3.09(f) of the Company Disclosure Letter, as of the
last day of the most recent prior plan year, the market value of assets
under each employee pension benefit plan (as defined in Section 3(2) of
ERISA) equated or exceeded the present value of liabilities thereunder
(determined in accordance with then current funding assumptions). No Plan
has suffered any accumulated funding deficiency within the meaning of
Section 302 of ERISA and Section 412 of the Code. Neither the Company nor
any ERISA Affiliate has any outstanding liability under Section 4971 of
the Code. As of the Effective Time, all required premium payments for
Plans have been made, when due, to the Pension Benefit Guaranty
Corporation ("PBGC"), and all required premium payments for the Plans for
plan years commencing in the plan year which would include the Effective
Time of the Merger have been made to the PBGC. No event or condition
exists with respect to any Plan which could be deemed a "reportable
event" as defined in Section 4043 of ERISA, with respect to which the 30-
day notice requirement has not been waived and which could result in a
liability, and no condition exists which would subject the Company to
fine under Section 4071 of ERISA. There is no lien upon any property of
the Company or any ERISA Affiliate outstanding pursuant to Section 4068
of ERISA in favor of the PBGC. There is no lien upon any property of the
Company or any ERISA Affiliate outstanding pursuant to Code Section
412(n) in favor of any Plan and no assets of the Company or any ERISA
Affiliate have been provided as security for any Plan pursuant to Code
Section 401(a)(29).
(g) 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 current Summary Plan Description, together with each
current 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.
(h) Except as disclosed in Section 3.09(h) the Company Disclosure Letter or
the Company's SEC Reports filed prior to April 1, 1998, the Company and
each ERISA Affiliate has made fully and timely payment of all amounts
required to be contributed under the terms of each Plan and applicable
law or required to be paid as expenses under such Plan and no excise
taxes are assessable as a result of any nondeductible or other
contributions made or not made to a Plan. The assets of all Plans which
are required under applicable laws to be held in trust are in fact held
in trust. The liabilities of each other plan are properly and accurately
reported on the financial statements and records of the Company. The
assets of each Plan are reported at their fair market value, as
determined based on the most recent valuation of such assets, on the
books and records of each Plan.
(i) Except as disclosed in Section 3.09(i)of the Company Disclosure Letter or
the Company SEC Reports filed prior to April 1, 1998, to the knowledge of
the Company, neither the Company nor any ERISA Affiliate is subject to
any material liability, tax or penalty to any person as a result of the
Company's or any ERISA Affiliate's engaging in a prohibited transaction
under ERISA or the Code, and the Company has no knowledge of any
circumstances which reasonably might result in any such material
liability, tax or penalty as a result of a breach of fiduciary duty under
ERISA.
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(k) Except as disclosed in Section 3.09(k) of the Company Disclosure Letter
or the Company SEC Reports filed prior to April 1, 1998, the Company and
each ERISA Affiliate have complied with the continuation coverage
requirements of Section 1001 of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, and ERISA Sections 601 through
608.
(l) Except as disclosed in Section 3.09(l) of the Company Disclosure Letter,
the consummation of the transactions contemplated hereby will not
accelerate or increase any liability under any Plan because of an
acceleration or increase of any of the rights or benefits to which
employees of the Company or any ERISA Affiliate may be entitled
thereunder.
(m) Except as disclosed in Section 3.09(f) of the Company Disclosure Letter
or in the Company SEC Reports filed prior to April 1, 1998, neither the
Company nor any of its Subsidiaries has announced any Plan or has become
subject to any 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.
(n) 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 April 1, 1998, 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 the
Transaction Documents to which the Company is a party. Except as set forth in
Section 3.10 of the Company Disclosure Letter or as disclosed in the Company
SEC Reports filed prior to April 1, 1998, 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 the
Transaction Documents to which the Company is a party.
Section 3.11 TAX MATTERS. Except as set forth in Section 3.11 of the Company
Disclosure Letter 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 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, 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
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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. 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 April
1, 1998, 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 Company
Disclosure Letter or in the Company SEC Reports filed prior to April 1, 1998,
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 April 1, 1998, 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
April 1, 1998, (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 Section 3.14 of the Company
Disclosure Letter or the Company SEC Reports filed prior to April 1, 1998, 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 April 1, 1998 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
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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 OPINION OF FINANCIAL ADVISOR. The Company has received from a
financial advisor satisfactory to the Company's Board of Directors, an opinion
to the effect that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the Company's stockholders. Such opinion (a copy
of which has been delivered to Parent) has not been withdrawn, revoked or
modified.
Section 3.16 STATE TAKEOVER LAWS. With respect to the Company, the Board of
Directors of the Company has taken all actions necessary to render the
restrictions contained in Section 203 of the DGCL, and such restrictions are
inapplicable to the Transaction Documents and the transactions contemplated
thereby, including without limitation the Merger and the exercise of the
option granted pursuant to the Company Option Agreement.
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 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 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, except for those jurisdictions where the failure to
be so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on Parent or Sub. 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 $.0l (the "Preferred Stock") none of which has been designated. As
of the Capitalization Date, 41,336,682 shares of Parent Common Stock
were issued and outstanding; no shares of Preferred Stock were issued
and outstanding; and no shares of Parent Common Stock were held in the
Parent's treasury. Since the Capitalization Date, except as set forth in
Section 4.02(a) of the Parent Disclosure Letter or in the Parent SEC
Reports (as defined in Section 4.05) filed prior to April 1, 1998,
Parent (i) has not issued any shares of Parent Common Stock other than
the issuance of shares of Parent Common Stock upon the exercise of
options granted pursuant to the Parent Plans, (ii) has not granted any
options, restricted stock or rights to purchase or acquire shares of
Parent Common stock (under the Parent's employee benefit plans or
otherwise) other than the Parent Option Agreement and options granted to
newly hired officers and employees of the Parent and its Subsidiaries
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 for the Parent
Option Agreement or as set forth in this Section 4.02 or in Section
4.02(a) of the Parent Disclosure Letter or in the Parent SEC Reports
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filed prior to April 1, 1998, 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
(including preemptive rights), or other agreements or commitments to
acquire from the Parent, and except as contemplated by this Agreement and
by those matters set forth on Section 5.01(b) of the Parent Disclosure
Letter), 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 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
4.02(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.
(b) Except as set forth in Section 4.02(b) of the Parent Disclosure Letter or
in the Parent SEC Reports filed prior to April 1, 1998, the Parent 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 4.02(b) of the
Parent Disclosure Letter or in the Parent SEC Reports filed prior to
April 1, 1998, 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, warrants, rights, (including preemptive
rights), or other agreements or commitments 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, option, 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. Each of the Parent and the Sub has the requisite
corporate power and authority to execute and deliver the Transaction Documents
to which it is a party and to consummate the transactions contemplated by such
agreements. The execution and delivery by each the Parent and the Sub of the
Transaction Documents to which they are parties and the consummation by the
Parent and the Sub of the transactions contemplated by such documents have been
duly and validly authorized by the Board of Directors of each of the Parent and
the Sub, and by the Parent as the sole stockholder of Sub, and no other
corporate proceedings on the part of the Parent and the Sub are necessary to
authorize the Transaction Documents to which Parent or Sub are parties or
consummate the transactions so contemplated, other than the approval of the
holders of a majority of the quorum at the Parent Stockholder Meeting to obtain
the Parent Stockholder Approval shares of Parent Common Stock. The Transaction
Documents to which Parent or Sub are parties have been duly and validly
executed and delivered by the Parent and the Sub and, assuming such documents
constitute the valid and binding obligation of the other parties thereto, each
such Transaction Document constitutes a valid and binding agreement of each of
the Parent and the Sub, as the case may be, 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 April 1, 1998 or in Section 4.04 of the Parent
Disclosure Letter, since September 30, 1997, (i) the Parent and its
Subsidiaries have not suffered any Material Adverse Effect, (ii) the Parent and
its Subsidiaries have, in all
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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 the Transaction Documents to which
Parent or Sub are parties and (iii) there has not been (a) any declaration,
setting aside or payment of any dividend or other distribution in respect of
the Parent Common Stock or any repurchase, redemption or other acquisition by
Parent or any of its Subsidiaries of any Parent Securities; or (b) any action
by 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 April 1, 1998 or in Section 4.04 of the Parent Disclosure Letter,
since December 31, 1997, there has not been any change by the Parent in
accounting methods, principles or practices, except to the extent required by
the SEC or United States generally accepted accounting principles.
Section 4.05 REPORTS.
(a) Since January 1, 1996, Parent 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 "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. Since January 1, 1996, 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 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 December 31, 1997, to the knowledge of the Parent or its
Subsidiaries, 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 April 1, 1998 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 will, at the time the S-4 becomes effective under the Securities
Act, 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.
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Section 4.07 CONSENTS AND APPROVALS; NO VIOLATION. Except as set forth in
Section 4.07 of the Parent Disclosure Letter, the execution and delivery by
each of the Parent or the Sub of the Transaction Documents to which they are a
party and the consummation of the transactions contemplated by such
Transaction Documents 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
or the Exchange Act, (C) pursuant to the requirements of 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 by the
Transaction Documents; (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 by Transaction Documents; (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 by the Transaction Document;
or (v) violate any order, writ, injunction, decree, statute (including,
without limitation, state laws governing "business combinations,"
"moratorium," "control share," or other state antitakeover statutes or
regulations), 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 by the Transaction
Documents.
Section 4.08 BROKERS. No broker, finder or other investment banker (other
than Morgan Stanley & Co., Incorporated) 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 EMPLOYEE BENEFIT MATTERS.
(a) Section 4.09(a) of the Parent Disclosure Letter sets forth each
employment agreement between a person and Parent or any of its
Subsidiaries (other than an employment agreement terminable without
liability on no more than sixty (60) days' notice).
(b) Except as set forth in Section 4.09(b) of the Parent Disclosure Letter,
neither the Parent nor the Sub, nor any of their 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;
(B) any other material employee benefits plan as defined in Section 3(3)
of ERISA; or
(C) "multiemployer plan" as defined in Section 4001 of ERISA.
(c) No event has occurred and no condition of circumstance currently exists
in connection with which Parent or the Sub, or any of their
Subsidiaries, their respective ERISA affiliates or any Plan, directly or
indirectly, would be subject to any liability under ERISA, the Code or
any other law, regulation or governmental order applicable to any Plan
which would have a Material Adverse Effect.
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(d) Except as disclosed in the Parent Disclosure Letter or in the Parent SEC
Reports filed prior to April 1, 1998, Parent does not maintain, nor has
it at any time established or maintained, nor has it at any time been
obligated to make, or made, contributions to or under any plan that
provides post-retirement medical or health benefits with respect to
former or current employees as former or current directors of Parent.
(e) With respect to each Plan, (a) all material payments due from the Parent
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 4.09(d) of the Parent 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 Parent's knowledge, threatened with respect
to such Plan or against the assets of such Plan.
(f) Except as disclosed in the Parent Disclosure Letter, as of the last day
of the most recent prior plan year, the market value of assets under
each employee pension benefit plan (as defined in Section 3(2) of ERISA)
equated or exceeded the present value of liabilities thereunder
(determined in accordance with then current funding assumptions). No
Plan has suffered any accumulated funding deficiency within the meaning
of Section 302 of ERISA and Section 412 of the Code. Neither Parent nor
any ERISA Affiliate has any outstanding liability under Section 4971 of
the Code. As of the Effective Time, all required premium payments for
Plans have been made, when due, to the PBGC, and all required premium
payments for the Plans for plan years commencing in the plan year which
would include the Effective Time of the Merger have been made to the
PBGC. No event or condition exists with respect to any Plan which could
be deemed a "reportable event" as defined in Section 4043 of ERISA, with
respect to which the 30-day notice requirement has not been waived and
which could result in a liability, and no condition exists which would
subject the Company to a fine under Section 4071 of ERISA. There is no
lien upon any property of Parent or any ERISA Affiliate outstanding
pursuant to Section 4068 of ERISA in favor of the PBGC. There is no lien
upon any property of Parent or any ERISA Affiliate outstanding pursuant
to Code Section 412(n) in favor of any Plan and no assets of Parent or
any ERISA Affiliate have been provided as security for any Plan pursuant
to Code Section 401(a)(29).
(g) The Parent has made available to the Company, 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 current 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.
(h) Except as disclosed in Section 4.09(h) of the Parent Disclosure Letter,
Parent and each ERISA Affiliate has made full and timely payment of all
amounts required to be contributed under the terms of each Plan and
applicable law or required to be paid as expenses under such Plan and no
excise taxes are assessable as a result of any nondeductible or other
contributions made or not made to a Plan. The assets
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of all Plans which are required under applicable laws to be held in trust
are in fact held in trust. The liabilities of each other plan are
properly and accurately reported on the financial statements and records
of Parent. The assets of each Plan are reported at their fair market
value on the books and records of each Plan.
(i) Except as disclosed in the Section 409(i) of Parent Disclosure Letter,
neither Parent nor any ERISA Affiliate is subject to any material
liability, tax or penalty whatsoever to any person as a result of Parent
or any ERISA Affiliate's engaging in a prohibited transaction under
ERISA or the Code, and has no knowledge of any circumstances which
reasonably might result in any such material liability, tax or penalty
as a result or a breach of fiduciary duty under ERISA.
(j) Except as disclosed in Section 4.11 of the Parent Disclosure Letter, no
payment required to be made to any employee associated with Parent as a
result of the transactions contemplated hereby under any contract or
otherwise will, if made, constitute an "excess parachute payment" within
the meaning of Section 280G of the Code.
(k) Except as disclosed in Section 4.09(k) of the Parent Disclosure Letter
or the Parent SEC Reports filed prior to April 1, 1998, Parent and each
ERISA Affiliate have complied with the continuation coverage
requirements of Section 1001 of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, and ERISA Sections 601 through
608.
(l) Except as disclosed in Section 4.09(l) of the Parent Disclosure Letter,
the consummation of the transactions contemplated hereby will not
accelerate or increase of any liability under any Plan because of an
acceleration or increase of the rights or benefits to which employees of
Parent or any ERISA Affiliate may be entitled thereunder.
(m) Except as disclosed in Section 4.09(f) of the Parent Disclosure Letter
or in the Parent SEC Reports filed prior to April 1, 1998 , neither the
Parent nor the Sub nor any of their Subsidiaries has announced any Plan
or become subject to any 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 as required by law
or as necessary to maintain tax-qualified status.
(n) For purposes of this Section 4.09, ERISA affiliates include each
corporation that is a member of the same controlled group as the Parent,
the Sub or any of their respective Subsidiaries within the meaning of
Section 414(b) of the Code, any trade or business, whether or not
incorporated, under common control with the Parent, the Sub or any of
their respective Subsidiaries within the meaning of Section 414(c) of
the Code and any member of any affiliated service group that includes
the Parent or the Sub, or any of their respective Subsidiaries, and any
of the corporations, trades or businesses described above, within the
meaning of Section 414(m) of the Code.
Section 4.10 LITIGATION, ETC. Except as set forth in Section 4.10 of the
Disclosure Letter or as disclosed in the Parent SEC Reports filed prior to
April 1, 1998, there is no pending audit, claim, action, proceeding, citizen's
suit and, to the knowledge of the Parent, no audit, claim, action, proceeding,
citizen's suit or governmental investigation has been threatened against the
Parent 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 Parent and the Sub to consummate the transactions contemplated by the
Transaction Documents. Except as set forth in Section 4.10 of the Parent
Disclosure Letter or as disclosed in the Parent SEC Reports filed prior to
April 1, 1998, neither the Parent nor any Subsidiary of the Parent 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 Parent or the Sub to
consummate the transactions contemplated by the Transaction Documents to which
either of them is a party.
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Section 4.11 TAX MATTERS. Except as set forth in Section 4.11 of the Parent
Disclosure Letter, 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 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, 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 4.11 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.
Section 4.12 COMPLIANCE WITH LAW. Except as set forth in Section 4.12 of the
Parent Disclosure Letter or as disclosed in the Parent SEC Reports filed prior
to April 1, 1998, neither the Parent nor the Sub, nor any of their
Subsidiaries, is in conflict with, or in default or in violation of, any law,
rule, regulation, order, judgment or decree applicable to Parent or Sub, or
any of their respective Subsidiaries, or by which any property or asset of the
Parent or the Sub, or any of their respective Subsidiaries is bound or
affected, except for such conflicts, defaults or violations that would not, in
the aggregate, have a Material Adverse Effect. Except as set forth in
Section 4.12 of the Parent Disclosure Letter or as disclosed in the Parent SEC
Reports filed prior to April 1, 1998, Parent and Sub and their respective
Subsidiaries have all permits, licenses, authorizations, consents, approvals
and franchises from governmental agencies required to conduct their business
as now being conducted (the "Parent Permits"), except for such permits,
licenses, authorizations, consents, approvals and franchises, the absence of
which would not have a Material Adverse Effect. Except as set forth in Section
4.12 of the Parent Disclosure Letter or as disclosed in the Parent SEC Reports
filed prior to April 1, 1998, Parent and Sub, and their respective
Subsidiaries are in compliance with the terms of the Parent Permits, except
where the failure to so comply would not, in the aggregate, have a Material
Adverse Effect.
Section 4.13 ENVIRONMENTAL COMPLIANCE. Except as set forth in Section 4.13
of the Parent Disclosure Letter or in the Parent SEC Reports filed prior to
April 1, 1998, (i) the assets, properties, businesses and operations of Parent
and Sub and their respective 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, any Material Adverse Effect;
(ii) the Company and its Subsidiaries have obtained and, as currently
operating, are in compliance with all Parent Permits necessary under any
Environmental Law for the conduct of the business and operations of Parent and
Sub, and their Subsidiaries in the manner now conducted, except for such non-
compliance which has not had, and will not have, any Material Adverse Effect;
and (iii) neither Parent nor Sub, nor any of their Subsidiaries nor any of the
respective assets, properties, businesses or operations has received or is
subject to any order, decree, judgment, complaint, agreement, claim, citation,
notice or proceeding indicating that Parent or Sub, or any of their
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 4.14 INSURANCE. Except as set forth in Section 4.14 of the Parent
Disclosure Schedule or the Parent SEC reports filed prior to April 1, 1998,
Parent and Sub, and each of their Subsidiaries, maintains, and through the
Closing Date will maintain, insurance with reputable insurers (or pursuant to
prudent self-insurance
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programs) in such amounts and covering such risks as are in accordance with
normal industry practice with companies engaged in businesses similar to those
the Parent and Sub, and each of their Subsidiaries, and owning property in the
same general areas in which Parent and Sub, and each of their Subsidiaries,
conducts their businesses. 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 Parent or Sub,
or any of their 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 set forth in Section 4.14 of the Parent
Disclosure Letter or in the Parent SEC Reports filed prior to April 1, 1998,
(a) there are no outstanding claims in excess of normal retentions that are
not covered under any such policy or binders, and, to the best knowledge of
Parent and Sub, 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 Parent or the Sub, or any of their Subsidiaries,
that is not covered by any of such policy or binder; (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 Parent,
the Sub or any of their Subsidiaries.
Section 4.15 OPINION OF FINANCIAL ADVISOR. Parent has received from a
financial advisor satisfactory to Parent's Board of Directors, an opinion to
the effect that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to Parent. Such opinion (a copy of which has been
delivered to the Company) has not been withdrawn, revoked or modified.
Section 4.16 STATE TAKEOVER LAW. With respect to Parent, the Board of
Directors of Parent has taken all actions necessary to render the restrictions
contained in Section 203 of the DGCL, and such restrictions and provisions
are, inapplicable to the Transaction Documents and the transactions
contemplated thereby, including without limitation the Merger and the exercise
of the option granted pursuant to the Parent Option Agreement.
ARTICLE V
COVENANTS
Section 5.01 CONDUCT OF BUSINESS.
(a) Except as contemplated by the Transaction Documents 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 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 otherwise expressly provided
in or contemplated by the Transaction Documents or Section 5.01(a) of
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 or issuances of securities upon exercise or
exchange of the Rights Agreement Rights (as defined below) in accordance
with the terms of the Rights Agreement (as defined below), so long as
the Company has complied with its obligations pursuant to Section 5.12
hereof, 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 the exercise of
rights under any Company 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
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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 $20,000,000 or more (excluding any assumed indebtedness)
other than pursuant to definitive agreements entered into prior to the
date of this Agreement that are identified in Section 5.01(a) of the
Company Disclosure Letter, 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 in a principal amount not to exceed $15,000,000; (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); (viii) change any of the accounting methods, 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 Certificate of Incorporation or Bylaws
(or similar documents) of the Company or any Subsidiary except as may be
required in order to consummate the Merger and the transactions
contemplated by the Transaction Documents; (x) except as may be required
under any previous existing agreement or Company Plan, grant any options
or stock related awards; (xi) except as may be required by applicable law
or as contemplated by the Transaction Documents, enter into any new, or
amend in any material respect 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 of the Company or its Subsidiaries, or grant any
increases in the compensation or benefits to such 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 (other than
mergers, consolidations or transfers (A) involving wholly owned
Subsidiaries or (B) in which the Company or its Subsidiary is the
surviving corporation and such acquisition would be permitted by (iv)
above); (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 the Transaction Documents 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 relationships with the Parent and its
Subsidiaries, in each case in all material respects. Without limiting
the generality of the foregoing, except as otherwise expressly provided
in or contemplated by this Agreement or in Section 5.01(b) of 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
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owned subsidiary of the Parent, issue, sell or pledge, or authorize or
propose the issuance, sale or pledge of (A) Parent Securities or Parent
Subsidiary Securities, in each case, other than Parent Common Stock
issuable upon the exercise of rights under any Company Plan or any
agreement referred to in Section 4.02 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 Parent
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 $40,000,000 or
more (excluding any assumed indebtedness) other than pursuant to
definitive agreements entered into prior to the date hereof that are
identified on Schedule 5.01(b) of the Parent Disclosure Letter, 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 in an aggregate principal amount not
to exceed $30,000,000 or in connection with the transactions contemplated
hereby; (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); (viii) change any of the accounting
methods, 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 Amended
and Restated Certificate of Incorporation or Bylaws (or similar documents)
of the Parent or any Subsidiary except as may be required in order to
consummate the Merger and the transactions contemplated by the Transaction
Documents or effect a change in the name of Parent; (x) except as may be
required under any previously existing agreement or Plan grant any options
or 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 any employment, severance, consulting or salary continuation agreements
with any officers, directors or key employees of Parent, or grant any
increases in the compensation or benefits to such 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 (other than
mergers, consolidations or transfers (A) involving wholly owned
subsidiaries or (B) in which Parent or its Subsidiary is the surviving
corporation and such acquisition would be permitted by (iv) above); (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 BY THE COMPANY.
(a) Immediately following the execution of this Agreement, the Company will
terminate any and all existing activities, arrangements, discussions and
negotiations with third parties (other than Parent and Sub), with
respect to any possible Company Acquisition Transaction (defined below).
Except as expressly provided in Sections 5.02(b), 5.02(c) and 7.01,
prior to the Effective Time, the Company shall not, and shall not
authorize or permit any of its Subsidiaries or any of its or its
Subsidiaries' directors, officers, employees, agents or representatives
to, directly or indirectly, solicit, initiate, facilitate or
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encourage (including by way of furnishing or disclosing information) (i)
any merger, consolidation, or other business combination involving the
Company or its Subsidiaries, (ii) any acquisition, sale, lease, exchange,
mortgage, pledge, transfer or other disposition of, or tender offer for,
all or a substantial portion of the assets or capital stock of the Company
or any of its material Subsidiaries or (iii) inquiries or proposals
concerning or which may reasonably be expected to lead to, any of the
foregoing (a "Company Acquisition Transaction"), or negotiate, explore or
otherwise enter into discussions in any way with any third party (other
than Parent or its affiliates) with respect to any Company Acquisition
Transaction or enter into any agreement, arrangement or understanding
requiring it to abandon, terminate or fail to consummate the Merger or any
other transaction contemplated by the Transaction Documents. The Company
shall promptly advise Parent of the terms, conditions and identity of the
third party making any inquiries or proposals relating to any Company
Acquisition Transaction.
(b) Notwithstanding the foregoing, in the event that the Company receives an
unsolicited bona fide written proposal for a Company Acquisition
Transaction from a third party, the Company may furnish non-public
information to, and negotiate with, such third party; provided that the
Company (i) provides prior written notice to Parent, (ii) such third
party enters into a confidentiality agreement having terms no more
favorable to such third party than the terms of the Confidentiality
Agreement are to Parent and (iii) (A) the Company's Board of Directors
shall have concluded in good faith, based on the advice of its
investment banker, that such Company Acquisition Transaction may
reasonably be expected, if consummated, to result in a transaction more
favorable to the Company and it stockholders than the Merger, and such
third party is financially capable of consummating such Company
Acquisition Transaction, and (B) the Company's Board of Directors shall
have concluded in good faith, based on the advice of outside counsel to
the Company, that any failure to provide such non-public information to,
or negotiate with, such party would be inconsistent with the Company's
Board of Directors' fiduciary duties to stockholders of the Company.
(c) Nothing in this Section 5.02 shall prohibit the Board of Directors of
the Company from withdrawing or modifying its recommendation referred to
in Section 2.09 if there exists a Company Acquisition Transaction and
the Board of Directors of the Company, after one (1) business day prior
written notice to Parent and consultation with and based upon the advice
of independent legal counsel, determines in good faith that any failure
to do so would be inconsistent with the fiduciary duties of the Board of
Directors of the Company to stockholders of the Company.
Section 5.03 NO SOLICITATION BY PARENT.
(a) Immediately following the execution of this Agreement, Parent will
terminate any and all existing activities, arrangements, discussions and
negotiations with third parties (other than the Company and those
entities identified in Section 5.01(b)(iv)(1) of the Parent Disclosure
Letter) with respect to any possible Parent Acquisition Transaction (as
defined below). Except as expressly provided in Sections 5.03(b),
5.03(c) and 7.01, prior to the Effective Time, Parent shall not, and
shall not authorize or permit any of its Subsidiaries or any of its or
its Subsidiaries' directors, officers, employees, agents or
representatives to, directly or indirectly, solicit, initiate,
facilitate or encourage (including by way of furnishing or disclosing
information) (i) any merger, consolidation, other business combination
involving Parent or its Subsidiaries (other than mergers, consolidations
or transfers solely between and among Parent and any wholly-owned
Subsidiary), (ii) any acquisition, sale, lease, exchange, mortgage,
pledge, transfer or other disposition of, or tender offer for, all or
any substantial portion of the assets or capital stock of Parent or any
of its material Subsidiaries taken as a whole, or (iii) inquiries or
proposals concerning or which may reasonably be expected to lead to, any
of the foregoing (a "Parent Acquisition Transaction") or negotiate,
explore or otherwise enter into discussions in any way with any third
party (other than the Company or its affiliates) with respect to any
Parent Acquisition Transaction or enter into any agreement, arrangement
or understanding requiring it to abandon, terminate or fail to
consummate the Merger or any other transactions contemplated by the
Transaction Documents. Parent shall promptly advise the Company of the
terms, conditions and identity of the third party making any inquiries
or proposals relating to any Parent Acquisition Transaction.
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(b) Notwithstanding the foregoing in the event that Parent receives an
unsolicited bona fide written proposal for a Parent Acquisition
Transaction from a third party, Parent may furnish non-public
information to, and negotiate with, such third party; provided that
Parent (i) provides prior written notice to the Company; (ii) such third
party enters into a confidentiality agreement having terms no more
favorable to such third party than the terms of the Confidentiality
Agreement are to the Company; (iii) (A) Parent's Board of Directors
shall have concluded in good faith based on the advice of its investment
banker, that such Parent Acquisition Transaction may reasonably be
expected, if consummated, to result in a transaction more favorable to
Parent and its stockholders than the Merger and such third party is
financially capable of consummating such Parent Acquisition Transaction,
and (B) Parent's Board of Directors shall have concluded in good faith
based on the advice of outside counsel to Parent, that any failure to
provide such non-public information to, or negotiate with, such party
would be inconsistent with Parent's Board of Directors' fiduciary duties
to stockholders of Parent.
(c) Nothing in this Section 5.03 shall prohibit the Board of Directors of
Parent from withdrawing or modifying its recommendation referred to in
Section 2.09 if there exists a Parent Acquisition Transaction and the
Board of Directors of the Company, after one (1) business day prior
written notice to the Company and consultation with and based upon the
advice of independent legal counsel, determines in good faith that any
failure to do so would be inconsistent with the fiduciary duties of the
Board of Directors of Parent to stockholders of the Company.
Section 5.04 ACCESS TO INFORMATION.
(a) From the date of this Agreement until the Effective Time, the Company
will give Parent and its authorized representatives (including counsel,
environmental and other consultants, accountants, auditors, and
intellectual property counsel and agents) reasonable access in light of
the terms of this Agreement during normal business hours to all
facilities, personnel and operations and to all books and records of the
Company and its Subsidiaries, will permit Parent to make such
inspections as it may reasonably require and will cause its officers and
those of its Subsidiaries to furnish Parent such financial and operating
data and other information with respect to the business and properties
of the Company and its Subsidiaries as Parent may from time to time
reasonably request.
(b) From the date of this Agreement until the Effective Time, Parent will
give the Company its authorized representatives (including counsel,
environmental and other consultants, accountants, auditors, and
intellectual property counsel and agents) reasonable access in light of
the terms of this Agreement during normal business hours to all
facilities, personnel and operations and to all books and records of
Parent and its Subsidiaries, will permit the Company to make such
inspections as it may reasonably require and will cause its officers and
those of its Subsidiaries to furnish the Company with such financial and
operating data and other information with respect to the business and
properties of Parent and its Subsidiaries as the Company may from time
to time reasonably request.
(c) Information obtained by the Company, Parent or the Sub or their
respective representatives pursuant to this Section 5.04 shall be
subject to the provisions of the Confidentiality Agreement, dated as of
April 1, 1998, between the Parent and the Company (the "Confidentiality
Agreement") the terms of which are incorporated herein by reference;
provided that the provisions of Section 9 of the Confidentiality
Agreement shall cease to have any further effectiveness (i) with respect
to the restrictions on Parent set forth therein, upon termination of
this Agreement under circumstances in which the Company Option Agreement
becomes exercisable and (ii) with respect to the restrictions on the
Company set forth therein, upon termination of this Agreement under
circumstances in which the Parent Option Agreement becomes exercisable.
Section 5.05 COMMERCIALLY REASONABLE EFFORTS; OTHER ACTIONS.
(a) Subject to the terms and conditions provided in this Agreement, Parent
and the Company shall use all commercially reasonable efforts to take,
or cause to be taken, all other actions and do, or cause to be
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done, all other things necessary, proper or appropriate under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement at the earliest practicable time,
including, without limitation, (i) the filings of Notification and Report
Forms under the HSR Act with the Federal Trade Commission (the "FTC") and
the Antitrust Division of the Department of Justice (the "Antitrust
Division") and using all commercially reasonable efforts to respond as
promptly as practicable to all inquiries received from the FTC or the
Antitrust Division for additional information of documentation, (ii) if
required by any governmental, regulatory or administrative agency,
authority or commission (a "Governmental Entity") as a condition to the
obtaining of any consent of such Governmental Entity or the agreement of
such Governmental Entity not to raise any objection to the transactions
contemplated by the Transaction Documents, agreeing to make any
undertakings or satisfy any commitments with respect to the Company,
Parent or their respective Subsidiaries or dispose of any operations of
the Company, Parent or their respective Subsidiaries the making,
satisfaction or disposal of which (after taking into account the net
proceeds realized upon such disposal) could not reasonably be expected to
have a Material Adverse Effect with respect to Parent, the Company and
their Subsidiaries, taken as a whole, (iii) defending any lawsuits or
other proceedings challenging this Agreement or the transactions
contemplated by this Agreement, (iv) the obtaining of all necessary
consents, approvals or waivers, and (v) the lifting of any legal bar to
the Merger. Parent shall not take any action which would cause the
Company to fail to perform its obligations hereunder. The Company shall
not take any action which would cause Parent to fail to perform its
obligations hereunder.
(b) Company and Parent, as the case may be, shall use all commercially
reasonable efforts to cause to be delivered to each other a comfort
letter prepared by their respective independent auditors, dated a date
within two business days of the effective date of the S-4 in form
reasonably satisfactory to Company or Parent, as the case may be, and
customary in scope and substance for such letters in connection with
similar registration statements.
Section 5.06 INDEMNIFICATION AND INSURANCE.
(a) Parent and 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 statute 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 reasonable 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 5.06 (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.
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(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
cost 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 5.06.
(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 5.06.
(f) This Section 5.06, 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 5.06 or indemnified
hereunder each of whom may enforce the provisions of this Section 5.06
(whether or not parties to this Agreement).
(g) Parent guarantees as primary obligor, and not as surety, the full and
punctual performance of the Surviving Corporation of its obligations
hereunder to the extent of the rights of indemnification provided for in
the Certificate of Incorporation or Bylaws of the Company or its
Subsidiaries.
Section 5.07 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 5.07(a) of the Company Disclosure
Letter.
(b) In addition to honoring the agreements referred to in Section 5.07(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
provided to each such employee. Nothing in this Section 5.07(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) in accordance with the customary practices of the
Parent and its Subsidiaries under all employee benefit plans, programs,
policies and arrangements maintained by the Surviving
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Corporation or the Parent 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 5.07, 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 5.07, each of whom may enforce the
provisions of this Section 5.07 (whether or not parties to this
Agreement). Except as provided in clause (a) above, nothing contained in
this Section 5.07 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 or participation in Parent benefit plans, programs, policies
or arrangements for any specified period of any nature or kind
whatsoever.
Section 5.08 PROXY STATEMENT AND S-4. The Company and 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 Merger as
required by the Exchange Act and the Securities Act and the rules and
regulations thereunder. Each of 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, Parent and Sub will
cooperate with each other in the preparation of the Proxy Statement. The
Company and Parent shall use all commercially 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 Parent's
stockholders at the earliest practicable date.
Section 5.09 NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt
notice to Parent and the Sub, and Parent or 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
5.09 shall not limit or otherwise affect the remedies available hereunder to
any of the parties receiving such notice.
Section 5.10 AGREEMENTS OF RULE 145 AFFILIATES. Prior to the Effective Time,
the Company shall cause to be 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.
Section 5.11 STOCK EXCHANGE LISTINGS. Parent shall use all commercially
reasonable efforts to have the Parent Common Stock to be issued in connection
with the Merger authorized for listing on the New York Stock Exchange subject
to notice of issuance.
Section 5.12 RIGHTS AGREEMENT.
(a) The Company shall promptly enter into an amendment to the Rights
Agreement, (the "Rights Agreement Amendment") substantially in the form
of Exhibit E hereto in form and substance acceptable to Parent pursuant
to which the execution of this Agreement and the Company Option
Agreement and the consummation of the transactions contemplated hereby
and thereby, shall not result
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in Parent or Sub or any of their affiliates being an "Acquiring Person"
or an "Adverse Person" or result in the occurrence of a "Triggering
Event," "Stock Acquisition Date," or "Distribution Date" under the Rights
Agreement. In the event that the Rights Agreement Amendment is not
entered into within ten (10) days of the date hereof or a "Distribution
Date") otherwise occurs as a result of the execution of this Agreement or
the Company Option Agreement, the Company will to redeem all Rights
immediately upon such distribution.
(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.
(c) Except as expressly provided herein, the Company shall not amend, modify
or waive any provision of the Rights Agreement or redeem the Rights
without the prior written consent of Parent.
Section 5.13 TAKEOVER LAWS. No party hereto will take or permit to be taken
any action that could cause the transactions contemplated by the Transaction
Documents to be subject to requirements imposed by Section 203 of the DGCL and
any "moratorium," "control share," "fair price," "affiliate transaction,"
"control transaction," "business combination" or other antitakeover laws and
regulations (collectively, "Takeover Laws") and each party hereto shall take
all necessary steps within its control to exempt (or ensure the continued
exemption of) the transactions contemplated by the Transaction Documents from,
or if necessary challenge the validity or applicability of, any applicable
Takeover Law, as now or hereafter in effect.
Section 5.14 EMPLOYEE STOCK PURCHASE PLAN. The Company will terminate its
1993 Employee Stock Purchase Plan (the "Purchase Plan") effective as of June
30, 1998 pursuant to Article 15 thereof and the Payment Period (as defined
therein) for the six months ending June 30, 1998 will be the last Payment
Period under the Purchase Plan; provided, however, that such termination shall
not affect options issued with respect to the Payment Period ending June 30,
1998.
Section 5.15 FINANCING. Not later than the earlier of (i) the 30th calendar
day after the mailing of the Proxy Statement to the stockholders of Parent and
the Company and (ii) the date of the earlier of the two Stockholder Meetings,
Parent shall enter into one or more definitive financing agreements (the
"Definitive Financing Agreements") pursuant to which Parent shall have the
right to borrow as of the Closing Date an aggregate amount sufficient to
refinance on terms reasonably acceptable to Parent, the Company's senior bank
credit facility, the 9 1/2% Senior Subordinated Notes due 2006 and any other
indebtedness of the Company, Parent and its Subsidiaries if (A) as a result of
the Merger such indebtedness would be in default (or that with notice of the
passage of time or both would be in default) or entitle the holder of such
indebtedness to require Parent, the Company or any of their Subsidiaries to
repurchase such indebtedness and (B) Parent or the Company shall not, as of
the Closing Date, have obtained consents, modifications or waivers relating to
the Merger with respect to such indebtedness. Parent, Sub and the Company
shall each use its best efforts to satisfy on the earlier of the date required
(if so required) or the Closing Date all requirements of the Definitive
Financing Agreements to be satisfied or complied with by it thereunder which
are conditions to closing thereunder; provided, however, that the Company's
obligations under this sentence shall apply only to such requirements which
Parent has informed the Company and to which the Company consents (not to be
unreasonably withheld). The Company shall use its best efforts to assist the
Parent and Sub, to the extent reasonably requested by them, in the negotiation
and preparation of the Definitive Financing Agreements and in effecting such
financing on or prior to the Closing Date.
Section 5.16 BOARD DESIGNEES. Parent shall take all necessary corporate
action to appoint two designees of the Company reasonably acceptable to Parent
to the Parent Board of Directors as of the Effective Time.
Section 5.17 PARENT BY-LAWS. Parent shall take all necessary corporate
action to amend its bylaws to read as set forth on Exhibit F hereto, effective
as of the Effective Time.
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SECTION 5.18 NO AMENDMENTS. Parent will not execute any amendments to, or
otherwise take any action to modify or change the terms and provisions of the
Amendment to Stockholders Agreement or the Stockholders Agreement prior to the
Effective Time without the prior written consent of 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, by each party hereto prior to the
proposed Effective Time, of the following conditions:
(a) the Company Stockholder Approval and the Parent Stockholder Approval
shall have been obtained;
(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 all
commercially reasonable efforts to have any such prohibition lifted);
(c) 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;
(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 Parent, Sub or the Company or to
materially adversely affect the consummation of the Merger;
(e) the Company and Parent shall have received an opinion from their
respective 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, Parent and Sub will each be a "party to a
reorganization" within the meaning of Section 368(b) of the Code with
respect to the Merger.
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 the Company, 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;
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(c) the representations and warranties of Parent and Sub contained in
Article IV hereof (without regard to any materiality exception or
provisos therein) shall be true and correct in all material respects on
the Closing Date as though such representations and warranties were made
at and on such date, except (i) for those untruths or inaccuracies which
would not, singly or in the aggregate, reasonably be expected to have a
Material Adverse Effect; and (ii) for changes permitted or contemplated
by the Transactions Documents. For purposes of the foregoing,
notwithstanding any other provisions of this Agreement to the contrary,
the effects arising out of or relating to (i) economic conditions
affecting the U.S. economy or the health care industry generally, (ii)
the proposal, adoption or implementation after the date hereof of any
law, statute, rule or regulation relating to health care, Medicaid or
Medicare, including, without limitation, the proposal, adoption or
implementation of prospective payment systems and "salary equivalency"
rates (including amendments to any salary equivalency rates currently in
effect), (iii) the Merger or the announcement thereof, including without
limitation, resignations of key employees; (iv) any action or event
permitted by Section 5.1(a) hereof; or (v) any matter identified in
Section 3.04 of the Company Disclosure Letter shall not constitute a
circumstance which will be a basis for asserting the existence or
occurrence of a Material Adverse Effect. The existence or occurrence of
a Material Adverse Effect notwithstanding the exclusions referred to in
the immediately preceding sentence is hereinafter referred to as an
"Omnibus Parent Material Adverse Event."
(d) Parent shall have entered into the Definitive Financing Agreements
referred to in Section 5.14.
(e) Parent and Sub shall have performed in all material respects all
covenants, agreements and obligations required to be performed by them
under the 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 Parent and Sub to effect the Merger
shall be subject to the satisfaction, or waiver by Parent and Sub, 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 or Sub 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
6.03(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 Closing Date, there shall not
have occurred and be continuing 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; and
(d) the representations and warranties of the Company contained in Article
III hereof (without regard to any materiality exceptions or provisos
contained therein) shall be true and correct in all respects on the
Closing Date as though such representations and warranties were made at
and on such date, except (i) for those untruths or inaccuracies which
would not, singly or in the aggregate, reasonably be expected to have
Material Adverse Effect and (ii) for changes expressly permitted or
contemplated by the Transaction Documents. For purposes of the
foregoing, notwithstanding any other provisions of this Agreement to the
contrary, the effects arising out of or relating to (i) economic
conditions affecting the U.S. economy or the health care industry
generally, (ii) the proposal, adoption or implementation after the date
hereof of any law, statute, rule or regulation relating to health care,
Medicaid or Medicare, including, without limitation, the proposal,
adoption or implementation of prospective payment systems and "salary
equivalency" rates (including amendments to any salary equivalency rates
currently in
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effect), (iii) the Merger or the announcement thereof, including without
limitation, resignations of key employees; (iv) any action or event
permitted by Section 5.1(a) hereof; or (v) any matter identified in
Section 3.014 of the Parent Disclosure Letter shall not constitute a
circumstance which will be a basis for asserting the existence or
occurrence of a Material Adverse Effect. The existence or occurrence of a
Material Adverse Effect notwithstanding the exclusions referred to in the
immediately preceding sentence is hereinafter referred to as an "Omnibus
Company Material Adverse Event."
(e) The Company shall have performed in all material respects all covenants,
agreements and obligations 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 Parent:
(a) Mutual Consent. By mutual written consent of the Boards of Directors of
the Company and Parent;
(b) Expiration. By Parent or the Company if the Effective Time shall not
have occurred on or before December 31, 1998 (the "Expiration Time")
(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) Court Order. By either 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 (other than a temporary restraining
order), decree, judgment or ruling, or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such,
judgment, order, decree, ruling or other action shall have become final
and non-appealable;
(d) Material Parent Breach. By the Company (i) if at any time prior to the
Closing Date an Omnibus Parent Material Adverse Event shall have
occurred or (ii) Parent or Sub shall have breached or failed to comply
in any material respect with any of their obligations under this
Agreement and, in each case, such Omnibus Parent Material Adverse Event,
breach or failure shall continue unremedied for ten (10) days after
Parent or Sub has received written notice from the Company of the
occurrence of such Omnibus Parent Material Adverse Event, breach or
failure;
(e) Adverse Parent Recommendation. Prior to obtaining the Parent Stockholder
Approval, by the Company if the Board of Directors of Parent fails to
make, withdraws or modifies in a manner adverse to the Company its
favorable recommendation of the Merger or shall have recommended or
entered into a definitive agreement with respect to a Parent Acquisition
Transaction with a party other than the Company or any of its
affiliates;
(f) Parent Acquisition Transaction. Prior to the Effective Time, by Parent
if Parent receives a written offer with respect to a Parent Acquisition
Transaction with a party other than the Company or its affiliates or
such other party has commenced a tender offer which, in either case, the
Board of Directors of Parent determines in good faith is more favorable
to Parent's stockholders than the transactions contemplated by this
Agreement;
(g) Material Company Breach. By Parent if (i) at any time prior to the
Closing Date an Omnibus Company Material Adverse Event shall have
occurred or (ii) the Company shall have breached or failed to comply in
any material respect with any of its obligations under this Agreement
and, in each case,
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such Omnibus Company Material Adverse Event, breach or failure shall
continue unremedied for ten (10) days after the Company has received
written notice from Parent or Sub of the occurrence of such Omnibus
Company Material Adverse Event, breach or failure;
(h) Adverse Company Recommendation. Prior to obtaining the Company
Stockholder Approval, by Parent if the Board of Directors of the Company
fails to make, withdraws or modifies in a manner adverse to Parent or
Sub its favorable recommendation of the Merger or shall have recommended
or entered into a definitive agreement with respect to a Company
Acquisition Transaction with a party other than Parent or any of its
affiliates;
(i) Company Acquisition Transaction. Prior to the Effective Time, by the
Company if the Company receives a written offer with respect to a
Company 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 determines in good
faith is more favorable to the Company's stockholders than the
transactions contemplated by this Agreement;
(j) Non-Approval. By Parent or the Company (i) if the Company fails to
obtain the Company Stockholder Approval or (ii) if the Parent fails to
obtain the Parent Stockholder Approval.
Section 7.02 EFFECT OF TERMINATION.
(a) If this Agreement is terminated and the Merger is abandoned pursuant to
Section 7.01 hereof, this Agreement, except for the provisions of
Section 5.04(c) 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 (subject to Section 5.04(c) hereof) shall
remain in full force and effect following any termination of this
Agreement.
(b) If this Agreement is terminated pursuant to Section 7.01(h) or (i), the
Company promptly, but in no event later than one business day after
termination of this Agreement will pay to Parent a fee (the "Termination
Fee") equal to $12,000,000 in same day funds, in respect of the fees and
expenses of Parent incurred in connection with pursuing the transactions
contemplated hereby. If this Agreement is terminated pursuant to (i)
Section 7.01(b) and, at the Expiration Time any person has made (or
publicly disclosed an intention to make) a proposal to effect a Company
Acquisition Transaction or (ii) Section 7.01(j)(i) 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 Company
Acquisition and, in either case, within 12 months after such termination
a Company 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 to Parent. Nothing in this Section
7.02 shall relieve any party to this Agreement of liability for breach
of this Agreement.
(c) If this Agreement is terminated pursuant to Section 7.01(e) or (f),
Parent promptly, but in no event later than one business day after
termination of this Agreement will pay to the Company the Termination
Fee in same day funds, in respect of the fees and expenses of the
Company incurred in connection with pursuing the transactions
contemplated hereby. If this Agreement is terminated pursuant to
(i) Section 7.01(b) and, at the Expiration Time any person has made (or
publicly disclosed an intention to make) a proposal to effect a Parent
Acquisition Transaction or (ii) Section 7.01(j)(ii) 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 Parent
Acquisition Transaction and, in either case, within 12 months after such
termination a Parent Acquisition Transaction, shall be consummated,
Parent shall promptly (but in no event later than one business day)
after such consummation, pay the Termination Fee to the Company. Nothing
in this Section 7.02 shall relieve any party to this Agreement of
liability for breach of this Agreement.
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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, Parent and Sub, at any time before or after adoption
of this Agreement by the stockholders of each of the Company and Parent 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 in any material respect without the approval
of the stockholders of the Company that beneficially own a majority of the
shares of Company Common Stock. 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, Parent and 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.
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 Company Disclosure Letter and the Parent Disclosure Letter,
this Agreement together with the other Transaction Documents (a) constitute
the entire agreement between the parties with respect to the subject matter
hereof and supersede 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 Parent or Sub may assign any of its rights and
obligations to any wholly-owned direct subsidiary of Parent incorporated in
Delaware, but no such assignment shall relieve Parent or Sub, as the case may
be, of its obligations hereunder.
Section 8.03 ENFORCEMENT OF THE AGREEMENT; JURISDICTION.
(a) 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.
(b) 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.
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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, or by facsimile transmission with
confirmation of receipt, three Business Days following deposit in the Untied
States mails, by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties as follows:
If to Parent or Sub:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Attention: General Counsel
Fax No.: (770) 677-7902
with a copy to:
Powell, Goldstein, Frazer & Murphy LLP
Sixteenth Floor
191 Peachtree Street N.E.
Atlanta, Georgia 30303-1740
Attention: Rick Miller
Fax No.: (404) 572-6999
and
Sidley & Austin
555 West Fifth Street, Suite 4000
Los Angeles, California 90013
Attention: Robert W. Kadlec
Fax No.: (213) 896-6600
If to the Company:
Mariner Health Group, Inc.
125 Eugene O'Neill Drive
New London, Connecticut 06320
Attention: General Counsel
Fax No.: (860) 701-2201
with a copy to:
Testa, Hurwitz & Thibeault, LLP
125 High Street
High Street Tower
Boston, Massachusetts 02110
Attention: Mark H. Burnett
Fax No.: (617) 248-7100
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.
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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 2.10, 2.11, 5.06 and 5.07 (which are intended
to be for the benefit of the persons referred to therein, and may be enforced
by 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.
Section 8.11 PRESS RELEASES. Subject to the proviso to this sentence,
Parent, 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., the Nasdaq National Market and any other appropriate exchange.
Section 8.12 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 8.13 FACSIMILE SIGNATURES. A facsimile of this Agreement containing
signatures of all the parties hereto shall constitute an original document for
all purposes.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, each of the parties has caused this Agreement and Plan of
Merger to be executed on its behalf by its officers thereunto duly authorized.
PARAGON HEALTH NETWORK, INC.
By: /s/ Keith B. Pitts
-------------------------------------
Its: Chairman, President & Chief
Executive Officer
PARAGON ACQUISITION SUB, INC.
By: /s/ Keith B. Pitts
-------------------------------------
Its: President
MARINER HEALTH GROUP, INC.
By: /s/ Arthur W. Stratton, Jr., M.D.
-------------------------------------
Its: Chairman, President & Chief
Executive Officer
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ANNEX II
COMPANY STOCK OPTION AGREEMENT
THIS COMPANY STOCK OPTION AGREEMENT (the "Agreement") is made and entered
into as of April 13, 1998 by and between Paragon Health Network, Inc., a
Delaware corporation ("Paragon"), and Mariner Health Group, Inc., a Delaware
corporation (the "Company").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, Paragon,
the Company, and Paragon Acquisition Sub, Inc., a Delaware corporation
("Sub"), are entering into an Agreement and Plan of Merger, dated as of April
13, 1998 (the "Merger Agreement"), which provides, among other things, upon
the terms and subject to the conditions thereof, for the merger of Sub with
and into the Company in accordance with the laws of the State of Delaware (the
"Merger"); and
B. As a condition and inducement to Paragon's willingness to enter into the
Merger Agreement, Paragon has requested that the Company agree, and the
Company has agreed, to grant to Paragon an option to acquire certain shares of
The Company's authorized but unissued common stock, $.01 par value per share
("Company Common Stock").
NOW, THEREFORE, to induce Paragon to enter into the Merger Agreement and in
consideration of the representations, warranties, covenants and agreements
contained herein and in the Merger Agreement, the parties hereto, intending to
be legally bound, hereby agree as follows. Capitalized terms used herein but
not defined herein shall have the respective meanings ascribed to them in the
Merger Agreement.
1. Grant Of Option. The Company hereby grants to Paragon an irrevocable
option (the "Company Option") to purchase a number of shares of Company Common
Stock equal to the Option Number (as defined in Section 2(d)), on the terms
and subject to the conditions set forth below.
2. Exercise And Termination Of The Company Option.
(a) Exercise. The Company Option may be exercised by Paragon, in whole or
in part, at any time or from time to time after the occurrence of a
Purchase Event and prior to the termination of Paragon's right to exercise
the Company Option by the terms of this Agreement. The Company shall notify
Paragon promptly in writing of the occurrence of any Trigger Event;
however, such notice shall not be a condition to the right of Paragon to
exercise the Company Option. For purposes of this Agreement, the following
terms shall have the meanings set forth below:
"Purchase Event" means the consummation of any transaction the proposal
of which would constitute a Company Acquisition Transaction (as defined in
the Merger Agreement) within twelve (12) months following the occurrence of
a Trigger Event.
"Trigger Event" means a termination of the Merger Agreement under
circumstances that causes a Termination Fee (as defined in the Merger
Agreement) to become payable by the Company to Paragon pursuant to Section
7.02(b) of the Merger Agreement or that would cause a Termination Fee to
become payable if the provisions of the penultimate sentence of Section
7.02(b) were satisfied.
(b) Exercise Procedure. In the event that Paragon wishes to exercise the
Company Option, Paragon shall deliver to the Company written notice (an
"Exercise Notice") specifying the total number of shares of Company Common
Stock that Paragon wishes to purchase. To the extent permitted by law and
the Certificate of Incorporation of the Company (the "Company Charter") and
provided that the conditions set forth in Section 3 to the Company's
obligation to issue the shares of Company Common Stock to Paragon hereunder
have been satisfied or waived, Paragon shall, upon delivery of the Exercise
Notice and tender of the applicable aggregate Exercise Price, immediately
be deemed to be the holder of record of the shares of Company Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books
of the Company shall then be closed or that certificates representing such
shares of Company Common Stock shall
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<PAGE>
not theretofore have been delivered to Paragon. Each closing of a purchase
of shares of Company Common Stock hereunder (a "Closing") shall occur at a
place, on a date, and at a time designated by Paragon in an Exercise Notice
delivered at least two (2) business days prior to the date of such Closing.
(c) Termination Of The Company Option. Paragon's right to exercise the
Company Option shall terminate upon the earliest to occur of: (i) the
Effective Time of the Merger; (ii) the termination of the Merger Agreement
other than under circumstances which also constitute or may lead to a
Trigger Event under this Agreement; or (iii) 12 months following the
receipt by Paragon of written notice from the Company of the occurrence of
a Trigger Event unless a Purchase Event shall have occurred prior thereto
in which case the right to exercise the Company Option shall terminate 12
months following the occurrence of such Purchase Event. Notwithstanding the
foregoing, if the Company Option cannot be exercised as of the date the
Company Option would have otherwise terminated pursuant to the preceding
sentence by reason of any applicable judgment, decree, order, law or
regulation, the Company Option shall remain exercisable and shall not
terminate until the earlier of (x) the date on which such impediment shall
become final and not subject to appeal and (y) 5:00 p.m., Eastern Time, on
the tenth (10th) business day after such impediment shall have been
removed. The rights of Paragon set forth in Section 7 shall not terminate
upon termination of Paragon's right to exercise the Company Option, but
shall extend to the time provided in such sections. Notwithstanding the
termination of the Company Option, Paragon shall be entitled to purchase
the shares of Company Common Stock with respect to which Paragon had
exercised the Company Option prior to such termination.
(d) Option Number. The Option Number shall initially be the number of
shares equal to nineteen and nine-tenths percent (19.9%) of the total
number of shares of Company Common Stock issued and outstanding as of the
date of this Agreement, and shall be adjusted hereafter to reflect changes
in the Company capitalization occurring after the date hereof in accordance
with Section 8.
(e) Exercise Price. The purchase price per share of Company Common Stock
pursuant to the Company Option (the "Exercise Price") shall be $19.75 per
share, payable in cash.
3. Conditions To Closing. The obligation of the Company to issue the shares
of Company Common Stock to Paragon hereunder is subject to the conditions that
(a) all waiting periods, if any, under the Hart Scott Rodino Antitrust
Improvements Act of 1975, as amended (the "HSR Act"), applicable to the
issuance of the shares of Company Common Stock by the Company and the
acquisition of such shares by Paragon hereunder shall have expired or have
been terminated; (b) no preliminary or permanent injunction or other order by
any court of competent jurisdiction prohibiting or otherwise restraining such
issuance shall be in effect; and (c) all consents, approvals, orders,
authorizations and permits of any federal, state, local or foreign
governmental authority, if any, required in connection with the issuance of
the shares of Company Common Stock and the acquisition of such shares by
Paragon hereunder shall have been obtained; provided, however, that the
parties hereto shall use their best efforts to cause all such conditions to be
fulfilled as promptly as possible. In the event the closing is delayed as a
result of the immediately preceding sentence, the date of the closing shall be
within five business days following the date such condition has been
fulfilled; provided that, notwithstanding any prior notice of intention to
exercise the Option, Paragon shall not be obligated to purchase any share of
Company Common Stock pursuant hereto after the date three months following the
date of such Exercise Notice.
4. Closing. At any Closing:
(a) The Company shall deliver to Paragon or its designee a certificate or
certificates in definitive form representing the number of shares of
Company Common Stock in the denominations designated by Paragon in its
Exercise Notice, such certificate to be registered in the name of Paragon
and to bear the legend set forth in Section 9;
(b) Paragon shall deliver to the Company the aggregate Exercise Price for
the shares of Company Common Stock so designated and being purchased by
wire transfer of immediately available funds to the account or accounts
specified in writing by the Company;
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(c) The Company shall pay all expenses, and any and all federal, state
and local taxes and other charges that may be payable in connection with
the preparation, issue and delivery of stock certificates under this
Section 4; and
(d) The Company shall cause the shares of Company Common Stock being
delivered at the Closing to be approved for quotation on The Nasdaq
National Market and shall pay all expenses in connection with the
application for approval of such quotation.
5. Representations And Warranties Of The Company. The Company represents and
warrants to Paragon that:
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the requisite
corporate power and authority to carry on its business as such business is
being conducted as of the date of this Agreement. The Company is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or
leasing of its properties makes such qualification or licensing necessary,
other than any such jurisdiction where the failure to be so qualified or
licensed (individually or in the aggregate) would not have a material
adverse effect on the Company.
(b) The Company has all corporate power and authority required to enter
into this Agreement and to carry out its obligations hereunder. The
execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company and no other corporate actions or proceedings on the part of the
Company or the Company's stockholders are necessary to authorize this
Agreement or any of the transactions contemplated hereby; this Agreement
has been duly and validly executed and delivered by the Company, and,
assuming the due authorization, execution and delivery hereof by Paragon
and the receipt of any required governmental approvals, constitutes the
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally, and except that
the availability of equitable remedies, including specific performance, may
be subject to the discretion of any court before which any proceeding
therefor may be brought;
(c) The Company has taken all necessary corporate action to authorize and
reserve for issuance and to permit it to issue, upon exercise of the
Company Option, and at all times from the date hereof through the
expiration of the Company Option will have reserved, a number of authorized
and unissued shares of Company Common Stock not less than the Option
Number, such amount being subject to adjustment as provided in Section 8,
all of which, upon their issuance and delivery in accordance with the terms
of this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable;
(d) the shares of Company Common Stock issued to Paragon upon the
exercise of the Company Option will be, upon delivery thereof to Paragon,
free and clear of all claims, liens, charges, encumbrances and security
interests of any nature whatsoever and shall not be subject to any
preemptive right of any stockholder of the Company;
(e) the execution and delivery of this Agreement by the Company does not,
and, the consummation by the Company of the transactions contemplated
hereby will not, violate, conflict with, or result in a breach of any
provision of, or constitute a default (with or without notice or lapse of
time, or both) under, or give rise to the termination of, or accelerate the
performance required by, or result in a right of termination, cancellation,
or acceleration of any obligation or the loss of a material benefit under,
or the creation of a lien, pledge, security interest or other encumbrance
on assets (any such violation, conflict, breach, default, termination,
acceleration, right of termination, cancellation or acceleration, loss, or
creation, a "Violation") of the Company or any of its subsidiaries,
pursuant to (i) any provision of the Company Certificate of
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<PAGE>
Incorporation or the Bylaws of the Company, (ii) any provision of any
material loan or credit agreement, note, mortgage, indenture, lease,
benefit plan or other agreement, obligation, instrument, permit,
concession, franchise or license (a "Material Contract") of the Company or
any of its subsidiaries or to which any of them is a party or by which any
of them or their properties or assets are bound, or (iii) assuming the
regulatory requirements referred to in Section 5(f) are satisfied, any
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to the Company or any of its subsidiaries or any of their
properties or assets;
(f) the execution and delivery of this Agreement by the Company does not,
and (except for the expiration or early termination of the waiting period
under the HSR Act and any consent, approval or notice required by federal,
state and local regulatory agencies, commissions, boards or public
authorities with jurisdiction over healthcare facilities and providers) the
performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby will not, require any consent, approval,
order, authorization or permit of, filing with, or notification to any
governmental or regulatory authority; and
(g) none of the Company or any of its affiliates or anyone acting on its
or their behalf has issued, sold or offered any security of the Company to
any person under circumstances that would cause the issuance and sale of
shares of Company Common Stock hereunder to be subject to the registration
requirements of the Securities Act as in effect on the date hereof, and,
assuming the representations and warranties of Paragon contained in Section
6 are true and correct, the issuance, sale and delivery of the shares of
Company Common Stock hereunder would be exempt from the registration and
prospectus delivery requirements of the Securities Act, as in effect on the
date hereof, and the Company shall not take any action which would cause
the issuance, sale, and delivery of shares of Company Common Stock
hereunder not to be exempt from such requirements.
6. Representations and Warranties of Rebel. Paragon represents and warrants
to the Company that any shares of Company Common Stock acquired by Paragon
upon exercise of the Company Option will be acquired for Paragon's own
account, for investment purposes only and will not be, and the Company Option
is not being, acquired by Paragon with a view to the public distribution
thereof, in violation of any applicable provision of the Securities Act.
7. Registration Rights. At any time after the Company Option becomes
exercisable, the Company shall, at the request of Paragon, promptly prepare,
file and keep current a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering any shares issued and
issuable pursuant to this Option and shall use its best efforts to cause such
registration statement to become effective and remain current in order to
permit the sale or other disposition of any shares of Company Common Stock
issued upon total or partial exercise of this Option ("Option Shares") in
accordance with any plan of disposition requested by Paragon. The Company will
use its best efforts to cause such registration statement promptly to become
effective and then to remain effective (i) in the case of a "shelf"
registration on Form S-3 or any successor form thereto, until the second
anniversary of the latest date on which any Option Shares were issued upon
exercise of the Option or in the event that Paragon is deemed to be an
affiliate of the Company as of such date, the date that is 90 days following
the date Paragon ceases to be an affiliate of the Company, or (ii) in all
other events for such period not in excess of 180 days from the day such
registration statement first becomes effective or such shorter time as may be
reasonably necessary to effect such sales or other dispositions. Paragon shall
have the right to demand no more than two such registrations. The Company
shall bear the costs of such registrations (including, but not limited to, the
Company's attorneys' fees (but excluding the fees and expenses of counsel for
Paragon) printing costs and filing fees), except for underwriting discounts or
commissions and brokers' fees. The foregoing notwithstanding, if, at the time
of any request by Paragon for registration of Option Shares as provided above,
the Company is in registration with respect to an underwritten public offering
by the Company of shares of Common Stock, and if in the good faith judgment of
the managing underwriter or managing underwriters, or, if none, the sole
underwriter or underwriters, of such offering the offer and sale of the Option
Shares would
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<PAGE>
interfere with the successful marketing of the shares of Common Stock offered
by the Company, the number of Option Shares otherwise to be covered in the
registration statement contemplated hereby may be reduced; provided, however
in no event shall the number of Option Shares to be included in such offering
for the account of Paragon constitute less than 25% of the total number of
shares to be sold by Paragon and the Company in the aggregate; and provided
further, however, that if such reduction occurs, then the Company shall file a
registration statement for the balance of the Option Shares excluded from such
prior offering as promptly as practicable thereafter as to which no reduction
pursuant to this Section 7 shall be permitted or occur and Paragon shall
thereafter be entitled to one additional registration. Paragon shall provide
all information reasonably requested by the Company for inclusion in any
registration statement to be filed hereunder. If requested by Paragon in
connection with such registration, the Company shall become a party to any
underwriting agreement relating to the sale of such shares, but only to the
extent of obligating itself in respect of representations, warranties,
indemnities and other agreements customarily included in such underwriting for
the Company. Upon receiving any request under this Section 7 from Paragon, the
Company agrees to send a copy thereof to any other person known to the Company
to be entitled to registration rights under this Section 7, in each case by
promptly mailing the same, postage prepaid, to the address of record of the
persons entitled to receive such copies. Notwithstanding anything to the
contrary contained herein, in no event shall the number of registrations that
the Company is obligated to effect be increased by reason of the fact that
there shall be more than one holder of Option Shares as a result of any
assignment or division of the Option and this Agreement.
8. Adjustment Upon Changes In Capitalization.
(a) Without limiting any restriction on the Company contained in this
Agreement or in the Merger Agreement, in the event of any change in the
Company Common Stock by reason of any stock dividend, stock split, merger
(other than the Merger), recapitalization, combination, exchange of shares
spin-off or other change in the corporate or capital structure of the
Company which could have the effect of diluting or otherwise diminishing
Paragon's rights hereunder (including any issuance of Company Common Stock
or other equity security of the Company at a price below the fair value
thereof), the type and number of shares or securities subject to the
Company Option, and the Exercise Price per share provided herein, shall be
adjusted appropriately and proper provision shall be made in the agreements
governing such transaction so that Paragon shall receive, upon exercise of
the Company Option, the number and class of securities or property that
Paragon would have received in respect of the shares of Company Common
Stock issuable to Paragon if the Company Option had been exercised
immediately prior to such event or the record date therefor, as applicable.
(b) In the event that the Company shall enter into an agreement: (i) to
consolidate with or merge into any person, other than Paragon or one of its
subsidiaries, and shall not be the continuing or surviving corporation of
such consolidation or merger; (ii) to permit any person, other than Paragon
or one of its subsidiaries, to merge into the Company and the Company shall
be the continuing or surviving corporation, but, in connection with such
merger, the then-outstanding shares of Company Common Stock shall be
changed into or exchanged for stock or other securities of the Company or
any other person or cash or any other property; or (iii) to sell or
otherwise transfer all or substantially all of its assets to any person,
other than Paragon or one of its subsidiaries, then, and in each such case,
the agreement governing such transaction shall make proper provision so
that upon the consummation of such transaction and upon the subsequent
exercise of the Company Option, Paragon shall be entitled to receive, for
each share of Company Common Stock with respect to which the Company Option
has not theretofore been exercised, an amount of consideration in the form
of and equal to the per share amount of consideration that would be
received by the holder of one share of Company Common Stock upon
consummation of such transaction (and, in the event of an election or
similar arrangement with respect to the type of consideration to be
received by the holders of Company Common Stock, subject to the foregoing,
proper provision shall be made so that the holder of the Company Option
would have the same election or similar rights as would the holder of the
number of shares of Company Common Stock for which the Company Option is
then exercisable).
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<PAGE>
9. Restrictive Legends. Each certificate representing shares of Company
Common Stock issued to Paragon upon exercise of the Company Option shall
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
OR BLUE SKY LAWS, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR
IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
It is understood and agreed that (i) the reference to the resale
restrictions of the Securities Act and state securities or Blue Sky laws in
the foregoing legend shall be removed by delivery of substitute certificate(s)
without such reference if Paragon or the Company, as the case may be, shall
have delivered to the other party a copy of a letter from the staff of the
Securities and Exchange Commission, or an opinion of counsel, in form and
substance reasonably satisfactory to the other party, to the effect that such
legend is not required for purposes of the Securities Act or such laws; and
(ii) the legend shall be removed in its entirety if the conditions in the
preceding clause (i) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law. Certificates representing
shares sold in a registered public offering pursuant to Section 7 shall not be
required to bear the legend set forth in this Section 9.
10. Binding Effect; No Assignment; No Third-Party Beneficiaries. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. Except as expressly
provided for in this Agreement, neither this Agreement nor the rights or
obligations of either party hereto are assignable, except by operation of law,
or with the written consent of the other party, and any such attempted
assignment in violation of this Agreement shall be void and of no force or
effect. Nothing contained in this Agreement, express or implied, is intended
to confer upon any person other than the parties hereto and their respective
permitted assigns any rights or remedies of any nature whatsoever.
11. Specific Performance. The parties hereto recognize and agree that if for
any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not
be an adequate remedy. Accordingly, each party agrees that, in addition to
other remedies, whether at law or in equity, the other party shall be entitled
to an injunction to prevent or restrain any violation or threatened violation
of the provisions of this Agreement, and to enforce specifically the terms and
provisions hereof, in any court of the State of Delaware or of the United
States of America located in the State of Delaware. In the event that any
action should be brought in equity to enforce the provisions of this
Agreement, neither party will allege, and each party hereby waives the
defense, that there is an adequate remedy at law. Each party hereto
irrevocably and unconditionally consents and submits to the jurisdiction of
the courts of the State of Delaware and of the United States of America
located in the State of Delaware for any actions, suits or proceedings arising
out of or relating to this Agreement and the transactions contemplated hereby,
and further agrees that service of any process, summons, notice or document by
U.S. registered or certified mail to the respective addresses set forth in the
Merger Agreement shall be effective service of process for any action, suit or
proceeding brought against such party in any such court. Each party hereto
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit, or proceeding arising out of this Agreement or the
transactions contemplated hereby, in the courts of the State of Delaware or of
the United States of America located in Wilmington, Delaware, and hereby
further irrevocable and unconditionally waives and agrees not to plead or
claim in any such court that any such action, suit or proceeding brought in
any such court has been brought in an inconvenient forum.
12. Validity.
(a) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of the other provisions of
this Agreement, which shall remain in full force and effect.
(b) In the event any court or other governmental or regulatory authority
holds any provisions of this Agreement to be null, void or unenforceable,
the parties hereto shall negotiate in good faith the execution
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<PAGE>
and delivery of an amendment to this Agreement in order, as nearly as
possible, to effectuate, to the extent permitted by law, the intent of the
parties hereto with respect to such provision and the economic effects
thereof.
(c) If for any reason any such court or other governmental or regulatory
authority determines that Paragon is not permitted to acquire the full
number of shares of Company Common Stock provided in this Agreement (as the
same may be adjusted), it is the express intention of the Company to allow
Paragon to acquire or to require the Company to repurchase such lesser
number of shares as may be permissible without any other amendment or
modification hereof.
(d) Each party agrees that, should any court or other governmental or
regulatory authority hold any provision of this Agreement or part hereof to
be null, void or unenforceable, or order any party to take any action
inconsistent herewith, or not take any action required herein, the other
party shall not be entitled to specific performance of such provision or
part hereof or to any other remedy, including but not limited to money
damages, for breach hereof or of any other provision of this Agreement or
part hereof as the result of such holding or order.
13. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if (a) delivered personally, or (b) if sent
by overnight courier service (receipt confirmed in writing), or (c) if
delivered by facsimile transmission (with receipt confirmed), or (d) five days
after being mailed by registered or certified mail (return receipt requested)
to the parties in each case to the respective addresses set forth in the
Merger Agreement (or at such other address for a party as shall be specified
by like notice).
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements
made and to be performed entirely within such State and without regard to its
choice of law principles.
15. Interpretation. The headings contained in this Agreement are for
reference purposes and shall not affect in any way the meaning or
interpretation of the Agreement. When reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement, unless
otherwise indicated. Whenever the words "include," "includes," or "including"
are used in this Agreement, they shall be deemed to be followed by the words
"without limitation." Whenever "or" is used in this Agreement it shall be
construed in the nonexclusive sense. The words "herein," "hereby," "hereof,"
"hereto," "hereunder" and words of similar import refer to this Agreement.
16. Counterparts; Effect. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
17. Expenses. Except as otherwise expressly provided herein or in the Merger
Agreement, all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
18. Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and conditions hereof may be waived only by an instrument in
writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
19. Extension Of Time Periods. The time periods for exercises of certain
rights hereunder shall be extended (but in no event by more than twelve (12)
months): (a) to the extent necessary to obtain all governmental approvals for
the exercise of such rights, and for the expiration of all statutory waiting
periods; and (b) to the extent necessary to avoid any liability or
disgorgement of profits under Section 16(b) of the Exchange Act by reason of
such exercise.
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<PAGE>
20. Further Assurance. Each party agrees to execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
21. Facsimile Execution. A facsimile of this Agreement containing signatures
of all the parties hereto shall constitute an original document for all
purposes.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have caused this Company Stock Option
Agreement to be executed by their respective duly authorized officers as of
the date first above written.
MARINER HEALTH GROUP, INC.
By: /s/ Arthur W. Stratton, Jr., M.D.
----------------------------------
Name: Arthur W. Stratton, Jr., M.D
Title: President and Chief
Executive Officer
PARAGON HEALTH NETWORK, INC.
By: /s/ R. Jeffrey Taylor
---------------------------------
Name: R. Jeffrey Taylor
Title: Senior Vice President
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<PAGE>
ANNEX III
PARENT STOCK OPTION AGREEMENT
THIS PARENT STOCK OPTION AGREEMENT (the "Agreement") is made and entered
into as of April 13, 1998 by and between Paragon Health Network, Inc., a
Delaware corporation ("Paragon"), and Mariner Health Group, Inc., a Delaware
corporation (the "Company").
RECITALS
A. Concurrently with the execution and delivery of this Agreement, Paragon,
the Company, and Paragon Acquisition Sub, Inc., a Delaware corporation
("Sub"), are entering into an Agreement and Plan of Merger, dated as of April
13, 1998 (the "Merger Agreement"), which provides, among other things, upon
the terms and subject to the conditions thereof, for the merger of Sub with
and into the Company in accordance with the laws of the State of Delaware (the
"Merger"); and
B. As a condition and inducement to the Company's willingness to enter into
the Merger Agreement, the Company has requested that Paragon agree, and
Paragon has agreed, to grant to the Company an option to acquire certain
shares of Paragon's authorized but unissued common stock, $.01 par value per
share ("Paragon Common Stock").
NOW, THEREFORE, to induce the Company to enter into the Merger Agreement and
in consideration of the representations, warranties, covenants and agreements
contained herein and in the Merger Agreement, the parties hereto, intending to
be legally bound, hereby agree as follows. Capitalized terms used herein but
not defined herein shall have the respective meanings ascribed to them in the
Merger Agreement.
1. Grant Of Option. Paragon hereby grants to the Company an irrevocable
option (the "Paragon Option") to purchase a number of shares of Paragon Common
Stock equal to the Option Number (as defined in Section 2(d)), on the terms
and subject to the conditions set forth below.
2. Exercise And Termination Of Paragon Option.
(a) Exercise. The Paragon Option may be exercised by the Company, in
whole or in part, at any time or from time to time after the occurrence of
a Purchase Event and prior to the termination of the Company's right to
exercise the Paragon Option by the terms of this Agreement. Paragon shall
notify the Company promptly in writing of the occurrence of any Trigger
Event; however, such notice shall not be a condition to the right of the
Company to exercise the Paragon Option. For purposes of this Agreement, the
following terms shall have the meanings set forth below:
"Purchase Event" means the consummation of any transaction the proposal
of which would constitute a Parent Acquisition Transaction (as defined in
the Merger Agreement) within twelve (12) months following the occurrence of
a Trigger Event.
"Trigger Event" means a termination of the Merger Agreement under
circumstances that causes a Termination Fee (as defined in the Merger
Agreement) to become payable by Paragon to the Company pursuant to Section
7.02(c) of the Merger Agreement or that would cause a Termination Fee to
become payable if the provisions of the penultimate sentence of Section
7.02(c) were satisfied.
(b) Exercise Procedure. In the event that the Company wishes to exercise
the Paragon Option, the Company shall deliver to Paragon written notice (an
"Exercise Notice") specifying the total number of shares of Paragon Common
Stock that the Company wishes to purchase. To the extent permitted by law
and the Certificate of Incorporation of Paragon and provided that the
conditions set forth in Section 3 to
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<PAGE>
Paragon's obligation to issue the shares of Paragon Common Stock to the
Company hereunder have been satisfied or waived, the Company shall, upon
delivery of the Exercise Notice and tender of the applicable aggregate
Exercise Price, immediately be deemed to be the holder of record of the
shares of Paragon Common Stock issuable upon such exercise, notwithstanding
that the stock transfer books of Paragon shall then be closed or that
certificates representing such shares of Paragon Common Stock shall not
theretofore have been delivered to the Company. Each closing of a purchase
of shares of Paragon Common Stock hereunder (a "Closing") shall occur at a
place, on a date, and at a time designated by the Company in an Exercise
Notice delivered at least two (2) business days prior to the date of such
Closing.
(c) Termination Of Paragon Option. The Company's right to exercise the
Paragon Option shall terminate upon the earliest to occur of: (i) the
Effective Time of the Merger; (ii) the termination of the Merger Agreement
other than under circumstances which also constitute or may lead to a
Trigger Event under this Agreement; or (iii) 12 months following the
receipt by the Company of written notice from Paragon of the occurrence of
a Trigger Event unless a Purchase Event shall have occurred prior thereto
in which case the right to exercise the Paragon Option shall terminate 12
months following the occurrence of such Purchase Event. Notwithstanding the
foregoing, if the Paragon Option cannot be exercised as of the date the
Paragon Option would have otherwise terminated pursuant to the preceding
sentence by reason of any applicable judgment, decree, order, law or
regulation, the Paragon Option shall remain exercisable and shall not
terminate until the earlier of (x) the date on which such impediment shall
become final and not subject to appeal and (y) 5:00 p.m., Eastern Time, on
the tenth (10th) business day after such impediment shall have been
removed. The rights of the Company set forth in Section 7 shall not
terminate upon termination of the Company's right to exercise the Paragon
Option, but shall extend to the time provided in such sections.
Notwithstanding the termination of the Paragon Option, the Company shall be
entitled to purchase the shares of Paragon Common Stock with respect to
which the Company had exercised the Paragon Option prior to such
termination.
(d) Option Number. The Option Number shall initially be the number of
shares equal to nineteen and nine-tenths percent (19.9%) of the total
number of shares of Paragon Common Stock issued and outstanding as of the
date of this Agreement, and shall be adjusted hereafter to reflect changes
in Paragon capitalization occurring after the date hereof in accordance
with Section 8.
(e) Exercise Price. The purchase price per share of Paragon Common Stock
pursuant to the Paragon Option (the "Exercise Price") shall be $19.75 per
share, payable in cash.
3. Conditions To Closing. The obligation of Paragon to issue the shares of
Paragon Common Stock to the Company hereunder is subject to the conditions
that (a) all waiting periods, if any, under the Hart Scott Rodino Antitrust
Improvements Act of 1975, as amended (the "HSR Act"), applicable to the
issuance of the shares of Paragon Common Stock by Paragon and the acquisition
of such shares by the Company hereunder shall have expired or have been
terminated; (b) no preliminary or permanent injunction or other order by any
court of competent jurisdiction prohibiting or otherwise restraining such
issuance shall be in effect; and (c) all consents, approvals, orders,
authorizations and permits of any federal, state, local or foreign
governmental authority, if any, required in connection with the issuance of
the shares of Paragon Common Stock and the acquisition of such shares by the
Company hereunder shall have been obtained; provided, however, that the
parties hereto shall use their best efforts to cause all such conditions to be
fulfilled as promptly as possible. In the event the closing is delayed as a
result of the immediately preceding sentence, the date of the closing shall be
within five business days following the date such condition has been
fulfilled; provided that, notwithstanding any prior notice of intention to
exercise the Option, the Company shall not be obligated to purchase any share
of Paragon Common Stock pursuant hereto after the date three months following
the date of such Exercise Notice.
4. Closing. At any Closing:
(a) Paragon shall deliver to the Company or its designee a certificate or
certificates in definitive form representing the number of shares of
Paragon Common Stock in the denominations designated by the
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Company in its Exercise Notice, such certificate to be registered in the
name of the Company and to bear the legend set forth in Section 9;
(b) the Company shall deliver to Paragon the aggregate Exercise Price for
the shares of Paragon Common Stock so designated and being purchased by
wire transfer of immediately available funds to the account or accounts
specified in writing by Paragon;
(c) Paragon shall pay all expenses, and any and all federal, state and
local taxes and other charges that may be payable in connection with the
preparation, issue and delivery of stock certificates under this Section 4;
and
(d) Paragon shall cause the shares of Paragon Common Stock being
delivered at the Closing to be approved for listing on the New York Stock
Exchange, Inc. and shall pay all expenses in connection with the
application for approval of such listing.
5. Representations And Warranties Of Paragon. Paragon represents and
warrants to the Company that:
(a) Paragon is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has the requisite
corporate power and authority to carry on its business as such business is
being conducted as of the date of this Agreement. Paragon is duly qualified
or licensed to do business and is in good standing in each jurisdiction in
which the nature of its business or the ownership or leasing of its
properties makes such qualification or licensing necessary, other than any
such jurisdiction where the failure to be so qualified or licensed
(individually or in the aggregate) would not have a material adverse effect
on Paragon.
(b) Paragon has all corporate power and authority required to enter into
this Agreement and to carry out its obligations hereunder. The execution
and delivery of this Agreement by Paragon and the consummation by Paragon
of the transactions contemplated hereby have been duly authorized by all
necessary corporate action on the part of Paragon and no other corporate
actions or proceedings on the part of Paragon or Paragon's stockholders are
necessary to authorize this Agreement or any of the transactions
contemplated hereby; this Agreement has been duly and validly executed and
delivered by Paragon, and, assuming the due authorization, execution and
delivery hereof by the Company and the receipt of any required governmental
approvals, constitutes the valid and binding obligation of Paragon,
enforceable against Paragon in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights generally, and
except that the availability of equitable remedies, including specific
performance, may be subject to the discretion of any court before which any
proceeding therefor may be brought;
(c) Paragon has taken all necessary corporate action to authorize and
reserve for issuance and to permit it to issue, upon exercise of the
Paragon Option, and at all times from the date hereof through the
expiration of the Paragon Option will have reserved, a number of authorized
and unissued shares of Paragon Common Stock not less than the Option
Number, such amount being subject to adjustment as provided in Section 8,
all of which, upon their issuance and delivery in accordance with the terms
of this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable;
(d) the shares of Paragon Common Stock issued to the Company upon the
exercise of the Paragon Option will be, upon delivery thereof to the
Company, free and clear of all claims, liens, charges, encumbrances and
security interests of any nature whatsoever and shall not be subject to any
preemptive right of any stockholder of Paragon;
(e) the execution and delivery of this Agreement by Paragon does not,
and, the consummation by Paragon of the transactions contemplated hereby
will not, violate, conflict with, or result in a breach of any provision
of, or constitute a default (with or without notice or lapse of time, or
both) under, or give rise to
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the termination of, or accelerate the performance required by, or result in
a right of termination, cancellation, or acceleration of any obligation or
the loss of a material benefit under, or the creation of a lien, pledge,
security interest or other encumbrance on assets (any such violation,
conflict, breach, default, termination, acceleration, right of termination,
cancellation or acceleration, loss, or creation, a "Violation") of Paragon
or any of its subsidiaries, pursuant to (i) any provision of Paragon
Certificate of Incorporation or the Bylaws of Paragon, (ii) any provision
of any material loan or credit agreement, note, mortgage, indenture, lease,
benefit plan or other agreement, obligation, instrument, permit,
concession, franchise or license (a "Material Contract") of Paragon or any
of its subsidiaries or to which any of them is a party or by which any of
them or their properties or assets are bound, or (iii) assuming the
regulatory requirements referred to in Section 5(f) are satisfied, any
judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Paragon or any of its subsidiaries or any of their properties
or assets;
(f) the execution and delivery of this Agreement by Paragon does not, and
(except for the expiration or early termination of the waiting period under
the HSR Act and any consent, approval or notice required by federal, state
and local regulatory agencies, commissions, boards or public authorities
with jurisdiction over healthcare facilities and providers) the performance
of this Agreement by Paragon and the consummation of the transactions
contemplated hereby will not, require any consent, approval, order,
authorization or permit of, filing with, or notification to any
governmental or regulatory authority; and
(g) none of Paragon or any of its affiliates or anyone acting on its or
their behalf has issued, sold or offered any security of Paragon to any
person under circumstances that would cause the issuance and sale of shares
of Paragon Common Stock hereunder to be subject to the registration
requirements of the Securities Act as in effect on the date hereof, and,
assuming the representations and warranties of the Company contained in
Section 6 are true and correct, the issuance, sale and delivery of the
shares of Paragon Common Stock hereunder would be exempt from the
registration and prospectus delivery requirements of the Securities Act, as
in effect on the date hereof, and Paragon shall not take any action which
would cause the issuance, sale, and delivery of shares of Paragon Common
Stock hereunder not to be exempt from such requirements.
6. Representations and Warranties of Rebel. The Company represents and
warrants to Paragon that any shares of Paragon Common Stock acquired by the
Company upon exercise of the Paragon Option will be acquired for the Company's
own account, for investment purposes only and will not be, and the Paragon
Option is not being, acquired by the Company with a view to the public
distribution thereof, in violation of any applicable provision of the
Securities Act.
7. Registration Rights. At any time after the Paragon Option becomes
exercisable, Paragon shall, at the request of the Company, promptly prepare,
file and keep current a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering any shares issued and
issuable pursuant to the Paragon Option and shall use its best efforts to
cause such registration statement to become effective and remain current in
order to permit the sale or other disposition of any shares of Paragon Common
Stock issued upon total or partial exercise of the Paragon Option ("Option
Shares") in accordance with any plan of disposition requested by the Company.
Paragon will use its best efforts to cause such registration statement
promptly to become effective and then to remain effective (i) in the case of a
"shelf" registration on Form S-3 or any successor form thereto, until the
second anniversary of the latest date on which any Option Shares were issued
upon exercise of the Paragon Option or in the event that the Company is deemed
to be an affiliate of Paragon as of such date, the date that is 90 days
following the date the Company ceases to be an affiliate of Paragon, or (ii)
in all other events for such period not in excess of 180 days from the day
such registration statement first becomes effective or such shorter time as
may be reasonably necessary to effect such sales or other dispositions. The
Company shall have the right to demand no more than two such registrations.
Paragon shall bear the costs of such registrations (including, but not limited
to, Paragon's attorneys' fees (but excluding the fees and expenses of counsel
for the Company) printing costs and filing fees), except for underwriting
discounts or commissions and brokers' fees. The foregoing notwithstanding, if,
at the time of any request by the Company for registration of Option Shares as
provided above, Paragon is in registration with respect to an underwritten
public offering by Paragon of shares
III-4
<PAGE>
of Paragon Common Stock, and if in the good faith judgment of the managing
underwriter or managing underwriters, or, if none, the sole underwriter or
underwriters, of such offering the offer and sale of the Option Shares would
interfere with the successful marketing of the shares of Paragon Common Stock
offered by Paragon, the number of Option Shares otherwise to be covered in the
registration statement contemplated hereby may be reduced; provided, however
in no event shall the number of Option Shares to be included in such offering
for the account of the Company constitute less than 25% of the total number of
shares to be sold by the Company and Paragon in the aggregate; and provided
further, however, that if such reduction occurs, then Paragon shall file a
registration statement for the balance of the Option Shares excluded from such
prior offering as promptly as practicable thereafter as to which no reduction
pursuant to this Section 7 shall be permitted or occur and the Company shall
thereafter be entitled to one additional registration. The Company shall
provide all information reasonably requested by Paragon for inclusion in any
registration statement to be filed hereunder. If requested by the Company in
connection with such registration, Paragon shall become a party to any
underwriting agreement relating to the sale of such shares, but only to the
extent of obligating itself in respect of representations, warranties,
indemnities and other agreements customarily included in such underwriting for
Paragon. Upon receiving any request under this Section 7 from the Company,
Paragon agrees to send a copy thereof to any other person known to Paragon to
be entitled to registration rights under this Section 7, in each case by
promptly mailing the same, postage prepaid, to the address of record of the
persons entitled to receive such copies. Notwithstanding anything to the
contrary contained herein, in no event shall the number of registrations that
Paragon is obligated to effect be increased by reason of the fact that there
shall be more than one holder of Option Shares as a result of any assignment
or division of the Paragon Option and this Agreement.
8. Adjustment Upon Changes In Capitalization.
(a) Without limiting any restriction on Paragon contained in this
Agreement or in the Merger Agreement, in the event of any change in Paragon
Common Stock by reason of any stock dividend, stock split, merger (other
than the Merger), recapitalization, combination, exchange of shares, spin-
off or other change in the corporate or capital structure of Paragon which
could have the effect of diluting or otherwise diminishing the Company's
rights hereunder (including any issuance of Paragon Common Stock or other
equity security of Paragon at a price below the fair value thereof), the
type and number of shares or securities subject to the Paragon Option, and
the Exercise Price per share provided herein, shall be adjusted
appropriately and proper provision shall be made in the agreements
governing such transaction so that the Company shall receive, upon exercise
of the Paragon Option, the number and class of securities or property that
the Company would have received in respect of the shares of Paragon Common
Stock issuable to the Company if the Paragon Option had been exercised
immediately prior to such event or the record date therefor, as applicable.
(b) In the event that Paragon shall enter into an agreement: (i) to
consolidate with or merge into any person, other than the Company or one of
its subsidiaries, and shall not be the continuing or surviving corporation
of such consolidation or merger; (ii) to permit any person, other than the
Company or one of its subsidiaries, to merge into Paragon and Paragon shall
be the continuing or surviving corporation, but, in connection with such
merger, the then-outstanding shares of Paragon Common Stock shall be
changed into or exchanged for stock or other securities of Paragon or any
other person or cash or any other property; or (iii) to sell or otherwise
transfer all or substantially all of its assets to any person, other than
the Company or one of its subsidiaries, then, and in each such case, the
agreement governing such transaction shall make proper provision so that
upon the consummation of such transaction and upon the subsequent exercise
of the Paragon Option, the Company shall be entitled to receive, for each
share of Paragon Common Stock with respect to which the Paragon Option has
not theretofore been exercised, an amount of consideration in the form of
and equal to the per share amount of consideration that would be received
by the holder of one share of Paragon Common Stock upon consummation of
such transaction (and, in the event of an election or similar arrangement
with respect to the type of consideration to be received by the holders of
Paragon Common Stock, subject to the foregoing, proper provision shall be
made so that the holder of the Paragon Option would have the same election
or similar rights as would the holder of the number of shares of Paragon
Common Stock for which the Paragon Option is then exercisable).
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<PAGE>
9. Restrictive Legends. Each certificate representing shares of Paragon
Common Stock issued to the Company upon exercise of the Paragon Option shall
include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
OR BLUE SKY LAWS, AND MAY BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR
IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
It is understood and agreed that (i) the reference to the resale
restrictions of the Securities Act and state securities or Blue Sky laws in
the foregoing legend shall be removed by delivery of substitute certificate(s)
without such reference if the Company or Paragon, as the case may be, shall
have delivered to the other party a copy of a letter from the staff of the
Securities and Exchange Commission, or an opinion of counsel, in form and
substance reasonably satisfactory to the other party, to the effect that such
legend is not required for purposes of the Securities Act or such laws; and
(ii) the legend shall be removed in its entirety if the conditions in the
preceding clause (i) are both satisfied. In addition, such certificates shall
bear any other legend as may be required by law. Certificates representing
shares sold in a registered public offering pursuant to Section 7 shall not be
required to bear the legend set forth in this Section 9.
10. Binding Effect; No Assignment; No Third-Party Beneficiaries. This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns. Except as expressly
provided for in this Agreement, neither this Agreement nor the rights or
obligations of either party hereto are assignable, except by operation of law,
or with the written consent of the other party, and any such attempted
assignment in violation of this Agreement shall be void and of no force or
effect. Nothing contained in this Agreement, express or implied, is intended
to confer upon any person other than the parties hereto and their respective
permitted assigns any rights or remedies of any nature whatsoever.
11. Specific Performance. The parties hereto recognize and agree that if for
any reason any of the provisions of this Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not
be an adequate remedy. Accordingly, each party agrees that, in addition to
other remedies, whether at law or in equity, the other party shall be entitled
to an injunction to prevent or restrain any violation or threatened violation
of the provisions of this Agreement, and to enforce specifically the terms and
provisions hereof, in any court of the State of Delaware or of the United
States of America located in the State of Delaware. In the event that any
action should be brought in equity to enforce the provisions of this
Agreement, neither party will allege, and each party hereby waives the
defense, that there is an adequate remedy at law. Each party hereto
irrevocably and unconditionally consents and submits to the jurisdiction of
the courts of the State of Delaware and of the United States of America
located in the State of Delaware for any actions, suits or proceedings arising
out of or relating to this Agreement and the transactions contemplated hereby,
and further agrees that service of any process, summons, notice or document by
U.S. registered or certified mail to the respective addresses set forth in the
Merger Agreement shall be effective service of process for any action, suit or
proceeding brought against such party in any such court. Each party hereto
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit, or proceeding arising out of this Agreement or the
transactions contemplated hereby, in the courts of the State of Delaware or of
the United States of America located in Wilmington, Delaware, and hereby
further irrevocable and unconditionally waives and agrees not to plead or
claim in any such court that any such action, suit or proceeding brought in
any such court has been brought in an inconvenient forum.
12. Validity.
(a) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of the other provisions of
this Agreement, which shall remain in full force and effect.
(b) In the event any court or other governmental or regulatory authority
holds any provisions of this Agreement to be null, void or unenforceable,
the parties hereto shall negotiate in good faith the execution
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<PAGE>
and delivery of an amendment to this Agreement in order, as nearly as
possible, to effectuate, to the extent permitted by law, the intent of the
parties hereto with respect to such provision and the economic effects
thereof.
(c) If for any reason any such court or other governmental or regulatory
authority determines that the Company is not permitted to acquire the full
number of shares of Paragon Common Stock provided in this Agreement (as the
same may be adjusted), it is the express intention of Paragon to allow the
Company to acquire or to require Paragon to repurchase such lesser number
of shares as may be permissible without any other amendment or modification
hereof.
(d) Each party agrees that, should any court or other governmental or
regulatory authority hold any provision of this Agreement or part hereof to
be null, void or unenforceable, or order any party to take any action
inconsistent herewith, or not take any action required herein, the other
party shall not be entitled to specific performance of such provision or
part hereof or to any other remedy, including but not limited to money
damages, for breach hereof or of any other provision of this Agreement or
part hereof as the result of such holding or order.
13. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if (a) delivered personally, or (b) if sent
by overnight courier service (receipt confirmed in writing), or (c) if
delivered by facsimile transmission (with receipt confirmed), or (d) five days
after being mailed by registered or certified mail (return receipt requested)
to the parties in each case to the respective addresses set forth in the
Merger Agreement (or at such other address for a party as shall be specified
by like notice).
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements
made and to be performed entirely within such State and without regard to its
choice of law principles.
15. Interpretation. The headings contained in this Agreement are for
reference purposes and shall not affect in any way the meaning or
interpretation of the Agreement. When reference is made in this Agreement to a
Section, such reference shall be to a Section of this Agreement, unless
otherwise indicated. Whenever the words "include," "includes," or "including"
are used in this Agreement, they shall be deemed to be followed by the words
"without limitation." Whenever "or" is used in this Agreement it shall be
construed in the nonexclusive sense. The words "herein," "hereby," "hereof,"
"hereto," "hereunder" and words of similar import refer to this Agreement.
16. Counterparts; Effect. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
17. Expenses. Except as otherwise expressly provided herein or in the Merger
Agreement, all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
18. Amendments; Waiver. This Agreement may be amended by the parties hereto
and the terms and conditions hereof may be waived only by an instrument in
writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
19. Extension Of Time Periods. The time periods for exercises of certain
rights hereunder shall be extended (but in no event by more than twelve (12)
months): (a) to the extent necessary to obtain all governmental approvals for
the exercise of such rights, and for the expiration of all statutory waiting
periods; and (b) to the extent necessary to avoid any liability or
disgorgement of profits under Section 16(b) of the Exchange Act by reason of
such exercise.
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<PAGE>
20. Further Assurance. Each party agrees to execute and deliver all such
further documents and instruments and take all such further action as may be
necessary in order to consummate the transactions contemplated hereby.
21. Facsimile Execution. A facsimile of this Agreement containing signatures
of all the parties hereto shall constitute an original document for all
purposes.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed by their respective duly authorized officers as of the date first
above written.
MARINER HEALTH GROUP, INC.
By: /s/ Arthur W. Stratton, Jr., M.D.
----------------------------------
Name: Arthur W. Stratton, Jr., M.D.
Title: Chairman, President and Chief
Executive Officer
PARAGON HEALTH NETWORK, INC.
By: /s/ R. Jeffrey Taylor
--------------------------------
Name: R. Jeffrey Taylor
Title: Senior Vice President
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<PAGE>
ANNEX IV
COMPANY VOTING AGREEMENT
VOTING AGREEMENT dated as of April 13, 1998 (this "Agreement") by and among
Paragon Health Network, Inc., a Delaware corporation (the "Parent"), and the
other parties signatory hereto (each a "Stockholder")
WHEREAS, each Stockholder is the beneficial owner of shares (the "Company
Common Stock") of common stock, par value $.01 per share, of Mariner Health
Group, Inc., a Delaware corporation (the "Company"), Paragon Acquisition Sub,
Inc., a Delaware corporation and wholly owned subsidiary of the Parent (the
"Subsidiary") and the Parent enter into an Agreement and Plan of Merger dated
as of the date hereof (as the same may be amended or supplemented, the "Merger
Agreement") with respect to the merger of Subsidiary with and into the Company
(the "Merger") with the Company surviving the Merger; and
WHEREAS, as an inducement to the Parent and the Subsidiary to enter into,
execute and deliver the Merger Agreement, Parent and Subsidiary requested that
each Stockholder execute this Agreement pursuant to which each Stockholder
will agree to vote the shares of Common Stock beneficially owned by such
Stockholders as provided herein.
NOW, THEREFORE, in consideration of the execution and delivery by the Parent
and the Subsidiary of the Merger Agreement and the mutual covenants,
conditions and agreements contained herein, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
1. Voting Agreements. Subject to the provisions of Section 6 hereof, in
connection with the efforts of the Company to cause the Merger Agreement and
the Merger to receive the required approval of the stockholders of the Company
and to be consummated, each Stockholder severally agrees with, and covenants
to, the Parent as follows:
(a) At any meeting of stockholders of the Company called to vote upon the
Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstance upon which a vote, consent or other approval of
stockholders of the Company is sought with respect to the Merger and the
Merger Agreement, such Stockholder shall (i) appear or otherwise take
appropriate action to ensure that such Stockholder's Shares (as defined
below) are present at such meeting for the purpose of obtaining a quorum
and (ii) vote (or cause to be voted) or execute a written consent with
respect to such Stockholder's Shares in favor of the Merger, the execution
and delivery by the Company of the Merger Agreement and the approval
thereof and each of the other transactions contemplated by or in any way
related to the Merger Agreement.
(b) At any meeting of stockholders of the Company or at any adjournment
thereof or in any other circumstance upon which the vote, consent or other
approval of stockholders of the Company is sought, such Stockholder shall
vote (or cause to be voted) or execute a written consent in connection with
such Stockholder's Shares against (i) any merger agreement or merger (other
than the Merger Agreement and the Merger), consolidation, combination, sale
of substantial assets, reorganization, recapitalization, dissolution,
liquidation or winding up of or by the Company or (ii) any action or
agreement, including any proposed amendment of the Company's Certificate of
Incorporation or By-laws or other proposal or transaction involving the
Company or any of its subsidiaries which action, agreement, amendment or
other proposal or transaction is intended, or could reasonably be expected
to impede, interfere with, delay, or attempt to frustrate, prevent or
nullify the Merger, the Merger Agreement or any of the other transactions
contemplated thereby (each of the foregoing in clauses (i) or (ii) above, a
"Competing Transaction").
2. Representations and Warranties. Each Stockholder severally represents and
warrants to the Parent as follows:
(a) Such Stockholder is the record and beneficial owner of, or is a
trustee of a trust that is the record holder of, the number of shares of
the Company Common Stock set forth opposite such Stockholder's name in
Schedule A hereto (as to any Stockholder, such "Stockholder's Shares").
Except for such Stockholder's Shares, such Stockholder is not the record or
beneficial owner of any shares of Company Common Stock.
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<PAGE>
(b) This Agreement has been duly executed and delivered by such
Stockholder and such Stockholder intends for this to be a valid and binding
agreement and will not take any action to contest the valid and binding
nature of this Agreement. If such Stockholder is a natural person, such
Stockholder (i) has the full power and capacity necessary to enter into and
perform his or her obligations under this Agreement, (ii) has read all
provisions of this Agreement, has reviewed such provisions with counsel to
the extent such Stockholder deemed appropriate, understands each of such
provisions and voluntarily agrees to be bound thereby and (iii) if such
Stockholder is married and such Stockholder's Shares constitute community
property, this Agreement has been duly executed and delivered by and
constitutes a valid and binding agreement of such Stockholder's spouse and
such Stockholder's spouse intends for this to be a valid and binding
agreement and will not take any action to contest the valid and binding
nature of this Agreement. If such Stockholder is an entity, such
Stockholder is duly organized, validly existing and in good standing under
the laws of the state of its organization with full power and authority
necessary to enter into this Agreement and to perform its obligations
hereunder. If such Stockholder is a partnership, such partnership is duly
formed, validly existing and in good standing under the laws of the state
of its organization with full partnership power and authority necessary to
enter into this Agreement and to perform its obligations hereunder.
(c) Except as described on Schedule 2(c) hereof, neither the execution
and delivery of this Agreement nor the consummation by such Stockholder of
the transactions contemplated hereby will result in a violation of, or a
default under, or conflict with, any contract, trust, commitment,
agreement, understanding, arrangement or restriction of any kind to which
such Stockholder is a party or bound or to which such Stockholder's Shares
are subject. Except as described on Schedule 2(c) hereof, neither the
execution and delivery of this Agreement nor the consummation by such
Stockholder of the transactions contemplated hereby will violate, or
require any consent, approval or notice under any provision of any
judgment, order or decree applicable to such Stockholder or such
Stockholder's Shares, except for any necessary consent, approval or notice
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
or Section 13 of the Securities Exchange Act of 1934, as amended, and (ii)
required by local, state and federal regulatory agencies, commissions,
boards or public authorities with jurisdiction over health care facilities
and providers.
(d) Except as described on Schedule 2(d) hereof, none of which as of the
date hereof impede the ability of the Stockholders to fulfill its
obligations under this Agreement, such Stockholder's Shares and the
certificates representing such Shares are now and at all times during the
term hereof will be held by such Stockholder, or by a nominee or custodian
for the benefit of such Stockholder, free and clear of all liens, claims,
security interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever, except for any such
encumbrances or proxies arising hereunder.
(e) Such Stockholder understands and acknowledges that the Parent is
entering into the Merger Agreement in reliance upon such Stockholder's
execution and delivery of this Agreement.
3. Covenants. Each Stockholder severally agrees with, and covenants to, the
Parent as follows:
(a) Such Stockholder shall not (i) transfer (which terms shall include,
without limitation, for the purposes of this Agreement, any sale, gift,
pledge, alienation, assignment or other disposition, directly or
indirectly, by operation of law, in connection with any merger or otherwise
(collectively, a "Transfer")), or consent to any Transfer of, any or all of
such Stockholder's Shares or any interest therein, except pursuant to the
Merger, (ii) enter into any contract, option or other agreement or
understanding with respect to any Transfer of any or all of such
Stockholder's Shares or any interest therein, (iii) grant any proxy, power
of attorney or other authorization in or with respect to such Stockholder's
Shares, except for this Agreement and any proxy granted in connection with
any meeting of stockholders of the Company called to vote upon the Merger
and the Merger Agreement or at any adjournment thereof which contains
voting instructions consistent with such Stockholder's obligations under
this Agreement, or (iv) deposit such Stockholder's Shares into a voting
trust or enter into a voting agreement or any other arrangement with
respect to such
IV-2
<PAGE>
Shares; provided, that any such Stockholder may, subject to the provisions
of Section 4 hereof, transfer any of such Stockholder's Shares to any other
Stockholder who is on the date hereof a party to this Agreement, or to any
family member of a Stockholder, charitable institution or affiliate (as
defined in the Securities Act (as defined in the Merger Agreement)) of such
Stockholder which prior to such Transfer becomes a party to this Agreement
bound by all obligations of a "Stockholder" hereunder.
(b) If a majority of the holders of Company Common Stock approve the
Merger and the Merger Agreement, upon consummation of the Merger such
Stockholder's Shares shall, subject to the terms and conditions of the
Merger Agreement, be converted into the right to receive the consideration
provided in the Merger Agreement. Such Stockholder hereby waives any rights
of appraisal, or rights to dissent from the Merger, that such Stockholder
may have.
(c) Subject to the provisions of Section 6 hereof, such Stockholder shall
not, in its, his or her capacity as a stockholder of the Company, and shall
instruct any investment banker, attorney or other adviser or representative
of such Stockholder not to, directly or indirectly, (i) solicit, initiate,
facilitate, or encourage any Competing Transactions or (ii) participate in
any discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, a Competing Transaction. Each Stockholder shall
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing. Without limiting the foregoing, it is
understood that solely for purposes of enabling Parent to avail itself of
the remedies available pursuant to Section 9(h) hereof, any violation of
the restrictions set forth in the preceding sentence by an investment
banker, attorney or other adviser or representative of such Stockholder,
whether or not such person is purporting to act on behalf of such
Stockholder or otherwise, shall be deemed to be a violation of this Section
3(c) by such Stockholder.
4. Certain Events. Each Stockholder agrees that this Agreement and the
obligations hereunder shall attach to such Stockholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership of
such Stockholder's Shares shall pass, whether by operation of law or
otherwise, including without limitation, such Stockholder's heirs, guardians,
administrators or successors. In the event of any stock split, stock dividend,
merger, reorganization, recapitalization or other change in the capital
structure of the Company affecting the Company Common Stock, or the
acquisition of additional shares of Company Common Stock or other voting
securities of the Company by any Stockholder, the number of Stockholder's
Shares listed in Schedule A beside the name of such Stockholder shall be
adjusted appropriately and this Agreement and the obligations hereunder shall
attach to any additional shares of the Company Common Stock or other voting
securities of the Company issued to or acquired by such Stockholder.
5. Voidability. If prior to the execution hereof, the Board of Directors of
the Company shall not have duly and validly authorized and approved by all
necessary corporate action the Merger Agreement and the transactions
contemplated thereby, so that by the execution and delivery hereof the Parent
would become, or could reasonably be expected to become, an "interested
stockholder" with whom the Company would be prevented for any period pursuant
to Section 203 of the DGCL from engaging in any "business combination" (as
such terms are defined in Section 203 of the DGCL), then this Agreement shall
be void and unenforceable until such time as such authorization and approval
shall have been duly and validly obtained.
6. Stockholder Capacity. No person executing this Agreement who is or
becomes during the term hereof a director or officer of the Company makes any
agreement or understanding herein in his or her capacity as such director or
officer and the provisions of this Agreement shall not restrict or limit any
such person in the discharge of his or her fiduciary duties as an officer or
director of the Company. Each Stockholder signs solely in his or her capacity
as the record and beneficial owner or the trustee of a trust whose
beneficiaries are the beneficial owners of such Stockholder's Shares.
7. Regulatory Approval. Each of the provisions of this Agreement is subject
to compliance with applicable regulatory conditions.
IV-3
<PAGE>
8. Further Assurances. Each Stockholder shall, upon request of the Parent,
execute and deliver any additional documents and take such further actions as
may reasonably be deemed by the Parent to be necessary or desirable to carry
out the provisions hereof.
9. Termination. It is a condition precedent to the effectiveness of this
Agreement that the Merger Agreement shall have been executed and delivered and
be in full force and effect. This Agreement shall automatically terminate and
be of no further force and effect upon the first to occur of (i) the Effective
Time of the Merger or (ii) the date upon which the Merger Agreement is
terminated in accordance with its terms. Upon such termination, except for any
rights any party may have in respect of any breach by any other party of its
or his obligations hereunder, none of the parties hereto shall have any
further obligation or liability hereunder.
10. Miscellaneous.
(a) Capitalized terms used and not otherwise defined in this Agreement
shall have the respective meanings assigned to them in the Merger
Agreement.
(b) All notices, requests, claims, demands and other communications under
this Agreement shall be in writing and shall be deemed given upon the same
terms as set forth in Section 8.05 of the Merger Agreement, except that
notices to the undersigned Stockholders shall be sent to the address set
forth in Schedule A hereto opposite each such Stockholder's name.
(c) The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
(d) This Agreement may be executed in two or more counterparts, all of
which shall be considered one and the same agreement and shall become
effective as to any Stockholder when one or more counterparts have been
signed by each of Parent and such Stockholder and delivered to Company,
Subsidiary, Parent and such Stockholder.
(e) This Agreement (including the documents and instruments referred to
herein) constitutes the entire agreement, and supersedes all prior
agreements and undertakings, both written and oral, among the parties with
respect to the subject matter hereof.
(f) 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 applicable principles of conflicts of laws thereof.
(g) Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part,
through any merger, by operation of law or otherwise, by any of the parties
without the prior written consent of the other parties, except by laws of
descent or as expressly contemplated by Section 3(a) hereof. Any assignment
in violation of the foregoing shall be void.
(h) Each Stockholder agrees that irreparable damage would occur and that
Parent would not have any adequate remedy at law 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 Parent shall be entitled to an injunction or injunctions to prevent
breaches or threatened breaches by any Stockholder of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any
court of the United States located in the State of Delaware or in Delaware
state court, this being in addition to any other remedy to which Parent may
be entitled at law or in equity. In addition, each of the parties hereto
irrevocably and unconditionally (i) consents to be subject to the personal
jurisdiction of any Federal court located in the State of Delaware or any
Delaware state court in the event any dispute arises out of this Agreement
or any of the transactions contemplated hereby, (ii) agrees that such party
will not attempt to deny or defeat the personal jurisdiction of such courts
by motion or other request for leave from any such court, (iii) agrees that
such party will not bring any action relating to this Agreement or any of
the
IV-4
<PAGE>
transactions contemplated hereby in any court other than a Federal court
sitting in the State of Delaware or a Delaware state court and (iv) that
service of process may also be made on such party by prepaid certified mail
with a proof of mailing receipt validated by the United States Postal
Service constituting evidence of, valid service, and that service made
pursuant to this clause (iv) shall have the same legal force and effect as
if served upon such party personally within the State of Delaware.
(i) If any term, provision, covenant or restriction herein, or the
application thereof to any circumstance, shall, to any extent, be held by a
court of competent jurisdiction to be invalid, void, or unenforceable, the
remainder of the terms, provisions, covenants and restrictions herein and
the application thereof to any other circumstances, shall remain in full
force and effect, shall not in any way be affected, impaired, or
invalidated, and shall be enforced to the fullest extent permitted by law
and the provision found to be invalid, void or unenforceable shall be
immediately revised by the parties hereto so as to be valid, binding and
enforceable to the greatest extent then permitted by applicable law.
(j) No amendment, modification or waiver in respect of this Agreement
shall be effective against any party unless it shall be in writing and
signed by such party.
(k) A facsimile of this Agreement containing signatures of all of the
parties hereto shall constitute an original document for all purposes.
[BALANCE OF PAGE INTENTIONALLY OMITTED]
IV-5
<PAGE>
IN WITNESS WHEREOF, the Parent and each Stockholder have caused this Company
Voting Agreement to be duly executed and delivered on day and year first above
written.
PARAGON HEALTH NETWORK, INC.
By: /s/ R. Jeffrey Taylor
----------------------------------
Name: R. Jeffrey Taylor
Title: Senior Vice President
STOCKHOLDERS:
/s/ Stiles A. Kellett, Jr.
-------------------------------------
Name: Individually
/s/ Stiles A. Kellett, Jr.
-------------------------------------
Name: Kellett Partners, L.P. as
General Partner
/s/ Samuel B. Kellett
-------------------------------------
Name: Samuel B. Kellett
/s/ William R. Bassett
-------------------------------------
Name: William R. Bassett as Trustee
of the Samuel B. Kellett, Jr.
Irrevocable Trust Dated 11/1/91
/s/ William R. Bassett
-------------------------------------
Name: William R. Bassett as Trustee
of the Charlotte Rich Kellett
Irrevocable Trust Dated 11/1/91
IV-6
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
STOCKHOLDER ADDRESS OF STOCKHOLDER COMPANY COMMON STOCK
----------- -------------------------------- --------------------
<S> <C> <C>
Stiles A. Kellett, Jr. 200 Galleria Parkway, Suite 1800 2,181,183
Atlanta, Georgia 30339
Kellett Partners, L.P. 200 Galleria Parkway, Suite 1800 862,760
Atlanta, Georgia 30339
Samuel B. Kellett 1935 Garraux Road, N.W. 427,066
Atlanta, Georgia 30327
William R. Bassett, TR 2970 Clairmont Road, Suite 600 2,154,696
Charlotte R. Kellett IRR Atlanta, Georgia 30329
Trust dated 11/1/91
William R. Bassett, TR 2970 Clairmont Road, Suite 600 427,066
Samuel B. Kellett, Jr. Atlanta, Georgia 30329
IRR Trust dated 11/1/91
</TABLE>
SCHIV-1
<PAGE>
SCHEDULE 2(C)
Certain of the stock beneficially owned by Stiles A. Kellett, Jr. has been
pledged to NationsBank, N.A. ("NationsBank") to secure financing extended by
NationsBank to Stiles A. Kellett. As a part of that pledge, a contingent proxy
has been granted to NationsBank.
SCHIV-2
<PAGE>
SCHEDULE 2(D)
Certain of the shares of stock beneficially owned by Stiles A. Kellett, Jr.
are subject to a pledge in favor of NationsBank, N.A.
SCHIV-3
<PAGE>
ANNEX V
PARENT VOTING AGREEMENT
VOTING AGREEMENT dated as of April 13, 1998 (this "Agreement") by and among
Mariner Health Group, Inc., a Delaware corporation (the "Company"), and Apollo
Management, L.P., Apollo Investment Fund III, L.P., Apollo UK Partners, III,
L.P. and Apollo Overseas Partners III, L.P. (collectively, "Apollo")
WHEREAS, Apollo is the beneficial owner of shares of common stock, par value
$.01 per share (the "Parent Common Stock"), of Paragon Health Network, Inc., a
Delaware corporation ("Parent"), and through a Proxy and Voting Agreement
dated as of November 4, 1997 (the "Proxy and Voting Agreement"), Apollo has
the right to vote additional shares of Parent Common Stock;
WHEREAS, Paragon Acquisition Sub, Inc., a Delaware corporation and wholly
owned subsidiary of the Parent (the "Subsidiary"), Mariner Health Group, Inc.
and Parent have entered into an Agreement and Plan of Merger, dated as of the
date hereof (as the same may be amended or supplemented, the "Merger
Agreement"), with respect to the merger of Subsidiary with and into the
Company (the "Merger") with the Company surviving the Merger; and
WHEREAS, as an inducement to the Company to enter into, execute and deliver
the Merger Agreement, the Company requested that Apollo execute this Agreement
pursuant to which Apollo will agree to vote the shares of Parent Common Stock
which Apollo beneficially owns or has the right to vote as provided herein.
NOW, THEREFORE, in consideration of the execution and delivery by the
Company of the Merger Agreement and the mutual covenants, conditions and
agreements contained herein, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Voting Agreements. Subject to the provisions of Section 6 hereof, in
connection with the efforts of the Parent to cause the Merger Agreement and
the Merger to receive the required approval of the stockholders of Parent and
to be consummated, Apollo agrees with, and covenants to, the Company as
follows:
(a) At any meeting of stockholders of Parent called to vote upon the
Merger and the Merger Agreement or at any adjournment thereof or in any
other circumstance upon which a vote, consent or other approval of
stockholders of Parent is sought with respect to the issuance of shares of
Parent Common Stock in connection with the Merger and pursuant to the
Merger Agreement (the "Issuance"), Apollo shall (i) appear or otherwise
take appropriate action to ensure that the Apollo Shares (as defined below)
are present at such meeting for the purpose of obtaining a quorum and (ii)
vote (or cause to be voted) or execute a written consent with respect to
the Apollo Shares in favor of the Issuance and each of the other
transactions contemplated by or in any way related to the Merger Agreement.
(b) At any meeting of stockholders of Parent or at any adjournment
thereof or in any other circumstance upon which the vote, consent or other
approval of stockholders of Parent is sought, Apollo shall vote (or cause
to be voted) or execute a written consent in connection with the Apollo
Shares against (i) any merger agreement or merger (other than the Merger
Agreement and the Merger), consolidation, combination, sale of substantial
assets, reorganization, recapitalization, dissolution, liquidation or
winding up of or by Parent or (ii) any action or agreement, including any
proposed amendment of Parent's Certificate of Incorporation or By-laws or
other proposal or transaction involving Parent or any of its subsidiaries
which action, agreement, amendment or other proposal or transaction is
intended, or could reasonably be expected to impede, interfere with, delay,
or attempt to frustrate, prevent or nullify the Merger, the Merger
Agreement or any of the other transactions contemplated thereby (each of
the foregoing in clauses (i) or (ii) above, a "Competing Transaction").
V-1
<PAGE>
2. Representations and Warranties. Apollo represents and warrants to the
Company as follows:
(a) Through its beneficial ownership and pursuant to the Proxy and Voting
Agreement, Apollo has the right to vote 17,777,778 shares of Parent Common
Stock (the "Apollo Shares"). Except for the Apollo Shares, Apollo is not
the record or beneficial owner of any shares of Parent Common Stock.
(b) This Agreement has been duly executed and delivered by Apollo and
Apollo intends for this to be a valid and binding agreement and will not
take any action to contest the valid and binding nature of this Agreement.
Apollo is a limited partnership duly formed, validly existing and in good
standing under the laws of the state of its formation with full partnership
power and authority necessary to enter into this Agreement and to perform
its obligations hereunder.
(c) Except as described on Schedule 2(c) hereof, neither the execution
and delivery of this Agreement nor the consummation by Apollo of the
transactions contemplated hereby will result in a violation of, or a
default under, or conflict with, any contract, trust, commitment,
agreement, understanding, arrangement or restriction of any kind to which
Apollo is a party or bound or to which the Apollo Shares are subject.
Neither the execution and delivery of this Agreement nor the consummation
by Apollo of the transactions contemplated hereby will violate, or require
any consent, approval or notice under any provision of any judgment, order
or decree applicable to Apollo or the Apollo Shares, except for any
necessary consent, approval or notice under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, or Section 13 of the Securities
Exchange Act of 1934, as amended, and (ii) required by local, state and
federal regulatory agencies, commissions, boards or public authorities with
jurisdiction over health care facilities and providers.
(d) Except as described on Schedule 2(d) hereof, none of which as of the
date hereof impede the ability of Apollo to fulfill its obligations under
this Agreement, the Apollo Shares owned by affiliates of Apollo (the
"Affiliate Shares") and the certificates representing such Shares are now
and at all times during the term hereof will be held by such affiliates, or
by a nominee or custodian for the benefit of such affiliate, free and clear
of all liens, claims, security interests, proxies, voting trusts or
agreements, understandings or arrangements or any other encumbrances
whatsoever, except for any such encumbrances or proxies arising hereunder.
(e) Apollo understands and acknowledges that the Company is entering into
the Merger Agreement in reliance upon Apollo's execution and delivery of
this Agreement.
3. Covenants. Apollo agrees with, and covenants to, the Company as follows:
(a) Apollo shall not (i) transfer (which terms shall include, without
limitation, for the purposes of this Agreement, any sale, gift, pledge,
alienation, assignment or other disposition, directly or indirectly, by
operation of law, in connection with any merger or otherwise (collectively,
a "Transfer")), or consent to any Transfer of, any or all of the Affiliate
Shares or any interest therein, except pursuant to the Merger or as set
forth on Schedule 3(a) hereof, (ii) enter into any contract, option or
other agreement or understanding with respect to any Transfer of any or all
of the Affiliate Shares or any interest therein, (iii) grant any proxy,
power of attorney or other authorization in or with respect to the
Affiliate Shares, except for this Agreement and any proxy granted in
connection with any meeting of stockholders of Parent called to vote upon
the Issuance or at any adjournment thereof which contains voting
instructions consistent with Apollo's obligations under this Agreement, or
(iv) deposit the Affiliate Shares into a voting trust or enter into a
voting agreement or any other arrangement with respect to such Shares;
provided, that Apollo may, subject to the provisions of Section 4 hereof,
transfer any Affiliate Shares to another affiliate of Apollo or other party
to the Proxy and Voting Agreement so long as Apollo continues to be able to
vote such Shares in accordance with the terms of this Agreement.
V-2
<PAGE>
(b) Subject to the provisions of Section 6 hereof, Apollo shall not, in
its capacity as a stockholder of Parent, and shall instruct any investment
banker, attorney or other adviser or representative of Apollo not to,
directly or indirectly, (i) solicit, initiate, facilitate, or encourage any
Competing Transactions or (ii) participate in any discussions or
negotiations regarding, or furnish to any person any information with
respect to, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to
lead to, a Competing Transaction. Apollo shall immediately cease and cause
to be terminated any existing activities, discussions or negotiations with
any parties conducted heretofore with respect to any of the foregoing.
Without limiting the foregoing, it is understood that solely for purposes
of enabling the Company to avail itself of the remedies available pursuant
to Section 9(h) hereof, any violation of the restrictions set forth in the
preceding sentence by an investment banker, attorney or other adviser or
representative of Apollo, whether or not such person is purporting to act
on behalf of Apollo or otherwise, shall be deemed to be a violation of this
Section 3(b) by Apollo.
4. Certain Events. Apollo agrees that this Agreement and the obligations
hereunder shall attach to the Apollo Shares and shall be binding upon any
person or entity to which legal or beneficial ownership of the Apollo Shares
shall pass, whether by operation of law or otherwise. In the event of any
stock split, stock dividend, merger, reorganization, recapitalization or other
change in the capital structure of Parent affecting Parent Common Stock, or
the acquisition of additional shares of Parent Common Stock or other voting
securities of Parent by Apollo, the obligations hereunder shall attach to any
additional shares of Parent Common Stock or other voting securities of Parent
issued to or acquired by Apollo.
5. Voidability. If prior to the execution hereof, the Board of Directors of
Parent shall not have duly and validly authorized and approved by all
necessary corporate action the Merger Agreement and the transactions
contemplated thereby, so that by the execution and delivery hereof the Company
would become, or could reasonably be expected to become, an "interested
stockholder" with whom Parent would be prevented for any period pursuant to
Section 203 of the DGCL from engaging in any "business combination" (as such
terms are defined in Section 203 of the DGCL), then this Agreement shall be
void and unenforceable until such time as such authorization and approval
shall have been duly and validly obtained.
6. Stockholder Capacity. Certain persons affiliated with Apollo are
directors of Parent and Apollo does not make any agreement or understanding
herein with respect to such individuals in their capacity as directors and the
provisions of this Agreement shall not restrict or limit the discharge of
their fiduciary duties as directors of Parent. Apollo signs solely in its
capacity as the beneficial owner or holder of a proxy with respect to the
Apollo Shares.
7. Regulatory Approval. Each of the provisions of this Agreement is subject
to compliance with applicable regulatory conditions.
8. Further Assurances. Apollo shall, upon request of the Company, execute
and deliver any additional documents and take such further actions as may
reasonably be deemed by the Company to be necessary or desirable to carry out
the provisions hereof.
9. Termination. It is a condition precedent to the effectiveness of this
Agreement that the Merger Agreement shall have been executed and delivered and
be in full force and effect. This Agreement shall automatically terminate and
be of no further force and effect upon the first to occur of (i) the Effective
Time of the Merger or (ii) the date upon which the Merger Agreement is
terminated in accordance with its terms. Upon such termination, except for any
rights any party may have in respect of any breach by any other party of its
or his obligations hereunder, none of the parties hereto shall have any
further obligation or liability hereunder
10. Miscellaneous.
(a) Capitalized terms used and not otherwise defined in this Agreement
shall have the respective meanings assigned to them in the Merger
Agreement.
V-3
<PAGE>
(b) All notices, requests, claims, demands and other communications under
this Agreement shall be in writing and shall be deemed given upon the same
terms as set forth in Section 8.05 of the Merger Agreement, except that
notices to Apollo shall be sent to:
Apollo Advisors, L.P.
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Peter P. Copses
With a copy to:
Robert W. Kadlec
Sidley & Austin
555 West Fifth Street, 40th Floor
Los Angeles, California 90013-1010
(c) The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement.
(d) This Agreement may be executed in two or more counterparts, all of
which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the
Company and Apollo and delivered to Company, Subsidiary, Parent and Apollo.
(e) This Agreement (including the documents and instruments referred to
herein) constitutes the entire agreement, and supersedes all prior
agreements and undertakings, both written and oral, among the parties with
respect to the subject matter hereof.
(f) 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 applicable principles of conflicts of laws thereof.
(g) Neither this Agreement nor any of the rights, interests or
obligations under this Agreement shall be assigned, in whole or in part,
through any merger, by operation of law or otherwise, by any of the parties
without the prior written consent of the other parties, except by laws of
descent or as expressly contemplated by Section 3(a) hereof. Any assignment
in violation of the foregoing shall be void.
(h) Apollo agrees that irreparable damage would occur and that the
Company would not have any adequate remedy at law 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 Company shall be entitled to an injunction or injunctions to
prevent breaches or threatened breaches by Apollo of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any
court of the United States located in the State of Delaware or in Delaware
state court, this being in addition to any other remedy to which the
Company may be entitled at law or in equity. In addition, each of the
parties hereto irrevocably and unconditionally (i) consents to be subject
to the personal jurisdiction of any Federal court located in the State of
Delaware or any Delaware state court in the event any dispute arises out of
this Agreement or any of the transactions contemplated hereby, (ii) agrees
that such party will not attempt to deny or defeat the personal
jurisdiction of such courts by motion or other request for leave from any
such court, (iii) agrees that such party will not bring any action relating
to this Agreement or any of the transactions contemplated hereby in any
court other than a Federal court sitting in the State of Delaware or a
Delaware state court and (iv) that service of process may also be made on
such party by prepaid certified mail with a proof of mailing receipt
validated by the United States Postal Service constituting evidence of,
valid service, and that service made pursuant to this clause (iv) shall
have the same legal force and effect as if served upon such party
personally within the State of Delaware.
V-4
<PAGE>
(i) If any term, provision, covenant or restriction herein, or the
application thereof to any circumstance, shall, to any extent, be held by a
court of competent jurisdiction to be invalid, void, or unenforceable, the
remainder of the terms, provisions, covenants and restrictions herein and
the application thereof to any other circumstances, shall remain in full
force and effect, shall not in any way be affected, impaired, or
invalidated, and shall be enforced to the fullest extent permitted by law
and the provision found to be invalid, void or unenforceable shall be
immediately revised by the parties hereto so as to be valid, binding and
enforceable to the greatest extent then permitted by applicable law.
(j) No amendment, modification or waiver in respect of this Agreement
shall be effective against any party unless it shall be in writing and
signed by such party.
(k) A facsimile of this Agreement containing signatures of all of the
parties hereto shall constitute an original document for all purposes.
[BALANCE OF PAGE INTENTIONALLY OMITTED]
V-5
<PAGE>
IN WITNESS WHEREOF, the Company and Apollo have caused this Parent Voting
Agreement to be duly executed and delivered on day and year first above
written.
MARINER HEALTH GROUP, INC.
By:/s/ Arthur W. Stratton, Jr., M.D
--------------------------------
Name: Arthur W. Stratton, Jr., M.D.
Title: Chairman, President & CEO
APOLLO MANAGEMENT, L.P.
By: AIF III Management, Inc.,
Its General Partner
By:/s/ Peter Copses
--------------------------------
Name: Peter Copses
Title: Vice President
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:/s/ Peter Copses
--------------------------------
Name: Peter Copses
Title: Vice President
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: /s/ Peter Copses
--------------------------------
Name: Peter Copses
Title: Vice President
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:/s/ Peter Copses
--------------------------------
Name: Peter Copses
Title: Vice President
V-6
<PAGE>
SCHEDULE 2(C)
Stockholders Agreement, dated as of November 4, 1997, by and among Parent
and the Stockholders (as defined therein)
SCHEDULE 2(D)
Warrant Purchase Agreement, dated as of September 17, 1997, between Apollo
and Chase Equity Associates, L.P. and the related Warrant to Purchase Common
Stock, dated as of November 4, 1997.
SCHEDULE 3(A)
Warrant Purchase Agreement, dated as of September 17, 1997, between Apollo
and Chase Equity Associates, L.P. and the related Warrant to Purchase Common
Stock, dated as of November 4, 1997.
SCHV-1
<PAGE>
ANNEX VI
MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
April 13, 1998
Board of Directors
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, GA 30346
Members of the Board:
We understand that Mariner Health Group, Inc. ("Mariner"), Paragon Health
Network, Inc. ("Paragon") and Paragon Acquisition Sub, Inc., a direct Delaware
corporation wholly owned by Paragon (the "Sub"), have entered into an
Agreement and Plan of Merger dated as of April 13, 1998 (the "Merger
Agreement"), which provides, among other things, for the merger (the "Merger")
of the Sub with and into Mariner. Pursuant to the Merger, Mariner will become
a direct, wholly owned subsidiary of Paragon, and each issued and outstanding
share of common stock, par value $.01 per share, of Mariner (the "Mariner
Common Stock"), other than shares held in treasury or held by Paragon or any
subsidiary of Paragon, will be converted into the right to receive one share
(the "Exchange Ratio") of common stock, par value $.01 per share, of Paragon
(the "Paragon Common Stock"). The terms and conditions of the Merger are more
fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to Paragon.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Paragon and Mariner, respectively;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning Paragon and Mariner prepared by the
managements of Paragon and Mariner, respectively;
(iii) analyzed certain financial projections prepared by the managements
of Paragon and Mariner, respectively;
(iv) discussed the past and current operations and financial condition
and the prospects of Mariner with senior executives of Mariner;
(v) discussed the past and current operations and financial condition
and the prospects of Paragon with senior executives of Paragon;
(vi) analyzed the pro forma impact of the Merger on Paragon's earnings
per share, cash flows, capitalization and financial ratios;
(vii) reviewed the reported prices and trading activity for the Paragon
Common Stock and the Mariner Common Stock;
(viii) compared the financial performance of Paragon and Mariner and the
prices and trading activity of the Paragon Common Stock and the
Mariner Common Stock with that of certain other comparable
publicly-traded companies and their securities;
<PAGE>
MORGAN STANLEY
(ix) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(x) discussed with senior management of Paragon their estimates of the
synergies and cost savings anticipated from the Merger;
(xi) participated in discussions and negotiations among representatives
of Paragon, Mariner and their financial and legal advisors;
(xii) reviewed the Merger Agreement and certain related documents; and
(xiii) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon without independent verification the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the financial projections, including the estimates of
synergies and cost savings anticipated from the Merger, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of
Paragon and Mariner, respectively. We have not made any independent valuation
or appraisal of the assets or liabilities of Paragon or of Mariner, nor have
we been furnished with any such valuations or appraisals. We have assumed that
the transaction will be consummated on the terms set forth in the Merger
Agreement. Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of,
the date hereof.
We have been retained to provide a financial opinion to the Board of Directors
of Paragon in connection with this transaction and will receive a fee for our
services. In the past, Morgan Stanley & Co. Incorporated and its affiliates
have provided financial advisory and financing services for Paragon and have
received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of Paragon and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its
entirety in any filing made by Paragon in respect of the Merger with the
Securities and Exchange Commission. In addition, Morgan Stanley & Co.
Incorporated expresses no opinion or recommendation as to how the stockholders
of Paragon should vote at the stockholders' meeting held in connection with
the Merger, and this opinion does not in any manner address the prices at
which the Paragon Common Stock will trade following the consummation of the
Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to Paragon.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
/s/ James S. Redpath
By: -----------------------------
James S. Redpath
Principal
<PAGE>
[LETTERHEAD OF BT ALEX BROWN APPEARS HERE] ANNEX VII
April 13, 1998
Board of Directors
Mariner Health Group, Inc.
125 Eugene O'Neill Drive
New London, CT 06320
Dear Sirs:
Mariner Health Group, Inc. ("Mariner"), Paragon Health Network, Inc.
("Paragon"), and Paragon Acquisition Sub, Inc., a wholly-owned subsidiary of
Paragon, (the "Merger Sub"), have entered into an Agreement and Plan of Merger
dated as of April 13, 1998 (the "Agreement"). Pursuant to the Agreement, the
implementation of which is contingent on stockholder approval by both Mariner
stockholders and Paragon stockholders, Merger Sub shall be merged with and into
Mariner, and each share of the common stock, par value $0.01 per share, of
Mariner ("Mariner Common Stock") issued and outstanding immediately prior to
the effective time of the Merger will be converted into 1.0 share (the
"Exchange Ratio") of common stock, par value $0.01 per share, of Paragon
("Paragon Common Stock"). You have requested our opinion as to whether the
Exchange Ratio is fair, from a financial point of view, to the holders of
Mariner Common Stock.
BT Alex. Brown Incorporated ("BT Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors of
Mariner in connection with the transaction described above and will receive a
fee for our services, a portion of which is contingent upon the consummation of
the Merger. We have also provided financing and advisory services to Mariner in
the past. BT Alex. Brown maintains a market in the Mariner Common Stock and
regularly publishes research reports regarding the long term care industry and
the businesses and securities of Mariner and other publicly traded companies in
the long term care industry. In the ordinary course of business, BT Alex. Brown
may actively trade the securities of Mariner and Paragon for our own account
and the account of our customers and, accordingly, may at any time hold a long
or short position in securities of Mariner and Paragon.
In connection with this opinion, we have reviewed certain publicly available
financial information and other information concerning Mariner and Paragon and
certain internal analyses and other information furnished to us by Mariner and
Paragon. We have also held discussions with the members of the senior
management of Mariner and Paragon regarding the business and prospects of their
respective companies and the joint prospects of a combined company. In
addition, we have (i) reviewed the reported prices and trading activity for the
common stock of Mariner and Paragon, (ii) compared certain financial and stock
market information for Mariner and Paragon with similar information for certain
other companies whose securities are publicly traded, (iii) reviewed the
financial terms of certain recent business combinations which we deemed
comparable in whole or in part, (iv) reviewed the terms of the Agreement and
certain related documents, and (v) performed such other studies and analyses
and considered such other factors as we deemed appropriate.
<PAGE>
Board of Directors
Mariner Health Group, Inc.
Page 2
We have not independently verified the information described above and for
purposes of this opinion have assumed the accuracy, completeness and fairness
thereof. With respect to the information relating to the prospects of Mariner
and Paragon, we have assumed that such information reflects the best currently
available judgments and estimates of the management of Mariner and Paragon as
to the likely future financial performances of their respective companies and
of the combined entity. In addition, we have not made an independent
evaluation or appraisal of the assets of Mariner or Paragon, nor have we been
furnished with any such evaluation or appraisal. With your permission, we have
assumed that the pending litigation against Paragon will not have a material
adverse effect on Paragon. We have also assumed that the Merger will qualify
as a tax-free transaction for the holders of Mariner Common Stock. Our opinion
is based on market, economic and other conditions as they exist and can be
evaluated as of the date of this letter.
In connection with our engagement, we were not authorized to solicit, and
did not solicit, interest from any party with respect to the acquisition of
Mariner or any of its assets.
Our advisory services and the opinion expressed herein were prepared for the
use of the Board of Directors of Mariner and do not constitute a
recommendation to the stockholders of Mariner as to how they should vote at
any stockholders meeting held in connection with the Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date of this letter, the Exchange Ratio is fair, from a financial point of
view, to the holders of the common stock of Mariner.
Very truly yours,
BT Alex. Brown Incorporated
/s/ Harris Hyman IV
-------------------------------------
Harris Hyman IV
Managing Director
<PAGE>
ANNEX VIII
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
MARINER POST-ACUTE NETWORK, INC.
FIRST: Corporate Name. The name of the Corporation is Mariner Post-Acute
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 505 million (505,000,000) shares, divided into 500
million (500,000,000) 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.
VIII-1
<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.
VIII-2
<PAGE>
ANNEX IX
SECOND AMENDED AND RESTATED BYLAWS
OF
MARINER POST-ACUTE 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,
IX-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
IX-2
<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.
IX-3
<PAGE>
(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 November 4, 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); provided, however that such super majority approval requirement
shall not apply to any action taken or required to be taken by the board of
directors in connection with any merger, consolidation or tender offer
involving or commenced by a third party in which the sole consideration is
cash and following consummation of which, direct control of the Company
will no longer reside with the fluid public market (an "Exempted
Transaction") the approval of which action shall be authorized by the
affirmative vote of directors constituting a majority of the entire board
of directors;
(2) any investment in excess of $10,000,000 (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 November 4, 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"); other than with respect to an Exempted
Transaction, the approval of which shall be given by the affirmative vote
of directors constituting a majority of the entire board of directors;
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(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
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.
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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 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
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the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended or pursuant to any successor act or regulation.
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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(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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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant is a Delaware corporation. Reference is made to Section 145
of the Delaware General Corporation Law (the "DGCL"), which provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation, by reason of the fact that such person
is or was a director, officer, employee or agent of the corporation, or is or
was serving at its request in such capacity of another corporation or business
organization against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interest of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that such
person's conduct was unlawful. A Delaware corporation may indemnify officers
and directors in an action by or in the right of a corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses that he or she 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) any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts for 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 Amended and Restated Certificate of Incorporation of
the Registrant 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, as it may be amended from time to time. Article Eighth of the Amended
and Restated Certificate of Incorporation provides that the Registrant shall
indemnify its directors and officers to the fullest extent permitted by
Section 145 of the DGCL, as it may be amended from time to time. In addition,
Article VII of the Amended and Restated Bylaws of the Registrant requires that
the Registrant indemnify any person who was or is an authorized representative
of the Registrant and who was, is 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 Registrant against expenses, judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such proceeding if the person acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interest of the Registrant and, with respect to any criminal third party
proceeding, had no reasonable cause to believe such conduct was unlawful. In a
corporate proceeding, the Registrant is required to indemnify any person who
was or is an authorized representative of the Registrant and was, is 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 Registrant
against expenses actually and reasonably incurred by such person in connection
with the defense or settlement of the proceeding if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the
best interest of the Registrant, 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 Registrant unless and only to the extent
that the Court of Chancery or the court in which such corporate proceeding is
brought shall determine upon application that the authorized representative is
fairly and reasonably entitled to indemnify for such expenses as the court
shall deem proper. To the extent that an authorized representative of the
Registrant has been successful on the merits or otherwise in the defense of
any third party 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 herewith. Any indemnification
shall be made by the Registrant only as authorized in the specific case upon a
determination that indemnification is proper under the circumstances because
the authorized representative has either met the
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applicable standard of conduct or has been successful on the merits or
otherwise and that the amount requested has been actually and reasonably
incurred. Such determination shall be made (i) by the Board of Directors by a
majority of a quorum consisting of directors who were not parties to the
proceeding; (ii) 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 (iii) by the stockholders of the Registrant. Expenses
actually and reasonably incurred by an officer or director in defending any
third party or corporate proceeding shall be paid on his or her behalf by the
Registrant in advance of the final disposition of the proceeding upon receipt
of an undertaking by or on behalf of such officer or director to repay such
amount if it is ultimately determined that he or she is not entitled to be
indemnified by the Registrant. In the case of an authorized representative
other than an officer or director, the Registrant shall advance expenses
actually and reasonably incurred in defending any third party or corporate
proceeding in advance of the final disposition of the proceeding as authorized
by the Board of Directors upon receipt of the undertaking described above.
The Registrant maintains at its expense a policy of insurance that 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
EXHIBIT NO.DESCRIPTION
----------------------
2.1 Agreement and Plan of Merger, dated as of April 13, 1998, among Paragon
Health Network, Inc. ("Paragon"), Mariner Health Group, Inc. ("Mariner")
and Paragon Acquisition Sub, Inc. ("Merger Sub") (incorporated by
reference to Annex I hereto)
4.1 Form of Common Stock Certificate of Paragon (incorporated by reference
to Exhibit 4.7 to Paragon's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (File No. 001-10968))
4.2 Amended and Restated Certificate of Incorporation of Paragon
(incorporated by reference to Annex III to Paragon's Registration
Statement on Form S-4 (Registration No. 333-36525))
4.3 Second Amended and Restated Certificate of Incorporation of Mariner
Post-Acute Network, Inc. (incorporated by reference to Annex VIII
hereto)
4.4 Amended and Restated Bylaws of Paragon (incorporated by reference to
Annex IV to Paragon's Registration Statement on Form S-4 (Registration
No. 333-36525))
4.5 Second Amended and Restated Bylaws of Mariner Post-Acute Network, Inc.
(incorporated by reference to Annex IX hereto)
4.6 Stockholders Agreement dated November 4, 1997 (the "Apollo Stockholders
Agreement") by and among Paragon, Apollo Management L.P. ("Apollo") and
certain other investors (incorporated by reference to Annex V to
Paragon's Registration Statement on Form S-4 (Registration No. 333-
36525))
4.7* Amendment No.1 to Apollo Stockholders Agreement
4.8 Registration Rights Agreement among Paragon and certain investors
(incorporated by reference to Exhibit 4.7 to Paragon's Registration
Statement on Form S-4 (Registration No. 333-36525))
4.9 Exchange and Registration Rights Agreement dated November 4, 1997, among
Paragon, Chase Securities, Inc., Smith Barney Inc. and Credit Suisse
First Boston Corporation (incorporated by reference to Exhibit 4.6 to
Paragon's Annual Report on Form 10-K for the fiscal year ended September
30, 1997 (File No. 001-10968))
5.1* Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding securities
being issued
8.1* Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding tax matters
8.2* Opinion of Testa, Hurwitz & Thibeault, LLP regarding tax matters
10.1 Company Stock Option Agreement dated as of April 13, 1998, by and
between Paragon and Mariner (incorporated by reference to Annex II
hereto)
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10.2 Parent Stock Option Agreement, dated as of April 13, 1998, by and
between Paragon and Mariner (incorporated by reference to Annex III
hereto)
10.3 Company Voting Agreement, dated as of April 13, 1998, by and among
Paragon and Stiles A. Kellett, Jr., Samuel B. Kellett, Kellett Partners,
L.P., Charlotte R. Kellett Irrevocable Remainder Trust and Samuel B.
Kellett, Jr. Irrevocable Remainder Trust (incorporated by reference to
Annex IV hereto)
10.4 Parent Voting Agreement, dated as of April 13, 1998, by and among
Mariner and Apollo, Apollo Investment Fund III, L.P., Apollo UK
Partners, III, L.P. and Apollo Overseas Partners, III, L.P.
(incorporated by reference to Annex V hereto)
10.5* Form of First Amendment to Employment Agreement dated November 4, 1997
between Paragon and Keith B. Pitts
10.6* Employment Agreement dated April 13, 1998 between Paragon and Arthur W.
Stratton, Jr., M.D.
10.7* Form of First Amendment to Paragon Health Network, Inc. 1997 Long-Term
Incentive Plan
10.8* Agreement regarding certain Kellett Issues dated June 19, 1998 by and
among Mariner, Mariner Health Care of Nashville, Inc., Stiles A.
Kellett, Jr., Samuel B. Kellett, certain partnerships controlled by the
Kelletts, and Paragon
23.1* Consent of Ernst & Young LLP, independent auditors (Atlanta)
23.2* Consent of Ernst & Young LLP, independent auditors (Houston)
23.3* Consent of Coopers & Lybrand, L.L.P., independent auditors
23.4* Consent of KPMG Peat Marwick LLP, independent auditors
23.5 Consent of Powell, Goldstein, Frazer & Murphy LLP (contained in Exhibits
5.1 and 8.1)
23.6 Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit 8.2)
24.1 Power of Attorney (included as part of the signature pages hereto)
99.1 Opinion of Morgan Stanley & Co. Incorporated (incorporated by reference
to Annex VI hereto)
99.2 Opinion of BT Alex. Brown Incorporated (incorporated by reference to
Annex VII hereto)
99.3* Consent of Morgan Stanley & Co. Incorporated
99.4* Consent of BT Alex. Brown Incorporated
99.5* Consent of Samuel B. Kellett to be named a director
99.6* Consent of Arthur W. Stratton, Jr. M.D. to be named a director
99.7* Form of Paragon Proxy Card
99.8* Form of Mariner Proxy Card
- --------
* Filed herewith.
(b) Financial Statement Schedules
Incorporated by Reference
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ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the law or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in the post-effective amendment by
those paragraphs is contained in periodic reports filed with or furnished
to the Commission by the registrant pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
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.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant
to Item 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.
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.
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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 Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim of
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 Act and will be governed by the final
adjudication of such issue.
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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 ATLANTA, STATE OF
GEORGIA, ON THE 19TH DAY OF JUNE, 1998.
Paragon Health Network, Inc.
By: /s/ Keith B. Pitts
--------------------------------
Keith B. Pitts
Chairman of the Board, President
And Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Keith B. Pitts and Susan Thomas Whittle, and
each of them, 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/S-8 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/ Keith B. Pitts Chairman of the Board, June 19, 1998
- --------------------------- President and Chief
KEITH B. PITTS Executive Officer
(Principal Executive
Officer)
/s/ Charles B. Carden Executive Vice President June 19, 1998
- --------------------------- and Chief Financial
CHARLES B. CARDEN Officer (Principal
Financial Officer)
/s/ Ronald W. Fleming Vice President, Controller June 19, 1998
- --------------------------- and Chief Accounting
RONALD W. FLEMING Officer (Principal
Accounting Officer)
/s/ Donald E. Beaver Director June 19, 1998
- ---------------------------
DONALD E. BEAVER
/s/ Laurence M. Berg Director June 19, 1998
- ---------------------------
LAURENCE M. BERG
/s/ Gene E. Burleson Director June 19, 1998
- ---------------------------
GENE E. BURLESON
II-6
<PAGE>
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Peter P. Copses Director June 19, 1998
- ---------------------------
PETER P. COPSES
/s/ Jay M. Gellert Director June 19, 1998
- ---------------------------
JAY M. GELLERT
/s/ joel S. Kanter Director June 19, 1998
- ---------------------------
JOEL S. KANTER
/s/ John H. Kissick Director June 19, 1998
- ---------------------------
JOHN H. KISSICK
/s/ Baltej S. Maini Director June 19, 1998
- ---------------------------
BALTEJ S. MAINI, M.D.
/s/ William G. Petty, Jr. Director June 19, 1998
- ---------------------------
WILLIAM G. PETTY, JR.
/s/ Robert L. Rosen Director June 19, 1998
- ---------------------------
ROBERT L. ROSEN
II-7
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of April 13, 1998, among Paragon
Health Network, Inc. ("Paragon"), Mariner Health Group, Inc. ("Mariner")
and Paragon Acquisition Sub, Inc. ("Merger Sub") (incorporated by
reference to Annex I hereto)
4.1 Form of Common Stock Certificate of Paragon (incorporated by reference
to Exhibit 4.7 to Paragon's Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (File No. 001-10968))
4.2 Amended and Restated Certificate of Incorporation of Paragon
(incorporated by reference to Annex III to Paragon's Registration
Statement on Form S-4 (Registration No. 333-36525))
4.3 Second Amended and Restated Certificate of Incorporation of Mariner
Post-Acute Network, Inc. (incorporated by reference to Annex VIII
hereto)
4.4 Amended and Restated Bylaws of Paragon (incorporated by reference to
Annex IV to Paragon's Registration Statement on Form S-4 (Registration
No. 333-36525))
4.5 Second Amended and Restated Bylaws of Mariner Post-Acute Network, Inc.
(incorporated by reference to Annex IX hereto)
4.6 Stockholders Agreement dated November 4, 1997 (the "Apollo Stockholders
Agreement") by and among Paragon, Apollo Management L.P. ("Apollo") and
certain other investors (incorporated by reference to Annex V to
Paragon's Registration Statement on Form S-4 (Registration No. 333-
36525))
4.7* Amendment No.1 to Apollo Stockholders Agreement.
4.8 Registration Rights Agreement among Paragon and certain investors
(incorporated by reference to Exhibit 4.7 to Paragon's Registration
Statement on Form S-4 (Registration No. 333-36525))
4.9 Exchange and Registration Rights Agreement dated November 4, 1997, among
Paragon, Chase Securities, Inc., Smith Barney Inc. and Credit Suisse
First Boston Corporation (incorporated by reference to Exhibit 4.6 to
Paragon's Annual Report on Form 10-K for the year ended September 30,
1997 (File No. 001-10968))
5.1* Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding securities
being issued
8.1* Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding tax matters
8.2* Opinion of Testa, Hurwitz & Thibeault, LLP regarding tax matters
10.1 Company Stock Option Agreement, dated as of April 13, 1998, by and
between Paragon and Mariner (incorporated by reference to Annex II
hereto)
10.2 Parent Stock Option Agreement, dated as of April 13, 1998, by and
between Paragon and Mariner (incorporated by reference to Annex III
hereto)
10.3 Company Voting Agreement, dated as of April 13, 1998, by and among
Paragon and Stiles A. Kellett, Jr., Samuel B. Kellett, Kellett Partners,
L.P., Charlotte R. Kellett Irrevocable Remainder Trust and Samuel B.
Kellett, Jr. Irrevocable Remainder Trust (incorporated by reference to
Annex IV hereto)
10.4 Parent Voting Agreement, dated as of April 13, 1998, by and among
Mariner and Apollo, Apollo Investment Fund III, L.P., Apollo UK
Partners, III, L.P. and Apollo Overseas Partners, III, L.P.
(incorporated by reference to Annex V hereto)
<PAGE>
10.5* Form of First Amendment to Employment Agreement dated November 4, 1997
between Paragon and Keith B. Pitts
10.6* Employment Agreement dated April 13, 1998 between Paragon and Arthur W.
Stratton, Jr. M.D.
10.7* Form of First Amendment to Paragon Health Network, Inc. 1997 Long-Term
Incentive Plan
10.8* Agreement Regarding Certain Kellett Issues dated June 19, 1998 by and
among Mariner, Mariner Health Care of Nashville, Inc., Stiles A.
Kellett, Jr., Samuel B. Kellett, certain partnerships controlled by the
Kelletts, and Paragon.
23.1* Consent of Ernst & Young LLP, independent auditors (Atlanta)
23.2* Consent of Ernst & Young LLP, independent auditors (Houston)
23.3* Consent of Coopers & Lybrand, L.L.P., independent auditors
23.4* Consent of KPMG Peat Marwick LLP, independent auditors
23.5 Consent of Powell, Goldstein, Frazer & Murphy LLP (contained in Exhibits
5.1 and 8.1)
23.6 Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit 8.2)
24.1 Power of Attorney (included as part of the signature pages hereto)
99.1 Opinion of Morgan Stanley & Co. Incorporated (incorporated by reference
to Annex VI hereto)
99.2 Opinion of BT Alex. Brown Incorporated (incorporated by reference to
Annex VII hereto)
99.3* Consent of Morgan Stanley & Co. Incorporated
99.4* Consent of BT Alex. Brown Incorporated
99.5* Consent of Samuel B. Kellett to be named a director
99.6* Consent of Arthur W. Stratton, Jr. M.D. to be named a director
99.7* Form of Paragon Proxy Card
99.8* Form of Mariner Proxy Card
- --------
* Filed herewith.
(b) Financial Statement Schedules
Incorporated by Reference
<PAGE>
EXHIBIT 4.7
AMENDMENT NO. 1 TO
STOCKHOLDERS AGREEMENT
This AMENDMENT NO. 1 TO STOCKHOLDERS AGREEMENT (the "Amendment"), dated as of
April 13, 1998, by and among Paragon Health Network, Inc., a Delaware
corporation (the "Company") and the stockholders listed on the signature pages
attached hereto (together with each other Person (defined below) who is or
becomes a party to the Stockholders Agreement (defined below) in accordance with
the terms hereof, the "Stockholders").
W I T N E S S E T H:
WHEREAS, the parties hereto are parties to that certain Stockholders
Agreement, dated as of November 4, 1997 (the "Stockholders Agreement"), pursuant
to which the parties provided for certain rights and obligations in respect of
the Shares (defined in the Stockholders Agreement);
WHEREAS, as an inducement to Mariner Health Group, Inc. ("Mariner") to enter
into that certain Agreement and Plan of Merger by and among the Company, Mariner
and Paragon Acquisition Sub, Inc., a wholly owned subsidiary of the Company
("Sub"), Mariner requested, and the Stockholders and the Company have agreed to
enter into this Amendment to become effective as of the effective time (the
"Effective Time") of the merger of Sub with and into Mariner; and
WHEREAS, the Stockholders Agreement may be amended only in accordance with
Section 7.1 thereof which requires a written instrument executed by the Company
(in accordance with the approval of two-thirds of the entire Board of Directors
of the Company, including a majority of the directors who are not an Affiliate)
and the holders of a majority of the Shares held by the Stockholders including,
so long as Apollo beneficially owns at least 25% of the Shares held by Apollo on
the Effective Time, the consent of Apollo, and if any amendment or modification
would have a disproportionately material adverse effect on the rights or
obligations of any Other Stockholder or would otherwise unfairly discriminate
against any Other Stockholder, the consent of such Other Stockholder;
WHEREAS, each Stockholder party hereto owns 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 party
hereto collectively beneficially own 14,517,591 shares of Common Stock of the
17,777,778 Shares currently held by the Stockholders;
WHEREAS, effective as of the Effective Time, Keith B. Pitts will no longer be
a Stockholder.
NOW THEREFORE, the parties hereto agree as follows:
<PAGE>
ARTICLE I.
DEFINITIONS
Section 1.1 Definitions. Defined terms used herein and not otherwise defined
herein have the meaning ascribed to them in the Stockholders Agreement as
amended by this Amendment.
ARTICLE II.
REPRESENTATION AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each of the Stockholders as
follows:
Section 2.1 Authority for this Amendment. The Company has the requisite
corporate power and authority to execute and deliver this Amendment. The
execution and delivery of this Amendment by the Company have been duly and
validly authorized by two-thirds of the entire Board of Directors of the
Company, including a majority of the directors who are not an Affiliate or an
Associate of any Stockholder, and no other corporate proceedings on the part of
the Company are necessary to authorize this Amendment. This Amendment has been
duly and validly executed and delivered by the Company and assuming that this
Amendment constitutes a valid and binding obligation of the Stockholders, this
Amendment 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 2.2 Consents and Approvals; No Violation. Except as set forth on
Schedule 2.2, the execution and delivery of this Amendment by the Company will
not (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, (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,
(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 (v) violate any order, writ injunction, agreement, contract, decree,
statute, rule or regulation applicable to the Company, any of its
2
<PAGE>
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.
Section 2.3 No Inconsistent Agreements. As of the Effective Time, there is no
(and from and after the Effective Time 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 Time
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 the Stockholders Agreement as amended by this Amendment.
Without limiting the foregoing, except for the Stockholders Agreement as
amended by this Amendment, that certain Proxy and Voting Agreement, dated as of
November 4, 1997, by and among Apollo and the Other Stockholders and that
certain Parent Voting Agreement, dated as of the date hereof, by and among
Mariner and Apollo, there are no other existing agreements relating to the
voting of any equity securities of the Company or any of its subsidiaries.
Section 2.4 Share Ownership. To the Company's knowledge, no Stockholder has
transferred any Shares following the Effective Date.
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
Amendment by such Stockholder has been duly and validly authorized by all
necessary action on its part. This Amendment has been duly and validly executed
and delivered by such Stockholder and, assuming the representations made by each
Stockholder in Section 3.3 of this Amendment are true and correct and, assuming
this Amendment constitutes a valid and binding obligation of the Company,
constitutes a valid and binding agreement of such Stockholder enforceable
against each 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. The execution and delivery of this Amendment by such
Stockholder will not conflict with or result in any breach of any provision
under such Stockholder's partnership agreement or similar governing documents of
such Stockholder.
Section 3.3 Beneficial Ownership. As of the date of this Amendment, each
Stockholder party hereto beneficially owns the number of shares of Common Stock
set forth under its name on the signature pages attached hereto.
3
<PAGE>
ARTICLE IV.
AMENDMENT OF STOCKHOLDERS AGREEMENT
As of the Effective Time, the following amendments to the Stockholders
Agreement shall become effective.
Section 4.1 Definitions. Section 1.1 of the Stockholders Agreement is hereby
amended by inserting the following definition immediately after the definition
of "Commission:"
"Effective Time" shall mean the effective time of the merger of Paragon
Acquisition Sub, Inc., a wholly owned subsidiary of the Company ("Sub"),
and Mariner Health Group, Inc. ("Mariner") pursuant to that certain
Agreement and Plan of Merger, dated as of April 13, 1998, by and among the
Company, Sub and Mariner.
Section 4.2 Board Representation. Section 4.1(a) of the Stockholders
Agreement is hereby amended by deleting such subsection in its entirety and
inserting the following subsection in lieu thereof:
"(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) five 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 fifth anniversary of the Effective
Time, 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
4
<PAGE>
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."
Section 4.3 Pitts' Rights and Obligations. As of the Effective Time, Keith B.
Pitts will no longer be a Stockholder or an Other Stockholder under the
Stockholders Agreement and from and after the Effective Time the Stockholders
Agreement as amended by this Amendment shall be deemed to be terminated and of
no further effect with respect to Mr. Pitts and any shares of Common Stock he
beneficially owns.
ARTICLE V.
MISCELLANEOUS
Section 5.1 Force and Effect. Except as expressly modified by this Amendment,
the Stockholders Agreement is hereby ratified and confirmed and shall remain in
full force and effect after the Effective Time.
Section 5.2 Termination. This Amendment will expire without becoming
effective and will be of no force and effect upon the earlier to occur of (i)
the termination of the Merger Agreement and (ii) the amendment or waiver of any
provision of the Merger Agreement without the prior written consent of Apollo.
Section 5.3 Separability. In the event that any provision of this Amendment
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 Amendment 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 Amendment.
Section 5.4 Governing Law. This Amendment 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 5.5 Headings. The headings in this Amendment are for convenience of
reference only and shall not constitute a part of this Amendment, nor shall they
affect their meaning, construction or effect.
Section 5.6 Counterparts. This Amendment 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.
5
<PAGE>
Section 5.7 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 Amendment and the transactions contemplated
hereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
date first above written.
PARAGON HEALTH NETWORK, INC.
By: /s/ R. Jeffrey Taylor
---------------------
Name: R. Jeffrey Taylor
Title: Senior Vice President
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: /s/ Peter Copses
----------------
Name: Peter Copses
------------
Title: Vice President
--------------
13,100,370 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: /s/ Peter Copses
----------------
Name: Peter Copses
------------
Title: Vice President
--------------
484,188 Shares of Common Stock
7
<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: /s/ Peter Copses
----------------
Name: Peter Copses
------------
Title: Vice President
--------------
783,033 Shares of Common Stock
OTHER STOCKHOLDERS
/s/ Keith B. Pitts
------------------
Keith B. Pitts
150,000 Shares of Common Stock
Address for Notice:
c/o Paragon Health Network, Inc.
1 Ravinia Drive, Suite 1500
Atlanta, GA 30346
Telecopy No.: (770) 379-0753
8
<PAGE>
EXHIBIT 5.1
June 19, 1998
Paragon Health Network, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Re: Registration Statement on Form S-4/S-8 of Paragon Health Network, Inc.
Ladies and Gentlemen:
We have served as counsel for Paragon Health Network, Inc., a Delaware
corporation ("Paragon"), in connection with the registration under the
Securities Act of 1933, as amended, pursuant to Paragon's registration statement
on Form S-4/S-8 (the "Registration Statement"), of 31,784,707 shares (the
"Shares") of Paragon's common stock, par value $.01 per share (the "Paragon
Common Stock"), (i) up to 31,051,157 shares (the "Merger Shares") of which will
be issued to the stockholders of Mariner Health Group, Inc. ("Mariner") in
exchange for an equivalent number of shares of Mariner held by such
stockholders, which exchange will be consummated in accordance with the terms of
that certain Agreement and Plan of Merger dated April 13, 1998 (the "Merger
Agreement") by and among Paragon, Mariner and Paragon Acquisition Sub, Inc.
("Merger Sub"), a wholly-owned subsidiary of Paragon and (ii) up to 733,550
shares (the "Option Shares") which will be issuable pursuant to the exercise
of options assumed by Paragon pursuant to the terms of the Merger Agreement.
Pursuant to the Merger Agreement, Merger Sub will merge (the "Merger") with and
into Mariner, with Mariner surviving and continuing as a wholly-owned subsidiary
of Paragon. Capitalized terms used herein but not otherwise defined shall have
the same meanings as set forth in the Merger Agreement.
We have examined and are familiar with originals or copies (certified or
otherwise identified to our satisfaction) of such documents, corporate records
and other instruments relating to the formation of Paragon and to the
authorization and issuance of the Shares, including, but not limited to, the
following documents:
1. Resolutions of the Board of Directors of Paragon dated April 12, 1998,
authorizing the Merger and the Merger Agreement, and certain other
related agreements;
2. The Amended and Restated Certificate of Incorporation of Paragon;
<PAGE>
Paragon Health Network, Inc.
June 19, 1998
Page 2
3. The Amended and Restated Bylaws of Paragon; and
4. The Merger Agreement.
Based upon the foregoing and having regard for such legal considerations as
we have deemed relevant, it is our opinion that, (i) upon issuance in accordance
with the terms of the Merger Agreement, the Merger Shares will be validly
issued, fully paid and non-assessable and (ii) upon exercise in accordance with
the terms of the relevant option agreement and payment of the consideration
provided for therein, the Option Shares will be validly issued, fully paid and
non-assessable.
We do hereby consent to the reference to our Firm under the heading "Legal
Opinions" in the Prospectus contained in the Registration Statement and to the
filing of this Opinion as an Exhibit thereto.
Very truly yours,
/s/ Powell, Goldstein, Frazer & Murphy LLP
-----------------------------------------------------------
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
<PAGE>
Exhibit 8.1
June 19, 1998
Paragon Health Network, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Re: Registration Statement on Form S-4/S-8 of Paragon Health Network,
Inc. ("Paragon") containing the Joint Proxy Statement/Prospectus of
Paragon and Mariner Health Group, Inc. ("Mariner") dated June 19, 1998
(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 "Merger" (as
that term is defined in the Joint Proxy Statement/Prospectus). In connection
with rendering this opinion we have made certain assumptions and relied upon
certain representations, including representations of the management of Paragon
and Mariner as to the facts upon which this opinion is based.
Based upon the assumptions and the representations, we confirm our opinions as
set forth in the Joint Proxy Statement/Prospectus under the headings "THE MERGER
AGREEMENT; Certain Federal Income Tax Consequences-- Tax Opinions."
The opinion addresses only the effect under the federal income tax laws of the
Merger, and we express no opinion with respect to the applicability thereto, or
the effect thereon, of other federal laws, the laws of any state or other
jurisdiction, or as to any matters of municipal law or the laws of any other
local agencies within any state.
We hereby consent to the filing of this opinion as an exhibit to such 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
June 19, 1998
Mariner Health Group, Inc.
125 Eugene O'Neill Drive
New London, Connecticut 06320
Re: Registration Statement on Form S-4/S-8 of Paragon Health Network, Inc.
("Paragon") containing the Joint Proxy Statement/Prospectus of Paragon
and Mariner Health Group, Inc. ("Mariner") dated June 19, 1998 (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 "Merger" (as
that term is defined in the Joint Proxy Statement/Prospectus). In connection
with rendering this opinion we have made certain assumptions and relied upon
certain representations, including representations of the management of Paragon
and Mariner as to the facts upon which this opinion is based.
Based upon the assumptions and the representations, we confirm our opinions as
set forth in the Joint Proxy Statement/Prospectus under the headings "THE MERGER
AGREEMENT; Certain Federal Income Tax Consequences--Tax Opinions."
The opinion addresses only the effect under the federal income tax laws of the
Merger, and we express no opinion with respect to the applicability thereto, or
the effect thereon, of other federal laws, the laws of any state or other
jurisdiction, or as to any matters of municipal law or the laws of any other
local agencies within any state.
We hereby consent to the filing of this opinion as an exhibit to such 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/ Testa, Hurwitz & Thibeault, LLP
-----------------------------------
TESTA, HURWITZ & THIBEAULT, LLP
<PAGE>
EXHIBIT 10.5
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT dated as of June __, 1998,
between KEITH B. PITTS (the "Executive") and PARAGON HEALTH NETWORK, INC., a
Delaware corporation (the "Company").
W I T N E S S E T H
-------------------
WHEREAS, the Executive and the Company desire to amend certain provisions
of that certain Employment Agreement dated as of November 4, 1997 between the
Executive and the Company (the "Original Employment Agreement") in order to
provide for revised terms governing base salary, term of the agreement, the
vesting of options in the event of termination of the Executive's employment and
certain healthcare benefits to be extended to the Executive and his dependents;
NOW, THEREFORE, the parties agree, as follows:
1. Paragraph 2 of the Original Employment Agreement shall be deleted in its
entirety and replaced by the following:
2. Term. This Agreement became effective on November 4, 1997 (the
----
"Effective Date"). This Agreement is for the period (the "Term")
commencing on the Effective Date and terminating on the fourth
anniversary of the date of the consummation of the transactions
contemplated by the Agreement and Plan of Merger dated as of April 13,
1998 (the "Mariner Merger Agreement"), among the Company, Mariner
Health Group, Inc. and Paragon Acquisition Sub, Inc. (the date of the
consummation of the transactions contemplated by the Mariner Merger
Agreement is referred to herein as the "Mariner Merger Date"), or upon
the Executive's earlier death, disability or termination of employment
pursuant to Section 11; provided, however, that commencing on the
-------- -------
fourth anniversary of the Mariner Merger Date and on each anniversary
thereafter, the term shall automatically be extended for one
additional year unless, not later than 90 days prior to any such
anniversary, either party hereto shall have notified the other party
hereto in writing that such extension shall not take effect.
2. Section 6(b) of the Original Employment Agreement shall be deleted in
its entirety and replaced by the following:
(b) Base Salary. The Executive's Base Salary hereunder shall be
-----------
$850,000 a year, payable monthly. The Board shall review such base
salary at least annually and make such adjustment from time to time
<PAGE>
as it may deem advisable, but the base salary shall not at any time be
less than $850,000 a year.
3. Subsequent to Section 6(b) in the Original Employment Agreement, each
time the number "$700,000" appears, it shall be deleted and replaced with the
number "$850,000."
4. Section 9 of the Original Employment Agreement shall be deleted in its
entirety and replaced by the following:
9. Pension and Welfare Benefits. During the Term, the Executive
----------------------------
shall be eligible to participate fully in all health benefits,
insurance programs, pension and retirement plans and other employee
benefit and compensation arrangements available to senior officers of
the Company generally. In addition, the Company shall reimburse the
Executive for all out-ofpocket costs incurred and paid by the
Executive relating to the health care of the Executive and his
dependents that are not covered by the health benefit plans or
arrangements of the Company or its subsidiaries through the later of
the Date of Termination or the seventh anniversary of the Effective
Date.
5. Section 10 of the Original Employment Agreement shall be deleted in its
entirety and replaced by the following:
10. Stock Options. The Company, pursuant to the terms of its Stock
-------------
Option Plan (and as approved by the Compensation Committee of the
Board of Directors), granted to the Executive as of the Effective
Date, stock options to purchase 1,465,000 shares (as adjusted for the
3-for-1 stock split which took place on December 29, 1997) of common
stock of the Company which, as of the Effective Date, represented
approximately 3-3/10% (3.3%) of the fully diluted common shares of the
Company. Such stock options shall, in accordance with the Company's
Stock Option Plan, (i) expire ten years from the Effective Date or 90
days after the Executive's Date of Termination, if earlier; (ii) vest
and become exercisable on each of the first four anniversaries of the
Effective Date in an amount equal to one-fourth (1/4) of the stock
options granted; (iii) be exercisable, in the event of the Executive's
termination of employment, for a period of 90 days following his Date
of Termination; and (iv) have an exercise price per share equal to the
fair market value of a share of common stock of the Company as of the
Effective Date, which equaled the closing price of a share of
GranCare, Inc. on the Effective Date, divided by .23457, with the
resulting quotient being further divided by three to reflect the
aforementioned stock split. The Executive shall be eligible for
additional stock option awards under the stock option plan of the
Company and, in this regard, the
2
<PAGE>
Compensation Committee of the Board of Directors may consider whether,
but not be obligated, to award the Executive additional stock options
under such plan.
6. The following subparagraph shall be added immediately following
subparagraph (h) of Section 12 of the Original Employment Agreement:
(i) Continuation of Health Care Reimbursement. Nothing in this
-----------------------------------------
Section 12 or elsewhere in this Agreement shall reduce in any way the
Company's obligations set forth in the second sentence of Section 9
hereof to reimburse the Executive for all out-of-pocket costs incurred
and paid by the Executive relating to the health care of the Executive
and his dependents that are not covered by the health benefit plans or
arrangements of the Company or its subsidiaries throught the later of
the Date of Termination or the seventh anniversary of the Effective
Date.
7. All capitalized terms used herein but not otherwise defined shall have
the same meanings as set forth in the Original Employment Agreement.
8. Except for such amendments as are specifically provided for herein, the
Original Employment Agreement remains in full force and effect in all respects.
9. This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
By:_____________________________
Susan Thomas Whittle
Senior Vice President and
General Counsel
THE EXECUTIVE
________________________________
Keith B. Pitts
216160
4
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
Employment Agreement dated as of April 13, 1998 between ARTHUR W.
STRATTON, JR. (the "Executive") and PARAGON HEALTH NETWORK, INC., a Delaware
corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as its Vice-
Chairman of the Board, Chief Operating Officer and President, and the Executive
desires to accept such employment, for the term and upon the other conditions
hereinafter set forth; and
WHEREAS, the parties desire to enter into this Agreement setting forth
the terms and conditions of the employment relationship of the Executive with
the Company.
NOW, THEREFORE, the parties agree as follows:
1. Employment. The Company hereby employs the Executive, and the
----------
Executive hereby accepts employment with the Company, upon the terms and subject
to the conditions set forth herein.
2. Term. This Agreement shall become effective on the date of the
----
consummation of the transactions contemplated by the Agreement and Plan of
Merger dated as of April 13, 1998 among the Company, Mariner Health Group, Inc.
("Yank") and Paragon Acquisition Sub, Inc. (the "Effective Date"). This
Agreement is for the four-year period (the "Term") commencing on the Effective
Date and terminating on the fourth anniversary of the Effective Date, or upon
the Executive's earlier death, disability or other termination of employment
pursuant to Section 11; provided, however, that commencing on the fourth
anniversary of the Effective Date and on each anniversary thereafter, the Term
shall automatically be extended for one additional year unless, not later than
90 days prior to any such anniversary, either party hereto shall have notified
the other party hereto in writing that such extension shall not take effect.
3. Position. During the Term, the Executive shall serve as Vice-
--------
Chairman of the Board, Chief Operating Officer and President of the Company or
in such other senior executive position in the Company as the Executive shall
approve.
4. Duties and Reporting Relationship. During the Term, the Executive
---------------------------------
shall, on a full time basis, use his skills and render services to the best of
his abilities in supervising and conducting the operations of the Company and
shall not engage in any other business activities except with the prior written
approval of the Board of Directors of the Company (the "Board") or its duly
authorized designee. Notwithstanding the preceding sentence, nothing contained
herein shall prevent the Executive from (a) serving as a director of any
company, provided, that, the Executive is not required to devote a material
-------- ----
amount of his time to such service or (b) except as provided in Section 15(c),
acquiring an investment in any entity, provided, that, the Executive does not
--------
participate in the management or operation of such entity. The Executive shall
report to
<PAGE>
the Chief Executive Officer of the Company and the Executive shall have
responsibility and authority to oversee the general operations of the Company
and to assist the Chief Executive Officer of the Company in the overall
strategic policies, management and leadership of the Company. The Executive
shall also perform such other executive and administrative duties (not
inconsistent with the position of Vice-Chairman of the Board, Chief Operating
Officer and President) as the Executive may reasonably be expected to be capable
of performing on behalf of the Company, as may from time to time be authorized
or directed by the Board or the Chief Executive Officer of the Company. The
Executive agrees to be employed by the Company in all such capacities for the
Term, subject to all the covenants and conditions hereinafter set forth.
5. Place of Performance. The Executive shall perform his duties and
--------------------
conduct his business at the principal executive offices of the Company, except
for required travel on the Company's business.
6. Salary and Annual Bonus.
-----------------------
(a) Base Salary. The Executive's base salary hereunder shall be
-----------
$850,000 a year, payable monthly. The Board shall review such base salary at
least annually and make such adjustment from time to time as it may deem
advisable, but the base salary shall not at any time be less than $850,000 a
year.
(b) Annual Bonus. The Company shall provide the Executive with an
------------
annual bonus plan providing the Executive with an opportunity to earn an annual
bonus equal to between fifty percent (50%) and one hundred fifty percent (150%)
of his base salary if the Company achieves for the relevant year certain
financial targets established pursuant to such plan.
7. Vacation, Holidays and Sick Leave. During the Term, the Executive
---------------------------------
shall be entitled to paid vacation, paid holidays and sick leave in accordance
with the Company's standard policies for its senior executive officers.
8. Business Expenses. The Executive shall be reimbursed for all
-----------------
ordinary and necessary business expenses incurred by him in connection with his
employment upon timely submission by the Executive of receipts and other
documentation as required by the Internal Revenue Code and in conformance with
the Company's normal procedures.
9. Pension and Welfare Benefits. During the Term, the Executive
----------------------------
shall be eligible to participate fully in all health benefits, insurance
programs, pension and retirement plans and other employee benefit and
compensation arrangements available to senior officers of the Company generally.
In addition, the Company shall reimburse the Executive for all out-of-pocket
costs incurred and paid by the Executive relating to the health care of the
Executive and his dependents that are not covered by the health benefit plans or
arrangements of the Company or its subsidiaries through the later of the Date of
Termination or the seventh anniversary of the Effective Date.
2
<PAGE>
10. Stock Options. The Company, pursuant to the terms of its stock
-------------
option plan (and as approved by the Compensation Committee of the Board of
Director), shall grant to the Executive as of the Effective Date, stock options
to purchase 1,000,000 shares of common stock of the Company. Such stock options
shall, in accordance with the Company's stock option plan (i) expire ten (10)
years from the Effective Date or ninety (90) days after the Executive's Date of
Termination, if earlier, (ii) vest and become exercisable on each of the four
anniversaries of the Effective Date in the amount equal to one-fourth (1/4) of
the stock options granted, (iii) be exercisable, in the event of the Executive's
termination of employment, for a period of ninety (90) days following his Date
of Termination; and (iv) have an exercise price per share equal to the fair
market value of a share of common stock of the Company as of the Effective Date.
The Executive shall be eligible for additional stock option awards under the
stock option plan of the Company and, in this regard, the compensation committee
of the Board may consider whether, but not be obligated, to award the Executive
additional stock options under such plan.
11. Termination of Employment.
-------------------------
(a) General. The Executive's employment hereunder may be
-------
terminated without any breach of this Agreement only under the following
circumstances.
(b) Death or Disability.
-------------------
(i) The Executive's employment hereunder shall
automatically terminate upon the death of the Executive.
(ii) If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive is unable to perform the
essential functions of his job for any one hundred eighty (180) days
(whether or not consecutive) during any twelve (12) month period, and no
reasonable accommodation can be made that will allow Executive to perform
his essential functions, the Company may terminate the Executive's
employment hereunder for any such incapacity (a "Disability").
(c) Termination by the Company. The Company may terminate the
--------------------------
Executive's employment hereunder at any time, whether or not for Cause. For
purposes of this Agreement, "Cause" shall mean (i) the failure or refusal by the
Executive to perform his duties hereunder (other than any such failure resulting
from the Executive's incapacity due to physical or mental illness), which has
not ceased within ten (10) days after a written demand for substantial
performance is delivered to the Executive by the Company, which demand
identifies the manner in which the Company believes that the Executive has not
performed such duties, (ii) the engaging by the Executive in willful misconduct
or an act of moral turpitude which is materially injurious to the Company,
monetarily or otherwise (including, but not limited to, conduct described in
Section 15) or (iii) the conviction of the Executive of, or the entering of a
plea of nolo contendere by, the Executive with respect to, a felony.
Notwithstanding the foregoing, the Executive's employment hereunder shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than a majority
3
<PAGE>
of the entire membership of the Board, other than the Executive, at a meeting of
the Board at which the Executive recuses himself (after written notice to the
Executive and a reasonable opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board), finding that in the good
faith opinion of the Board the Executive should be terminated for Cause.
(d) Termination by the Executive. The Executive shall be
----------------------------
entitled to terminate his employment hereunder (A) for Good Reason, (B) if his
health should become impaired to an extent that makes his continued performance
of his duties hereunder hazardous to his physical or mental health, provided
that the Executive shall have furnished the Company with a written statement
from a qualified doctor to such effect and provided, further, that, at the
Company's request, the Executive shall submit to an examination by a doctor
selected by the Company and such doctor shall have concurred in the conclusion
of the Executive's doctor or (C) without the Executive's express written
consent, any failure by the Company to comply with any material provision of
this Agreement, which failure has not been cured within ten (10) days after
notice of such noncompliance has been given by the Executive to the Company. For
purposes of this Agreement, "Good Reason" shall mean the occurrence (without the
Executive's express written consent), following a Change in Control during the
term of this Agreement, of any one of the following acts by the Company, or
failures by the Company to act, unless, in the case of any act or failure to act
described below, such act or failure to act is corrected prior to the Date of
Termination specified in the Notice of Termination given in respect thereof:
(i) any change in the Executive's title, authorities,
responsibilities (including reporting responsibilities) which, in the
Executive's reasonable judgment, represents an adverse change from his
status, title, position or responsibilities (including reporting
responsibilities) which were in effect immediately prior to the Change in
Control or from his status, title, position or responsibilities (including
reporting responsibilities) which were in effect following a Change in
Control pursuant to the Executive's consent to accept any such change; the
assignment to him of any duties or work responsibilities which are
inconsistent with such status, title, position or work responsibilities; or
any removal of the Executive from, or failure to reappoint or reelect him
to any of such positions, except if any such changes are because of
Disability, retirement, death or Cause;
(ii) a reduction by the Company in the Executive's annual base
salary as in effect on the date hereof or as the same may be increased from
time to time except for across-the-board salary reductions similarly
affecting all senior executives of the Company and all senior executives of
any Person (as defined in Section 11(h)(i) below) in control of the Company
provided in no event shall any such reduction reduce the Executive's base
--------
salary below $850,000;
(iii) the relocation of the Executive's office at which he is
to perform his duties, to a location more than fifty (50) miles from the
4
<PAGE>
location at which the Executive performed his duties prior to the Change in
Control, except for required travel on the Company's business to an extent
substantially consistent with his business travel obligations prior to the
Change in Control;
(iv) the failure by the Company, without the Executive's
consent, to pay to the Executive any portion of the Executive's current
compensation, or to pay to the Executive any portion of an installment of
deferred compensation under any deferred compensation program of the
Company, within seven (7) days of the date such compensation is due;
(v) the failure by the Company to continue to provide the
Executive with benefits substantially similar in value to the Executive in
the aggregate to those enjoyed by the Executive under any of the Company's
pension, life insurance, medical, health and accident, or disability plans
in which the Executive was participating immediately prior to the Change in
Control, unless the Executive participates after the Change in Control in
other comparable benefit plans generally available to senior executives of
the Company and senior executives of any Person in control of the Company;
(vi) the adverse and substantial alteration of the nature and
quality of the office space within which the Executive performed his duties
prior to a Change in Control, as well as in the secretarial and
administrative support provided to the Executive, provided, however, that a
reasonable alteration of the nature and quality of the office space or the
secretarial or administrative support provided to the Executive as a result
of reasonable measures implemented by the Company to effectuate a cost-
reduction or consolidation program shall not constitute Good Reason
hereunder; or
(vii) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 11(f) below; for purposes of this Agreement, no
such purported termination shall be effective.
The Executive's continued employment for 6 months shall constitute consent to,
and a waiver of rights with respect to, any act or failure to act constituting
Good Reason hereunder.
(e) Voluntary Resignation. Should the Executive wish to resign
---------------------
from his position with the Company or terminate his employment for other than
Good Reason during the Term, the Executive shall give sixty (60) days written
notice to the Company ("Notice Period"), setting forth the reasons and
specifying the date as of which his resignation is to become effective. During
the Notice Period, the Executive shall cooperate fully with the Company in
achieving a smooth transition of the Executive's duties and responsibilities to
such person(s) as may be designated by the Company. The Company reserves the
right to accelerate
5
<PAGE>
the Date of Termination by giving the Executive notice and payment of amounts
due to the Executive under Section 6(b) and, to the extent applicable, Section
6(c) for the balance of the Notice Period. The Company's obligation to continue
to employ the Executive or to continue payment of the amounts described in the
preceding sentence shall cease immediately if: (1) the Executive has not
satisfied his obligations to cooperate fully with a smooth transition or (2) the
Company has grounds to terminate the Executive's employment immediately for
Cause.
(f) Notice of Termination. Any purported termination of the
---------------------
Executive's employment by the Company or by the Executive shall be communicated
by written Notice of Termination to the other party hereto in accordance with
Section 19. "Notice of Termination" shall mean a notice that shall indicate the
specific termination provision in this Agreement relied upon and shall set forth
in reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
(g) Date of Termination. "Date of Termination" shall mean (i)
-------------------
if the Executive's employment is terminated because of death, the date of the
Executive's death, (ii) if the Executive's employment is terminated for
Disability, the date Notice of Termination is given, (iii) if the Executive's
employment is terminated pursuant to Subsection (c), (d) or (e) hereof or for
any other reason (other than death or Disability), the date specified in the
Notice of Termination (which, in the case of a termination for Good Reason shall
not be less than fifteen (15) nor more than sixty (60) days from the date such
Notice of Termination is given, and in the case of a termination for any other
reason shall not be less than thirty (30) days (sixty (60) days in the case of a
termination under Subsection (e) hereof) from the date such Notice of
Termination is given).
(h) Change in Control. For purposes of this Agreement, a
-----------------
Change in Control of the Company shall have occurred if:
(i) any "Person" (as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934 (the "Exchange Act") as modified and used in Sections
13(d) and 14(d) of the Exchange Act (other than (1) the Company or any of
its subsidiaries, (2) any trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of its subsidiaries,
(3) an underwriter temporarily holding securities pursuant to an offering
of such securities, (4) any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as
their ownership of the Company's common stock or (5) Apollo Management,
L.P., any of its affiliates and any investments funds managed by it
(collectively, "Apollo"))), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than 50% of the combined voting
power of the Company's then outstanding voting securities;
6
<PAGE>
(ii) during any period of not more than two consecutive years,
not including any period prior to the date of this Agreement, individuals
who at the beginning of such period constitute the Board, and any new
director (other than a director designated by a person (other than Apollo)
who has entered into an agreement with the Company to effect a transaction
described in clause (i), (iii), or (iv) of this Section 1l(h)) whose
election by the Board or nomination for election by the Company's
stockholders was (A) made pursuant to the Stockholders Agreement dated as
of November 4, 1997, as amended as of April 13, 1998, or (B) approved by a
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute at least a majority thereof;
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than both
(A) a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving or parent entity) 50% or more of the
combined voting power of the voting securities of the Company or such
surviving or parent entity outstanding immediately after such merger or
consolidation or (B) a merger or consolidation in which no person acquires
50% or more of the combined voting power of the Company's then outstanding
securities; or
(iv) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Company's assets (or any
transaction having a similar effect) other than such a sale or disposition
to Apollo.
(i) Resignation as Member of Board. If the Executive's employment by
------------------------------
the Company is terminated for any reason, the Executive hereby agrees that he
shall simultaneously submit his resignation as a member of the Board in writing
on or before the Date of Termination. If the Executive fails to submit such
required resignation in writing, the provisions of this Section 11(i) may be
deemed by the Company to constitute the Executive's written resignation as a
member of the Board effective as of the Date of Termination.
(j) Return of Property. When the Executive shall cease to be employed
------------------
by the Company, the Executive shall promptly surrender to the Company all
Company property, including without limitation, all records and other documents
obtained by him or entrusted to him during the course of his employment with the
Company provided, however, that the Executive may retain copies of such
-------- --------
documents as necessary for the Executive's personal records for federal income
tax purposes.
7
<PAGE>
12. Compensation During Disability, Death or Upon Termination.
---------------------------------------------------------
(a) During any period that the Executive fails to perform his duties
hereunder as a result of incapacity due to physical or mental illness
("Disability Period"), the Executive shall continue to receive his full salary
at the rate then in effect for such period until his employment is terminated
pursuant to Section 1 l(b)(ii) hereof, provided that payments so made to the
Executive during the Disability Period shall be reduced by the sum of the
amounts, if any, payable to the Executive with respect to such period under
disability benefit plans of the Company or under the Social Security disability
insurance program, and which amounts were not previously applied to reduce any
such payment.
(b) If the Executive's employment is terminated by his death or
Disability, the Company shall pay (i) any amounts due to the Executive under
Section 6(b) through the date of such termination and (ii) an amount equal to
the bonus he would have received for the fiscal year that ends on or immediately
after the Date of Termination, assuming the Company achieved the lowest target
level for which a bonus is paid under the plan described in Section 6(c),
prorated for the period beginning on the first day of the fiscal year in which
occurs the Date of Termination through the Date of Termination. In addition, if
the Executive's employment is terminated by his death, the Company shall
continue to pay to his estate his salary for an additional six months at the
rate then in effect.
(c) If the Executive's employment shall be terminated by the Company
for Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his full salary through the Date of Termination at the rate in
effect at the time Notice of Termination is given, and the Company shall have no
further obligations to the Executive under this Agreement.
(d) If (A) following a Change in Control the Company shall terminate
the Executive's employment in breach of this Agreement, or (B) following a
Change in Control the Executive shall terminate his employment for Good Reason,
then
(i) the Company shall pay the Executive his full salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which the
Executive is entitled as of the Date of Termination under any compensation
plan or program of the Company, at the time such payments are due;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay as
liquidated damages to the Executive an aggregate amount equal to the
product of (A) the sum of (1) the Executive's annual salary rate in effect
as of the Date of Termination and (2) the average of the annual bonuses
actually paid to the Executive by the Company with respect to the two
fiscal years which immediately precede the year of the Term in which the
Date of Termination
8
<PAGE>
occurs provided if there was a bonus or bonuses paid to the Executive with
--------
respect only to one fiscal year which immediately precedes the year of the
Term in which the Date of Termination occurs, then such single year's bonus
or bonuses shall be utilized in the calculation pursuant to this clause
(2), provided, further, that for purposes of this Agreement, if the Date of
------------------
Termination occurs before the end of the first fiscal year that ends after
the Effective Date, the amount of the bonus paid by the Company to the
Executive shall be deemed to be $850,000 and (B) the number three (3);
(iii) the Company shall (x) continue coverage for the Executive,
on the same terms and conditions as would be applicable if the Executive
were an active Employee, under the Company's life insurance, medical,
health, disability and similar welfare benefit plans for a period equal to
the greater of the remainder of the Term and eighteen (18) months, and (y)
provide the benefits which the Executive would have been entitled to
receive pursuant to any supplemental retirement plan maintained by the
Company had his employment continued at the rate of compensation specified
herein for the remainder of the Term. Benefits otherwise receivable by the
Executive pursuant to clause (x) of this Section 12(d)(iii) shall be
reduced to the extent comparable benefits are actually received by the
Executive from a subsequent employer during the period during which the
Company is required to provide such benefits, and the Executive shall
report any such benefits actually received by him to the Company; and
(iv) the payments provided for in this Section 12(d) (other than
Section 12(d)(iii)) shall be made not later than the thirtieth day
following the Date of Termination, provided, however, that if the amounts
of such payments, and the limitation on such payments set forth in Section
16 hereof, cannot be finally determined on or before such day, the Company
shall pay to the Executive on such day an estimate, as determined in good
faith by the Company, of the minimum amount of such payments to which the
Executive is clearly entitled and shall pay the remainder of such payments
(together with interest at the rate provided in section 1274(b)(2)(B) of
the Code (as defined in Section 16)) as soon as the amount thereof can be
determined but in no event later than the sixtieth (60th) day after the
Date of Termination. In the event that the amount of the estimated payments
exceeds the amount determined by the Company within six (6) months after
payment to have been due, such excess shall constitute a loan by the
Company to the Executive, payable no later than the thirtieth (30th)
business day after demand by the Company (together with interest at the
rate provided in section 1274(b)(2)(B) of the Code). At the time that
payments are made under this Section 12(d), the Company shall provide the
Executive with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations including,
without limitation, any opinions or other advice the Company has received
from outside
9
<PAGE>
counsel, auditors or consultants (and any such opinions or advice which are
in writing shall be attached to the statement).
(e) If prior to any Change of Control the Company shall terminate the
Executive's employment without Cause or the Executive terminates his employment
under clause (C) of Section 11(d) hereof, then
(i) the Company shall pay the Executive his full salary through
the Date of Termination at the rate in effect at the time Notice of
Termination is given and all other unpaid amounts, if any, to which the
Executive is entitled as of the Date of Termination under any compensation
plan or program of the Company, at the time such payments are due;
(ii) in lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay as
liquidated damages to the Executive an aggregate amount equal to the
product of (A) the sum of (1) the Executive's annual salary rate in effect
as of the Date of Termination and (2) the average of the annual bonuses
actually paid to the Executive by the Company with respect to the two
fiscal years which immediately precede the year of the Term in which the
Date of Termination occurs provided if there was a bonus or bonuses paid to
---------
the Executive with respect only to one fiscal year which immediately
precedes the year of the Term in which the Date of Termination occurs, then
such single year's bonus or bonuses shall be utilized in the calculation
pursuant to this clause (2), provided, further, that for purposes of this
-------------------
Agreement, if the Date of Termination occurs before the end of the first
fiscal year that ends after the Effective Date, the amount of the bonus
paid by the Company to the Executive shall be deemed to be $850,000 and (B)
the lesser of (x) the number three (3) and (y) the greater of (aa) the
number of years (including partial years) remaining in the Term and (bb)
the number two (2); such amount to be paid in substantially equal monthly
installments during the period commencing with the month immediately
following the month in which the Date of Termination occurs and ending with
the month corresponding to the end of the Term hereunder; and
(iii) the Company shall (x) continue coverage for the Executive,
on the same terms and conditions as would be applicable if the Executive
were an active employee, under the Company's life insurance, medical,
health, disability and similar welfare benefit plans for a period equal to
the greater of the remainder of the Term and eighteen (18) months, and (y)
provide the benefits which the Executive would have been entitled to
receive pursuant to any supplemental retirement plan maintained by the
Company had his employment continued at the rate of compensation specified
herein for the remainder of the Term. Benefits otherwise receivable by the
Executive pursuant to clause (x) of this Section 12(e)(iii) shall be
reduced to the extent comparable benefits are actually received by the
Executive from a subsequent employer
10
<PAGE>
during the period during which the Company is required to provide such
benefits, and the Executive shall report any such benefits actually
received by him to the Company.
(f) If the Executive shall terminate his employment under clause (B)
of Sections 11(d) or 11(e) hereof, the Company shall pay the Executive his full
salary through the Date of Termination at the rate in effect at the time Notice
of Termination is given, and the Company shall have no further obligations to
the Executive under this Agreement.
(g) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 12 by seeking other employment or
otherwise, and, except as provided in Sections 12(d) and 12(e) hereof, the
amount of any payment or benefit provided for in this Section 12 shall not be
reduced by any compensation earned by the Executive as the result of employment
by another employer or by retirement benefits.
(h) Release. Prior to making any payment pursuant to Sections
-------
12(d)(ii) and 12(d)(iii) or Sections 12(e)(ii) and 12(e)(iii), whichever is
applicable, the Company shall have the right to require the Executive to sign,
and the Executive hereby agrees to sign, an agreement to be bound by the terms
of Section 15 of this Agreement and a waiver of all claims the Executive may
have (including any claims under the Age Discrimination in Employment Act),
other than claims for payments or benefits hereunder or claims for
indemnification for director or officer liability, in connection with the
termination of the Executive's employment with the Company and the Company may
withhold payment of such amount until the period during which the Executive may
revoke such waiver (normally seven days) has elapsed.
(i) Continuation of Health Care Reimbursement. Nothing in this
-----------------------------------------
Section 12 or elsewhere in this Agreement shall reduce in any way the Company's
obligations set forth in the second sentence of Section 9 hereof to reimburse
the Executive for all out-of-pocket costs incurred and paid by the Executive
relating to the health care of the Executive and his dependents that are not
covered by the health benefit plans or arrangements of the Company or its
subsidiaries through the later of the Date of Termination or the seventh
anniversary of the Effective Date.
13. Representations and Covenants.
-----------------------------
(a) The Company represents and warrants that this Agreement has been
authorized by all necessary corporate action of the Company and is a valid and
binding agreement of the Company enforceable against it in accordance with its
terms. The Company agrees and covenants that it will (i) provide the Executive
with customary director and officer indemnification; and (ii) maintain director
and officer liability insurance which is of a type customarily maintained by
companies of similar size and with a similar business as the Company.
(b) The Executive represents and warrants that he is not a party to
any agreement or instrument which would prevent him from entering into or
performing his duties in
11
<PAGE>
any way under this Agreement. The Executive agrees and covenants that he will
obtain, and submit to, such physical examinations as may be necessary to
facilitate the Company obtaining an insurance policy for its benefit insuring
the life of the Executive.
14. Successors: Binding Agreement.
-----------------------------
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(b) This Agreement is a personal contract and the rights and interests
of the Executive hereunder may not be sold, transferred, assigned, pledged,
encumbered, or hypothecated by him, except as otherwise expressly permitted by
the provisions of this Agreement. This Agreement shall inure to the benefit of
and be enforceable by the Executive and his personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amount would still be payable to
him hereunder had the Executive continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to his devisee, legatee or other designee or, if there is no such
designee, to his estate.
15. Confidentiality and Non-Competition Covenants.
---------------------------------------------
(a) The Executive covenants and agrees that he will not at any time
during or at any time after the end of the Term, directly or indirectly, use for
his own account, or disclose to any person, firm or corporation, other than
authorized officers, directors and employees of the Company or its subsidiaries,
Confidential Information (as hereinafter defined) that is treated as trade
secrets by the Company and will not at any time during or for a period of five
(5) years after the end of the Term, directly or indirectly, use for his own
account, or disclose to any person, firm or corporation, other than authorized
officers, directors and employees of the Company or its subsidiaries, any other
Confidential Information. As used herein, "Confidential Information" of the
Company means information of any kind, nature or description which is disclosed
to or otherwise known to the Executive as a direct or indirect consequence of
his association with the Company, which information is not generally known to
the public or in the business in which the Company is engaged or which
information relates to specific investment opportunities within the scope of the
Company's business which were considered by the Executive or the Company during
the term of this Agreement. Confidential Information that is treated as
confidential trade secrets by the Company shall include, but not be limited to,
strategic operating plans and budgets, policy and procedure manuals, computer
programs, financial forms and information, patient or resident lists and
accounts, supplier information, accounting forms and procedures, personnel
policies, information pertaining to the salaries, positions and performance
reviews of the Company's employees, information on the methods of the Company's
operations, research and data developed by or for the benefit of the Company and
information relating to revenues, costs, profits and the financial
12
<PAGE>
condition of the Company. During the Term and for a period of two years
following the termination of the Executive's employment, the Executive shall not
induce any employee of the Company or its subsidiaries to terminate his or her
employment by the Company or its subsidiaries in order to obtain employment by
any person, firm or corporation affiliated with the Executive.
(b) The Executive covenants and agrees that any information,
materials, ideas, discoveries, techniques or programs developed or discovered by
the Executive in connection with the performance of his duties hereunder shall
remain the sole and exclusive property of the Company and, to the extent it
constitutes Confidential Information, shall be subject to the covenants
contained in the preceding paragraph.
(c) The Executive covenants and agrees that during the Term and, if
the Executive's employment is terminated by the Executive for other than Good
Reason, for a period of two (2) years following the termination of the
Executive's employment, the Executive shall not, directly or indirectly, own an
interest in, operate, join, control, or participate as a partner, director,
principal, officer, or agent of, enter into the employment of, or act as a
consultant to, in any case in which he has control or supervision over a
significant portion of any entity (i) whose principal business is the operation
of one or more skilled nursing facilities or (ii) which operates a skilled
nursing business that is material in relation to the Company's comparable
business and (iii) in either case, which derives at least 10% of its skilled
nursing facility revenue from facilities which are located within 35 miles of a
center or facility operated by the Company. Notwithstanding anything herein to
the contrary, the foregoing provisions of this Section 15(c) shall not prevent
the Executive from acquiring securities representing not more than 5% of the
outstanding voting securities of any publicly held corporation.
(d) Without limiting the right of the Company to pursue all other
legal and equitable remedies available for violation by the Executive of the
covenants contained in this Section 15, it is expressly agreed by the Executive
and the Company that such other remedies cannot fully compensate the Company for
any such violation and that the Company shall be entitled to injunctive relief,
without the necessity of proving actual monetary loss, to prevent any such
violation or any continuing violation thereof. Each party intends and agrees
that if in any action before any court or agency legally empowered to enforce
the covenants contained in this Section 15, any term, restriction, covenant or
promise contained herein is found to be unreasonable and accordingly
unenforceable, then such term, restriction, covenant or promise shall be deemed
modified to the extent necessary to make it enforceable by such court or agency.
The covenants contained in Section 15 shall survive the conclusion of the
Executive's employment by the Company.
16. Prohibition on Parachute Payments.
---------------------------------
(a) Notwithstanding any other provisions of this Agreement (other than
Section 27), in the event that at any time on or after the first anniversary of
the Effective Date any payment or benefit received or to be received by the
Executive in connection with a Change in
13
<PAGE>
Control of the Company or the termination of the Executive's employment (whether
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any person whose actions result in a Change in
Control or any Person affiliated with the Company or such Person) (all such
payments and benefits, including, without limitation, base salary and bonus
payments, being hereinafter called "Total Payments") would not be deductible (in
whole or in part), by the Company, an affiliate or any Person making such
payment or providing such benefit as a result of section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), then, to the extent necessary to
make such portion of the Total Payments deductible (and after taking into
account any reduction in the Total Payments provided by reason of section 280G
of the Code in such other plan, arrangement or agreement), (A) such cash
payments shall first be reduced (if necessary, to zero), and (B) all other non-
cash payments by the Company to the Executive shall next be reduced (if
necessary, to zero). For purposes of this limitation, (i) no portion of the
Total Payments the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the Date of Termination shall be taken
into account, (ii) no portion of the Total Payments shall be taken into account
which in the opinion of tax counsel selected by the Company's independent
auditors and reasonably acceptable to the Executive does not constitute a
"parachute payment" within the meaning of section 280G(b)(2) of the Code,
including by reason of section 280G(b)(4)(A) of the Code, (iii) such payments
shall be reduced only to the extent necessary so that the Total Payments (other
than those referred to in clauses (i) or (ii)) in their entirety constitute
reasonable compensation for services actually rendered within the meaning of
section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance
as deductions, in the opinion of the tax counsel referred to in clause (ii); and
(iv) the value of any non-cash benefit or any deferred payment or benefit
included in the Total Payments shall be determined by the Company's independent
auditors in accordance with the principles of sections 280G(d)(3) and (4) of the
Code.
(b) Other than as provided in Section 27 hereof, if it is established
pursuant to a final determination of a court or an Internal Revenue Service
proceeding that, notwithstanding the good faith of the Executive and the Company
in applying the terms of this Section 16, the aggregate "parachute payments"
paid to or for the Executive's benefit are in an amount that would result in any
portion of such "parachute payments" not being deductible by reason of section
280G of the Code, then the Executive shall have an obligation to pay the Company
upon demand an amount equal to the sum of (i) the excess of the aggregate
"parachute payments" paid to or for the Executive's benefit over the aggregate
"parachute payments" that could have been paid to or for the Executive's benefit
without any portion of such "parachute payments" not being deductible by reason
of section 280G of the Code; and (ii) interest on the amount set forth in clause
(i) of this sentence at the rate provided in section 1274(b)(2)(B) of the Code
from the date of the Executive's receipt of such excess until the date of such
payment.
17. Entire Agreement. This Agreement contains all the understandings
----------------
between the parties hereto pertaining to the matters referred to herein, and on
the Effective Date shall supersede all undertakings and agreements, whether oral
or in writing, concerning the Executive's employment with the Company or any of
its predecessors; provided, however, that the rights, duties and obligations of
-----------------
the parties identified in Section 27 hereof under or with respect to the Yank
Employment Agreement (as defined in Section 27) shall be as set forth in Section
27 hereof. Notwithstanding the foregoing, nothing contained in this Section is
intended
14
<PAGE>
to supercede or otherwise modify any of the Executive's rights under any
existing stock option award or any of the Executive's vested rights under any
employee benefit plan or program in which the Executive participates. The
Executive represents that, in executing this Agreement, he does not rely and has
not relied upon any representation or statement not set forth herein made by the
Company with regard to the subject matter, bases or effect of this Agreement or
otherwise.
18. Amendment or Modification. Waiver. No provision of this
---------------------------------
Agreement may be amended or waived unless such amendment or waiver is agreed to
in writing, signed by the Executive and by a duly authorized officer of the
Company. No waiver by any party hereto of any breach by another party hereto of
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of a similar or dissimilar condition or provision at
the same time, any prior time or any subsequent time.
19. Notices Any notice to be given hereunder shall be in writing and
-------
shall be deemed given when delivered personally, sent by courier or telecopy or
registered or certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or to such other
address as such party may subsequently give notice of hereunder in writing:
To Executive at: Arthur W. Stratton, Jr.
136 Rockport Road
Weston, Massachusetts 02193
To the Company at: Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Any notice delivered personally or by courier under this Section 19
shall be deemed given on the date delivered and any notice sent by telecopy or
registered or certified mail, postage prepaid, return receipt requested, shall
be deemed given on the date telecopied or mailed.
20. Severability. If any provision of this Agreement or the
------------
application of any such provision to any party or circumstances shall be
determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this Agreement or the application
of such provision to such person or circumstances other than those to which it
is so determined to be invalid and unenforceable, shall not be affected thereby,
and each provision hereof shall be validated and shall be enforced to the
fullest extent permitted by law.
21. Survivorship. The respective rights and obligations of the
------------
parties hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of such rights and obligations.
22. Governing Law: Attorney's Fees.
------------------------------
15
<PAGE>
(a) This Agreement will be governed by and construed in accordance
with the laws of the State of Georgia, without regard to its conflicts of laws
principles.
(b) The prevailing party in any dispute arising out of this Agreement
shall be entitled to be paid its reasonable attorney's fees incurred in
connection with such dispute from the other party to such dispute.
23. Dispute Resolution. The Executive and the Company shall not
------------------
initiate legal proceedings relating in any way to this Agreement or to the
Executive's employment or termination from employment with the Company until
thirty days after the party against whom the claim is made ("respondent")
receives written notice from the claiming party of the specific nature of any
purported claims and the amount of any purported damages attributable to each
such claim. The Executive and the Company further agree that if respondent
submits the claiming party's claim to the CPR Institute for Dispute Resolution,
JAMS/Endispute, or other local dispute resolution service for nonbinding
mediation prior to the expiration of such thirty day period, the claiming party
may not institute arbitration or other legal proceedings against respondent
until the earlier of: (a) the completion of good-faith mediation efforts or (b)
90 days after the date on which the respondent received written notice of the
claimant's claim(s); provided, however, that nothing in this Section 23 shall
prohibit the Company from pursuing injunctive or other equitable relief against
the Executive prior to, contemporaneous with, or subsequent to invoking or
participating in these dispute resolution processes. The Company shall pay the
cost of the mediator.
24. Headings. All descriptive headings of sections and paragraphs in
--------
this Agreement are intended solely for convenience, and no provision of this
Agreement is to be construed by reference to the heading of any section or
paragraph.
25. Withholdings All payments to the Executive under this Agreement
------------
shall be reduced by all applicable withholding required by federal, state or
local tax laws.
26. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
27. Yank Employment Agreement Matters. Immediately upon this
---------------------------------
Agreement becoming effective, Executive's employment with Yank shall, for all
purposes under the Amended and Restated Employment Agreement dated as of October
20, 1997 by and between Yank and Executive (the "Yank Employment Agreement"), be
deemed terminated by Yank pursuant to Section 5(b)(i) of the Yank Employment
Agreement as of the Effective Date, and as of the Effective Date Executive shall
be entitled to, and vested in, all rights and remedies available to Executive
under Sections 5(e)(iii), 5(f), 5(h), 8 and 9(b) of the Yank Employment
Agreement resulting from such termination. The Company hereby assumes the
duties of Yank pursuant to Sections Sections 5(e)(iii), 5(f), 5(h), 8 and 9(b)
of the Yank Employment Agreement and shall perform all such duties and
obligations in full in a timely manner. On the Effective Date, the Company
shall pay to Executive, in satisfaction of Section 5(e)(iii)(A) and clause (y)
of
16
<PAGE>
the first sentence of Section 5(f) of the Yank Employment Agreement, by wire
transfer to an account specified by Executive an amount equal to $9,922,041 plus
any amounts required to be paid to Executive pursuant to Section 5(h) of the
Yank Employment Agreement (subject to any applicable payroll or other taxes
required to be withheld). Section 16 of this Agreement shall not be applicable
to any payments required to be made to Executive pursuant to this Section 27 or
the Yank Employment Agreement. For purposes of Section 16 of this Agreement, no
payments by the Company or Yank pursuant to this Section 27 or the Yank
Employment Agreement shall be considered in determining whether the limitations
set forth in Section 16 apply to, or shall be used as the basis for reducing any
payments required to be made to Executive pursuant to this Agreement in
connection with, any Change in Control of the Company or the termination of
Executive's employment after the Effective Date.
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written.
PARAGON HEALTH NETWORK, INC.
BY: /s/ Keith B. Pitts
--------------------------------------
NAME: Keith B. Pitts
TITLE: Chairman of the Board, President
and Chief Executive Officer
THE EXECUTIVE
/s/ Arthur W. Stratton, Jr., M.D.
----------------------------------------
Arthur W. Stratton, Jr., M.D.
18
<PAGE>
EXHIBIT 10.7
FIRST AMENDMENT TO
PARAGON HEALTH NETWORK, INC.
1997 LONG-TERM INCENTIVE PLAN
THIS FIRST AMENDMENT is made on the _____ day of ________, 1998, by Paragon
Health Network, Inc., a Delaware corporation (the "Corporation").
INTRODUCTION
------------
WHEREAS, the Corporation adopted the Paragon Health Network, Inc. 1997
Long-Term Incentive Plan (the "Plan"), effective November 4, 1997;
WHEREAS, the stockholders of the Corporation approved the Plan on February
19 1998;
WHEREAS, the Corporation has entered into an Agreement and Plan of Merger,
dated April 13, 1998 with Mariner Health Group, Inc. ("Mariner") and Paragon
Acquisition Sub, Inc. ("Sub"), pursuant to which Mariner will merge with and
into Sub with Mariner surviving as a wholly-owned subsidiary of the Corporation
(the "Merger");
WHEREAS, in connection with the Merger, the Corporation intends to issue
options to certain of the directors and officers of Mariner, and after the
issuance of such options, the Corporation will have insufficient shares of
common stock, par value $.01 per share, of the Corporation ("Common Stock")
available under the Plan to continue to utilize the Plan as a component of
compensation for qualified officers, key employees and consultants; and
WHEREAS, the Corporation desires to amend the Plan to increase the number
of shares of Common Stock authorized for issuance under the Plan from 6,000,000
(adjusted to reflect a three-for-one stock split that occurred on December 30,
1997, whereby the number of shares of Common Stock available for issuance under
the Plan was increased from 2,000,000 to 6,000,000 pursuant to Section 6.7 of
the Plan) to 10,000,000 shares.
AMENDMENT
---------
NOW, THEREFORE, effective July 31, 1998 and subject to approval by the
holders of Common Stock, the first sentence of Section 1.5 of the Plan is hereby
amended and modified by as follows:
"Subject to adjustment as provided in Section 6.7, 10,000,000 shares
of Common Stock shall be available under this Plan, reduced by the sum
of the aggregate number of shares of Common Stock which become subject
to outstanding options, including Director Options, outstanding Free-
Standing SARs, outstanding Stock Awards and outstanding Performance
Shares."
<PAGE>
Except as specifically provided for herein, the Plan shall remain in full
force and effect as prior to this First Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to
be executed as of the day and year first above written.
PARAGON HEALTH NETWORK, INC.
By:_________________________
Title:______________________
ATTEST:
By:__________________________
Title:_______________________
[CORPORATE SEAL]
2
<PAGE>
EXHIBIT 10.8
AGREEMENT REGARDING CERTAIN KELLETT ISSUES
This Agreement made this 19th day of June, 1998, by and among (i) MARINER
HEALTH GROUP, INC., a Delaware corporation ("Mariner"); (ii) MARINER HEALTH CARE
OF NASHVILLE, INC., a Delaware corporation and a wholly owned subsidiary of
Mariner ("Mariner-Nashville") as successor in interest by merger to Convalescent
Services, Inc., a Georgia corporation ("CSI"); (iii) STILES A. KELLETT, JR.,
individually; (iv) SAMUEL B. KELLETT, individually and as the Stockholders Agent
under the Participation Agreement (as defined below); (v) HOUSTON-NORTHWEST
MEDICAL INVESTORS, LTD. (L.P.), a Georgia limited partnership; DALLAS MEDICAL
INVESTORS, LTD. (L.P.), a Georgia limited partnership; FT. BEND MEDICAL
INVESTORS, LTD. (L.P.), a Georgia limited partnership; NORTHWEST HEALTHCARE,
L.P., a Georgia limited partnership; BELLEAIR EAST MEDICAL INVESTORS, LTD.
(L.P.), a Georgia limited partnership; DENVER MEDICAL INVESTORS, LTD. (L.P.), a
Georgia limited partnership; TALLAHASSEE HEALTHCARE ASSOCIATES, LTD. (L.P.), a
Georgia limited partnership; PORT CHARLOTTE HEALTHCARE ASSOCIATES, LTD. (L.P.),
a Georgia limited partnership; SOUTH DENVER HEALTHCARE ASSOCIATES, LTD. (L.P.),
a Georgia limited partnership; MELBOURNE HEALTHCARE ASSOCIATES, LTD. (L.P.), a
Georgia limited partnership; PINELLAS III HEALTHCARE, LTD. (L.P.), a Georgia
limited partnership; POLK HEALTHCARE, LTD. (L.P.), a Georgia limited
partnership; ORANGE HEALTHCARE, LTD. (L.P.), a Georgia limited partnership; and
CREEK FOREST, LIMITED, a Georgia limited partnership (each, a "Lessor" and,
collectively, the "Lessors"); and (vi) PARAGON HEALTH NETWORK, INC., a Delaware
corporation ("Paragon").
WITNESSETH:
WHEREAS, Stiles A. Kellett, Jr., individually and as general partner of
Kellett Partners (L.P.), a Georgia limited partnership, and Samuel B. Kellett,
individually, are shareholders of Mariner (Stiles A. Kellett, Jr. and Samuel B.
Kellett are hereinafter referred to collectively as the "Kelletts"); and
WHEREAS, on January 2, 1996 Mariner and the Kelletts completed the merger
of CSI (CSI then being wholly owned by the Kelletts) and a wholly owned
subsidiary of Mariner, with CSI being the surviving corporation (said merger
transaction being hereinafter referred to as the "CSI-Mariner Merger"); and
WHEREAS, in connection with the CSI-Mariner Merger, Mariner, CSI (now
Mariner-Nashville), the Kelletts, and certain related entities entered into a
number of agreements setting forth the rights and obligations of the respective
parties thereto, such agreements including among others, the Participation
Agreement dated as of January 9, 1995 (the "Original Participation Agreement");
the Option and Lease Amendment Agreement dated as of January 9, 1995 (the
"Option Agreement"); the Stockholders Agreement dated as of January 9, 1995 (the
"Stockholders Agreement"); the Amendment Agreement dated as of May 24, 1995 (the
"Amendment Agreement"); the Amended and Restated Stockholders Agreement dated as
<PAGE>
of May 24, 1995 (the "Amended and Restated Stockholders Agreement"); the Amended
and Restated Option Agreement dated as of May 24, 1995 (the "Amended and
Restated Option Agreement"); and the Second Amendment Agreement dated as of
December 29, 1995 (the "Second Amendment Agreement"); and
WHEREAS, subsequent to the CSI-Mariner Merger, Mariner, the Kelletts, and
certain related parties entered into the Second Amended and Restated
Stockholders Agreement dated as of May 30, 1997 (the "Second Amended and
Restated Stockholders Agreement"); and
WHEREAS, prior to the CSI-Mariner Merger, CSI leased certain health care
facilities (the "Facilities") from the Lessors; and
WHEREAS, at the time of the CSI-Mariner Merger, the leases between CSI and
the Lessors relating to the Facilities were amended and restated (each a "Lease"
and collectively, the "Leases");
WHEREAS, subsequent to the CSI-Mariner Merger, CSI was merged with and into
Mariner-Nashville, with Mariner-Nashville continuing in existence as the
surviving corporation in such merger, and as such became the Lessee under the
Leases; and
WHEREAS, Mariner, Paragon and a subsidiary of Paragon have entered into an
Agreement and Plan of Merger dated as of April 13, 1998, (the "Mariner-Paragon
Merger Agreement") whereby a subsidiary of Paragon would be merged into Mariner
(the "Mariner-Paragon Merger"); and
WHEREAS, on April 13, 1998, Paragon and the Kelletts, among others, entered
into the Company Voting Agreement dated as of April 13, 1998 (the "Voting
Agreement"), pursuant to which the Kelletts agreed to vote their shares of
Mariner Common Stock in favor of the Mariner-Paragon Merger; and
WHEREAS, in connection with entering into the Voting Agreement, the
Kelletts requested that Mariner and Paragon, and Mariner and Paragon agreed to,
use their commercially reasonable best efforts to address certain issues that
had been raised by the Kelletts with respect to the Operative Agreements (as
defined in the Second Amendment Agreement) and certain matters arising
thereunder; and
WHEREAS, Mariner, Paragon and the Kelletts desire to set forth in this
Agreement their resolution of those issues;
NOW, THEREFORE, for and in consideration of the premises and the rights and
obligations herein expressed, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
<PAGE>
1. Termination of Stockholders Agreement. Effective as of the Effective
-------------------------------------
Time (as defined in the Mariner-Paragon Merger Agreement) of the Mariner-Paragon
Merger, the Second Amended and Restated Stockholders Agreement (as well as the
Amended and Restated Stockholders Agreement and the Stockholders Agreement)
shall be deemed terminated and void and of no further effect.
2. Resolution of Arbitration Issues. As of the Effective Time of the
--------------------------------
Mariner-Paragon Merger, for purposes of clause (iv), as modified by clause
(vii), of the first sentence of Section 11.2 of the Participation Agreement (as
amended by the Amendment Agreement and the Second Amendment Agreement), Mariner,
Mariner-Nashville, MSSI and MHC Rehab (a) shall be deemed not to have incurred
any Losses (as defined in the Participation Agreement) unless and until such
Losses shall have exceeded the entire amount, up to but not exceeding
$2,000,000, of the accrued liabilities relating to CSI's self-insured retention
program for general and professional liability insurance carried on the books of
CSI as of May 24, 1995; and (b) shall not be permitted to make claims for
indemnification for any Losses arising out of third party claims against CSI
arising out of events occurring prior to the CSI-Mariner Merger and settled
between May 24, 1995 and January 2, 1996, which settlements are final, binding
and nonappealable. As of the Effective Time of the Mariner-Paragon Merger, the
issues raised in that certain arbitration proceeding currently in process
between the Kelletts and Mariner shall be deemed to be decided in accordance
with the immediately preceding sentence. The Kelletts, Mariner and Paragon agree
that such decision shall be a final decision, fully enforceable in a court of
law or equity, and agree to promptly act in accordance with such decision.
3. Amendment to Option Agreement. As of the Effective Time of the
-----------------------------
Mariner-Paragon Merger, the Amended and Restated Option Agreement shall be
amended as follows:
A. Schedule 2 attached to the Amended and Restated Option Agreement
(entitled "Revised Schedule 2") shall be amended by revising the dates (years)
set forth under the column entitled "Exercise Year" and the values set forth
under the column entitled "Fair Market Value", so that said dates and values
shall read as set forth on the "Second Revised Schedule 2" attached hereto as
Exhibit "A" and made a part hereof. Further, the term "Purchase Option Date" as
- -----------
used in the Amended and Restated Option Agreement shall refer to the date (year)
set forth under the "Exercise Year" column on the Second Revised Schedule 2.
Each reference in the Amended and Restated Option Agreement to "Schedule 2"
shall be deemed to refer to "Second Revised Schedule 2".
B. Each reference in the Amended and Restated Option Agreement to
"Lease" or "Leases" shall be deemed to refer to a Lease or the Leases (in each
case as defined in the Amended and Restated Option Agreement) as such Lease or
3
<PAGE>
the Leases shall have been or are amended through the date hereof (including as
amended as contemplated by this Agreement).
C. Article II of the Amended and Restated Option Agreement shall be
amended by adding a new section 2.10, which shall read as follows:
"2.10. Termination of Option. Notwithstanding anything to the
---------------------
contrary in this Agreement or any other Operative Agreement, the Option
granted in this Article II with respect to a Facility shall terminate with
respect to that Facility in the event (i) the Lessee under the Lease for
such Facility shall fail or refuse to pay any rent, additional rent or
other charges due under such Lease (within the meaning thereof contained in
Section 23a. of such Lease), (ii) such failure or refusal shall continue
for ten (10) days after written notice from the Lessor under such Lease to
such Lessee (within the meaning thereof contained in Section 23a. of such
Lease) and (iii) the Lessor under such Lease shall have terminated such
Lease in accordance with Section 23a.(1) of such Lease. Furthermore, in the
event an Option is so terminated, the Lessee shall forfeit the right to
receive the Option Deposit (as defined in Section 2.3 hereof and as set
forth on Revised Schedule 2 attached hereto, as the same may be revised
from time to time) with respect to such Facility; and such Option Deposit
shall be retained by the applicable Lessor as full and final damages
arising from any and all defaults of the Lessee under such Lease and any
other claims the applicable Lessor may have against the Lessee or any of
its affiliates under such Lease, and upon such termination of such Option,
the applicable Lessor, the Kelletts and their respective affiliates shall
be deemed to have waived any and all claims they or any of them may have
against the Lessee or any of its affiliates for any act or omission, or
with respect to any event, occurring at or prior to such termination or
arising under the Lease. If an Option is terminated in accordance with this
Section 2.10, the Lessee shall, at the request of the Lessor, execute and
deliver to such Lessor any agreements, instruments, notices or memoranda
that such Lessor may reasonably request to properly reflect the termination
of such Option. Notwithstanding anything to the contrary in this Section
2.10, the termination of any such Lease and any such Option shall not
effect in any way any rights or obligations of Lessee and the Lessors under
any other Lease or any other Option granted pursuant to this Agreement with
respect to any other Facility and any term contained in any of the Leases
as now existing or hereafter amended providing for a cross default in the
event of the termination of any of the other Leases shall be deemed null
and void for purposes of this Section 2.10.
4. Amendment to Amendment Agreement. Effective as of the later of (i) the
--------------------------------
Effective Time of the Mariner-Paragon Merger, or (ii) the date on which the
credit facility that Mariner has with a group of lenders for which PNC Bank,
National Association acts as agent (as such credit facility has been, and may in
4
<PAGE>
the future be, amended, extended, increased or otherwise changed, the "Mariner
Credit Facility") is terminated and the indebtedness thereunder has been repaid
in full, Section 2.6(d)(i) of the Amendment Agreement shall be amended in its
entirety to read as follows: "(i) an intercreditor agreement with Mariner's
lenders on as favorable terms to Mariner's lenders as such holder of a Lien
shall reasonably agree to,".
5. Amendments to Leases. As of the Effective Time of the Mariner-Paragon
--------------------
Merger, amendments to the Leases between Mariner-Nashville and Denver Medical
Investors, Ltd. (L.P.), Port Charlotte Healthcare Associates, Ltd. (L.P.) and
Belleair East Medical Investors, Ltd. (L.P.) in the forms attached hereto as
Exhibits 1, 2 and 3, which have been executed contemporaneously herewith, shall
become effective (the "Lease Amendments"). Mariner, as guarantor of Lessee's
obligations under such Leases, hereby consents to such amendments. Mariner-
Nashville and each of the Lessors mentioned above shall enter into and record an
amendment to the Memorandum of Lease, Right of First Refusal, and Option to
Purchase which is currently recorded in the public records with respect to each
affected Facility to reflect the changes effected by the Lease Amendments. Each
Lease Amendment shall be subject to the approval of the holder of any mortgage
encumbering the affected Facility, if such approval is required by the mortgage
or related documents.
6. Assumption of Lease Guaranties by Paragon. Effective as of the later
-----------------------------------------
of (i) the Effective Time of the Mariner-Paragon Merger, or (ii) the date on
which the Mariner Credit Facility is terminated and the indebtedness thereunder
has been repaid in full, Paragon shall (a) assume the guaranty obligation of
Mariner under each existing Lease Guaranty previously delivered by Mariner
pursuant to Section 2.6(c)(iii) of the Amendment Agreement, and (b) if requested
by any Person (as defined in the Amendment Agreement) making a loan for money
borrowed to a Lessor that is secured by a mortgage on a Facility leased by
Lessee, provide a guaranty of Lessee's obligations to pay rent under the
applicable Lease (as defined in the Amendment Agreement), which guaranty shall
be in substantially the form of Exhibit J to the Amendment Agreement.
---------
7. Common Definitions. Unless otherwise defined in this Agreement,
------------------
capitalized terms used in this Agreement that are defined in the Original
Participation Agreement as amended by the Amendment Agreement and the Second
Amendment Agreement (the "Participation Agreement") shall have the meanings
assigned to them in the Participation Agreement, and the rules of construction
and documentary conventions set forth in the Participation Agreement shall apply
to this Agreement. From and after the Effective Time of the Mariner-Paragon
Merger, all notices and other communications under or with respect to the
Operative Agreements (as defined in the Second Amendment Agreement), as amended
from time to time, and the Leases should be sent to Mariner, Mariner-Nashville
or any of their affiliates, c/o Mariner Post-Acute Network, Inc., One Ravinia
Drive, Suite 1500, Atlanta, Georgia 30346.
5
<PAGE>
8. Entire Agreement. This Agreement, together with the Operative
----------------
Agreements (as defined in the Second Amendment Agreement) and the Exhibits and
Schedules hereto and thereto, supersede any other agreement, whether written or
oral, that may have been made or entered into by the parties relating to the
matters contemplated hereby and thereby. This Agreement, together with the
Operative Agreements (as defined in the Second Amendment Agreement) and the
Exhibits and Schedules hereto and thereto, constitute the entire agreement of
the parties with respect to the matters covered hereby and thereby.
9. Amendment or Modification. This Agreement may be amended only with the
-------------------------
written consent of the parties hereto.
10. Waiver. Any party to this Agreement or any of the Operative Agreements
------
may, by written notice to the other parties to this Agreement or such Operative
Agreement, (a) extend the time for the performance of any of the obligations or
other actions of the other parties for its benefit under this Agreement or such
Operative Agreement; (b) waive any inaccuracies in the representations or
warranties of the other parties made to it contained in this Agreement or such
Operative Agreement or in any document delivered pursuant hereto or thereto; (c)
waive compliance with any of the conditions or covenants of the other parties
for its benefit contained in this Agreement or such Operative Agreement; or (d)
waive or modify performance of any of the obligations of the other parties for
its benefit under this Agreement or such Operative Agreement. Except as provided
in the preceding sentence, no action taken pursuant to this Agreement or any of
the Operative Agreements, including any investigation by or on behalf of any
party, shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants, conditions or
agreements contained in this Agreement or any of the Operative Agreements. The
failure of any party hereto to enforce at any time any of the provisions of this
Agreement or any of the Operative Agreements shall in no way be construed to be
a waiver of any such provision, nor in any way to affect the validity of this
Agreement or any of the Operative Agreements or any part hereof or thereof or
the right of such party thereafter to enforce each and every such provision. No
waiver of any breach of or non-compliance with this Agreement or any of the
Operative Agreements shall be held to be a waiver of any other or subsequent
breach or non-compliance.
11. Law Governing. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Georgia, without giving
effect to the principles of conflicts of law thereof.
6
<PAGE>
12. Counterparts. This Agreement may be executed simultaneously in one or
------------
more counterparts, each of which shall be deemed to be an original but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties on the date first above written.
MARINER HEALTH GROUP, INC.,
a Delaware corporation
By: /s/ Arthur W. Stratton, Jr.
--------------------------------------
Arthur W. Stratton, Jr., M.D.
President and Chief Executive Officer
MARINER HEALTH CARE OF NASHVILLE,
INC., a Delaware corporation
By: /s/ Arthur W. Stratton, Jr.
--------------------------------------
Arthur W. Stratton, Jr., M.D.
President
/s/ Stiles A. Kellett, Jr.
--------------------------------------
Stiles A. Kellett, Jr.
/s/ Samuel B. Kellett
--------------------------------------
Samuel B. Kellett, both individually and as
the Stockholders Agent under the Participation
Agreement
DENVER MEDICAL INVESTORS, LTD.
(L.P.), a Georgia limited partnership
By: /s/ Samuel B. Kellett
--------------------------------------
Samuel B. Kellett
General Partner
7
<PAGE>
MELBOURNE HEALTHCARE ASSOCIATES,
LTD. (L.P.), a Georgia limited partnership
By: /s/ Samuel B. Kellett
---------------------------------------
General Partner
DALLAS MEDICAL INVESTORS, LTD. (L.P.),
a Georgia limited partnership
By: /s/ Samuel B. Kellett
---------------------------------------
General Partner
NORTHWEST HEALTHCARE, L.P.,
a Georgia limited partnership
By: /s/ Samuel B. Kellett
---------------------------------------
General Partner
HOUSTON-NORTHWEST MEDICAL INVESTORS,
LTD. (L.P.), a Georgia limited partnership
By: /s/ Samuel B. Kellett
---------------------------------------
General Partner
FT. BEND MEDICAL INVESTORS, LTD. (L.P.),
a Georgia limited partnership
By: /s/ Samuel B. Kellett
---------------------------------------
General Partner
8
<PAGE>
BELLEAIR EAST MEDICAL INVESTORS, LTD.
(L.P.), a Georgia limited partnership
By: /s/ Samuel B. Kellett
-------------------------------------
General Partner
PORT CHARLOTTE HEALTHCARE
ASSOCIATES, LTD. (L.P.), a Georgia
limited partnership
By: /s/ Samuel B. Kellett
-------------------------------------
General Partner
TALLAHASSEE HEALTHCARE ASSOCIATES,
LTD., (L.P.), a Georgia limited partnership
By: /s/ Samuel B. Kellett
-------------------------------------
General Partner
SOUTH DENVER HEALTHCARE ASSOCIATES,
LTD. (L.P.), a Georgia limited partnership
By: /s/ Samuel B. Kellett
-------------------------------------
General Partner
PINELLAS III HEALTHCARE, LTD. (L.P.),
a Georgia limited partnership
By: /s/ Samuel B. Kellett
-------------------------------------
General Partner
9
<PAGE>
POLK HEALTHCARE, LTD. (L.P.), a Georgia
limited partnership
By: /s/ Samuel B. Kellett
---------------------------------------
General Partner
ORANGE HEALTHCARE, LTD. (L.P.), a
Georgia limited partnership
By: /s/ Samuel B. Kellett
---------------------------------------
General Partner
CREEK FOREST, LIMITED, a Georgia
limited partnership
By: /s/ Samuel B. Kellett
---------------------------------------
General Partner
PARAGON HEALTH NETWORK, INC.,
a Delaware corporation
By: /s/ Stefano Miele
---------------------------------------
Title: Vice President and Associate
General Counsel
10
<PAGE>
SECOND REVISED SCHEDULE 2
Exercise Option Fair Market
Facility Year Deposit Value
- ------------------------ -------- ------------ -----------
Colony House 2005 (1,025,000) $4,400,000
Melbourne Terrace 2005 ( 860,000) 5,200,000
Villa Northwest 2004 (1,010,000) 4,300,000
Belleair East 2006 (1,215,000) 3,545,000
South Monaco* 2008 ( 780,000) 2,280,000
Centerville 2006 ( 975,000) 4,300,000
Palmview 2006 (1,330,000) 2,330,000
Heritage Park 2005 (1,130,000) 5,900,000
East Bay 2005 (1,205,000) 4,900,000
Spring Lake 2010 (1,250,000) 5,500,000
Conway Lakes 2010 (1,155,000) 5,100,000
Woodwind Lakes 2003 (1,220,000) 5,300,000
Meadowgreen
Bethany
____________
*Exercise year shall begin on December 1, 2008 (all others begin on May 24
of each exercise year)
Exhibit "A"
<PAGE>
FIRST AMENDMENT OF
AMENDED AND RESTATED
OPERATING LEASE
STATE OF COLORADO
COUNTY OF DENVER
THIS FIRST AMENDMENT OF AMENDED AND RESTATED OPERATING LEASE (this "First
Amendment") is entered into this 19th day of June, 1998, but made effective as
of the Effective Time as defined in that certain Agreement and Plan of Merger
dated as of April 13, 1998, among Paragon Health Network, Inc., Paragon
Acquisition Sub, Inc. and Mariner Health Group, Inc. (the "Effective Time") by
and between DENVER MEDICAL INVESTORS, LTD. (L.P.). a Georgia limited partnership
(hereinafter called "Landlord"), and MARINER HEALTH CARE OF NASHVILLE, INC., a
Delaware corporation, successor by merger to Convalescent Services, Inc., a
Georgia corporation (hereinafter called "Tenant").
W I T N E S S E T H :
WHEREAS, Landlord owns a nursing center located in Denver, Colorado,
formerly known as South Monoco Care Center, but now known as Mariner Health of
Denver (the "Facility"); and
WHEREAS, Landlord and Tenant entered into that certain Amended and Restated
Operating Lease dated May 24, 1995, but made effective the 2nd day of January,
1996 (the "Amended and Restated Operating Lease"), pursuant to which the parties
amended and restated the original lease between the parties dated April 1, 1994
(and amended on January 1, 1995), wherein the Landlord leased the Facility to
the Tenant; and
WHEREAS, Landlord and Tenant desire to amend the Amended and Restated
Operating Lease as set forth hereinafter, with such amendment to become
effective at the Effective Time.
THEREFORE, for and in consideration of the mutual benefits to be gained by
the performance hereof, Landlord and Tenant do hereby amend the Amended and
Restated Operating Lease as follows:
1. The first sentence of Section 2 of the Amended and Restated Operating
Lease is hereby amended to read as follows: "The Term of this Lease shall begin
at 12 o'clock A.M. on January 2, 1996, and shall continue for a period of
Exhibit 1
<PAGE>
eighteen (18) years and four (4) months from January 2, 1996, unless sooner
terminated as provided hereinafter."
2. The first sentence of Subsection 37b.(1) of the Amended and Restated
Operating Lease is hereby amended to read as follows: "Tenant may exercise its
Option granted in this Section 37(b)(1) at any time during the 365-day period
commencing on December 1, 2008 (the "Purchase Option Date").
3. Subject to the amendments set forth herein, the remaining terms and
conditions of the Amended and Restated Operating Lease (as previously amended)
shall remain in full force and effect and are hereby reaffirmed and ratified.
4. This First Amendment shall become effective at, and shall only be
effective from and after, the Effective Time. Prior to the Effective Time, this
First Amendment shall be of no force or effect. In the event the Effective Time
(as defined above) has not occurred by June 30, 1999, this First Amendment shall
be null and void.
IN WITNESS WHEREOF, the parties have duly executed this First Amendment as
of the date hereinabove set forth.
LANDLORD:
DENVER MEDICAL INVESTORS,
LTD. (L.P.)
By:___________________________________
General Partner
TENANT:
MARINER HEALTH CARE OF
NASHVILLE, INC.
By:___________________________________
Title:_____________________________
<PAGE>
ACKNOWLEDGMENTS
STATE OF GEORGIA
COUNTY OF ___________________
On this the _____ day of _________, 1998, before me, the undersigned
officer, personally appeared ______________________________, known to me to be
the general partner of the aforesaid limited partnership and the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same as general partner of said partnership for the purposes therein
contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
_______________________________________
Notary Public
[NOTARIAL SEAL]
My Commission expires:_______________
STATE/COMMONWEALTH OF _______________________
COUNTY OF ______________________
On this the _____ day of __________, 1998, before me, the undersigned
officer, personally appeared _______________________________________________,
known to me to be the _________________________________________ of the
aforesaid corporation and the person whose name is subscribed to the within
instrument as such officer of the aforesaid corporation, and acknowledged that
he executed the same in such capacity on behalf of the corporation for the
purposes therein contained.
_______________________________________
Notary Public
[NOTARIAL SEAL]
My Commission expires:_______________
3
<PAGE>
SECOND AMENDMENT OF
AMENDED AND RESTATED
OPERATING LEASE
STATE OF FLORIDA
COUNTY OF CHARLOTTE
THIS SECOND AMENDMENT OF AMENDED AND RESTATED OPERATING LEASE (this "Second
Amendment") entered into this 19th day of June, 1998, but made effective as of
the Effective Time as defined in that certain Agreement and Plan of Merger dated
as of April 13, 1998, among Paragon Health Network, Inc., Paragon Acquisition
Sub, Inc. and Mariner Health Group, Inc. (the "Effective Time"), by and between
PORT CHARLOTTE HEALTHCARE ASSOCIATES, LTD. (L.P.), a Georgia limited partnership
(hereinafter called "Landlord"), and MARINER HEALTH CARE OF NASHVILLE, INC., a
Delaware corporation, successor by merger to Convalescent Services, Inc., a
Georgia corporation (hereinafter called "Tenant").
W I T N E S S E T H :
WHEREAS, Landlord owns a nursing center located in Port Charlotte, Florida,
formerly known as Palmview but now known as Mariner Health of Port Charlotte
(the "Facility"); and
WHEREAS, Landlord and Tenant entered into that certain Amended and Restated
Operating Lease dated May 24, 1995, but made effective the 2nd day of January,
1996 (the "Amended and Restated Operating Lease"), pursuant to which the parties
amended and restated the original lease between the parties dated July 1, 1994,
wherein the Landlord leased the Facility to the Tenant; and
WHEREAS, Landlord and Tenant entered into a First Amendment of the Amended
and Restated Operating Lease, made effective January 2, 1996, making certain
amendments thereto; and
WHEREAS, Landlord and Tenant desire to further amend the Amended and
Restated Operating Lease as set forth hereinafter, with such amendment to become
effective at the Effective Time.
THEREFORE, for and in consideration of the mutual benefits to be gained by
the performance hereof, Landlord and Tenant do hereby amend the Amended and
Restated Operating Lease as follows:
Exhibit 2
<PAGE>
1. The first sentence of Section 2 of the Amended and Restated Operating
Lease is hereby amended to read as follows: "The Term of this Lease shall begin
at 12 o'clock A.M. on January 2, 1996, and shall continue for a period of
thirteen (13) years and four (4) months from January 2, 1996, unless sooner
terminated as provided hereinafter."
2. The first sentence of Subsection 37b.(1) of the Amended and Restated
Operating Lease is hereby amended to read as follows: "Tenant may exercise its
Option granted in this Section 37(b)(1) at any time during the 365-day period
commencing on the anniversary of the Lease Date in the year 2006 (the "Purchase
Option Date").
3. Subject to the amendments set forth herein, the remaining terms and
conditions of the Amended and Restated Operating Lease (as previously amended)
shall remain in full force and effect and are hereby reaffirmed and ratified.
4. This Second Amendment shall become effective at, and shall only be
effective from and after, the Effective Time. Prior to the Effective Time, this
Second Amendment shall be of no force or effect. In the event the Effective Time
(as defined above) has not occurred by June 30, 1999, this Second Amendment
shall be null and void.
IN WITNESS WHEREOF, the parties have duly executed this First Amendment as
of the date hereinabove set forth.
LANDLORD:
PORT CHARLOTTE HEALTHCARE
ASSOCIATES, LTD. (L.P.)
By:___________________________________
General Partner
TENANT:
MARINER HEALTH CARE OF
NASHVILLE, INC.
By:___________________________________
Title:_____________________________
2
<PAGE>
ACKNOWLEDGMENTS
STATE OF GEORGIA
COUNTY OF __________________
On this the _____ day of ____________, 1998, before me, the undersigned
officer, personally appeared ______________________________, known to me to be
the general partner of the aforesaid limited partnership and the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same as general partner of said partnership for the purposes therein
contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
_______________________________________
Notary Public
[NOTARIAL SEAL]
My Commission expires:_______________
STATE/COMMONWEALTH OF _____________________
COUNTY OF _____________________
On this the _____ day of ___________, 1998, before me, the undersigned
officer, personally appeared _______________________________________________,
known to me to be the _________________________________________ of the
aforesaid corporation and the person whose name is subscribed to the within
instrument as such officer of the aforesaid corporation, and acknowledged that
he executed the same in such capacity on behalf of the corporation for the
purposes therein contained.
_______________________________________
Notary Public
[NOTARIAL SEAL]
My Commission expires:_______________
3
<PAGE>
SECOND AMENDMENT OF
AMENDED AND RESTATED
OPERATING LEASE
STATE OF FLORIDA
COUNTY OF PINELLAS
THIS SECOND AMENDMENT OF AMENDED AND RESTATED OPERATING LEASE (this "Second
Amendment") entered into this 19th day of June, 1998, but made effective as of
the Effective Time as defined in that certain Agreement and Plan of Merger dated
as of April 13, 1998, among Paragon Health Network, Inc., Paragon Acquisition
Sub, Inc. and Mariner Health Group, Inc. (the "Effective Time"), by and between
BELLEAIR EAST MEDICAL INVESTORS, LTD. (L.P.). a Georgia limited partnership
(hereinafter called "Landlord"), and MARINER HEALTH CARE OF NASHVILLE, INC., a
Delaware corporation, successor by merger to Convalescent Services, Inc., a
Georgia corporation (hereinafter called "Tenant").
W I T N E S S E T H :
WHEREAS, Landlord owns a nursing center located in Clearwater, Florida,
formerly known as Belleair East Health Care Center, but now known as Mariner
Health of Clearwater (the "Facility"); and
WHEREAS, Landlord and Tenant entered into that certain Amended and Restated
Operating Lease dated May 24, 1995, but made effective the 2nd day of January,
1996 (the "Amended and Restated Operating Lease"), pursuant to which the parties
amended and restated the original lease between the parties dated July 1, 1994,
wherein the Landlord leased the Facility to the Tenant; and
WHEREAS, Landlord and Tenant entered into a First Amendment of the Amended
and Restated Operating Lease, made effective May 30,1997, making certain
amendments thereto; and
WHEREAS, Landlord and Tenant desire to further amend the Amended and
Restated Operating Lease as set forth hereinafter, with such amendment to become
effective at the Effective Time.
THEREFORE, for and in consideration of the mutual benefits to be gained by
the performance hereof, Landlord and Tenant do hereby amend the Amended and
Restated Operating Lease as follows:
Exhibit 3
<PAGE>
1. The first sentence of Section 2 of the Amended and Restated Operating
Lease is hereby amended to read as follows: "The Term of this Lease shall begin
at 12 o'clock A.M. on January 2, 1996, and shall continue for a period of
thirteen (13) years and four (4) months from January 2, 1996, unless sooner
terminated as provided hereinafter."
2. The first sentence of Subsection 37b.(1) of the Amended and Restated
Operating Lease is hereby amended to read as follows: "Tenant may exercise its
Option granted in this Section 37(b)(1) at any time during the 365-day period
commencing on the anniversary of the Lease Date in the year 2006 (the "Purchase
Option Date").
3. Subject to the amendments set forth herein, the remaining terms and
conditions of the Amended and Restated Operating Lease (as previously amended)
shall remain in full force and effect and are hereby reaffirmed and ratified.
4. This Second Amendment shall become effective at, and shall only be
effective from and after, the Effective Time. Prior to the Effective Time, this
Second Amendment shall be of no force or effect. In the event the Effective Time
(as defined above) has not occurred by June 30, 1999, this Second Amendment
shall be null and void.
IN WITNESS WHEREOF, the parties have duly executed this First Amendment as
of the date hereinabove set forth.
LANDLORD:
BELLEAIR EAST MEDICAL INVESTORS,
LTD. (L.P.)
By:___________________________________
General Partner
TENANT:
MARINER HEALTH CARE OF
NASHVILLE, INC.
By:___________________________________
Title:_____________________________
<PAGE>
ACKNOWLEDGMENTS
STATE OF GEORGIA
COUNTY OF _____________________
On this the _____ day of _________, 1998, before me, the undersigned
officer, personally appeared ______________________________, known to me to be
the general partner of the aforesaid limited partnership and the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same as general partner of said partnership for the purposes therein
contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
_______________________________________
Notary Public
[NOTARIAL SEAL]
My Commission expires:_______________
STATE/COMMONWEALTH OF _____________________
COUNTY OF ___________________
On this the _____ day of _____________, 1998, before me, the undersigned
officer, personally appeared _______________________________________________,
known to me to be the _________________________________________ of the
aforesaid corporation and the person whose name is subscribed to the within
instrument as such officer of the aforesaid corporation, and acknowledged that
he executed the same in such capacity on behalf of the corporation for the
purposes therein contained.
_______________________________________
Notary Public
[NOTARIAL SEAL]
My Commission expires:_______________
2
<PAGE>
ACKNOWLEDGMENTS
STATE OF GEORGIA
COUNTY OF ___________________
On this the _____ day of _________, 1998, before me, the undersigned
officer, personally appeared ______________________________, known to me to be
the general partner of the aforesaid limited partnership and the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same as general partner of said partnership for the purposes therein
contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
_______________________________________
Notary Public
[NOTARIAL SEAL]
My Commission expires:_______________
STATE/COMMONWEALTH OF _______________________
COUNTY OF ______________________
On this the _____ day of __________, 1998, before me, the undersigned
officer, personally appeared _______________________________________________,
known to me to be the _________________________________________ of the
aforesaid corporation and the person whose name is subscribed to the within
instrument as such officer of the aforesaid corporation, and acknowledged that
he executed the same in such capacity on behalf of the corporation for the
purposes therein contained.
_______________________________________
Notary Public
[NOTARIAL SEAL]
My Commission expires:_______________
4
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 25, 1997 (except for Note 13 as to which the
date is March 6, 1997) with respect to the consolidated financial statements and
schedule of GranCare, Inc. included in the Living Centers of America, Inc.
Registration Statement on Form S-4 (Registration Statement No. 333-36525) and
incorporated by reference in this Proxy Statement and related Prospectus of
Paragon Health Network, Inc. for the registration of its common stock.
ERNST & YOUNG LLP
Atlanta, Georgia
June 12, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Paragon Health Network, Inc. Selected Historical Consolidated Financial
Information" in the Proxy Statement (Form S-4/S-8) and related Prospectus of
Paragon Health Network, Inc. for the registration of its common stock and to the
incorporation by reference therein of our report dated December 10, 1997 with
respect to the consolidated financial statements and schedule of Paragon Health
Network, Inc. included in its Annual Report (Form 10-K) for the year ended
September 30, 1997, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
Houston, Texas
June 12, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement on
Form S-4/S-8 of Paragon Health Network, Inc. and subsidiaries of our report
dated February 10, 1998, on our audits of the consolidated financial statements
and the financial statement schedule of Mariner Health Group, Inc. and
subsidiaries as of December 31, 1997 and 1996, and for the years ended December
31, 1997, 1996, and 1995, which report is included in its Annual Report on Form
10-K for the year ended December 31, 1997 filed with the Securities and Exchange
Commission.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
June 15, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
THE BOARD OF DIRECTORS
EVERGREEN HEALTHCARE, INC.
We consent to the incorporation by reference in the registration statement on
Form S-4/S-8 of Paragon Health Network, Inc. of our report dated August 17, 1995
relating to the consolidated statements of operations, stockholders' equity and
cash flows of Evergreen Healthcare, Inc. and subsidiaries for the year ended
December 31, 1994, which report appears in the Registration Statement on Form
S-4 (No. 333-36525) of Living Centers of America, Inc. (predecessor to Paragon
Health Network, Inc.) and to the reference to our firm under the heading
"Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Indianapolis, Indiana
June 12, 1998
<PAGE>
EXHIBIT 99.3
Consent of Morgan Stanley & Co. Incorporated
--------------------------------------------
We hereby consent to the use of our opinion letter dated April 13, 1998 to
the Board of Directors of Paragon Health Network, Inc. included as Annex VI to
the Proxy Statement relating to the proposed merger of Paragon Acquisition Sub,
Inc., a wholly owned subsidiary of Paragon Health Network, Inc., with and into
Mariner Health Group, Inc. and to the references to such opinion in such Proxy
Statement. In giving such 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 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.
MORGAN STANLEY & CO. INCORPORATED
By /s/ Kevin S. Murphy
---------------------
June 18, 1998
1
<PAGE>
EXHIBIT 99.4
June 15, 1998
The Board of Directors
Mariner Health Group, Inc.
125 Eugene O'Neill Drive
New London, CT 06320
Members of the Board:
We hereby consent to the inclusion of our opinion letter, dated April
13, 1998, to the board of Directors of Mariner Health Group, Inc. as Annex VII
to the Joint Proxy Statement/Prospectus forming part of this Registration
Statement on Form S-4/S-8. 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, and the Rules and Regulations Promulgated
thereunder, and we do not admit that we are experts with respect to any part of
the Registration Statement within the meaning of the term "expert" as used in
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
By: /s/ BT Alex. Brown Incorporated
------------------------------------
BT Alex. Brown Incorporated
<PAGE>
EXHIBIT 99.5
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/S-8 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.
June 19, 1998
/s/ Samuel B. Kellett
----------------------------------------
Samuel B. Kellett
<PAGE>
EXHIBIT 99.6
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/S-8 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.
June 19, 1998
/s/ Arthur W. Stratton, Jr., M.D.
---------------------------------
Arthur W. Stratton, Jr., M.D.
<PAGE>
EXHIBIT 99.7
PARAGON HEALTH NETWORK, INC.
PROXY FOR A SPECIAL MEETING OF STOCKHOLDERS TO BE HELD JULY 28, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Keith B. Pitts and Susan T. Whittle and each
of them, attorneys and proxies, with full power of substitution and resubstitu-
tion, to vote at a special meeting of stockholders of Paragon Health Network,
Inc. (the "Company") to be held on July 28, 1998 at 10:00 a.m. local time at
the Crowne Plaza Ravinia, 4355 Ashford Dunwoody Road N.E., Atlanta, Georgia
30346, or at any adjournments or postponements thereof, revoking all previous
proxies, with all powers the undersigned would possess if present, to act upon
the following matters and upon such other business as may properly come before
the meeting or any adjournments thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3 AND 4.
PLEASE SIGN, DATE AND RETURN YOUR PROXY PROMPTLY IN THE POSTAGE PREPAID ENVE-
LOPE PROVIDED.
(TO BE SIGNED ON REVERSE SIDE)
----------------
SEE REVERSE
SIDE
----------------
- ---- Please mark your
X votes as in this
- ---- example.
<TABLE>
<S> <C> <C> <C>
1. To approve the issuance of FOR AGAINST ABSTAIN 2. To approve the adoption of an amendment FOR AGAINST ABSTAIN
up to 31,784,707 shares of ---- ----- ----- to the Amended and Restated Certifi- ----- ----- -----
common stock, par value $.01 | | | | | | cate of Incorporation of the Company | | | | | |
per share, of the Company ---- ----- ----- to change the corporate name from "Para- ----- ----- -----
("Company Common Stock"), to gon Health Network, Inc." to "Mariner
the stockholders of Mariner Post-Acute Network, Inc."
Health Group, Inc., a Delaware
corporation ("Mariner"), pur- 3. To approve the adoption of an amendment ----- ----- -----
suant to an Agreement and Plan to the Amended and Restated Certifi- | | | | | |
of Merger, dated as of April cate of Incorporation of the Company ----- ----- -----
13, 1998 among the Company, to increase the authorized number of
Mariner and Paragon Acquisi- shares of Company Common Stock from 75
tion Sub, Inc., a Delaware million shares to 500 million shares.
corporation and a wholly-
owned subsidiary of the 4. To approve an increase in the number ----- ----- -----
Company. of shares of Company Common Stock | | | | | |
available under the Company's 1997 ----- ----- -----
Long-Term Incentive Plan by an additional
four million shares.
5. 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.
</TABLE>
SIGNATURE(S) ____________________ DATE ___________________
NOTE: Please sign exactly as name appears hereon. Joint
owners should each sign. When signing as attorney,
executor, administrator, trustee or guardian,
please give full title as such.
<PAGE>
EXHIBIT 99.8
MARINER HEALTH GROUP, INC.
PROXY FOR A SPECIAL MEETING OF STOCKHOLDERS TO BE HELD JULY 28, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Arthur W. Stratton, Jr., M.D. and David N.
Hansen, and each of them, attorneys and proxies, with full power of
substitution and resubstitution, to vote at a special meeting of stockholders
of Mariner Health Group, Inc. (the "Company") to be held at State Street Bank &
Trust Company, 225 Franklin Street, Boston, Massachusetts 02110, on July 28,
1998 at 10:00 a.m., local time, or at any adjournments or postponements
thereof, revoking all previous proxies, with all powers the undersigned would
possess if present, to act upon the following matters and upon such other
business as may properly come before the meeting or any adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1 AND 2.
- -------------------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Please sign this proxy exactly as your name(s) appear(s) on the books
of the Company. Joint owners should each sign personally. Trustees and
other fiduciaries should indicate the capacity in which they sign, and
where more than one name appears, a majority must sign. If a
corporation, this signature should be that of an authorized officer who
should state his or her title.
- -------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
<PAGE>
- --- PLEASE MARK VOTES
X AS IN THIS EXAMPLE.
- ---
<TABLE>
<S> <C> <C>
- -------------------------------------
MARINER HEALTH GROUP, INC. FOR AGAINST ABSTAIN
- ------------------------------------- 1. The approval and adoption of the Agreement ----- ----- -----
and Plan of Merger, dated as of April 13, | | | | | |
Mark box at right if an 1998, among Paragon Health Network, Inc., ----- ----- -----
address change or comment a Delaware corporation ("Paragon"), the
has been noted on the Company and Paragon Acquisition Sub, Inc.,
reverse side of this a Delaware corporation and a wholly-owned
card. subsidiary of Paragon.
RECORD DATE SHARES:
2. Such other business as may properly come ----- ----- -----
before the meeting, including any motion | | | | | |
to adjourn the meeting to a later date ----- ----- -----
to permit further solicitation of
proxies, or any postponements or
adjournments thereof.
</TABLE>
Please be sure to sign and date this Proxy. Date
----------------------
Stockholder sign here Co-owner sign here
- ------------------- ------------------
