-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Oqtb2CMg6lC+Po4ySDG2NAKgXm6e/2gScFJJamGkn/68t+7nCsx2Y9JVDqLOOhdx Ebhkk3GKz+Z63IhPXMvmXw== 0000950109-98-000995.txt : 19980218 0000950109-98-000995.hdr.sgml : 19980218 ACCESSION NUMBER: 0000950109-98-000995 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980213 SROS: NONE GROUP MEMBERS: FOUNTAIN VIEW INC GROUP MEMBERS: FV-SCC ACQUISITION CORP. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SUMMIT CARE CORP CENTRAL INDEX KEY: 0000875192 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 953656297 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SC 14D1 SEC ACT: SEC FILE NUMBER: 005-43590 FILM NUMBER: 98539181 BUSINESS ADDRESS: STREET 1: 2600 W MAGNOLIA BLVD CITY: BURBANK STATE: CA ZIP: 91505-3031 BUSINESS PHONE: 8189724035 MAIL ADDRESS: STREET 1: 2600 W MAGNOLIA BLVD CITY: BURBANK STATE: CA ZIP: 91505-3031 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: FOUNTAIN VIEW INC CENTRAL INDEX KEY: 0001055468 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: 11900 W OLYMPIC BLVD STREET 2: STE 680 CITY: LOS ANGELES STATE: CA ZIP: 90064 BUSINESS PHONE: 3105710351 MAIL ADDRESS: STREET 1: 11900 W OLYMPIC BLVD STREET 2: STE 680 CITY: LOS ANGELES STATE: CA ZIP: 90064 SC 14D1 1 SCHEDULE 14D-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-1 TENDER OFFER STATEMENT (PURSUANT TO SECTION 14(d)(1) OF THE SECURITIES EXCHANGE ACT OF 1934) ------------------------ SUMMIT CARE CORPORATION (NAME OF SUBJECT COMPANY) FOUNTAIN VIEW, INC. FV-SCC ACQUISITION CORP. (NAME OF PERSONS FILING STATEMENT) ------------------------ COMMON STOCK, NO PAR VALUE PER SHARE (TITLE OF CLASS OF SECURITIES) ------------------------ 865910103 (CUSIP NUMBER OF CLASS OF SECURITIES) ROBERT M. SNUKAL FOUNTAIN VIEW, INC. 11900 W. OLYMPIC BOULEVARD SUITE 680 LOS ANGELES, CA 90064 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF PERSONS FILING STATEMENT) ------------------------ WITH A COPY TO: STEPHEN M. L. COHEN, ESQ. CHOATE, HALL & STEWART EXCHANGE PLACE 53 STATE STREET BOSTON, MA 02109 (617) 248-5000 - -------------------------------------------------------------------------------- CALCULATION OF FILING FEE - -------------------------------------------------------------------------------- TRANSACTION VALUATION* AMOUNT OF FILING FEE** $143,062,500 $28,613.00 - -------------------------------------------------------------------------------- * FOR PURPOSES OF CALCULATING THE FILING FEE ONLY. THIS CALCULATION ASSUMES THE PURCHASE OF AN AGGREGATE OF 6,812,500 SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE, OF SUMMIT CARE CORPORATION (THE "SHARES") AT $21.00 NET PER SHARE IN CASH. ** THE AMOUNT OF THE FILING FEE, CALCULATED IN ACCORDANCE WITH RULE 0-11(d) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, EQUALS 1/50TH OF 1% OF THE AGGREGATE VALUE OF CASH OFFERED BY FV-SCC ACQUISITION CORP. FOR SUCH NUMBER OF SHARES. [_] CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE 0-11(a)(2) AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID. IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT NUMBER, OR THE FORM OR SCHEDULE AND THE DATE OF ITS FILING. AMOUNT PREVIOUSLY PAID: N/A FILING PARTY: N/A FORM OF REGISTRATION NO.: N/A DATE FILED: N/A ============================================================================= CUSIP NO. 86590103 14D-1 -------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person: Fountain View, Inc. - -------------------------------------------------------------------------------- 2. Check Appropriate Box if (a) [_] a member of a Group (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Sources of Funds: BK AF - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of [_] Legal Proceedings Required Pursuant to Item 2(e) or 2(f) - -------------------------------------------------------------------------------- 6. Place of Organization: Delaware - -------------------------------------------------------------------------------- 7. Aggregate Amount Beneficially Owned: 0 Shares - -------------------------------------------------------------------------------- 8. Check if Amount in Row 7 Excludes Certain Shares [_] - -------------------------------------------------------------------------------- 9. Percent of Class: 0% - -------------------------------------------------------------------------------- 10. Type of Reporting Person: CO - -------------------------------------------------------------------------------- CUSIP NO. 86590103 14D-1 -------- - -------------------------------------------------------------------------------- 1. Name of Reporting Person: FV-SCC ACQUISITION CORP. - -------------------------------------------------------------------------------- 2. Check Appropriate Box if (a) [_] a member of a Group (b) [_] - -------------------------------------------------------------------------------- 3. SEC Use Only - -------------------------------------------------------------------------------- 4. Sources of Funds: AF - -------------------------------------------------------------------------------- 5. Check Box if Disclosure of [_] Legal Proceedings Required Pursuant to Item 2(e) or 2(f) - -------------------------------------------------------------------------------- 6. Place of Organization: Delaware - -------------------------------------------------------------------------------- 7. Aggregate Amount Beneficially Owned: None - -------------------------------------------------------------------------------- 8. Check if Amount in Row 7 Excludes Certain Shares [_] - -------------------------------------------------------------------------------- 9. Percent of Class: 0% - -------------------------------------------------------------------------------- 10. Type of Reporting Person: CO - -------------------------------------------------------------------------------- INTRODUCTION This Transaction Statement on Schedule 14D-1 (this "Statement") filed by Fountain View, Inc., a Delaware corporation ("Parent") and FV-SCC Acquisition Corp., a Delaware corporation ("Purchaser"), relates to the offer by Purchaser, a wholly owned subsidiary of Parent, to purchase all outstanding Shares of Summit Care Corporation, a California corporation (the "Company"), at a price of $21.00 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in Purchaser's Offer to Purchase dated February 13, 1998 (the "Offer to Purchase") and in the related Letter of Transmittal (which together constitute the "Offer"), copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively. ITEM 1. SECURITY AND SUBJECT COMPANY. (a) The name of the subject company is Summit Care Corporation, a California corporation, which has its principal executive offices at 2600 W. Magnolia Blvd., Burbank, California, 91505. (b) The class of equity securities being sought is all the outstanding shares of common stock, no par value per share, of the Company. The information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Terms of the Offer; Expiration Date" in the Offer to Purchase is incorporated herein by reference. (c) The information concerning the principal market in which the Shares are traded and certain high and low sales prices for the Shares in such principal market is set forth in "THE TENDER OFFER -- Price Range of Shares" in the Offer to Purchase is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. (a)-(d) and (g) The information set forth under "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" and Schedule I in the Offer to Purchase is incorporated herein by reference. (e) and (f) During the last five years, none of Purchaser or Parent or, to the best knowledge of Purchaser or Parent, none of the individuals listed in Schedule I of the Offer to Purchase, has been (i) convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, United States federal or state securities laws or finding any violation of such laws. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY. (a) The information set forth under "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Interests of Certain Persons in the Offer and the Merger", "SPECIAL FACTORS -- The Merger Agreement and Related Agreements" and "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" in the Offer to Purchase is incorporated herein by reference. (b) The information set forth under "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- The Merger Agreement and Related Agreements", "SPECIAL FACTORS -- Purpose and Effects of the Offer and the Merger; Reasons for the Offer and the Merger" and "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" in the Offer to Purchase is incorporated herein by reference. ITEM 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a)-(b) The information set forth under "THE TENDER OFFER -- Source and Amount of Funds" in the Offer to Purchase is incorporated herein by reference. (c) Not applicable. ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDER. (a)-(e) The information set forth under "INTRODUCTION", "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Purpose and Effects of the Offer and the Merger; Reasons for The Offer and The Merger", "SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger" and "SPECIAL FACTORS -- The Merger Agreement and Related Agreements" in the Offer to Purchase is incorporated herein by reference. (f)-(g) The information set forth under "SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger" and "THE TENDER OFFER -- Effect of the Offer on the Market for the Shares; Exchange Listing and Exchange Act Registration" in the Offer to Purchase is incorporated herein by reference. ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. (a) and (b) The information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" in the Offer to Purchase is incorporated herein by reference. ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE SUBJECT COMPANY'S SECURITIES. The information set forth under "INTRODUCTION", "SPECIAL FACTORS -- Background of the Offer and the Merger", "SPECIAL FACTORS -- Purpose and Effects of the Offer and the Merger; Reasons for The Offer and The Merger", "SPECIAL FACTORS -- Plans for the Company after the Offer and the Merger", "SPECIAL FACTORS -- Interests of Certain Persons in the Offer and the Merger", "SPECIAL FACTORS -- The Merger Agreement and Related Agreements", "THE TENDER OFFER -- Certain Information Concerning Purchaser and Parent" and "THE TENDER OFFER -- Source and Amount of Funds" in the Offer to Purchase is incorporated herein by reference. ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The information set forth under "INTRODUCTION" and "THE TENDER OFFER -- Fees and Expenses" in the Offer to Purchase is incorporated herein by reference. ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS. The information set forth under "THE TENDER OFFER -- Source and Amount of Funds" in the Offer to Purchase is incorporated herein by reference. ITEM 10. ADDITIONAL INFORMATION. (a)-(f) The information set forth under "THE TENDER OFFER -- Certain Legal Matters; Regulatory Approvals" and "THE TENDER OFFER -- Effect of the Offer on the Market for the Shares, Exchange Listing and Exchange Act Registration" in the Offer to Purchase hereto is incorporated herein by reference. The information set forth in the Offer to Purchase and the Agreement and Plan of Merger, dated as of February 6, 1998 among the Company, Parent, Purchaser and Heritage Fund II, L.P., copies of which are attached hereto as Exhibits (a)(1) and (c)(1), respectively, is incorporated herein by reference. ITEM 11. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Form of Offer to Purchase, dated February 13, 1998. (a)(2) Form of Letter of Transmittal. (a)(3) Form of Notice of Guaranteed Delivery. (a)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees. (a)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Nominees to Clients. (a)(6) Form of Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Summary Advertisement as published in The Wall Street Journal on February 13, 1998. (a)(8) Text of Press Release issued by the Company on February 9, 1998. (b) Commitment letter dated February 6, 1998 issued by the Bank of Montreal. (c)(1) Agreement and Plan of Merger, dated as of February 6, 1998, by and among the Company, Parent, Purchaser and Heritage Fund II, L.P. (c)(2) Agreement entered into as of February 6, 1998 by and among Parent, Robert Snukal, Sheila Snukal, William Scott and Heritage Fund II, L.P. (c)(3) Summit Care Corporation Special Severance Pay Plan. (d) Not Applicable. (e) Not Applicable. (f) Not Applicable.
SIGNATURES After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. February 13, 1998 FV-SCC ACQUISITION CORP. By: /s/ Robert M. Snukal ------------------------------- Name: Robert M. Snukal ----------------------------- Title: President and Treasurer FOUNTAIN VIEW, INC. By: /s/ Robert M. Snukal ------------------------------- Name: Robert M. Snukal ----------------------------- Title: Chief Executive Officer and President EXHIBIT INDEX ------------- (a)(1) Form of Offer to Purchase, dated February 13, 1998. (a)(2) Form of Letter of Transmittal. (a)(3) Form of Notice of Guaranteed Delivery. (a)(4) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees. (a)(5) Form of Letter from Brokers, Dealers, Commercial Banks, Trust Companies and Nominees to Clients. (a)(6) Form of Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Summary Advertisement as published in The Wall Street Journal on February 13, 1998. (a)(8) Text of Press Release issued by the Company on February 9, 1998. (b) Commitment letter dated February 6, 1998 issued by the Bank of Montreal. (c)(1) Agreement and Plan of Merger, dated as of February 6, 1998, by and among the Company, Parent, Purchaser and Heritage Fund II, L.P. (c)(2) Agreement entered into as of February 6, 1998 by and among Parent, Robert Snukal, Sheila Snukal, William Scott and Heritage Fund II, L.P. (c)(3) Summit Care Corporation Special Severance Pay Plan. (d) Not Applicable. (e) Not Applicable. (f) Not Applicable.
EX-99.A.1 2 FORM OF OFFER TO PURCHASE Exhibit (a)(1) OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF SUMMIT CARE CORPORATION AT $21.00 NET PER SHARE BY FV-SCC ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF FOUNTAIN VIEW, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT NEW YORK CITY TIME, ON MARCH 13, 1998, UNLESS THE OFFER IS EXTENDED. THE OFFER (AS DEFINED HEREIN) IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER SUCH NUMBER OF SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE (THE "SHARES"), OF SUMMIT CARE CORPORATION (THE "COMPANY") WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY FV-SCC ACQUISITION CORP. (THE "PURCHASER"), WOULD CONSTITUTE NOT LESS THAN 90% OF THE SHARES THEN OUTSTANDING (THE "MINIMUM CONDITION"), (II) ANY WAITING PERIOD UNDER THE HART- SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 APPLICABLE TO THE PURCHASE OF THE SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED AND (III) THE SATISFACTION OF THE OTHER CONDITIONS DESCRIBED IN "THE TENDER OFFER-- CERTAIN CONDITIONS OF THE OFFER." THE OFFER IS NOT SUBJECT TO ANY FINANCING CONTINGENCY. --------------- IN THE EVENT THE MINIMUM CONDITION IS NOT SATISFIED ON OR BEFORE THE TENTH BUSINESS DAY AFTER ALL OTHER CONDITIONS TO THE OFFER HAVE BEEN SATISFIED (THE "INITIAL EXPIRATION DATE"), (A) THE MINIMUM CONDITION SHALL BE AUTOMATICALLY AMENDED TO MEAN THAT NUMBER OF SHARES (THE "REVISED MINIMUM NUMBER") WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD EQUAL NOT LESS THAN 49.9% OF THE SHARES THEN OUTSTANDING (CALCULATED AS OF THE INITIAL EXPIRATION DATE) SHALL HAVE BEEN VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER, AND (B) PURCHASER WILL AMEND THE OFFER TO PROVIDE THAT PURCHASER WILL PURCHASE, ON A PRO RATA BASIS IN THE OFFER, THAT NUMBER OF SHARES WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD EQUAL 49.9% OF THE SHARES THEN OUTSTANDING (CALCULATED AS OF THE INITIAL EXPIRATION DATE) (IT BEING UNDERSTOOD THAT PURCHASER SHALL NOT IN ANY EVENT BE REQUIRED TO ACCEPT FOR PAYMENT, OR PAY FOR, ANY SHARES IF LESS THAN THE REVISED MINIMUM NUMBER OF SHARES ARE TENDERED PURSUANT TO THE OFFER AND NOT WITHDRAWN AT THE EXPIRATION OF THE OFFER). --------------- THE BOARD OF DIRECTORS OF THE COMPANY, ACTING ON THE UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS, BY THE UNANIMOUS VOTE OF ALL DIRECTORS PRESENT (WITH WILLIAM C. SCOTT, WHO, UPON THE CONSUMMATION OF THE MERGER, WILL BECOME CHAIRMAN OF THE BOARD, AN EXECUTIVE OFFICER AND A SHAREHOLDER OF FOUNTAIN VIEW, INC. ("PARENT"), ABSENT DURING THE VOTE), (A) HAS DETERMINED THAT THE MERGER AGREEMENT (AS DEFINED HEREIN) AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER (AS DEFINED HEREIN), ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND THE SHAREHOLDERS OF THE COMPANY, (B) HAS APPROVED AND ADOPTED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, AND (C) RECOMMENDS ACCEPTANCE OF THE OFFER BY SHAREHOLDERS OF THE COMPANY. --------------- IMPORTANT Any shareholder desiring to tender all or any portion of such shareholder's Shares should either (a) complete and sign the Letter of Transmittal (or a facsimile thereof) in accordance with the instructions set forth therein, have such shareholder's signature thereon guaranteed if required by Instruction 1 thereto, mail or deliver the Letter of Transmittal (or such facsimile thereof) and any other required documents to Harris Trust Company of New York, who is acting as depositary in connection with the Offer ("the Depositary"), and either deliver the Share Certificates (as defined herein) to the Depositary along with the Letter of Transmittal (or a facsimile thereof) or deliver such Shares pursuant to the procedure for book-entry transfer set forth in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" or (b) request such shareholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such shareholder. A shareholder having Shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee, must contact such broker, dealer, commercial bank, trust company or other nominee if such shareholder desires to tender such Shares. Any shareholder who desires to tender Shares and whose Share Certificates are not immediately available, or who cannot comply with the procedures for book-entry transfer described in this Offer to Purchase on a timely basis, may tender such Shares by following the procedures for guaranteed delivery set forth in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares". Questions and requests for assistance or for additional copies of this Offer to Purchase, the Letter of Transmittal or other related materials may be directed to the Information Agent or the Dealer-Manger at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. ---------------- THE DEALER MANAGER FOR THE OFFER IS: LOGO FEBRUARY 13, 1998 TABLE OF CONTENTS
PAGE ---- INTRODUCTION............................................................ 1 SPECIAL FACTORS......................................................... 4 1. Background of the Offer and the Merger............................. 4 2. Recommendation of the Special Committee and the Company Board; Fairness of the Offer and the Merger.............................. 16 3. Opinion of Financial Advisor to the Company........................ 18 4. Position of Purchaser and Parent Regarding Fairness of the Offer and the Merger.................................................... 22 5. Purpose and Effects of the Offer and the Merger; Reasons for the Offer and the Merger.............................................. 22 6. Plans for the Company after the Offer and the Merger............... 24 7. Rights of Shareholders in the Merger............................... 25 8. Interests of Certain Persons in the Offer and the Merger........... 25 9. The Merger Agreement and Related Agreements........................ 28 10. Certain U.S. Federal Income Tax Consequences....................... 42 THE TENDER OFFER........................................................ 44 1. Terms of the Offer; Expiration Date................................ 44 2. Acceptance for Payment and Payment for Shares...................... 46 3. Procedures for Accepting the Offer and Tendering Shares............ 47 4. Withdrawal Rights.................................................. 49 5. Price Range of Shares.............................................. 49 6. Effect of the Offer on the Market for the Shares; Exchange Listing and Exchange Act Registration..................................... 50 7. Certain Information Concerning the Company......................... 51 8. Certain Information Concerning Purchaser and Parent................ 54 9. Source and Amount of Funds......................................... 55 10. Dividends and Distributions........................................ 58 11. Certain Conditions of the Offer.................................... 58 12. Certain Legal Matters; Regulatory Approvals........................ 59 13. Fees and Expenses.................................................. 62 14. Miscellaneous...................................................... 63
SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF PARENT, PURCHASER AND HERITAGE SCHEDULE II DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
ANNEX A OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ANNEX B TEXT OF CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
i To the Holders of Shares of Common Stock of Summit Care Corporation: INTRODUCTION FV-SCC Acquisition Corp., a Delaware corporation ("Purchaser"), formed by Fountain View, Inc., a Delaware corporation ("Parent"), hereby offers to purchase all outstanding shares of common stock, no par value per share (the "Shares"), of Summit Care Corporation, a California corporation (the "Company"), at a price of $21.00 per Share, net to the seller in cash, without interest (the "Offer Price"), upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which together constitute the "Offer"). Tendering shareholders will not be obligated to pay brokerage fees or commissions, or, except as otherwise provided in Instruction 6 of the Letter of Transmittal, stock transfer taxes with respect to the purchase of Shares by Purchaser pursuant to the Offer. Purchaser will pay all charges and expenses of Harris Trust Company of New York, who is acting as depositary in connection with the Offer (the "Depositary"), Sutro & Co., who is acting as dealer- manager in connection with the Offer (the "Dealer-Manager"), and Morrow & Co., Inc., who is serving as information agent in connection with the Offer (the "Information Agent"), incurred in connection with the Offer. See "THE TENDER OFFER--Fees and Expenses". THE BOARD OF DIRECTORS OF THE COMPANY (THE "COMPANY BOARD"), ACTING ON THE UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS (THE "SPECIAL COMMITTEE"), BY THE UNANIMOUS VOTE OF ALL DIRECTORS PRESENT (WITH WILLIAM C. SCOTT ("MR. SCOTT"), WHO, UPON THE CONSUMMATION OF THE MERGER, WILL BECOME CHAIRMAN OF THE BOARD, AN EXECUTIVE OFFICER AND A SHAREHOLDER OF PARENT, ABSENT DURING THE VOTE), (A) HAS DETERMINED THAT THE MERGER AGREEMENT (AS DEFINED HEREIN) AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER (AS DEFINED HEREIN), ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND THE SHAREHOLDERS OF THE COMPANY, (B) HAS APPROVED AND ADOPTED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, AND (C) RECOMMENDS ACCEPTANCE OF THE OFFER BY SHAREHOLDERS OF THE COMPANY. The Company's financial advisor, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), has delivered to the Company Board a written opinion, dated February 6, 1998, to the effect that, as of such date and based upon and subject to certain matters stated in such opinion, the $21.00 per Share cash consideration to be received by the holders of Shares in the Offer and the Merger was fair from a financial point of view to such holders. A copy of the opinion of DLJ is set forth in Annex A hereto and is incorporated by reference in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the Company with the United States Securities and Exchange Commission (the "Commission") in connection with the Offer (together with any exhibits, annexes, amendments or supplements thereto, the "Schedule 14D-9"), which is being mailed to Company shareholders herewith and should be read carefully in its entirety. The opinion of DLJ is directed to the Company Board and relates only to the fairness of the cash consideration to be received in the Offer and the Merger by holders of Shares from a financial point of view, does not address any other aspect of the Offer or the Merger or related transactions, and is not intended to constitute, and does not constitute, a recommendation to any shareholder as to whether such shareholder should tender Shares in the Offer or how such shareholder should vote if a vote is held on the Merger. See "SPECIAL FACTORS--Opinion of Financial Advisor to the Company". THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER SUCH NUMBER OF SHARES WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD CONSTITUTE NOT LESS THAN 90% OF THE SHARES THEN OUTSTANDING (THE "MINIMUM CONDITION"), (II) ANY WAITING PERIOD UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HSR ACT") APPLICABLE TO THE PURCHASE OF 1 THE SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED, AND (III) THE SATISFACTION OF THE OTHER CONDITIONS DESCRIBED IN "THE TENDER OFFER-- CERTAIN CONDITIONS OF THE OFFER". THE OFFER IS NOT SUBJECT TO ANY FINANCING CONDITION. IN THE EVENT THE MINIMUM CONDITION IS NOT SATISFIED ON OR BEFORE THE TENTH BUSINESS DAY AFTER ALL OTHER CONDITIONS TO THE OFFER HAVE BEEN SATISFIED (THE "INITIAL EXPIRATION DATE"), (A) THE MINIMUM CONDITION SHALL BE AUTOMATICALLY AMENDED TO MEAN THAT A NUMBER OF SHARES (THE "REVISED MINIMUM NUMBER") WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD EQUAL NOT LESS THAN 49.9% OF THE SHARES THEN OUTSTANDING (CALCULATED AS OF THE INITIAL EXPIRATION DATE) SHALL HAVE BEEN VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER, AND (B) PURCHASER WILL AMEND THE OFFER TO PROVIDE THAT PURCHASER WILL PURCHASE, ON A PRO RATA BASIS IN THE OFFER, THAT NUMBER OF SHARES WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD EQUAL 49.9% OF THE SHARES THEN OUTSTANDING (CALCULATED AS OF THE INITIAL EXPIRATION DATE) (IT BEING UNDERSTOOD THAT PURCHASER SHALL NOT IN ANY EVENT BE REQUIRED TO ACCEPT FOR PAYMENT, OR PAY FOR, ANY SHARES IF LESS THAN THE REVISED MINIMUM NUMBER OF SHARES ARE TENDERED PURSUANT TO THE OFFER AND NOT WITHDRAWN AT THE EXPIRATION OF THE OFFER). The Offer is being made pursuant to an Agreement and Plan of Merger dated as of February 6, 1998 (the "Merger Agreement") among Parent, Purchaser, Heritage Fund II, L.P., a Delaware limited partnership ("Heritage"), and the Company. The Merger Agreement provides, among other things, for the making of the Offer and further provides that, following the purchase of Shares pursuant to the Offer, upon the terms and subject to the conditions set forth in the Merger Agreement, and in accordance with the California General Corporation Law ("California Law") and the General Corporation Law of the State of Delaware ("Delaware Law"), Purchaser will be merged with and into the Company (the "Merger"). Following consummation of the Merger, the separate corporate existence of Purchaser will cease and the Company will continue as the surviving corporation (the "Surviving Corporation") and will become a wholly- owned subsidiary of Parent. At the effective time of the Merger (the "Effective Time"), each Share issued and outstanding immediately prior to the Effective Time (other than Shares owned by the Company or by any subsidiary of the Company and each Share that is owned by Parent, Purchaser or any other subsidiary of Parent, and other than Shares held by shareholders who have demanded and perfected, and have not withdrawn or otherwise lost, appraisal rights, if any, under California Law) will be canceled and converted automatically into the right to receive $21.00 in cash, or any higher price that may be paid per Share in the Offer, without interest (the "Merger Consideration"). The Merger Agreement is more fully described in "SPECIAL FACTORS--The Merger Agreement and Related Agreements". The consummation of the Merger is subject to the satisfaction or waiver of certain conditions, including the approval of the Merger Agreement by the requisite vote, if any, of the shareholders of the Company. Under California Law, if Purchaser acquires, pursuant to the Offer, the Stock Option (as defined herein) or otherwise, at least 90% of the Shares then outstanding, Purchaser will be able to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, without a vote of the Company's shareholders. In such event, Parent, Purchaser and the Company have agreed to take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after such acquisition, without a meeting of the Company's shareholders. Under California Law, the Merger may not be accomplished for cash paid to the Company's shareholders if Purchaser or Parent owns directly or indirectly more than 50% but less than 90% of the then outstanding shares unless either all the shareholders consent or the Commissioner of Corporations of the State of California approves, after a hearing, the terms and conditions of the Merger and the fairness thereof. Accordingly, pursuant to the Merger Agreement, the Company granted to Parent an irrevocable option (the "Stock Option") to purchase up to 19.99% of the Shares outstanding immediately prior to the exercise of the option at a purchase price of $21.00 2 per Share. The Stock Option may be exercised by Parent only if, upon such exercise, Purchaser and Parent would own directly or indirectly in the aggregate 90% or more of the outstanding Shares. In that event, the Minimum Condition would be satisfied and, following the purchase of Shares in the Offer, Purchaser would be able to effect a short-form merger under California Law, subject to the terms and conditions of the Merger Agreement. Purchaser currently intends to effect a short-form merger if it is able to do so. In the event the Minimum Condition is not satisfied on or before the tenth business day after all other conditions to the Offer have been satisfied, (A) the Minimum Condition shall be automatically amended to mean that number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would equal not less than 49.9% of the Shares then outstanding (calculated as of the Initial Expiration Date) shall have been validly tendered and not withdrawn prior to the expiration of the Offer, and (B) Purchaser will amend the Offer to provide that Purchaser will purchase, on a pro rata basis in the Offer, that number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would equal 49.9% of the Shares then outstanding (calculated as of the Initial Expiration Date) (it being understood that Purchaser shall not in any event be required to accept for payment, or pay for, any Shares if less than the Revised Minimum Number of Shares are tendered pursuant to the Offer and not withdrawn at the expiration of the Offer). If only the Revised Minimum Number of Shares are purchased by Purchaser in the Offer, Purchaser would own upon consummation of the Offer 49.9% of the Shares then outstanding and would thereafter solicit the approval of the Merger Agreement by a vote of the shareholders of the Company. Under such circumstances, a significantly longer period of time will be required to effect the Merger, although, as a practical matter, Parent may have the ability to assure approval of the Merger. See "SPECIAL FACTORS--Purpose and Effects of the Offer and the Merger; Reasons for the Offer and Merger". The Merger Agreement provides that, promptly following the purchase of and payment for Shares by Purchaser pursuant to the Offer, Purchaser shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Board as will give Purchaser representation on the Board equal to the product of the total number of directors on the Board (giving effect to any increase in the number of directors pursuant to the Merger Agreement) and the percentage that the aggregate number of Shares so purchased by Purchaser bears to the total number of Shares then outstanding (on a fully diluted basis); provided, however, that notwithstanding the foregoing, until the Effective Time of the Merger, Parent and Purchaser will not cause the removal of John Brende, William Casey or Gary Massimino from the Board of Directors of the Company and shall permit such persons to remain as members of the Special Committee of the Board of Directors responsible for addressing on behalf of the Company any issues that arise under the Merger Agreement between the Company, on the one hand, and Parent and Purchaser, on the other hand. In the Merger Agreement, the Company has agreed to use its reasonable best efforts to cause Purchaser's designees to be so appointed or elected to the Board. The Company has advised Purchaser that as of the close of business on February 11, 1998, 6,812,500 Shares were issued and outstanding and 909,500 Shares were reserved for issuance pursuant to outstanding stock options granted by the Company to employees and directors ("Existing Stock Options"). As of the close of business on February 11, 1998, neither Parent nor Purchaser owned any Shares. As a result, Parent believes that the Minimum Condition would be satisfied if Purchaser acquired 6,131,250 Shares (assuming no Existing Stock Options were exercised prior to the consummation of the Offer). Except as otherwise set forth herein, the information concerning the Company contained in this Offer to Purchase and in the attached Schedules and Annexes, including financial information, has been furnished by the Company or has been taken from or based upon publicly available documents and records on file with the Commission and other public sources. The information contained in "SPECIAL FACTORS--Opinion of Financial Advisor to the Company" has been furnished by DLJ. Neither Purchaser nor Parent assumes any responsibility (i) for the accuracy or completeness of the information concerning the Company furnished by the Company or contained in such documents and records or for any failure by the Company to disclose events which may have occurred or may affect the significance or accuracy of any such information but which are unknown to Purchaser nor Parent or (ii) for information furnished by DLJ. THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 3 SPECIAL FACTORS 1. BACKGROUND OF THE OFFER AND THE MERGER. At a meeting of the Board of Directors of the Company on June 4, 1997, the Company Board examined a number of factors affecting the future value of the Company and the strategic direction that the Company should take. Among the factors considered were the consolidation trend in the long-term care industry, the competitive conditions that exist in the states in which the Company operates, the uncertainty concerning the effects of the federal government's forthcoming Prospective Payment System and the Company's repeated inability to meet its internal business plan. The Company Board determined that it was in the best interest of the Company and its shareholders to undertake a search for strategic alternatives to the Company's then current strategy. The Company Board decided to engage an investment banker to assist in the search for strategic alternatives and to advise the Company Board. Following discussions conducted by management and presentations to the Company Board, the investment banking firm of DLJ was engaged on September 19, 1997. Between September 29, 1997 and October 22, 1997, DLJ conducted extensive interviews with senior management, engaged in customary due diligence procedures, analyzed valuation parameters, prepared an information memorandum describing the Company (the "Information Memorandum") and developed a list of potential acquirors of the Company. At the regular meeting of the Company Board on October 23, 1997, DLJ made a presentation to the Company Board regarding DLJ's initial valuation estimate for the Company and reviewed the strategic affiliation process. DLJ also discussed with the Company Board other strategic and financial alternatives available to the Company. Between October 24, 1997 and November 17, 1997, DLJ contacted potential acquirors, obtained confidentiality agreements from the potential acquirors and distributed the Information Memorandum. On November 17, 1997, non-binding indications of interest were due from potential acquirors. Between November 18 and December 12, 1997, conferences occurred between potential acquirors and management of the Company, and due diligence investigations were undertaken during such period by potential acquirors. Of the 42 potential acquirors contacted by DLJ or who contacted DLJ with regard to a potential transaction (of whom 23 were strategic acquirors and 19 were financial acquirors), the Information Memorandum and confidentiality agreement were sent to 21 potential acquirors (including 11 strategic acquirors and 10 financial acquirors). Non-binding indications of interest were received from 5 potential acquirors (including 4 strategic acquirors and one financial acquiror). On October 24, 1997, Heritage submitted a letter to DLJ requesting information regarding the Company, and signed a confidentiality agreement on October 31. Heritage and Parent met with Mr. Scott and other members of the Company's management in connection with the bid process on November 9, 1997. On November 17, 1997, Heritage submitted a letter to DLJ expressing interest in a transaction in which Parent, a company in which Heritage is a principal stockholder, would acquire the Company for an approximate price per share in the range of $17.50 to $19.00. On December 15, 1997, DLJ delivered bid packages (containing guidelines and a draft merger agreement) to the 5 remaining potential acquirors, with final bids due on December 22, 1997. On or prior to December 22, 1997, three of the potential acquirors indicated that they would not be making a final bid. One of these three entities was Parent. On December 17, 1997, Parent had informed DLJ that it was withdrawing its interest in the Company and would not be submitting a final bid. Parent's and Heritage's decision to withdraw at that time was based on the fact that a health concern had arisen with respect to Mr. Robert Snukal ("Mr. Snukal") Parent's chief executive officer (which has since been satisfactorily resolved), and Heritage and Parent did not feel that it was in their best interests to proceed with a potential acquisition of the Company with the uncertainty raised by this health issue. 4 On November 5, 1997, Sutro & Co. ("Sutro") had signed a confidentiality agreement. On November 10, following discussions between Sutro and a real estate investment trust ("REIT"), Sutro had called Mr. Scott to explore his interest in pursuing a potential leveraged recapitalization transaction around existing management of the Company. Mr. Scott had expressed an interest in discussing the matter further. Sutro and Mr. Scott did not submit an indication of interest by the November 17, 1997 deadline and, at the time, did not advise DLJ of Mr. Scott's discussions with Sutro. Although Sutro and Mr. Scott were therefore not a part of the original group of 5 potential acquirors, they continued to discuss a possible transaction. On December 12, 1997 Sutro and Mr. Scott called the Company's counsel, Gibson Dunn & Crutcher LLP ("GD&C"), and the Company's accountants, Ernst & Young, to discuss the concept of a recapitalization transaction. On December 19, 1997, the REIT issued a commitment, subject to due diligence and certain other conditions, for $162.5 million in financing for a leveraged recapitalization through a sale/leaseback transaction. On December 22, 1997, Mr. Scott and Sutro met with a Texas-based health care organization and received a letter expressing interest in investing in a leveraged recapitalization of the Company, but indicating that it would probably be unable to commence its due diligence investigation until January 19, 1998. On or about December 22, 1997, Sutro and Mr. Scott informed DLJ that they would not be submitting a bid for the Company. On December 23, 1997 at the regular meeting of the Company Board, DLJ made a presentation to the Company Board concerning DLJ's activities on behalf of the Company with regard to the strategic affiliation process. Mr. Scott informed the Board at that meeting that he and Sutro would not be submitting a bid for the Company. Representatives of GD&C made a lengthy presentation to the Company Board regarding the fiduciary duties of directors in the strategic affiliation process under California law. Representatives of DLJ described to the Company Board the two final bids that had been received on December 22, 1997, copies of which were provided to the Company Board. One of the bids contemplated a stock-for-stock merger in which shareholders would receive, for each share of common stock of the Company, shares of stock of the acquiror having a market value (based on recent trading) of approximately $22.57. The other bid contemplated an all-cash tender offer/merger at a price of $22.00 per share. Extensive discussion and questioning of representatives of DLJ ensued concerning the two bids, the methods used to value such bids and the process employed with respect to the identification and consideration of strategic alternatives. The Company Board directed that DLJ conduct further discussions with the two final bidders in order to obtain further information about the bidding entities, and to improve upon the price and terms offered by each bidder. DLJ advised the Company Board that each bid was subject to the completion of due diligence and each, by its terms, would remain outstanding until the close of business on January 19, 1998. GD&C was directed to review and comment on the amendments to the draft merger agreement that had been included in the final bids by each entity. The Company Board was advised that, because one of the final bidders had offered shares of its common stock, rather than cash, substantial due diligence efforts would be required with respect to that bidding entity; to that end, GD&C had prepared a list of required due diligence information. DLJ advised the Company Board regarding the bidder's financial condition (based on publicly available information), its stock price trading history and its relative price volatility. Discussion followed regarding the uncertainties surrounding any attempt to place a valuation on the stock-for-stock proposal before having an opportunity to perform diligence. The Company Board discussed the relative merits of a cash transaction and a stock transaction and the prospects for further negotiating the terms of each proposal. Between December 23, 1997 and January 8, 1998, DLJ engaged in discussions with the two bidders in order to improve the price and terms of their respective bids. GD&C continued its legal evaluation of the two bids. On January 9, 1998, the Company Board met and was advised that Company Board member William Casey had indicated his interest in submitting a bid through the strategic affiliation process. As a result, Mr. Casey was excused from all Company Board discussions and information concerning the strategic affiliation process. The Company Board was informed that DLJ had instructed Mr. Casey to submit a bid by January 14, 1998, a date that balanced the Company's interest in receiving as many valid bids as possible with the fact that final bids had been due on December 22, 1997 and that the two bidders had been waiting for a response since then. The Company Board was informed that Mr. Casey had been advised regarding his duties concerning confidentiality of Company information, bid information and Company Board strategy. Representatives of GD&C discussed with the Company Board the appropriate process with respect to the handling of a submission of a proposal from 5 Mr. Casey. The Company Board was further informed of the state of negotiations with the two existing bidders. The Company Board was informed that discussions had been held on January 7, 1998 with the stock-for-stock bidder but that substantial issues remained outstanding concerning price and price protection mechanisms, and as a result, the bidder had decided not to allow the Company to commence due diligence with respect to the bidder. Representatives of GD&C presented to the Company Board GD&C's analysis, from a legal point of view, of the two bids, with particular attention to the break-up fees proposed therein, the proposed price protection mechanism in the stock-for-stock proposal and the conditions under which the Company Board, in the exercise of its fiduciary duties, could engage in discussions and negotiations with another bidder after the signing of a definitive purchase agreement. The Company Board discussed the likely timing of the two existing bids, and the Company Board adopted a negotiating strategy with respect to each of the two bidders. With respect to the bidder who had proposed an all-cash bid, the Company Board directed that negotiations focus on increasing the price and accelerating the due diligence process of the bidder. With respect to the bidder who had proposed a stock- for-stock merger, the Company Board directed that negotiations focus on increasing the exchange ratio of the number of shares of the bidder's stock to be received for each share of Company stock, tightening the proposed purchase price protection or "collar" mechanism, ensuring that substantial liquidated damages would be paid to the Company if such bidder decided, as a result of downward movement of its stock price, not to consummate the merger, reducing the proposed break-up fee payable by the Company and permitting the Company Board to consider and negotiate bids received after the signing of a definitive merger agreement. The Company Board also expressed its continuing concern that, given its inability to perform due diligence regarding the stock-for-stock bidder, it had an insufficient basis upon which to judge the value of the stock-for-stock proposal. Between January 10, 1998 and January 16, 1998, such discussions were held with each of the bidders. During this time, the bidder that had proposed an all-cash transaction conducted extensive due diligence and indicated a willingness to increase its bid to $22.25 per share. On or about January 15, 1998, the Company provided to the bidders its estimate of earnings for the second fiscal quarter ended December 31, 1997. On January 16, 1998, the all- cash bidder informed DLJ and GD&C that such bidder had determined to disengage from its strategic partner in the bid, and to propose entering into a relationship with Mr. Scott pursuant to which Mr. Scott would purchase an equity position in the acquiring entity and serve as its chief executive officer. In addition, the all-cash bidder informed DLJ that, principally as a result of the Company's earnings estimate for the second quarter ended December 31, 1997, such bidder was reducing its bid for the Company to $20.00 per share. Upon being so informed by the all-cash bidder and after soliciting from Mr. Scott his explanation of his potential relationship with such bidder, it was determined that Mr. Scott could no longer represent the Company in its negotiations with such bidder or with any other bidder, and that a special meeting of the Company Board should be called forthwith at which the Company Board should consider the appointment of a Special Committee of independent directors to control negotiations on behalf of the Company thenceforth. GD&C suggested to Mr. Scott that he retain his own counsel. GD&C also reminded Mr. Scott that he had obtained confidential information concerning the bidders, their bids, and the Company Board's negotiating strategy and, as a director and executive officer of the Company, was under a strict fiduciary duty of confidentiality not to disclose, in any way whatsoever, such confidential information to the all-cash bidder or to any other person or entity. The all-cash bidder was informed that, as a result of such bidder's potential entry into a relationship with Mr. Scott, the Company Board would consider the appointment of a Special Committee at a meeting to be held on January 20, 1998 and that, if a Special Committee were then appointed, the members of the Special Committee would likely require several days in order to become more familiar with the details of the proposals and negotiations then underway. On January 15, 1998, Heritage received a call from a senior lender that indicated that it was considering participating in a bid to acquire the Company organized by Sutro with the potential involvement of Mr. Scott. Heritage discussed the proposal with management of Parent, and they agreed that they should consider re-entering the process of seeking to acquire the Company. On the next day, Heritage and Parent met with Sutro and the senior lender to discuss a proposed bid for the Company. In anticipation of proceeding to make an offer, Heritage and Parent arranged for a meeting between Mr. Snukal, whose health issue had been resolved, and Mr. Scott to discuss the manner in which they would work together if the Company were acquired by Parent. 6 On January 20, 1998, the Company Board met to consider the status of the affiliation process and to consider the appointment of a Special Committee. William Casey attended the Company Board meeting and informed the Company Board that he was no longer pursuing any proposal in connection with the strategic affiliation process and stated that he would not be involved in any future proposal. A brief summary of the strategic affiliation process since the January 9, 1998 Company Board meeting was presented to the Company Board by DLJ. DLJ stated that, with Mr. Scott present, it would only describe matters already known to Mr. Scott. Representatives of GD&C discussed at length the standards of fiduciary duty as they applied to the strategic affiliation process and discussed the question of forming an independent Special Committee to assume responsibility for the strategic affiliation process and the functions and responsibility of such a committee. The members of the Board concluded that Mr. Scott was ineligible to serve on a Special Committee. Owing to Donald Amaral's relationship with an affiliate of one of the bidders, he stated that he could not properly serve as a member of the Special Committee. The Company Board adopted a resolution creating a Special Committee, comprising Messrs. John Brende, William Casey and Gary Massimino, the remaining members of the Company Board, and empowered it to consider strategic affiliation alternatives, to control the process of negotiation of one or more strategic affiliation agreements, and to recommend to the Company Board which strategic affiliation alternative, if any, was in the best interests of the Company and its shareholders. At that meeting, Mr. Scott and DLJ informed the Company Board for the first time that Heritage, which previously had dropped out of the bidding, had now expressed an interest in re-entering the bidding process. A Special Committee meeting was thereupon commenced. The Special Committee, upon discussion, decided to exclude from its deliberations Mr. Frank Osen, long-time principal counsel to the Company and Mr. Derwin Williams, the Company's Chief Financial Officer. The Special Committee elected Mr. Massimino as its Chairman. DLJ made a detailed presentation to the Special Committee on the present state of negotiations; and the Special Committee thoroughly questioned DLJ and discussed the negotiations to date. DLJ stated to the Special Committee that the all-cash bidder had been provided with internal Company information concerning the second quarter ended December 31, 1997 and, in particular, the fact that earnings before interest, taxes, depreciation and amortization were estimated to be approximately 8% below the Company's budget for such period. DLJ further informed the Special Committee that on January 19, 1998 DLJ had engaged in a conversation with the all-cash bidder pursuant to which such bidder confirmed that it had reduced its bid to $20.00 per share. DLJ also presented to the Special Committee the status of negotiations with the stock-for-stock bidder and indicated that DLJ had been unable to make further progress with the stock-for-stock bidder on price protection mechanisms and that, in any event, the bidder had not allowed the Company to commence any financial or legal due diligence with respect to the bidder. At that same meeting, DLJ also informed the Special Committee, and described in substantial detail, the fact that Heritage had expressed a desire to re- enter the bidding process at a price per share, in cash, of $23.00, that Heritage had done a substantial amount of due diligence prior to its earlier departure from the bidding process, but that Heritage had not yet been provided with the estimates for the second fiscal quarter ended December 31, 1998. The Special Committee extensively discussed the current bids, and directed that DLJ use all efforts to speed Heritage's process of submitting an all-cash bid. In addition, the Special Committee directed that DLJ attempt to increase the price offered by the existing all-cash bidder and to determine the level of interest of the stock-for-stock bidder after such bidder had an opportunity to review the Company's revised second fiscal quarter estimated results. The Special Committee also addressed the severance arrangements proposed by management. It was reported that the Compensation Committee had substantially cut back management's proposal, which had been reviewed by outside consultants. The Special Committee extensively questioned DLJ concerning alternatives to selling the Company and discussed the advantages and disadvantages of each of these alternatives. DLJ stated that a key limitation on the ability of the Company successfully to undertake other alternatives to the sale of the Company was the Company's capacity to increase its leverage for acquisitions or a recapitalization. 7 The Special Committee then addressed the process to be employed from January 20, 1998 forward. The Special Committee directed that Mr. Scott be advised not to take calls from Heritage or others in his capacity as Chairman and Chief Executive Officer; the Special Committee determined that representatives of the Special Committee should be a party to any discussions between Mr. Scott and Heritage or others, except as to any compensation arrangements between such parties and Mr. Scott following the sale of the Company. The Special Committee then readmitted Messrs. Scott, Williams and Osen and closely questioned Messrs. Scott and Williams concerning the financial results for the first and second quarters of the present fiscal year and the forecasted results for the third and fourth quarters of the present fiscal year, the expected effect of rate increases in Texas and of the recent acquisition of the McAllan, Texas property. The Special Committee also examined the sources of the Company's problems in the second quarter ended December 31, 1997. The Special Committee further inquired concerning the expected effect of the federal government's forthcoming Prospective Payment System and the specifics of the timing of its implementation and its proposed contents. The Special Committee also discussed with Messrs. Scott and Williams strategic alternatives to a sale of the Company, with particular focus on a possible transaction involving a Texas-based health care organization. Mr. Scott advised the Special Committee that he soon would be meeting with one or more representatives of Heritage to discuss possible compensation arrangements should they desire that he continue to manage the Company if Heritage were to purchase the Company. The Special Committee directed Mr. Scott not to discuss with Heritage any matters other than such compensation arrangements and/or equity investment arrangements and reminded him, in particular, that the confidential information he possessed concerning the other bidders and the Company Board's negotiating position must be held in confidence with respect to Heritage or any other bidder. The Special Committee unanimously adopted the following two resolutions: RESOLVED, that all contacts between prospective bidders and the Company shall be made through Gary Massimino, Chairman of the Special Committee, Donaldson, Lufkin & Jenrette or Gibson, Dunn & Crutcher LLP, and no officer of the Company shall have any contact with any prospective bidder without the prior consent of the Special Committee; FURTHER RESOLVED, with respect to the request of Mr. Scott to speak with representatives of Heritage, the Special Committee approves such request so long as Mr. Scott limits the discussions to issues of management roles within the Company if Heritage were to acquire the Company. The meeting between Messrs. Scott and Snukal occurred on January 21, 1998, and covered Mr. Snukal's and Mr. Scott's understanding of the allocation of responsibility and authority in a combined enterprise if Parent's bid were to be successful. As a result of this meeting, in which it was provisionally agreed that after the acquisition Mr. Scott would become Chairman of Parent, and Mr. Snukal would remain Chief Executive Officer, Heritage and Parent then proceeded to discuss a possible bid with various financing sources, including several banks and REITs. During that period and for the following week, Parent and Heritage engaged in various discussions with Mr. Scott regarding the compensation and equity ownership that he would receive as a shareholder and member of the continuing management of Parent after any acquisition of the Company. They eventually agreed on a package, which is described in "SPECIAL FACTORS--The Merger Agreement and Related Agreements--Management Agreement". In light of the fact that DLJ was retained by the Company under Mr. Scott's leadership and that GD&C had performed legal work for the Company in the past, the Special Committee decided to retain special counsel to advise the Special Committee regarding the retention of DLJ and GD&C. At the request of the Special Committee, GD&C reported to Mr. Massimino the total amount that GD&C had billed to the Company on all prior projects. On January 21, 1998, the Special Committee consulted with a representative of another law firm concerning the retention by the Special Committee of DLJ and GD&C. The Special Committee, determined that, taking into consideration the fact that DLJ's work for the Company consisted solely of work on the present project and the fact that GD&C's prior work for the Company primarily involved securities filings at the billing amounts provided to the Special Committee by GD&C, the fact that GD&C had drafted the contracts included in the bid package and had carefully analyzed the two present bids, and the interest of the Company and its shareholders in moving expeditiously through the process, that it was in the best interest of the Company and its shareholders to retain DLJ and GD&C as financial and legal advisors, respectively, to the Special Committee. 8 On January 22, 1998, the Special Committee met with representatives of DLJ and GD&C. The Special Committee conducted a telephone conference with representatives of Heritage, was informed by Heritage that Parent was considering making a cash offer in the range of $23 per share, explored the ability of Parent to finance its proposal, the likely timing of the receipt of firm commitment letters from financing sources and the importance to the Special Committee of limiting, in breadth and time limit, diligence conditions to an offer from Parent. During the telephone conference, Heritage described to the Special Committee and GD&C the role that Parent would have in the proposed acquisition, with attention to Parent earnings, unused debt capacity and possibility of synergies with the Company. Heritage stated that Parent would submit a formal bid for the acquisition of the Company by the close of business on January 23, 1998. Heritage explained to the Special Committee the nature of its relationship with Parent. Heritage explained that, on August 1, 1997, it had closed a recapitalization of Parent, as a result of which it had acquired approximately 50% of the outstanding capital stock of Parent and Mr. Snukal and his family, the prior owners of Parent, acquired the other 50%. Heritage stated that it held approximately 65% of the economic interest in Parent. Immediately following such conversation with Heritage, GD&C described to the Special Committee its past relationship with Parent and Mr. Snukal and his family, and indicated that, prior to the conversation, it had not been aware that Parent was involved in the transaction. GD&C urged the Special Committee to speak again to the representative of another law firm to seek his counsel on whether it would be advisable for the Special Committee to continue the retention of GD&C in light of the past representation by GD&C of Parent and the Snukal family in connection with the transactions by which Heritage acquired its interest in Parent. Representatives of GD&C and DLJ were excused while the Special Committee spoke with the representative of another law firm. Following such conversation, the representatives of GD&C and DLJ were readmitted to the meeting. The Special Committee asked a number of questions of GD&C regarding obtaining waivers of any potential conflict and the operation of an ethical screen to be erected within GD&C between personnel working on the Company's strategic affiliation process, and personnel who had represented Parent and the Snukal family in the prior transactions with Heritage. The Special Committee then determined that it was in the best interest of the Company and its shareholders to continue the retention of GD&C, and to waive any potential conflict of interest subject to the receipt of a waiver of any potential conflict of interest by Heritage, Parent and Mr. Snukal. The Special Committee discussed the most recently amended bid by the all-cash bidder, which the bidder had stated was fully-financed, and the timing of that bid. The Special Committee discussed the best strategy for responding to the all-cash bidder and determined to meet on January 23, 1998 to reach a decision whether to make a counter proposal to the all-cash bidder, and if so, at what price and to review and consider the bid expected to be received on that date from Parent. The Special Committee instructed DLJ to state to the all-cash bidder that the Special Committee had been formed only two days previously, and that the formation of the Special Committee was owing to the all-cash bidder's potential entry into an arrangement with Mr. Scott, that the Committee would require some additional time in collecting more information and in analyzing the available alternatives and that, as a result, the Special Committee would likely not be in a position to respond to the all- cash bidder on January 23, 1998. The Special Committee discussed at some length the stock-for-stock bid, the risks and concerns regarding the bidder's stock price and volatility and the length of time that would be involved in performing due diligence regarding the financial information and legal data with respect to such bidder. Representatives of GD&C discussed with the Special Committee the proposed amendments to the form of purchase agreement contained in the bid packages that had been proposed by the two bidders; and a comparison was presented of the relative advantages and disadvantages to the Company and its shareholders of such proposed amendments. The Special Committee questioned DLJ and GD&C concerning the advisability of a tender offer by a bidder followed by a merger, as opposed to a merger transaction contingent upon a shareholder vote at a special meeting. The Special Committee questioned DLJ at some length concerning its analysis of a potential leveraged recapitalization of the Company. The Special Committee particularly questioned DLJ concerning its numerical assumptions. DLJ advised the Special Committee that, on the basis of the analysis it had performed to that date, that such a leveraged recapitalization was not likely to be close in value to the proposals for the purchase of the Company 9 currently being considered by the Special Committee. The Special Committee then discussed the alternative of remaining independent and not engaging in a leveraged recapitalization transaction. The Special Committee discussed steps that could be taken to improve the Company's earnings and the risks and uncertainties with respect thereto. DLJ described its analysis of the uncertainty as to whether such steps could materially increase earnings sufficiently in a meaningful time frame to approximate the value for shareholders that would be created in the proposed transactions under consideration by the Special Committee. DLJ also advised the Special Committee that, after the specific provisions of the Prospective Payment System were announced by the federal government, potential buyers would take account of such System in valuing the Company; the results of such valuation were described as being unpredictable, in that the specifics of the new Prospective Payment System were then unknown. DLJ also stated that the multiple of earnings applicable to companies in this sector had been declining since DLJ's engagement in October 1997 through the present time. DLJ further discussed the discount rate appropriate in the calculation of a value for the Company based upon a discounted cash flow analysis. The Special Committee extensively questioned DLJ regarding each of these matters and, in particular, its numerical assumptions. The Special Committee was reminded by DLJ that Parent had been given a deadline of January 23, 1998 to submit its bid. On January 23, 1998 the Special Committee met to receive the report of DLJ concerning negotiations with the all-cash bidder and to receive the Parent bid. DLJ stated to the Special Committee that DLJ had been in contact with the stock-for-stock bidder, but that such bidder had expressed its view that it was not ready, at such time, to put forward a bid that reflected the estimated results for the second quarter ended December 31, 1997 and that it was not in a position to proceed with negotiations. DLJ advised the Special Committee that the all-cash bidder had indicated a willingness to increase its bid to $20.50 per share. The Special Committee discussed the timing of the response to the all-cash bidder and the necessity of gaining as much time as possible in the negotiations with the all-cash bidder if an offer from Parent were forthcoming at a price in cash higher than that offered by the all-cash bidder. During the meeting of the Special Committee, Parent submitted its bid to acquire the Company for $23.00 per share, subject to due diligence (estimated to take approximately 30 days), the receipt of financing and mutually acceptable documentation. Although the Parent bid was for cash at a price in excess of that offered by the all-cash bidder, the Special Committee noted with disapproval that the bid contained a long diligence period during which Parent had the option not to sign the transaction documents and yet not pay any fees or expenses to the Company. The Special Committee also noted with some disapproval that the Parent bid did not contemplate a tender offer, but proposed a merger transaction that would be voted upon at a special meeting of shareholders, which the Special Committee understood could involve a substantial increase in the amount of time between signing of a definitive agreement and the payment of consideration to the Company's shareholders. On January 24, 1998 the Special Committee met to review in detail the Parent bid, and to receive the analysis of DLJ and GD&C concerning the same. Following extensive discussion and questioning, the Special Committee directed DLJ to inform Parent that the Special Committee did not believe it could favorably recommend a transaction with Parent unless the diligence period were greatly shortened. The Special Committee also instructed DLJ to inform Parent that the Special Committee might reach the conclusion that the competing all- cash, fully financed bid might be accepted by the Special Committee absent evidence of a financing commitment for the Parent bid and a significant acceleration of timing. The Special Committee indicated that it would require either firm commitment letters from all of Parent's proposed financing sources or evidence sufficient to convince the Special Committee that such firm commitments would be forthcoming promptly. The Special Committee also instructed DLJ to contact representatives of the all-cash bidder to state that the all-cash bidder's most recent proposal was at a price that the Special Committee could recommend to the Company Board, assuming all other issues concerning the definitive Agreement and Plan of Merger could be resolved. DLJ so informed the all-cash bidder on January 24, 1998. Between January 26 and January 29, 1998, extensive negotiations occurred between representatives of the Special Committee and representatives of the all-cash bidder and between representatives of the Special Committee and Parent. In addition, both such bidders engaged in extensive due diligence during such period. On January 26, 1998, the Special Committee met to discuss the status of the two cash bids, including the information requests from the two bidders, the timing of the process and the discussions with Parent concerning its proposed transaction structure. 10 On January 28, 1998, the Special Committee conducted a conference call with representatives of the all-cash bidder, discussing the proposed price of $20.50 per share, the status of the all-cash bidder's due diligence efforts, and the commitment of such bidder to continue such efforts throughout the weekend of January 31 and February 1, 1998 if necessary. The all-cash bidder stated to the Special Committee that it was no longer engaged in any discussions with Mr. Scott with respect to management issues and that it was in the process of seeking a strategic partner concerning the management of the Company. The bidder reconfirmed that its proposal was fully financed and not subject to any financing contingencies. The Special Committee discussed the timing of contract negotiations with the representatives of the all-cash bidder and the remaining outstanding issues. On January 28, 1998, the Special Committee also conducted a meeting with representatives of Heritage, Parent, Sutro and a bank that was in the process of considering providing financing for the transaction. The representatives of Heritage and Parent made a presentation concerning the time schedule for the completion of their diligence effort and their obtaining of committed financing. The representatives of Heritage and Parent also discussed in some detail their current financing plan. The representatives stated that a condition subsequent to the entry into a definitive agreement was the settlement of all outstanding issues concerning equity holdings and management among Heritage and Messrs. Scott and Snukal. The representatives also addressed the preference of Heritage and Parent for a traditional cash merger transaction rather than a cash tender offer followed by a merger. The Special Committee closely questioned the representative of the bank concerning the likelihood of obtaining a firm commitment letter, the timing of the delivery of such a letter, and the structuring of the proposed financing. The representatives of Heritage and Parent described to the Committee their view of the future of the Company in combination with Parent. The Special Committee questioned the representatives of Heritage and Parent concerning the content and timing of their additional due diligence process. An extensive discussion occurred concerning the request of Heritage and Parent for reimbursement of their costs and expenses in case the Company entered into a definitive agreement with another party. After representatives of Heritage, Parent, Sutro and such bank were excused, the Special Committee discussed in detail the best strategy for dealing with Heritage and Parent and the all-cash bidder, timing issues and certain issues raised in the discussions with Heritage and Parent. The Committee directed DLJ to make plain to Heritage and Parent that the Committee was pleased that Heritage and Parent had greatly accelerated their diligence schedule and that the Committee was pleased that Heritage, Parent and the bank had stated that they all expected that all diligence would be completed and a firm commitment letter would be in place from financing sources by February 6, 1998. The Special Committee, however, instructed DLJ to inform Heritage and Parent that the Special Committee could not accept as a condition subsequent the entry into an agreement among Heritage and Messrs. Scott and Snukal concerning their relative equity ownership and management roles in the combined companies. In addition, DLJ was instructed to inform Heritage and Parent that a cash tender offer/merger structure was the strong preference of the Special Committee and that Heritage and Parent, if it hoped to succeed with its bid, would need to agree to a tender offer structure and would need to accelerate its diligence process and the process for obtaining a firm financing commitment letter. On January 29, 1998, the Special Committee met to discuss the current status of due diligence efforts by the two cash bidders, to discuss the contents of the bids and the best strategy for dealing with the two bidders. The Special Committee weighed the potential gain from accepting the higher cash price offered by Heritage and Parent as against the risk of losing the fully- financed cash bid from the all-cash bidder. The Committee determined that it need make no decision on this matter unless and until the all-cash bidder completed its diligence and presented the Special Committee with a deadline for approving or rejecting its bid. On January 30, 1998, the Special Committee again convened to discuss the status of the two cash offers and the stock-for-stock offer. DLJ informed the Special Committee that the stock-for-stock bidder was not prepared to renew its bid and/or engage in negotiations at the present time. DLJ also informed the Special Committee that it had been advised on the evening of January 29, 1998 that the all-cash bidder had decided to reduce the price it was willing to pay for the stock of the Company by a material amount below $20.50 per share. The Special Committee discussed these most recent developments, with a focus on the strategic implications for negotiations with Heritage and Parent. DLJ also informed the Special Committee that Heritage 11 and Parent had requested the Committee's assurance that it would not recommend a transaction with another bidder until February 6, 1998, because Heritage and Parent were unwilling to invest the resources to put forward a fully-financed cash offer unless they had some assurance that their expenses would be reimbursed by the Company if the Company entered into a transaction with another bidder before February 6, 1998. On January 30, 1998, the Special Committee held a second conference and invited Mr. Amaral to participate in part of the meeting in order to obtain his advice regarding the process and strategy. Mr. Amaral briefly described his ongoing relationship with an affiliate of the stock-for-stock bidder. The Special Committee determined, following discussions with representatives of GD&C and DLJ that, as the stock-for-stock bidder had stated that it would not put forward a renewed bid, and given Mr. Amaral's extensive experience and knowledge, it would be in the best interests of the Company and its shareholders to discuss certain matters relating to the bids with Mr. Amaral. Mr. Amaral was reminded that the contents of his discussions with the Committee needed to be kept in strictest confidence. The Special Committee then discussed the best strategy for encouraging the speedy resolution of Parent's bid at a price and on terms favorable to the Company's shareholders. After lengthy discussions, the Special Committee instructed DLJ to inform Heritage and Parent that, in light of the favorable price it had proposed, the Special Committee would be prepared to consider signing a definitive merger agreement with Parent on February 2, 1998 that would be subject to the receipt of firm financing commitments and the completion of due diligence. The Special Committee indicated that it would consider recommending such a transaction if the contract were structured as a tender offer/merger, if the contract would automatically expire by its terms on February 6, 1998 unless, by such time, Heritage's and Parent's diligence efforts were complete and firm commitment letters had been received sufficient to close the transaction, and if Heritage and/or Parent agreed to pay a break-up fee to the Company if it were unable to obtain financing. Between January 30, 1998 and February 6, 1998, extensive negotiations concerning the transaction documents were conducted between GD&C and Choate, Hall & Stewart, counsel to Heritage and Parent. The principal items of negotiation concerned timing, conditions to closing, termination rights, break-up fees payable by Heritage and/or Parent and the Company, expense payment obligations and representations and warranties. On January 31, 1998, the Special Committee convened to discuss Heritage's and Parent's response to the Company's proposal. Heritage and Parent proposed to sign the definitive transaction documents on February 2, 1998 providing for a tender offer/merger structure and subject to the receipt of a financing commitment and the completion of diligence. Heritage offered to materially increase the amount of equity it was investing in order to increase the likelihood of receiving a firm commitment letter on an expedited basis from a bank, but refused to entertain any break-up fee payable by Heritage and/or Parent. The Special Committee reviewed Heritage's and Parent's proposal and discussed Heritage's and Parent's request that the Company cover Heritage's and Parent's expenses in the event the Company entered into an agreement with another bidder before February 6, 1998 as opposed to afterwards. On January 31, 1998, the Special Committee spoke by telephone with a senior officer of one of the banking institutions considering providing financing for the transaction. This officer informed the Special Committee that such bank expected to be able to deliver a "highly confident" letter with respect to the proposed financing on February 2, 1998, expected to be able to deliver a form of firm commitment letter on February 2, 1998, and hoped to deliver a firm commitment to Heritage and Parent on February 4 or February 5, 1998. Another banking institution considering financing the transaction also stated to the Special Committee its interest in funding the transaction, particularly in light of the material increase in the amount of equity that Heritage was prepared to invest in the transaction. The Special Committee engaged in an extensive discussion concerning the best negotiating strategy for dealing with Heritage and Parent and, at the conclusion of the discussion, instructed DLJ to advise Heritage and Parent again that, if Heritage and Parent were to present a highly confident letter and a form of commitment letter and were to agree to a tender offer/merger structure, the Special Committee might be in a position to recommend signing an agreement with Parent on February 2, 1998. The Special Committee's position was presented to representatives of Heritage and Parent on January 31, 1998. 12 On February 2, 1998, members of the Special Committee met in person with representatives of Heritage and Parent to discuss the current status of Heritage's and Parent's diligence efforts and the timing for receiving firm commitment letters from a financing source sufficient to close the transaction. Heritage and Parent indicated that, although they had not received a highly confident letter or an acceptable form of commitment letter, they expected to complete their remaining due diligence by the close of business on February 5, 1998 and that they expected to receive a firm financing commitment on February 4 or 5, 1998 and in any event by no later than February 6, 1998. The Special Committee indicated it was satisfied that Heritage's Parent's due diligence efforts were on schedule, but expressed its concern that it appeared to be unlikely that the Special Committee would receive a highly confident letter or the form of firm commitment letter from a banking institution on February 2, 1998. GD&C advised the Special Committee with respect to the issues that remained outstanding in the negotiation of the definitive Agreement and Plan of Merger. At the February 2, 1998 meeting, the Special Committee advised Heritage and Parent that, in light of the fact that they were unable to present a highly confident letter and form of commitment letter and because they were unwilling to consider the payment of a break-up fee to the Company if they were unable to obtain financing, the Special Committee would no longer consider executing a merger agreement containing a financing contingency and that it would negotiate with Heritage and Parent with a view towards executing a definitive agreement, without financing or diligence contingencies, as soon as possible during the week of February 2. Mr. Massimino stated to Heritage and Parent that the Special Committee would not recommend a transaction with any other bidder prior to February 6, 1998 without giving Heritage or Parent twelve hours advance oral notice. On February 2, 1998, DLJ informed the Special Committee that DLJ had had a discussion with representatives of the all-cash bidder, had discussed in some detail the issues that the all-cash bidder had stated were its reasons for reducing its bid price below $20.50 per share, and was told by the representative of the all-cash bidder that, assuming such issues could be resolved satisfactorily, the all-cash bidder would be prepared to entertain resubmitting its bid at or near the same price as (but no higher than) before its most recent price reduction. DLJ also stated to the Special Committee that, as of February 1, 1998, DLJ had not yet completed the analysis and review process necessary for it to render its fairness opinion to the Company Board. DLJ also informed the Special Committee that it had been contacted by a financing source that had been involved in the bid by Parent. That financing source stated to DLJ that it was no longer a part of the Parent bid and was interested in contacting at least one other entity which it believed had been a bidder for the Company. The financing source requested that the Special Committee waive, as to such financing source and as to such other bidder, the confidentiality provisions applicable to each so that they might conduct discussions and negotiations among themselves. The Special Committee discussed with GD&C and DLJ the appropriate response to such overture. The Special Committee determined that it was in the best interests of the Company and its shareholders to encourage as many valid bids as possible. Accordingly, the Special Committee directed DLJ to inform such financing source and such other bidder that the Company was waiving its rights under the confidentiality agreements that had been entered into, to the extent of allowing discussions and negotiations between such other financing source and such other bidder. The Special Committee also directed DLJ to inform Parent forthwith of such developments, in the interests of full disclosure and the maintenance of trust and confidence between the Company and Parent. In a subsequent conversation with Parent, the latter stated its view that such other financing source would be acting in violation of a confidentiality arrangement with Parent if such other financing source were to participate in another bid. Parent requested the Special Committee not to grant the waivers requested by such other financing source. The Special Committee refused this request by Parent, and so informed such other financing source and such other bidder, and advised Parent and the other financing source that the Special Committee's waiver was granted with the explicit understanding that it was not encouraging the financing source to breach any agreement with Parent and that any such agreement and/or breach would be left to Parent and the financing source to discuss and resolve. On February 3 and February 4, 1998, Parent continued its due diligence efforts, negotiations continued between the parties concerning the definitive transaction documents, and the Special Committee convened several times on both days to deliberate upon the status of the negotiations and the negotiating position that the Special Committee determined was best. 13 During this period and the following days, Parent continued to receive information from its due diligence review of the Company that raised troubling issues for it, and Parent continued to assess the costs and risks in completing the acquisition. Various regulatory matters were considered by it, and the status of certain unexpectedly high payables and other financial issues were reviewed. On February 5, 1998, the Special Committee met with representatives of Heritage, Parent, Sutro and the Bank of Montreal. The representative of the Bank of Montreal stated that his bank was prepared to deliver a firm commitment letter, that there were no further approval processes required within his bank, that the Bank of Montreal would be the agent on this credit facility and that the Bank of Montreal was quite familiar with both the Company and Parent. At the February 5, 1998 meeting, the representatives of Heritage and Parent then described to the Special Committee a number of issues that, in their view, reduced the value of the Company below that which had been the basis of Heritage's and Parent's original bid, that as a result, Parent was reducing its bid to $20.75 per share, and that such offer would expire at noon, Pacific Standard Time on February 6, 1997. Counsel for Heritage and Parent then addressed the remaining issues concerning the definitive transaction documents. In particular, such counsel stated that Heritage and Parent now required that if the agreement were terminated because of a default by the Company that did not trigger the obligation to pay break-up fees, then the Company would fully reimburse Heritage and Parent for all of their expenses, including commitment fees, without a cap. Such counsel also stated that Heritage and Parent required that the Company make a representation and warranty that none of the information that had been supplied to Heritage and Parent, written or oral, contained any materially misleading statement and that such information did not fail to include any information that was necessary, in the context of the information that had been provided, to make the totality of such information not materially misleading. Such counsel also stated that Heritage and Parent insisted that a break-up fee would be payable to Parent if the Company willfully breached any representation, warranty or covenant and, within twelve months after the signing of definitive transaction documents with Heritage and Parent, entered into a transaction with any party with whom the Company had been in contact or to whom information had been supplied by the Company or its representatives on or after October 1, 1997. In addition, such counsel stated that Heritage and Parent required, as a condition of closing, that the Company obtain the consent of any landlord whose lease required consent to the transaction. Lastly, such counsel stated that Heritage and Parent required as a condition of closing that all regulatory approvals necessary to consummate the transactions and to continue the present business of the Company be obtained. Representatives of Heritage and Parent also indicated that if it were possible to negotiate an arrangement satisfactory to Parent and the Bank of Montreal whereby the Company's Senior Secured Notes would be amended and remain in place on a permanent basis, the shareholders of the Company would be entitled to be paid the difference, if any, between the "make-whole" payment provided for in the Company's Senior Secured Notes and the cost of obtaining the consent of the noteholders and the Bank of Montreal. Following Heritage's and Parent's presentation of their revised proposal, the representatives of the bidder were excused, but the Committee requested that Mr. Scott remain in order to answer certain questions to be posed by the members of the Special Committee. The Special Committee solicited Mr. Scott's views on the specific issues that had been raised by Heritage and Parent and the proposed price reduction that had been put forward by the representatives of Heritage and Parent. The Special Committee then excused Mr. Scott and discussed extensively the modified offer and the Special Committee's appropriate response thereto. The Special Committee directed DLJ to negotiate with Parent with a view to obtaining the maximum price per share that Parent was willing to pay. DLJ was also instructed to state the Special Committee's position with respect to each of the issues that had been raised by counsel to Heritage. In particular, the Special Committee instructed DLJ that the Special Committee was not prepared to accept an expense reimbursement obligation without a cap; that a broad "10b-5" representation and warranty was unacceptable and that the Special Committee's view was that, upon consultation with Mr. Scott and discussion with landlords on February 6, 1998, Parent ought to be able to accept definitive transaction documents without landlord consents as a condition to closing. 14 DLJ engaged in extensive negotiations with a representative of Heritage and Parent and reported back to the Special Committee that Parent was prepared to raise its price to $21.00 per share and that, as to the other outstanding issues, Heritage and Parent were prepared to accept a cap of $2 million on their fees and expenses in case of a default by the Company on its representations, warranties or covenants not triggering an obligation of the Company to pay the break-up fee; that Parent was prepared to be flexible concerning its desire for a "10b-5" representation and that Parent was willing to be flexible, as well, with respect to the obtaining of landlord consents as a condition of closing, assuming Parent obtained sufficient comfort with respect to such matters prior to the execution and delivery of definitive transaction documents on February 6, 1998. On February 6, 1998, extensive negotiations occurred between counsel for the Company and counsel for Heritage and Parent with respect to the issues identified in the meeting of February 5, 1998. The Special Committee convened at 9:00 a.m. and was in continuous session until approximately 7:00 p.m. In addition to the members of the Special Committee, Mr. Amaral was invited to participate. During such meeting, representatives of GD&C described, at several points during the day, the state of negotiation concerning the open issues and reviewed with the Special Committee the specific terms of the transaction as summarized in materials sent to the Special Committee and Mr. Amaral on February 5, 1998. The Special Committee discussed in detail Mr. Scott's proposed ongoing role with Parent and his proposed investment in Parent. DLJ described to the Company Board its view of the unlikelihood of the Company's shareholders receiving a substantial portion or any of the "make- whole" payment. DLJ presented an extensive analysis of the transaction from a financial point of view. DLJ described the methods and analytical techniques it had used in conducting its work and concluded by informing the Special Committee that it was prepared to issue a fairness opinion to the Company Board with respect to the proposed transaction. The Special Committee conducted a detailed questioning of DLJ's analysis, with particular focus on DLJ's assumptions underlying its analysis. The Special Committee reconvened at 9:00 p.m. and received the report of GD&C concerning changes in the language of the transaction documents that had been negotiated since the Committee adjourned at 7:00 p.m. GD&C informed the Special Committee that negotiations had concluded on the merger agreement on terms that the Special Committee had previously stated that day to be acceptable to the Special Committee. Following further discussion, the Special Committee adopted a resolution recommending that the Company Board approve the transactions with Heritage and Parent on the terms contained in the definitive transaction documents, subject to receipt by the Company Board of DLJ's fairness opinion. The Special Committee then adjourned. Following the completion of the Special Committee meeting, the Company Board then convened, with Mr. Scott excluded from the meeting because of his interest in the transaction. The Special Committee reported to the Company Board its conclusions with respect to the transaction and stated its belief that the transaction represented the highest price and the best value reasonably obtainable and that, in its view, the transaction was in the best interest of the Company and its shareholders. The Special Committee discussed in detail the basis of its belief. DLJ stated that at $21.00 per share, and under the terms and conditions contained in the definitive transaction documents, it was the opinion of DLJ that the transaction was fair from a financial point of view to the Company's shareholders. DLJ noted that a full presentation of the underlying analysis supporting its fairness opinion had been presented beginning at approximately 2:00 p.m. to the Special Committee with Mr. Amaral present and that discussion and questioning by the Special Committee and Mr. Amaral had continued for several hours after such presentation by DLJ. DLJ noted that the proposed transaction was fully financed by the Bank of Montreal and that bridge financing was in place to cover the funds necessary to consummate the Offer. The Company Board questioned GD&C concerning the likely timing until closing of the transaction and other material terms of the transaction. The Company Board (with Mr. Scott absent) unanimously adopted resolutions approving the entry by the Company into the transactions and favorably recommended the transaction to the Company's shareholders. Mr. Scott was invited to join the meeting; a discussion occurred concerning an appropriate press release and Mr. Scott was informed that the Company Board had authorized and directed him to execute and deliver the definitive transaction agreements on behalf of the Company. 15 The Merger Agreement was executed and delivered at approximately 11:00 p.m. on February 6, 1998. The Company and Parent issued a joint press release before the opening of the U.S. stock markets on February 9, 1998 announcing such execution and delivery. On February 13, 1998, Purchaser commenced the Offer. 2. RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE COMPANY BOARD; FAIRNESS OF THE OFFER AND THE MERGER. The Company Board has, by the unanimous vote of all directors present (with Mr. Scott, who upon consummation of the Merger will become Chairman of the Board, an executive officer and a shareholder of Parent, absent during the vote), determined that the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, are fair to and in the best interests of the Company and the holders of Shares, has approved and adopted the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, and recommends that the Company shareholders accept the Offer and tender their Shares. Mr. Scott was not present at the meeting at which the vote on the Merger and the Merger Agreement was taken. As set forth in the Merger Agreement, subject to the terms and conditions thereof, Purchaser will purchase any and all (or, in certain circumstances, the Revised Minimum Number of) outstanding Shares tendered prior to the expiration of the Offer if the conditions to the Offer have been satisfied (or waived). Recommendation of the Special Committee and the Company Board On February 6, 1998, the Special Committee unanimously recommended and approved the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger. On February 6, 1998, the Company Board (with Mr. Scott not present or participating in discussion or voting because of his agreement with Parent to become chairman, an executive officer and a shareholder of Parent if the Offer is consummated) based upon, among other things, the unanimous recommendation and approval of the Special Committee and the fairness opinion received from DLJ, approved the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, and it determined that each of the Offer and the Merger is fair to, in the best interests of, and produces the highest value reasonably obtainable to, the shareholders of the Company and recommended that the shareholders of the Company accept the Offer and tender their Shares in the Offer. SPECIAL COMMITTEE In reaching its determination referred to above, the Special Committee considered the following factors, each of which, in the view of the Special Committee, supported such determinations: (a) The historical market prices and recent trading activity of the Shares, including (i) that the Offer Price of $21.00 per Share represents a premium of approximately 29% over the $16.25 per Share closing price on January 30, 1998, which was seven days prior to the February 6, 1998 public announcement of the fact that the Company was near to concluding a definitive agreement for the sale of the Company at or about $21.00 per Share in cash, a premium of approximately 24% over the $16.88 per Share closing price on January 7, 1998, which was 30 days prior to such public announcement, a premium of approximately 33% over the $15.81 per Share closing price on December 8, 1997, which was 60 days prior to such public announcement, and a premium of approximately 29% and 31% over the average closing price for the one-month and three-month periods, respectively, preceding such date, (ii) that the Shares never traded on the Nasdaq Stock Market above $21.00 per share following such announcement, (iii) that the Shares have not traded on the Nasdaq Stock Market higher than $21.00 per share since October 21, 1996 and (iv) that the $21.00 price per share is payable in cash, thus eliminating any uncertainties in valuing the consideration to be received by the Company's shareholders; 16 (b) The history of the negotiations between the Special Committee and its representatives and Parent and its representatives, including (i) the Special Committee's belief that Parent would not further increase the Offer Price, and, accordingly, $21.00 per Share was, in the opinion of the Special Committee the highest price that could be obtained from Parent and (ii) the Special Committee's belief that further negotiations concerning price with Parent could cause Parent to abandon the Offer; (c) The opinion of DLJ that, based upon and subject to the various assumptions and limitations set forth therein, as of the date thereof, the $21.00 per Share to be received by the shareholders of the Company in the Offer and the Merger pursuant to the Merger Agreement was fair to the shareholders from a financial point of view, and the analyses presented to the Special Committee in connection therewith (See "SPECIAL FACTORS-- Opinion of Financial Advisor to the Company") (a copy of DLJ's opinion is attached hereto as Annex A, and shareholders are urged to read this opinion in its entirety); (d) The history of the negotiations with the stock-for-stock bidder and the all-cash bidder, and the absence of other bidders despite a substantial effort by DLJ to contact a large number of potential bidders; (e) The possibility that, because of: the lower than expected Company earnings for the second fiscal quarter ended December 31, 1997 and the six- month period ended December 31, 1997; the substantial uncertainty concerning whether the Company would be able to improve its performance in the six-months ended June 30, 1998; the frequency with which the Company had, in the past, not met its projected results; and the critical uncertainty regarding the contents of the federal government's forthcoming Prospective Payment System and its effect on future Company earnings, the consideration the Company's shareholders might obtain in a future transaction was likely to be less advantageous than the consideration they would receive pursuant to the Offer and the Merger; (f) The effect of the Minimum Condition that, without the consent of the Company, no change in the Offer may be made by Parent which decreases the $21.00 per Share payable in the Offer, which changes the form of consideration to be paid in the Offer, which reduces the maximum number of Shares to be purchased in the Offer, which imposes conditions to the Offer in addition to those set forth in "THE TENDER OFFER--Certain Conditions of the Offer" or which broadens the scope of such conditions except as expressly provided in the Merger Agreement; (g) The review by the Special Committee of alternatives to the transaction with Parent, including remaining independent and remaining independent in connection with a leveraged recapitalization, in light of the fact that each of Messrs. Scott and Casey were unable to obtain viable proposals for a leveraged recapitalization of the Company involving REITs, and in light of the advice of DLJ that it was unlikely that any such transaction could be structured that would produce value to the Company's shareholders at levels similar to $21.00 per share; (h) The fact that Heritage was a signatory to the Merger Agreement, and had promised therein to provide up to $82 million in cash equity, together with the Company's receipt of a copy of an executed firm financing commitment letter from the Bank of Montreal in an amount which, in combination with the Heritage commitment, was sufficient to close the transaction, all of which affected the likelihood that the proposed acquisition would be consummated; (i) The terms and conditions of the Merger Agreement; (j) The fact that pursuant to the Merger Agreement, the Company is not prohibited from responding to any unsolicited requests for information, and may participate in discussions and negotiate with the entity or group making such request concerning any merger, sale of assets, sale of shares of capital stock or similar transaction involving the Company or any of its subsidiaries or divisions, if such entity or group has submitted a written proposal to the Board relating to any such transaction and the Board by a majority vote determines in its good faith judgment, based on the advice of counsel, that it is required to do so in the exercise of its fiduciary duties under California Law, in which event, after giving notice to Purchaser, the Company may elect to terminate the Merger Agreement and pay the break-up fee provided for in the Merger Agreement; and 17 (k) The structure of the transaction, which is designed, among other things, to result in receipt by the shareholders of the Company at the earliest practicable time of the consideration to be paid in the Offer and the fact that the per Share consideration to be paid in the Offer and the Merger is the same. Additional Considerations of the Board The members of the Board evaluated the various factors listed above in light of their knowledge of the business, financial condition and prospects of the Company and based upon the advice of financial and legal advisors. In light of the number and variety of factors that the Board considered in connection with its evaluation of the Offer and the Merger, the Board did not find it practicable to assign relative weights to the foregoing factors and, accordingly, the Board did not do so. In addition to the factors listed above, the Board considered the fact that while consummation of the Offer and the Merger would result in the shareholders of the Company receiving a premium for their Shares over the trading prices of the Shares prior to the public announcement of the fact that the Company was close to entering into a definitive agreement for the sale of the Company at a price at or about $21.00 per share, consummation of the Offer and the Merger would eliminate any opportunity for shareholders of the Company to participate in the potential future growth prospects, if any, of the Company. The Board determined, however, that (a) the loss of opportunity is reflected in the price of $21.00 per Share, and (b) there are continued substantial business risks associated with independent operations and the healthcare regulatory and compensation environment that could materially negatively impact the Company's long-term financial prospects. In addition, the Board determined that the Offer and the Merger were the result of a process that was fair to the shareholders of the Company because, among other things, (a) a Special Committee was formed consisting of members of the Board of Directors who are neither employees of the Company nor were affiliated with any of the bidders, (b) the Special Committee conducted approximately 90 hours of meetings and conference calls during the 18 day period between the formation of the Special Committee and the execution and delivery of the definitive transaction documents, during which meetings the Special Committee evaluated and analyzed the bids, determined the negotiating strategy and reached informed conclusions based, in part, on the advice of its independent financial and legal advisors, (c) the Special Committee deliberated with respect both to the Offer and the Merger and a variety of alternative strategies, and (d) the $21.00 per share price and the other terms and conditions of the Merger Agreement resulted from active arm's-length bargaining between the Special Committee and its representatives, on the one hand, and Parent on the other. IN LIGHT OF ALL THE FACTORS SET FORTH ABOVE, THE COMPANY BOARD HAS DETERMINED BY THE UNANIMOUS VOTE OF ALL DIRECTORS PRESENT, (WITH MR. SCOTT, WHO UPON CONSUMMATION OF THE MERGER WILL BECOME CHAIRMAN OF THE BOARD, AN EXECUTIVE OFFICER AND A SHAREHOLDER OF PARENT, ABSENT DURING THE VOTE), THAT THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE HOLDERS OF THE SHARES, HAS APPROVED AND ADOPTED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, AND RECOMMENDS THAT THE HOLDERS OF THE SHARES ACCEPT THE OFFER AND TENDER THEIR SHARES THEREUNDER. NONE OF THE MEMBERS OF THE BOARD WHO VOTED TO APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING ANY OF THE MEMBERS OF THE SPECIAL COMMITTEE, WERE EMPLOYEES OF THE COMPANY OR ITS SUBSIDIARIES. 3. OPINION OF FINANCIAL ADVISOR TO THE COMPANY. DLJ has acted as financial advisor to the Company in connection with the Offer and the Merger and delivered its oral opinion to the Company Board dated February 6, 1998, which was confirmed in writing on the 18 same date (the "DLJ Opinion"), to the effect that, as of the date of such opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the Merger Consideration to be received by the holders of Shares in the Offer and the Merger is fair to such shareholders from a financial point of view. THE FULL TEXT OF THE DLJ OPINION IS SET FORTH AS ANNEX A TO THIS OFFER TO PURCHASE AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY DLJ. The DLJ Opinion was prepared for the Company Board and addresses only the fairness of the Merger Consideration to be received by the holders of the Shares from a financial point of view. The DLJ Opinion does not constitute a recommendation to any shareholder of the Company as to whether such shareholder should tender in the Offer or how such shareholder should vote if a vote is taken on the Merger. DLJ was not requested by the Company Board to make, nor did DLJ make, any recommendation as to the amount or type of consideration to be received by the Company shareholders, which determination was reached through negotiations between the Company and Parent, in which negotiations DLJ advised the Company. No restrictions were imposed upon DLJ with respect to the investigations made or procedures followed by DLJ in rendering its opinion. In arriving at the DLJ Opinion, DLJ reviewed the draft Merger Agreement dated February 5, 1998, including the exhibits thereto, as well as financial and other information that was publicly available or furnished to it by the Company, including information provided during discussions with management. Included in the information provided during discussions with management were certain financial projections for the Company for the period beginning June 30, 1997 and ending June 30, 2002 prepared by the management of the Company. In addition, DLJ compared certain financial and securities data of the Company with that of various other companies whose securities are traded in public markets, reviewed the historical stock prices and trading volumes of the Company's Common Stock, reviewed prices and premiums paid in certain other business combinations and conducted such other financial studies, analyses and investigations as DLJ deemed appropriate for purposes of rendering its opinion. In rendering its opinion, DLJ relied upon and assumed the accuracy and completeness of all of the financial and other information that was available to it from public sources or that was provided to it by the Company or its representatives, or that was otherwise reviewed by DLJ. DLJ assumed that the financial projections regarding the Company supplied by its management to DLJ were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of the Company as to the future operating and financial performance of the Company. DLJ assumed no responsibility for making an independent evaluation of any assets or liabilities or for making any independent verification of any of the information reviewed by DLJ. DLJ relied as to certain legal matters on advice of counsel to the Company. The DLJ Opinion is necessarily based on economic, market, financial and other conditions as they existed on, and on information made available to DLJ as of the date of its opinion. DLJ does not have any obligations to update, revise or reaffirm the DLJ Opinion. The DLJ Opinion does not address the relative merits of the proposed transaction and the other business strategies being considered by the Company Board, nor does it address the Board's decision to proceed with the Offer and the Merger. The following is a summary of the analyses undertaken by DLJ in preparing the DLJ Opinion. Common Stock Performance Analysis. DLJ's analysis of the performance of the Shares consisted of a historical analysis of closing prices and trading volumes since its initial public offering. Over the 52 weeks through January 30, 1998, the Shares traded between $10.63 and $17.88 (with a mean of $14.42) per share. Over the 90 days prior to January 30, 1998, the Shares traded between $15.00 and $17.00 (with a mean of $15.95) per share. Over the 30 days prior to January 30, 1998, the Shares traded between $15.25 and $17.00 (with a mean of $16.21) per share. 19 Premium Analysis. DLJ evaluated the transaction contemplated by the Merger Agreement based on an analysis of premiums offered in comparable merger and acquisition transactions. DLJ's analysis indicated that for the transactions reviewed, the average premiums offered to the market price of the acquired company one day, one week and one month prior to announcement were: 19.8%, 25.3% and 34.0%, respectively, for comparable health care services transactions, and 22.4%, 29.3% and 38.3%, respectively for comparable long- term care transactions. The premiums implied in the Merger Agreement over the market price of the Shares one day, one week and one month prior to the announcement on October 22, 1997 that the Company had hired DLJ to evaluate strategic alternatives for the Company, are 26.3%, 30.8% and 47.4%, respectively. The purchase price offered by Parent of $21.00 for the Shares represents a premium of 29.2%, 31.3% and 25.8%, one day, one week and one month prior to February 2, 1998, respectively. Comparable Public Company Analysis. To provide contextual data on comparative market information, DLJ analyzed the operating performance of the Company relative to a group of selected companies comprised of eleven long- term care companies whose securities are publicly traded and that are deemed by DLJ to be reasonably similar to the Company: Advocat Incorporated, Beverly Enterprises, Centennial Healthcare, Harborside Healthcare, Health Care & Retirement, Manor Care Inc., Mariner Health Group, National Healthcare LP, Paragon Health Network, Sun Healthcare Group and Vencor Inc. (the "DLJ Comparable Companies"). Historical financial information used in connection with the ratios provided below with respect to the Company and the DLJ Comparable Companies utilizes the most recent financial statements publicly available for each company as of September 30, 1997. DLJ performed a valuation analysis of the Company, by applying certain market trading statistics for the DLJ Comparable Companies to the Company's historical and estimated financial results. DLJ examined certain publicly available financial data of the DLJ Comparable Companies, including (i) enterprise value (defined as market value of common equity plus book value of total debt and preferred stock less cash) as a multiple of latest 12 months ("LTM") revenues as of September 30, 1997, EBITDA and EBIT; and (ii) price to earnings ratios based on: (a) LTM earnings per share ("EPS") as of September 30, 1997, and (b) estimated fiscal year 1998 EPS. DLJ noted that as of September 30, 1997, the DLJ Comparable Companies were trading at implied multiples of enterprise value and earnings, as the case may be, in (i) a range of 0.4x to 2.5x (with a mean, excluding the high and low (the "Mean") of 1.2x) LTM revenues; (ii) a range of 5.5x to 14.8x (with a Mean of 9.7x) LTM EBITDA; (iii) a range of 7.2x to 19.6x (with a Mean of 13.4x) LTM EBIT; (iv) a range of 9.6x to 37.4x (with a Mean of 21.9x) LTM EPS; and (v) a range of 7.0x to 23.5x (with a Mean of 15.9x) estimated fiscal year 1998 EPS. The acquisition price multiples for the Company exceed the Mean values of the DLJ Comparable Companies on an LTM and projected 1998 basis with multiples of: (i) 1.3x LTM revenue, (ii) 10.7x LTM EBITDA, (iii) 15.6x LTM EBIT, (iv) 27.9x LTM EPS and (v) 20.6x analyst estimated fiscal year 1998 EPS or 22.2x adjusted management estimated fiscal year 1998 EPS. No company utilized in the comparable company analysis is identical to the Company. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of the DLJ Comparable Companies and the Company and other factors that could affect the public trading value of the DLJ Comparable Companies. Mathematical analysis such as determining the mean is not in itself a meaningful method of using comparable company data. Comparable Transaction Analysis. DLJ performed an analysis of selected merger and acquisition transactions (the "DLJ Comparable Transactions") in the long-term care industry. Multiples reviewed in the DLJ Comparable Transactions consisted of (i) aggregate transaction value (defined as the equity value of the offer) as a multiple of (where available) LTM revenues, LTM EBITDA, and LTM EBIT, and (ii) aggregate purchase price (defined as the equity value of the offer plus book value of total debt and preferred stock less cash) as a multiple of (where available) LTM net income. The DLJ Comparable Transactions were comprised of 21 transactions announced during the period 1994 to 1997. DLJ noted that the implied multiples of aggregate transaction value and aggregate purchase price, as the case may be, for these transactions were in (i) a range of 0.9x to 2.4x (with a Mean of 1.5x) LTM revenue; (ii) a range of 8.7x to 14.1x (with a Mean of 10.8x) LTM EBITDA; (iii) a range of 11.1x to 22.9x (with a Mean of 14.8x) LTM EBIT; and (iv) a range of 17.8x to 40.8x (with a Mean of 25.3x) 20 LTM net income. The acquisition price multiples for the Company compare favorably with those of the DLJ Comparable Transactions with values of (i) 1.3x LTM revenue, (ii) 10.7x LTM EBITDA, (iii) 15.6x LTM EBIT and (iv) 28.5 LTM net income. No transaction utilized in the comparable transaction analysis is identical to the Offer and the Merger. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning differences in financial and operating characteristics of the Company and the companies included in the DLJ Comparable Transactions and other factors that could affect the acquisition value of the companies to which it is being compared. Mathematical analysis such as determining the mean is not in itself a meaningful method of using comparable transactions data. Discounted Cash Flow Analysis. DLJ performed a discounted cash flow analysis for the five-year period commencing January 1, 1998 and ending June 30, 2002 based on the stand-alone unlevered free cash flows of the Company. Unlevered free cash flows were calculated as the after-tax operating earnings of the Company, plus depreciation and amortization and other non-cash items, plus (or minus) net changes in working capital minus projected capital expenditures. This analysis was performed after DLJ adjusted the financial data presented by management to account for the McAllen acquisition and the impact of actual second quarter fiscal 1998 results whereby the Company's fiscal 1998 EBITDA may underperform projections by approximately $2.5 million. DLJ calculated terminal values by applying a range of estimated EBITDA multiples of 8.0x to 11.0x to the projected EBITDA of the Company in fiscal 2002. The unlevered free cash flows and terminal values were then discounted to the present using a range of discount rates of 10.0% to 20.0%, representing an estimated range of the weighted average cost of capital of the Company and further adjusting for a higher level of risk. Based on this analysis, DLJ derived a summary enterprise valuation range for the Company of $183.8 million to $339.4 million. Based on this same analysis, DLJ calculated per share equity values of the Company ranging from $7.90 to $29.95. The summary set forth above does not purport to be a complete description of the analyses performed by DLJ, but describes, in summary form, the principal elements of the analyses undertaken by DLJ in rendering its opinion. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and therefore, such an opinion is not readily susceptible to summary description. Each of the analyses conducted by DLJ was carried out in order to provide a different perspective on the transaction and add to the total mix of information available. DLJ did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion as to fairness from a financial point of view. Rather, in reaching its conclusion, DLJ considered the results of the analyses in light of each other and ultimately reached its opinion based on the results of the analyses taken as a whole. DLJ did not place particular reliance or weight on any individual factor, but instead concluded that its analyses, taken as a whole, supported its determination. Accordingly, notwithstanding the separate facts summarized above, DLJ believes that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, could create an incomplete or misleading view of the evaluation process underlying its opinion. The analyses performed by DLJ are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analysis. DLJ was selected to render an opinion in connection with the Offer and the Merger based upon DLJ's qualifications, expertise and reputation, including the fact that DLJ, as part of its investment banking business, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placement and valuations for corporate and other purposes. Pursuant to a letter agreement between the Company and DLJ dated September 19, 1997 (the "DLJ Engagement Letter"), DLJ is entitled (i) a fee of $500,000 payable at the time DLJ notifies the Company that it was prepared to deliver an opinion with respect to the Offer and the Merger, irrespective of the conclusion reached therein, (ii) a fee of $50,000 for the delivery of each updating opinion after the first update delivered by DLJ, and (iii) a fee of approximately $2.25 million less the amount previously paid pursuant to (i) and (ii) above, 21 based on an acquisition price for the Shares of $21.00 per share payable upon consummation of the Merger. In addition, the Company has agreed to reimburse DLJ for all out-of-pocket expenses (including the reasonable fees and expenses of its counsel), which shall not exceed $100,000 without the Company's written consent, incurred by DLJ in connection with its engagement thereunder, whether or not the Offer or the Merger is consummated, and to indemnify DLJ for certain liabilities and expenses arising out of the Offer and the Merger or the transactions in connection therewith, including liabilities under federal securities laws. The terms of the fee arrangement with DLJ, which DLJ and the Company believe are customary in transactions of this nature, were negotiated at arm's length between the Company and DLJ and the Company Board was aware of such arrangement. DLJ provides a full range of financial advisory and brokerage services and in the course of its normal trading activities may from time to time effect transactions and hold positions in the securities or options on the securities of the Company and/or Heritage for its own account and for the accounts of customers. An affiliate of DLJ, DLJ Fund Investment Partners, L.P., currently holds a limited partnership interest in Heritage with a committed capital of $1.0 million, representing less than one-third of one percent of Heritage's aggregate committed capital. 4. POSITION OF PURCHASER AND PARENT REGARDING FAIRNESS OF THE OFFER AND THE MERGER. Purchaser and Parent believe that the Offer Price is fair to the Company's shareholders. Purchaser and Parent base their belief on: (a) the fact that the Special Committee, consisting solely of independent directors, was appointed in connection with the Merger Agreement to represent the interests of shareholders, (b) the fact that the Special Committee was advised by independent financial and legal advisors, (c) the fact that the Company Board (with Mr. Scott absent during the vote), acting upon the unanimous recommendation of the Special Committee, and the Special Committee, based on the factors considered by the Special Committee set forth above, concluded that the Offer and Merger are fair to and in the best interests of the Company and the Company's shareholders, (d) the fact that Parent, Purchaser and the Company Board (through the Special Committee), with their respective financial and legal advisors, negotiated the terms of the Merger and the Merger Agreement with the Special Committee on an arm's-length basis over a period of time and (e) the fact that the consideration to be paid in the Offer and the Merger represents a premium of approximately 28.6% over the average reported closing price for the Shares on the 20 trading days prior to the public announcement of the Merger Agreement. Parent and Purchaser have reviewed the factors considered by the Special Committee and the Company Board in support of its decision described above and had no basis to question its consideration of or reliance on those factors. In reaching their conclusions, Parent and Purchaser also considered generally the current and historical market price for the Shares. Parent and Purchaser did not find it practicable to, and did not, assign relative weights to the individual factors discussed above in reaching their conclusion as to fairness. In light of the nature of the Company's business, Parent and Purchaser did not deem net book value or liquidation value to be relevant indicators of the value of the Shares. 5. PURPOSE AND EFFECTS OF THE OFFER AND THE MERGER; REASONS FOR THE OFFER AND THE MERGER. The purpose of the Offer and the Merger is for Parent indirectly to acquire control of, and the entire equity interest in, the Company. The purpose of the Merger is for Parent to acquire all Shares not purchased pursuant to the Offer. Upon consummation of the Merger, the Company will become an indirect wholly-owned subsidiary of Parent. The Offer is being made pursuant to the Merger Agreement. The acquisition of the entire equity interest in the Company has been structured as a cash tender offer followed by a cash merger in order to provide a prompt and orderly transfer of ownership of the equity interest in the Company held by shareholders of the Company from such shareholders to Parent and to provide the shareholders of the Company with cash for all their Shares. 22 Under California Law and the Company's Articles of Incorporation, the approval of the Board and, unless the Merger is consummated pursuant to the short-form merger provisions under California Law described below, the affirmative vote of the holders of a majority of the outstanding Shares is required to approve the Merger Agreement. The Board (with Mr. Scott absent during the vote) has unanimously approved the Merger Agreement. Under California Law, the Merger may not be accomplished for cash paid to the Company's shareholders if Purchaser or Parent owns directly or indirectly more than 50% but less than 90% of the then outstanding Shares unless either all the shareholders consent or the Commissioner of Corporations of the State of California approves, after a hearing, the terms and conditions of the Merger and the fairness thereof. Accordingly, pursuant to the Merger Agreement, the Company granted to Parent the Stock Option, which entitles Purchaser to purchase up to 19.99% of the Shares outstanding immediately prior to the exercise of the option at a purchase price of $21.00 per Share. The Stock Option may be exercised by Parent only if, upon such exercise, Purchaser and Parent would own directly or indirectly in the aggregate 90% or more of the outstanding Shares. In that event, the Minimum Condition would be satisfied and, following the purchase of Shares in the Offer, Purchaser would be able to effect a short-form merger under California Law, subject to the terms and conditions of the Merger Agreement. Purchaser currently intends to effect a short-form merger if it is able to do so. In the event the Minimum Condition is not satisfied on or before the tenth business day after all other conditions to the Offer have been satisfied, (A) the Minimum Condition shall be automatically amended to mean that number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would equal not less than 49.9% of the Shares then outstanding (calculated as of the Initial Expiration Date) shall have been validly tendered and not withdrawn prior to the expiration of the Offer, and (B) Purchaser will amend the Offer to provide that Purchaser will purchase, on a pro rata basis in the Offer, that number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would equal 49.9% of the Shares then outstanding (calculated as of the Initial Expiration Date) (it being understood that Purchaser shall not in any event be required to accept for payment, or pay for, any Shares if less than the Revised Minimum Number of Shares are tendered pursuant to the Offer and not withdrawn at the expiration of the Offer). If only the Revised Minimum Number of Shares are purchased by Purchaser in the Offer, Purchaser would own upon consummation of the Offer 49.9% of the Shares then outstanding and would thereafter solicit the approval of the Merger Agreement by a vote of the shareholders of the Company. Under such circumstances, a significantly longer period of time will be required to effect the Merger, although, as a practical matter, Parent may have the ability to assure approval of the Merger. See "SPECIAL FACTORS--Purpose and Effects of the Offer and the Merger; Reasons for the Offer and Merger". The Merger Agreement provides that, promptly following the purchase of and payment for Shares by Purchaser pursuant to the Offer, Purchaser shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Board as will give Purchaser representation on the Board equal to the product of the total number of directors on the Board (giving effect to any increase in the number of directors pursuant to the Merger Agreement) and the percentage that the aggregate number of Shares so purchased by Purchaser bears to the total number of Shares then outstanding (on a fully diluted basis); provided, however, that notwithstanding the foregoing, until the Effective Time of the Merger, Parent and Purchaser will not cause the removal of John Brende, William Casey or Gary Massimino from the Board of Directors of the Company and shall permit such persons to remain as members of the Special Committee of the Board of Directors responsible for addressing on behalf of the Company any issues that arise under the Merger Agreement between the Company, on the one hand, and Parent and Purchaser, on the other hand. In the Merger Agreement, the Company has agreed to use its reasonable best efforts to cause Purchaser's designees to be so appointed or elected to the Board. In the Merger Agreement, the Company has agreed to take all action necessary to convene a meeting of its shareholders as soon as practicable after the consummation of the Offer for the purpose of considering and taking action on the Merger Agreement and the transactions contemplated thereby, if a shareholder vote is required by California Law. 23 If Purchaser purchases Shares pursuant to the Offer, the Merger Agreement provides that Purchaser will be entitled to designate representatives to serve on the Board in proportion to Purchaser's ownership of Shares following such purchase. Purchaser expects that such representation would permit Purchaser to exert substantial influence over the Company's conduct of its business and operations. 6. PLANS FOR THE COMPANY AFTER THE OFFER AND THE MERGER. It is expected that, initially following the Merger, the business and operations of the Company will, except as set forth in this Offer to Purchase, be continued by the Company substantially as they are currently being conducted. Parent will continue to evaluate the business and operations of the Company during the pendency of the Offer and after the consummation of the Offer and the Merger, and will take such actions as it deems appropriate under the circumstances then existing. Parent intends to seek additional information about the Company during this period. Thereafter, Parent intends to review such information as part of a comprehensive review of the Company's business, operations, capitalization and management with a view to optimizing exploitation of the Company's potential in conjunction with Parent's businesses. It is expected that the business and operations of the Company would form an important part of Parent's future business plans. Upon the consummation of the Merger, or shortly thereafter, Parent intends to refinance the Company's existing bank and other indebtedness with funds obtained under the credit arrangements contemplated by the Commitment Letter described in "THE TENDER OFFER--Source and Amount of Funds". Parent also expects to refinance the Bridge Loan contemplated by the Commitment Letter shortly after the Merger. It is also anticipated that, upon the consummation of the Merger, Mr. Scott, who is currently the Chief Executive Officer and a director of the Company, will become the Chairman of the Board, a senior executive officer and a shareholder of Parent. See "SPECIAL FACTORS--Interests of Certain Persons in the Offer and the Merger" and "SPECIAL FACTORS--The Merger Agreement and Related Agreements". At the Effective Time, the officers and directors of Purchaser shall become the officers and directors of the Surviving Corporation. Except as indicated in this Offer to Purchase, Parent does not have any present plans or proposals which relate to or would result in an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries, a sale or transfer of a material amount of assets of the Company or any of its subsidiaries or any material change in the Company's capitalization or dividend policy or any other material changes in the Company's corporate structure or business, or the composition of the Board or the Company's management. As a result of the Offer, the interest of Parent in the Company's net book value and net earnings will increase in proportion to the number of Shares acquired in the Offer. If the Merger is consummated, Parent's interest in such items and in the Company's equity generally will increase to 100% and Parent will be entitled to all benefits resulting from that interest, including all income generated by the Company's operations and any future increase in the Company's value. Similarly, Parent will also bear the risk of losses generated by the Company's operations and any decrease in the value of the Company after the Merger. Subsequent to the Merger, current shareholders of the Company will cease to have any equity interest in the Company, will not have the opportunity to participate in the earnings and growth of the Company after the Merger and will not have any right to vote on corporate matters. Similarly, shareholders will not face the risk of losses generated by the Company's operations or decline in the value of the Company after the Merger. The Shares are currently traded on The Nasdaq Stock Market, Inc.'s National Market (the "Nasdaq National Market"). See "THE TENDER OFFER--Price Range of Shares; Dividends and Distribution". Following the consummation of the Merger, the Shares will no longer be quoted on the Nasdaq National Market and the registration of the Shares under the Exchange Act of 1934, as amended (the "Exchange Act") will be terminated. Accordingly, after the Merger there will be no publicly traded equity securities of the Company outstanding and 24 the Company will no longer be required to file periodic reports with the Commission. See "THE TENDER OFFER--Effect of the Offer on the Market for the Shares; Exchange Listing and Exchange Act". It is expected that if Shares are not accepted for payment by Purchaser pursuant to the Offer and the Merger is not consummated, the Company's current management, under the general direction of the Company Board, will continue to manage the Company as an ongoing business. 7. RIGHTS OF SHAREHOLDERS IN THE MERGER. Holders of Shares do not have dissenters' rights as a result of the Offer. However, in connection with the Merger, holders of Shares, by complying with the provisions of Chapter 13 of California Law, may have certain rights to dissent and to require the Company to purchase their Shares for cash at fair market value. In general, holders of Shares will be entitled to exercise "dissenters' rights" under California Law only if the holders of five percent or more of the outstanding Shares properly file demands for payment or if the Shares held by such holders are subject to any restriction on transfer imposed by the Company or any law or regulation ("Restricted Shares"). Accordingly, any holder of Restricted Shares and, if the holders of five percent or more of the Shares properly file demands for payment, all other such holders who fully comply with all other applicable provisions of Chapter 13 of California Law will be entitled to require the Company to purchase their Shares for cash at their fair market value if the Merger is consummated. In addition, if immediately prior to the Effective Time, the Shares are not listed on a national securities exchange or on the list of OTC margin stocks issued by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), holders of Shares may likewise exercise their dissenters' rights as to any or all of their Shares entitled to such rights. If the statutory procedures under California Law relating to dissenters' rights were complied with, such rights could lead to a judicial determination of the fair market value of the Shares. The "fair market value" would be determined as of the day before the first announcement of the terms of the proposed Merger, excluding any appreciation or depreciation in consequence of the Merger. The value so determined could be more or less than the Merger Consideration. The foregoing summary of dissenters' rights does not purport to be complete and is qualified in its entirety by reference to the full text of Chapter 13 of California law included herewith as Annex B. 8. INTERESTS OF CERTAIN PERSONS IN THE OFFER AND THE MERGER. In considering the recommendations of the Company Board and the Special Committee with respect to the Offer and the Merger and the fairness of the consideration to be paid under the Offer and in the Merger, shareholders of the Company should be aware that certain officers and directors of the Company have interests in the Offer and the Merger, including those referred to below, that present them with potential conflicts of interest. The Special Committee and the Company Board were aware of these potential conflicts prior to the approval and execution of the Merger Agreement. The following are the material contracts, agreements, arrangements or understandings, and actual or potential conflicts of interest, between the Company or its affiliates and (i) certain of the Company's executive officers, directors or affiliates or (ii) Parent and Purchaser and their respective executive officers, directors or affiliates: Executive Investment Plan for Mr. Scott. Mr. Scott is the beneficiary of an Executive Investment Plan (the "Scott Pension Plan") with the Company. Under the terms of the Scott Pension Plan, Mr. Scott was entitled to a vested benefit of $834,386 as of December 18, 1997. On December 19, 1997, the Company Board, in anticipation of a sale of the Company, voted to fully vest the remaining portion of the Scott Pension Plan and to cause the full pension benefit to be paid to Mr. Scott, in each case effective upon consummation of a sale of the Company. This action by the Company Board will result in an estimated additional $440,367 being available to Mr. Scott under the Scott Pension Plan assuming that the Effective Time of the Merger is March 31, 1998. The full benefit available under the Scott Pension Plan, estimated to be approximately $1,274,753, will be paid to Mr. Scott at the Effective Time. 25 Stock Option Plan. Under the Company's Stock Option Plan, the Merger will result in each holder of an Existing Stock Option which is not then vested having the right, during the 10-day period immediately preceding the Effective Time, to exercise the option whether or not the option is then otherwise exercisable, but contingent on the actual consummation of the Merger. Under the Merger Agreement, the Company has agreed to amend the Company's Stock Option Plan to provide that all Existing Stock Options, whether vested or unvested, shall be converted into and become the right to receive a cash payment per Share for which the option is exercisable equal to the excess of $21.00 over the applicable exercise price of such option (less any applicable tax withholding requirements). As of February 11, 1998, the following principal executive officers and directors of the Company held options to acquire Shares as follows: Mr. Scott held options to purchase 300,000 Shares, of which 139,000 were unvested; David G. Schumacher held options to purchase 65,000 Shares, of which 42,000 were unvested; Derwin L. Williams held options to purchase 60,000 Shares, of which 30,000 were unvested; Michael H. Martel held options to purchase 45,000 Shares, of which 29,000 were unvested; Donald J. Amaral held options to purchase 20,000 Shares, of which 13,500 were unvested; John A. Brende held options to purchase 20,000 Shares, of which 12,500 were unvested; William J. Casey held options to purchase 20,000 Shares, of which 12,500 were unvested; and Gary J. Massimino held options to purchase 20,000 Shares, of which 14,500 were unvested. As of February 11, 1998, (i) the aggregate number of Existing Stock Options held by all of the foregoing directors and executive officers as a group was 540,000, of which 293,000 were unvested, (ii) the aggregate number of Existing Stock Options outstanding was 909,500, of which 490,300 were unvested and (iii) the average exercise price of the Company's Existing Stock Options was $18.30 per share ($17.50 for the vested options and $18.98 for the unvested options). A table showing beneficial ownership of Shares by Directors and Executive Officers of the Company is set forth in Schedule II to this Offer to Purchase. Special Severance Plan. The Company has established a Special Severance Pay Plan (the "Special Severance Plan") which will become effective upon the consummation of the Offer. The Special Severance Plan provides for the payment of severance benefits to participants whose employment is terminated as provided in the Special Severance Plan and supersedes all other severance pay practices or plans of the Company or any of its subsidiaries. Only those individuals who are both listed in the Special Severance Plan and who are employed by the Company or one of its subsidiaries as of the day prior to the purchase of Shares in the Offer will be a "Participant" in the Special Severance Plan. If a Participant's employment is terminated on or prior to the second anniversary of the purchase of Shares in the Offer either (i) by the Parent, the Company or a subsidiary other than for "Cause" or (ii) by such Participant for "Good Reason", such Participant will be entitled to receive the greater of (x) the applicable cash severance benefits provided in the Special Severance Plan and (y) the severance benefits to which such Participant would be entitled under a then effective severance program of the Parent, but in each case only if the Participant provides a standard form of general release as required in the Special Severance Plan. The Special Severance Plan defines "Cause" for termination of a Participant's employment as such Participant's dishonesty, fraud, willful misconduct, self-dealing, breach of fiduciary duty, failure, neglect or refusal to perform such Participant's duties in any material respect or conviction of a crime involving moral turpitude. The Special Severance Plan defines "Good Reason" for termination of a Participant's employment as a material diminution in such Participant's title, authority or responsibilities, a reduction in such Participant's base pay (except for across the board reductions affecting similarly situated employees), the relocation of such Participant's principal office to a location that increases his commute by more than 30 miles and the failure to continue to provide benefits substantially similar in value to those enjoyed at the purchase of Shares in the Offer (unless such Participant participates in other comparable benefits generally available to employees). The Special Severance Plan provides that a Participant who is entitled to severance pay under the plan shall receive, as a lump sum cash payment, an amount determined by taking the maximum number of months of 26 severance pay to which such Participant is entitled under the Special Severance Plan (which varies from between two and twenty-four months depending upon the Participant) and, subtracting the number of whole months elapsed between the purchase of Shares in the Offer and the termination of employment of such Participant, and multiplying the result by such Participant's Base Pay (as defined in the Special Severance Plan). Under the Special Severance Plan, the following Participants who are executive officers of the Company would be entitled to a severance pay benefit of the amount indicated in the table below if such Participant's employment were terminated other than for Cause or by such Participant for Good Reason at the Effective Time:
NUMBER OF TOTAL MONTHS OF MONTHLY SEVERANCE PARTICIPANT SEVERANCE PAY BASE PAY BENEFIT ----------- ------------- -------- --------- William C. Scott............................ 24 $33,333 $800,000 Chairman and Chief Executive Officer David G. Schumacher......................... 12 $17,917 $215,000 President Derwin L. Williams.......................... 12 $15,167 $182,000 Senior Vice President Finance Michael H. Martel........................... 12 $12,917 $155,000 Senior Vice President Marketing
The aggregate maximum severance benefit payable under the Special Severance Plan to the four executive officers listed above is $1,352,000. The aggregate maximum severance benefit payable under the Special Severance Plan to the Company's twelve Vice Presidents, Regional Vice Presidents and Pharmacy Presidents is $1,322,722. The aggregate maximum severance benefit payable under the Special Severance Plan to the Company's Center Administrators and Executive Director and Corporate Main Office Department Heads is $3,050,126. The aggregate maximum severance benefit payable under the Special Severance Plan to all employees of the Company is $7,710,748. The aggregate annual salary of all such persons is $8,788,164. Remuneration of Special Committee Members. In consideration of the substantial efforts of the Special Committee, on February 6, 1998, the Company Board (with Messrs. Massimino, Brande, Casey and Scott not participating) authorized payments to be made to Messrs. Massimino, Brende and Casey in amounts equal to $50,000, $40,000 and $40,000, respectively. Payment of Bonus to Mr. Scott. At a meeting of the Company's Board of Directors held on December 19, 1997, the Company's Board of Directors approved the payment of a special bonus in the amount of $100,000 (the "Bonus") to Mr. Scott upon the successful completion of a sale of the Company. The Bonus will become payable upon the consummation of the Merger. Agreement With Mr. Scott, Parent and Others. In connection with the transactions contemplated by the Merger Agreement, Mr. Scott entered into an agreement with Parent, Heritage and certain other persons providing for, among other things, Mr. Scott's equity ownership in, employment by and representation on the Board of Directors of Parent. See "SPECIAL FACTORS--The Merger Agreement and Related Agreements--Management Agreement". Indemnification. As allowed by the California Law, the Company's Articles of Incorporation provide that the liability of the directors of the Company for monetary damages shall be eliminated to the fullest extent permissible under 27 California Law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of the Company for breach of a director's duties to the Company or its shareholders except for liability: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director; (iii) for any transaction from which a director derived an improper personal benefit; (iv) for acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders; (vi) with respect to certain transactions or the approval of transactions in which a director has a material financial interest; and (vii) expressly imposed by statute, for approval of certain improper distributions to shareholders or certain loans or guarantees. This provision does not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a director's duty of care. The Company's Bylaws permit it to indemnify its directors and officers to the full extent permitted by law. In addition, the Company's Articles of Incorporation expressly authorize the use of indemnification agreements, and the Company has entered into separate indemnification agreements with each of its directors and its executive officers. These agreements require the Company to indemnify its officers and directors to the full extent permitted by law, including circumstances in which indemnification would otherwise be discretionary. Among other things, the agreements require the Company to indemnify directors and officers against certain liabilities that may arise by reason of their status or service as directors and officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. Pursuant to the Merger Agreement, all rights to indemnification and exculpation from liabilities for acts or omissions occurring at or prior to the Effective Time existing in favor or the current or former directors or officers of the Company (and its subsidiaries) will be assumed by the Surviving Corporation and Parent shall cause the Surviving Corporation to maintain, for a period of not less than three years after the Effective Time, the current policies of directors' and officers' liability insurance maintained by the Company (or comparable policies with terms not less advantageous to such directors and officers), but is not required to expend in any given year more than 150% of the current annualized payments paid by the Company for such insurance. Related Party Transactions. During the past four years, the Company and Parent have purchased various health-related services from each other on an arms-length basis. The Company has provided pharmacy services to certain of Parent's skilled nursing facilities since July 1994. The approximate annual revenues from Parent's facilities to the Company were $1,900,000 in 1995, $2,500,000 in 1996 and $2,700,000 in 1997. Parent has provided physical, speech and occupational therapy services to certain of the Company's nursing centers. The approximate annual revenue from the Company to Parent from these services was $7,500,000 in 1995, $9,800,000 in 1996 and $10,300,000 in 1997. In 1998, Parent has purchased approximately $260,000 in pharmacy services from the Company, and the Company has purchased no services from Parent. Mr. Scott, the Chairman and Chief Executive Officer of the Company, and Mr. Snukal, the Chairman and Chief Executive Officer of Parent, have known each other for more than ten years. On numerous occasions during that time they have met socially or to discuss the business relations between their companies. 9. THE MERGER AGREEMENT AND RELATED AGREEMENTS. The Merger Agreement. The following is a summary of the material terms of the Merger Agreement, a copy of which is filed as an exhibit to the Tender Offer Statement on Schedule 14D-1 filed by Parent and Purchaser pursuant to Rule 14d-3 28 of the Exchange Act and the Transaction Statement on Schedule 13E-3 filed by Purchaser and Parent pursuant to Rule 13e-3 of the Exchange Act with the Commission in connection with the Offer (together with any amendments, supplements, schedules, annexes and exhibits thereto, the "Schedule 14D-1" and the "Schedule 13E-3", respectively). Such summary is qualified in its entirety by reference to the Merger Agreement. The Offer. The Merger Agreement provides that if none of the events or conditions set forth in "THE TENDER OFFER--Certain Conditions to the Offer" (the "Conditions") shall have occurred and be existing, as promptly as practicable after, but in no event later then five (5) Business Days after, the public announcement of the execution of the Merger Agreement by the parties thereto, Purchaser is required to commence the Offer for all the outstanding Shares, at the Offer Price. Purchaser is required to use all commercially reasonable efforts to consummate the Offer. Purchaser shall accept for payment all outstanding Shares which have been validly tendered and not withdrawn pursuant to the Offer at the earliest time following the expiration of the Offer provided that all conditions to the Offer shall have been satisfied or waived by Purchaser. The obligation of Purchaser to accept for payment, purchase and pay for Shares tendered pursuant to the Offer is subject only to the Conditions and to the Minimum Condition. Purchaser has expressly reserved the right to increase the Offer Price or to make any other changes in the terms and conditions of the Offer (provided that, unless previously approved by the Company in writing, no change may be made which decreases the Offer Price, which changes the form of consideration to be paid in the Offer, which reduces the maximum number of Shares to be purchased in the Offer, which imposes conditions to the Offer in addition to the Conditions or which broadens the scope of such Conditions except as provided below). The Merger Agreement provides that the Offer Price is to be paid net to the sellers of Shares in cash, less any required withholding of taxes, upon the terms and subject to the Conditions of the Offer. No Shares held by the Company or any of its subsidiaries will be tendered in the Offer. The Merger Agreement provides that the Offer will expire at midnight, New York City time, on the date that is twenty Business Days (which means any day other than Saturday, Sunday or a federal holiday) after the Offer is commenced; provided, however, that without the consent of the Company Board, Purchaser may (i) extend the Offer, if at the scheduled expiration date of the Offer any of the conditions to the Offer shall not have been satisfied or waived, until such time as such conditions are satisfied or waived, (ii) extend the Offer for any period required for any rule, regulation, interpretation or position of the Commission or the staff thereof applicable to the Offer or (iii) extend the Offer for any reason on one or more occasions for an aggregate period of not more than ten Business Days beyond the latest expiration date that would otherwise be permitted under clause (i) or (ii) of this sentence if on such expiration date there shall not have been tendered that number of Shares which, together with Shares then owned directly or indirectly by Purchaser, would equal at least ninety percent (90%) of the Shares. If all of the Conditions to the Offer are not satisfied on any scheduled expiration date of the Offer then, provided that all such Conditions are reasonably capable of being satisfied prior to July 31, 1998, Purchaser is required to extend the Offer from time to time until such Conditions are satisfied or waived, provided that Purchaser will not be required to extend the Offer beyond July 31, 1998. Subject to the terms and conditions of the Offer and the Merger Agreement, Purchaser has agreed to accept for payment, and pay for, all Shares validly tendered and not withdrawn pursuant to the Offer that Purchaser becomes obligated to accept for payment and pay for pursuant to the Offer, as promptly as practicable after the expiration of the Offer. Pursuant to the Merger Agreement, in the event that the Minimum Condition is not satisfied on or before the tenth Business Day after all other Conditions have been satisfied, Purchaser has agreed that (i) the Minimum Condition will be automatically amended to mean that a number of Shares which, together with Shares then owned directly or indirectly by Purchaser, would equal not less than 49.9% of the outstanding Shares (calculated as of the Initial Expiration Date) shall have been validly tendered and not withdrawn prior to the expiration date of the Offer, as extended as provided in clause (ii)(B) below, and (ii) Purchaser will forthwith amend the Offer (A) to provide that Purchaser will purchase, on a pro rata basis in the Offer, that number of Shares which, together with Shares then owned directly or indirectly by Purchaser, would equal 49.9% of the outstanding Shares (calculated as of the Initial Expiration Date) and (B) to extend the Offer for a period of not less than ten Business Days following the public announcement of such amendment of the Offer. 29 Company Action. The Company has approved of and consented to the Offer. The Company Board, at a meeting duly called and held, has, subject to the terms and conditions set forth in the Merger Agreement, (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, are fair to, and in the best interests of, the shareholders of the Company, (ii) approved the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, in all respects, such approval constituting approval of the Offer, the Merger Agreement and the Merger for purposes of Section 1201 of California Law, and similar provisions of any other similar state statutes that might be deemed applicable to the transactions contemplated by the Merger Agreement, and (iii) resolved to recommend that the shareholders of the Company accept the Offer, tender their Shares to Purchaser and approve and adopt the Merger Agreement and the Merger; provided, however, that such recommendation may be withdrawn, modified or amended to the extent that the Company Board by a majority vote determines in its good faith judgment, based on the advice of counsel, that it is required to do so in the exercise of its fiduciary duties under California Law. The Merger Agreement provides that the Company will file with the Commission a Solicitation/ Recommendation Statement on Schedule 14D-9 pertaining to the Offer (together with any amendments or supplements thereto, the "Schedule 14D- 9") containing the recommendation described above, and promptly mail the Schedule 14D-9 to the shareholders of the Company. Notwithstanding anything to the contrary in the Merger Agreement, if the Company Board by majority vote determines in its good faith judgment, based on the advice of counsel, that it is required in the exercise of its fiduciary duties to withdraw, modify or amend the recommendation of the Board, such withdrawal, modification or amendment shall not constitute a breach of the Merger Agreement. Boards of Directors and Committees. The Merger Agreement provides that, promptly upon the purchase by Purchaser of Shares pursuant to the Offer and from time to time thereafter, Purchaser shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Company Board as will give Purchaser representation on the Company Board equal to the product of the number of directors on the Board (giving effect to any increase in the number of directors as provided in the Merger Agreement) and the percentage that such number of Shares so purchased bears to the total number of outstanding Shares on a fully diluted basis, and the Company shall use its reasonable best efforts to, upon request by Purchaser, promptly, at the Company's election, either increase the size of the Board or secure the resignation of such number of directors as is necessary to enable Purchaser's designees to be elected to the Company Board and to cause Purchaser's designees to be so elected. At such times, the Company will use its reasonable best efforts to cause persons designated by Purchaser to constitute the same percentage as is on the Company Board to be represented on (i) each committee of the Company Board (other than any committee of the Company Board established to take action under the Merger Agreement), (ii) each board of directors of each subsidiary of the Company and (iii) each committee of each such board. Notwithstanding the foregoing, Parent and Purchaser have agreed that, until the consummation of the Merger, Parent and Purchaser will not cause the removal of Messrs. Brende, Casey or Massimino from the Board of Directors of the Company and shall permit such persons to remain as members of the Special Committee of the Board of Directors responsible for addressing on behalf of the Company any issues that arise under the Merger Agreement between the Company, on the one hand, and Parent and Purchaser, on the other hand. The Merger. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, and in accordance with Delaware Law and California Law, at the Effective Time, Purchaser will be merged with and into the Company. The Merger Agreement provides that the Merger will become effective upon the later to occur of the filing of the Merger Agreement with the Secretary of State of the State of California or the filing of a certificate of merger with the Secretary of State of the State of Delaware (the "Effective Time"). As a result of the Merger, the separate corporate existence of Purchaser will cease, and the Company will continue as the Surviving Corporation. Pursuant to the Merger Agreement, each Share issued and outstanding immediately prior to the Effective Time (other than Shares held by the Company, its subsidiaries or by Parent, Purchaser or any other subsidiaries of Parent, which will be canceled and extinguished without consideration, or Shares as to which appraisal rights 30 are exercised) shall be converted into the right to receive an amount in cash equal to the Offer Price, without interest (the "Merger Consideration"). In addition, each share of common stock of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and become one share of a class of capital stock of the Surviving Corporation with the same rights, powers and privileges as the share of capital stock so converted, and shall constitute the only outstanding shares of capital stock of the Surviving Corporation. Each Share or Option held by the Company as treasury stock or its subsidiary, as Parent, Purchaser or any subsidiary of Parent or Purchaser will be canceled and extinguished without consideration. Notwithstanding any other provision of the Merger Agreement to the contrary, Shares outstanding immediately prior to the Effective Time and held by shareholders who shall have not voted in favor of the Merger or consented thereto in writing and who shall be entitled to and shall have demanded properly in writing payment for such Shares in accordance with Chapter 13 of California Law and who shall not have withdrawn such demand or otherwise have forfeited appraisal rights shall not be converted into or represent the right to receive cash pursuant to the Merger Agreement. The Merger Agreement provides that the directors of Purchaser at the Effective Time will be the directors of the Surviving Corporation and that the officers of the Purchaser at the Effective Time will be the officers of the Surviving Corporation, in each case, until successors are duly elected or appointed and qualified in accordance with applicable law. The Merger Agreement also provides that the Articles of Incorporation of the Company in effect at the Effective Time will be the Articles of Incorporation of the Surviving Corporation, and that the bylaws of the Company will be the bylaws of the Surviving Corporation, in each case, until amended in accordance with applicable law. Shares of Dissenting Holders. The Merger Agreement provides that notwithstanding anything to the contrary contained in the Merger Agreement, any holder of Shares with respect to which dissenters' rights, if any, are granted by reason of the Merger under California Law and who does not vote in favor of the Merger and who otherwise complies with Chapter 13 of California Law ("Company Dissenting Shares") shall not be entitled to receive any Merger Consideration pursuant to the terms of the Merger Agreement, unless such holder fails to perfect, effectively withdraws or loses his or her right to dissent from the Merger under California Law. Such holder shall be entitled to receive only the payment provided for by Chapter 13 of California Law. If any such holder so fails to perfect, effectively withdraws or loses his or her dissenters' rights under California Law, each Company Dissenting Share of such holder shall thereupon be deemed to have been converted, as of the Effective Time, into the right to receive the Offer Price. Any payments relating to Company Dissenting Shares shall be made solely by the Surviving Corporation and no funds or other property have been or will be provided by Purchaser, Parent or any of Parent's other direct or indirect subsidiaries for such payment, nor shall the Company make any payment with respect to, or settle or offer to settle, any such demands. Exchange of Certificates. The Merger Agreement provides that a bank or trust company designated by Parent and reasonably acceptable to the Company, shall act as the exchange agent (in such capacity, the "Exchange Agent"), for the benefit of the holders of Shares, for the exchange of a certificate or certificates which immediately prior to the Effective Time represented Shares (the "Certificates") that were converted into the right to receive the Offer Price. The Merger Agreement provides that Parent will make available to the Exchange Agent from time to time the Merger Consideration to be paid in respect of the Shares. Pursuant to the Merger Agreement, as soon as reasonably practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of 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 Exchange Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for a cash payment of the proper Merger Consideration. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent and Purchaser, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in 31 exchange therefor by check an amount equal to (A) the Offer Price, multiplied by (B) the number of Shares represented by such Certificate, which such holder has the right to receive, and the Certificate so surrendered shall forthwith be canceled. No interest shall be paid or accrued on any Merger Consideration upon the surrender of any Certificates. In the event of a transfer of ownership of Shares which is not registered in the transfer records of the Company, payment of the proper Merger Consideration may be paid to a transferee if the Certificate representing such Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer or other taxes required as a result of such payment to a Person other than the registered holder of such shares have been paid. Until surrendered and exchanged, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender an amount equal to (A) the Offer Price, multiplied by (B) the number of Shares represented by such Certificate. In the event that any Certificate shall have been lost, stolen or destroyed, the Exchange Agent shall pay, upon the making of an affidavit of that fact by the holder thereof, the proper Merger Consideration, provided, however, that Parent may, in its discretion, require the delivery of a suitable bond and/or indemnity. The Merger Agreement further provides that the Merger Consideration paid upon the surrender for exchange of Shares shall be deemed to have been paid in full satisfaction of all rights pertaining to such Shares, subject, however, to the Surviving Corporation's obligation to pay any dividends or make any other distributions with a record date prior to the Effective Time which may have been declared or made by the Company on such Shares in accordance with the terms of the Merger Agreement or prior to the date thereof and which remain unpaid at the Effective Time, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged. Pursuant to the Merger Agreement, any portion of the Merger Consideration which remains undistributed to the shareholders of the Company for six months after the Effective Time shall be delivered to Parent, upon demand, and any shareholders of the Company who have not theretofore complied with the terms of the Merger Agreement shall thereafter look only to Parent for payment of their claim for any Merger Consideration. Company Stock Options. The Merger Agreement provides that at the Effective Time, each Existing Stock Option issued pursuant to the Summit Care Corporation Stock Option Plan, as amended, of the Company (the "Company Plan"), whether vested or unvested, shall be converted into and shall become the right to receive a cash payment per Existing Stock Option, without interest, determined by multiplying (i) the excess, if any, of the Offer Price over the applicable per share exercise price of such Existing Stock Option (without taking into account whether such Existing Stock Option was in fact exercisable at such time), by (ii) the number of Shares into which such Existing Stock Option was exercisable immediately prior to the Effective Time (less any amounts required to be deducted pursuant to any applicable income and employment tax withholding requirements). At the Effective Time, all Existing Stock Options (including those options with an exercise price equal to or in excess of the Offer Price) shall be canceled and be of no further force or effect except for the right to receive cash to the extent provided in the Merger Agreement. Conduct of Business Prior to Consummation of the Merger. Pursuant to the Merger Agreement, the Company Board has agreed not to permit the Company or its subsidiaries to conduct its business in any manner other than in the ordinary course of business and in a manner consistent with past practice. The Company has agreed that, among other things and subject to certain exceptions, between the date of the Merger Agreement and the Effective Time, other than with Parent's or Purchaser's prior written consent, the Company and its subsidiaries shall not, voluntarily or involuntarily, take any of the following actions: (i) amend its Articles of Incorporation and Bylaws; (ii) amend or modify (except as contemplated by the Merger Agreement) the terms of the Company Plan or authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or 32 otherwise) any stock of any class or any other securities or equity equivalents (including, without limitation, any stock options or stock appreciation rights), except for the issuance or sale of shares of Company common stock pursuant to the exercise of Existing Stock Options; (iii) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or redeem or otherwise acquire any securities of the Company or of its subsidiaries; (iv) except in connection with the exercise or purchase options under existing leases, (A) incur or assume any long-term or short-term debt or issue any debt securities, except for borrowings under existing lines of credit in the ordinary course of business and in amounts not material to the Company and its subsidiaries taken as a whole and except for indebtedness not exceeding $250,000 in the aggregate; (B) except as described in the Merger Agreement, assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently otherwise) for the obligations of any other person, except in the ordinary course of business consistent with past practice and in amounts not material to the Company and its subsidiaries taken as a whole and except for obligations of its subsidiaries; (C) except for investments not exceeding $500,000 in the aggregate, make any loans, advances or capital contributions to, or investments in, any other person (other than to subsidiaries of the Company or customary loans or advances to employees in the ordinary course of business consistent with past practice and in amounts not material to the maker of such loan or advance); (D) except as described in the Merger Agreement, pledge or otherwise encumber shares of capital stock of the Company or its subsidiaries; or (E) except as described in the Merger Agreement, mortgage or pledge any of its material assets, tangible or intangible, or create or suffer to exist any material lien thereupon except for liens securing indebtedness not exceeding $250,000 in the aggregate; (v) except as may be required by law or as contemplated by the Merger Agreement and except in connection with the hiring of officers (to replace any officer who retires or is terminated for any reason) or employees in the ordinary course of business, enter into, adopt or amend or terminate any bonus, profit sharing, compensation, severance, termination, stock option, stock appreciation right, restricted stock, performance unit, stock equivalent, stock purchase agreement, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan, fund or other arrangement for the benefit or welfare of any director, officer or employee in any manner, or (except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expense to the Company, except as required under existing agreements and except for the payment of bonuses and severance payments in the ordinary course of business generally consistent with past practice) increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan and arrangement as in effect as of the date of the Merger Agreement (including, without limitation, the granting of stock appreciation rights or performance units); (vi) except as described in the Merger Agreement or with the consent of Parent or Purchaser, which consent will not be unreasonably withheld, acquire, sell, lease or dispose of any assets outside the ordinary course of business or any assets which have a value in excess of $5 million; (vii) except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting principles or practices used by it; (viii) except in connection with the exercise of purchase options under existing leases, (A) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or any equity interest therein (except for transactions having an aggregate value not exceeding $500,000 in the aggregate); (B) authorize or make any new capital expenditure or expenditures which, individually, is in excess of $250,000 or, in the aggregate, are in excess of $1.0 million; provided, however, that none of the foregoing shall limit any capital expenditure already included in the Company's 1998 capital expenditure budget; or (C) enter into or amend any contract, agreement, commitment or arrangement providing for the taking of any action that would be prohibited by clauses (A) or (B) of this paragraph; 33 (ix) make any tax election or settle or compromise any income tax liability material to the Company and its subsidiaries taken as a whole; (x) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against, in, or contemplated by, the consolidated financial statements (or the notes thereto) of the Company and its subsidiaries at September 30, 1997 or incurred in the ordinary course of business consistent with past practice; (xi) settle or compromise any pending or threatened suit, action or claim relating to the transactions contemplated by the Merger Agreement; or (xii) take, or agree in writing or otherwise to take, any of the actions which would make any of the representations or warranties of the Company contained in the Merger Agreement untrue or incorrect as of the date when made. Other Potential Acquirors. The Merger Agreement provides that the Company, its affiliates and their respective officers, directors, employees, representatives and agents shall immediately cease any existing discussions or negotiations, if any, with any parties (other than the parties to the Merger Agreement) conducted with respect to any offer or proposal for a merger or other business combination involving the Company or any of its subsidiaries or the acquisition of all or any material portion of the assets of, or any equity interest in, the Company or its subsidiaries or any business combination with the Company or its Subsidiaries (each an "Acquisition Proposal"). The Company may, directly or indirectly, furnish information and access, in each case only in response to unsolicited requests therefor, to any corporation, partnership, limited liability company or other entity or group pursuant to confidentiality agreements on terms no less favorable to the Company than the confidentiality agreement that has been entered into by and between the Company and Parent, and may participate in discussions and negotiate with such entity or group concerning any merger, sale of assets, sale of shares of capital stock or similar transaction involving the Company or any Subsidiary or division thereof, if such entity or group has submitted a written proposal to the Company Board relating to any such transaction and the Company Board by a majority vote determines in its good faith judgment, based on the advise of counsel, that it is required to do so in the exercise of its fiduciary duties under California Law. The Company Board shall promptly (and in no event later than 24 hours after receipt of the relevant Acquisition Proposal) notify (which notice shall be provided orally and in writing and shall identify the person making the relevant Acquisition Proposal and set forth material terms thereof) Purchaser after (i) the Company has received any Acquisition Proposal or (ii) one of Messrs. Brende, Casey or Massimino has actual knowledge that any person has taken concrete steps that could reasonably be expected to result in an Acquisition Proposal, and thereafter shall keep Parent and Purchaser promptly advised of any development with respect thereto. Except as set forth above, neither the Company or any of its affiliates; nor any of its or their respective officers, director, employees, representatives or agents, shall, directly or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information to, any corporation, partnership, limited liability company or other entity or group (other than Parent and Purchaser, any affiliate or associate of Parent and Purchaser or any designees of Parent and Purchaser) concerning any merger, sale of assets, sale of shares of capital stock or similar transaction involving the Company, any subsidiary or any division of the Company or any subsidiary; provided, however, that nothing shall prevent the Company Board from taking, and disclosing to the Company's shareholders, a position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender offer; and provided further, however, that nothing shall prevent the Board from making such disclosure to the Company's shareholders as, in the good faith judgment of the Company Board, is required in the exercise of its fiduciaries duties under California Law, provided that the Company complies with the termination provisions of the Merger Agreement. Access to Information. The Merger Agreement provides that until the Effective Time, the Company will provide to Parent and Purchaser and their authorized representatives reasonable access to all employees, plants, offices, warehouses and other facilities and to all books and records of the Company and its subsidiaries, will permit Parent and Purchaser to make such inspections as Parent and Purchaser may reasonably require and will 34 cause the Company's officers and those of its subsidiaries to furnish Parent and Purchaser with such financial and operating data and other information with respect to the business and properties of the Company and its Subsidiaries as Parent or Purchaser may from time to time reasonably request. Pursuant to the Merger Agreement, each of Parent and Purchaser has agreed that it will hold and will cause its consultants and advisors to hold in confidence all documents and information concerning the Company and its subsidiaries furnished to Parent or Purchaser in connection with the transactions contemplated by the Merger Agreement pursuant to the terms of that certain Confidentiality Agreement entered into between the Company and Heritage dated October 31, 1997. Shareholders Meeting. The Merger Agreement provides that, if a vote of the Company's shareholders is required by law, the Company will, as promptly as practicable following the acceptance for payment of Shares by Purchaser pursuant to the Offer, take, in accordance with applicable law and its articles of incorporation and by-laws, all action necessary to convene a meeting of holders of Shares (the "Shareholders Meeting") to consider and vote upon the approval of the Merger Agreement. The Company shall, promptly following the acceptance for payment of Shares by Parent pursuant to the Offer, prepare and file with the Commission a proxy statement for the solicitation of a vote of holders of Shares approving the Merger (the "Proxy Statement"), which shall include the recommendation of the Company Board that shareholders of the Company vote in favor of the approval and adoption of the Merger Agreement and the written opinion of DLJ that the cash consideration to be received by the shareholders of the Company pursuant to the Merger is fair to such shareholders from a financial point of view. The Company shall use all reasonable efforts to have the Proxy Statement cleared by the Commission as promptly as practicable after such filing, and promptly thereafter mail the Proxy Statement to the shareholders of the Company. The Company shall also use its best efforts to obtain all necessary state securities law or "blue sky" permits and approvals required in connection with the Merger and to consummate the other transactions contemplated by the Merger Agreement and will pay all expenses incident thereto. Notwithstanding the foregoing, the Merger Agreement provides that if Parent, Purchaser and/or any other subsidiary of Parent shall acquire at least 90% of the outstanding Shares, the parties shall take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after the expiration of the Offer without a Shareholders Meeting in accordance with Section 1110 of the California Law. Parent and Purchaser have agreed to cause all Shares purchased pursuant to the Offer and all other Shares owned by Parent, Purchaser or any subsidiary of Parent to be voted in favor of the Merger. Additional Agreements; Reasonable Efforts. Subject to the terms and conditions in the Merger Agreement, Parent, Purchaser and the Company agree to use all commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by the Merger Agreement, including, without limitation, (a) cooperation in the preparation and filing of the Schedule 14D-1, the Schedule 14D-9, the Schedule 13E-3, the Proxy Statement, any filings that may be required under the HSR Act and any amendments thereto; (b) the taking of all action reasonably necessary, property or advisable to secure any necessary consents under existing debt obligations of the Company and its subsidiaries or to amend the notes, indentures or agreements relating thereto the extent required by such notes, indentures or agreements or redeem or repurchase such debt obligations; (c) contesting any legal proceeding relating to the Offer or the Merger and (d) the execution of any additional instruments, including the Merger Agreement, necessary to consummate the transactions contemplated thereby. Subject to the terms and conditions of the Merger Agreement, Parent and Purchaser agree to use all reasonable efforts to cause the Effective Time to occur as soon as practicable after the shareholder vote, if any, with respect to the Merger. In case at any time after the Effective Time any further action is necessary to carry out the purposes of the Merger Agreement, the proper officers and directors of each party shall take all such necessary action. Consents. The Merger Agreement provides that Parent, Purchaser and the Company each will use all commercially reasonable efforts to obtain consents of all third parties and governmental entities necessary, proper or advisable for the consummation of the transactions contemplated by the Merger Agreement. 35 Public Announcements. The Merger Agreement provides that Parent, Purchaser and the Company, as the case may be, will consult with one another before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by the Merger Agreement, including, without limitation, the Offer or the Merger, and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by applicable law or by obligations pursuant to any listing agreement with the New York Stock Exchange, Inc. or the NASDAQ Stock Market, as determined by Parent, Purchaser or the Company, as the case may be. Guarantee of Performance. Pursuant to the Merger Agreement, Parent has agreed to guarantee performance by Purchaser of its obligations under the Merger Agreement and the indemnification obligations of the Surviving Corporation (as described below). Financing Commitments. Subject only to the satisfaction of Parent's and Purchaser's conditions to consummation of the Offer, Heritage agreed in the Merger Agreement to provide to Parent and Purchaser not later than the purchase under the Offer $82 million of the funds necessary to purchase Shares in the Offer and/or the Merger. Parent and Purchaser represent in the Merger Agreement that Parent has also received a commitment letter from Bank of Montreal (the "Commitment"), to provide funds necessary to purchase the Shares, to refinance existing Company and subsidiary indebtedness and to pay any and all of the costs and expenses incurred and to be incurred by Parent and Purchaser in connection with the transactions contemplated by the Merger Agreement. See "THE TENDER OFFER-- Source and Amount of Funds". Other Financing Commitment. Pursuant to the Merger Agreement, Parent, Purchaser and Heritage have agreed to use their commercially reasonable efforts to consummate the transactions contemplated by the Commitment and to obtain the funding contemplated thereunder and, if the Commitment is terminated for any reason, then promptly to obtain another commitment letter or letters or similar documents covering at least the same amount of funds and for the same purpose, containing certain conditions excusing funding that are at least as restrictive on the issuer of such commitment letter or letters as those contained in the Commitment. Conditions to the Merger. Under the Merger Agreement, the respective obligations of the parties to effect the Merger are subject to the satisfaction or waiver of the following conditions prior to the Effective Time: (a) if required by California Law, the Merger Agreement and the Merger shall have been approved and adopted by the requisite vote of the shareholders of the Company; (b) no statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or enforced by any United States court or United States governmental authority which prohibits, restrains, enjoins or restricts the consummation of the Merger; (c) any waiting period applicable to the Merger under the HSR Act shall have terminated or expired, and any other governmental or regulatory notices or approvals required with respect to the transactions contemplated by the Merger Agreement shall have been either filed or received; (d) Purchaser shall have purchased the Shares pursuant to the Offer. Representations and Warranties. The Merger Agreement contains various customary representations and warranties of the parties thereto including representations by the Company as to the Company's corporate organization and qualification, the Company's subsidiaries, capitalization, authority, filings with the Commission and other governmental authorities, financial statements, the absence of certain changes or events concerning the Company's corporate organization and qualification, the absence of undisclosed liabilities, the truth of information supplied by the Company, litigation, labor matters, employee benefit matters and ERISA, taxes, compliance with applicable laws, environmental matters, real property, intellectual property, insurance, state takeover statutes and related party transactions. Indemnification; Directors' and Officers' Insurance. Pursuant to the Merger Agreement, Parent and Purchaser have agreed that all rights to indemnification or exculpation now existing in favor of the directors, officers, employees and agents of the Company and its Subsidiaries as provided in their respective charters or 36 bylaws (or other similar governing instruments) or otherwise in effect as of the date hereof with respect to matters occurring prior to the Effective Time shall survive the Merger and shall continue in full force and effect. To the maximum extent permitted by the CGCL, such indemnification shall be mandatory rather than permissive and the Surviving Corporation shall advance expenses in connection with such indemnification (subject to the Surviving Corporation's receipt of an undertaking by the indemnified party to return such advanced expenses to the Surviving Corporation if it is determined by a final, non- appealable order of a court of competent jurisdiction that such indemnified party is not entitled to retain such advanced expenses). The Merger Agreement further provides that Parent shall cause the Surviving Corporation to maintain in effect for not less than three years from the Effective Time the policies of the directors' and officers' liability and fiduciary insurance most recently maintained by the Company (provided that the Surviving Corporation may substitute policies of at least the same coverage containing terms and conditions which are no less advantageous to the beneficiaries thereof so long as such substitution does not result in gaps or lapses in coverage) with respect to matters occurring prior to the Effective Time; provided, however, that in satisfying its obligation, the Surviving Corporation shall not be obligated to pay premiums in excess of 150% of the amount per annum incurred by the Company in the twelve months ended December 31, 1997 with respect to such insurance. In the event the Surviving Corporation or its successor (i) is consolidated with or merges into another 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 other person in a single transaction or a series of related transactions, Parent has agreed that it will make or cause to be made proper provision so that the successor or transferee of the Surviving Corporation shall comply in all material respect with these terms. Employee Matters. Under the Merger Agreement, employees of the Company and its subsidiaries shall be treated after the Merger no less favorably under Parent's ERISA plans, to the extent applicable, than other similarly situated employees of Parent and its subsidiaries. For a period of one year following the Merger, Parent has agreed to, and to cause its subsidiaries to, maintain with respect to their employees who had been employed by the Company or any of its subsidiaries prior to the Effective Time and who remain employed following the Effective Time (i) base salary or regular hourly wage rates for each such employee at not less than the rate applicable immediately prior to the Merger to such employee, and (ii) employee benefits (as defined for purposes of Section 3(3) of ERISA), other than stock option plans) which are substantially comparable in the aggregate to such employee benefits provided by the Company and its subsidiaries immediately prior to the Merger. To the extent they participate under such plans, Parent and its subsidiaries have agreed to credit employees of the Company and its Subsidiaries for purposes of determining eligibility to participate or vesting under Parent's ERISA Plans with their service prior to the Merger with the Company and its subsidiaries to the same extent such service was counted under similar benefit plans of the Company prior to the Merger. Parent and Purchaser have also agreed to, and to cause the Surviving Corporation to, honor the Company's obligations to employees under the Employee Severance Plan. Neither Parent nor the Surviving Corporation is required to continue any specific plans or to continue the employment of any specific person. Parent Stock Option; Exercise; Adjustments. Subject to the terms and conditions set forth in the Merger Agreement, the Company has granted to Parent an irrevocable option (the "Parent Option") to purchase up to that number of authorized and unissued Shares equal to 19.99% of the Shares outstanding immediately prior to the exercise of the Parent Option (the "Option Shares") at a purchase price of $21.00 per Option Share (the "Option Price"). Subject to the conditions set forth below, the Parent Option may be exercised by Parent, in whole or in part, at any time or from time to time after the date on which Parent has accepted for payment the Shares tendered pursuant to the Offer and prior to the termination of the Merger Agreement. 37 In the event of any change in the number of issued and outstanding Shares outstanding by reason of any stock dividend, stock split, split-up, recapitalization, merger or other change in the corporate or capital structure of the Company, the number of Option Shares and the Option Price shall be appropriately adjusted to restore Parent to its rights. The Merger Agreement provides that Company's obligation to issue and deliver the Option Shares upon exercise of the Parent Option is subject only to the following conditions: (i) No preliminary or permanent injunction or other order issued by any federal or state court of competent jurisdiction in the United States prohibiting the delivery of the Option Shares shall be in effect; (ii) Any applicable waiting periods under the HSR Act, or other applicable United States or foreign Laws shall have expired or been terminated; and (iii) The number of Option Shares plus the number of Shares accepted for payment by Parent pursuant to the Offer will, upon issuance of the Option Shares, constitute at least ninety percent (90%) of the issued and outstanding Shares (provided, however, that, if the Offer has been consummated for the Revised Minimum Number, the condition contained in this clause (iii) will be deemed satisfied if, after the Offer has been consummated and prior to the consummation of the Merger, any Existing Stock Options have been exercised and, upon exercise of the Parent Option, the number of Option Shares to be purchased plus the number of Shares purchased by Parent pursuant to the Offer and the number of Shares then owned directly or indirectly by Parent will, upon issuance of the Option Shares, constitute 49.9% of the issued and outstanding Shares). Termination; Fees and Expenses. Termination. The Merger Agreement may be terminated and the Offer and the Merger may be abandoned at any time prior to the Effective Time: (a) by mutual written consent of Parent, Purchaser and the Company; (b) by Parent or Purchaser or the Company if any court of competent jurisdiction in the United States or other United States governmental authority shall have issued a final order, decree or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Offer or the Merger and such order, decree, ruling or other action is or shall have become nonappealable; (c) by Parent and Purchaser if, on or prior to July 31, 1998, due to an occurrence or circumstance which would result in a failure to satisfy any of the Conditions, Purchaser shall have (i) terminated the Offer or (ii) failed to pay for Shares pursuant to the Offer; provided, however, that the right to terminate the Merger Agreement pursuant to this clause shall not be available to Parent or Purchaser if either of them has breached in any material respect its obligations under the Merger Agreement in any manner that shall have proximately contributed to the failure referenced in this clause; (d) by the Company if, by July 31, 1998, Purchaser shall have failed to pay for the Shares properly tendered and not withdrawn pursuant to the Offer; provided, however, that the right to terminate the Merger Agreement pursuant to this clause shall not be available to the Company if it has breached in any material respect its obligations under the Merger Agreement that in any manner shall have proximately contributed to the failure referenced in this clause; (e) by the Company if (i) there shall have been a breach of any representation or warranty on the part of Parent or Purchaser set forth in the Merger Agreement, or if any representation or warranty of Parent or Purchaser shall have become untrue, in either case which materially adversely affects (or materially delays) the consummation of the Offer, (ii) there shall have been a breach on the part of Parent or Purchaser of any of their respective covenants or agreements set forth in the Merger Agreement having a Material Adverse Effect (as defined below) on Parent or materially adversely affecting (or materially delaying) the consummation of the Offer, and Parent or Purchaser, as the case may be, has not cured such breach prior to the earlier of (A) ten days following notice by the Company thereof and (B) two Business Days prior to the 38 date on which the Offer expires, provided that the Company has not breached any of its obligations in a manner that proximately contributed to such breach by Parent or Purchaser, or (iii) prior to the purchase of Shares pursuant to the Offer, the Company Board by a majority vote shall have determined in its good faith judgment, based on the advice of counsel, that it is required to do so in the exercise of its fiduciary duties under the CGCL, provided that such termination under this clause shall not be effective until payment of the required termination fee (see below), or (f) by Parent or Purchaser prior to the purchase of Shares pursuant to the Offer if (i) the Company Board withdraws or modifies in a manner materially adverse to Parent or Purchaser its favorable recommendation of the Offer or the approval or recommendation of the Merger or shall have recommended a Third Party Acquisition (as defined below), (ii) a Third Party Acquisition occurs, (iii) there shall have been a breach of any representation or warranty on the part of Company set forth in the Merger Agreement, or any representation or warranty of Company shall have become untrue, in either case if the respects in which the representations and warranties made by the Company are inaccurate would in the aggregate have a Material Adverse Effect on the Company or materially adversely affect (or delay) the consummation of the Offer or the Merger, (iv) there shall have been a breach on the part of the Company of its covenants or agreements set forth in the Merger Agreement having, individually or in the aggregate, a Material Adverse Effect on the Company or materially adversely affecting (or materially delaying) the consummation of the Merger, and, with respect to clauses (iii) and (iv) above, the Company has not cured such breach prior to the earlier of (A) ten days following notice by the Parent or Purchaser thereof and (B) two Business Days prior to the date on which the Offer expires, provided that, with respect to clauses (iii) and (iv) above, neither Parent or Purchaser has breached any of their respective obligations in a manner that proximately contributed to such breach by the Company or (v) Parent or Purchaser shall have discovered that any information supplied to Parent or Purchaser by the Company (excluding, for such purposes, any projections or forecasts or other forward looking information supplied by the Company), at the time provided to Parent or Purchaser, contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and such misstatement or omission would have a Material Adverse Effect on the Company. As used in the Merger Agreement, "Material Adverse Effect" means any change or effect that is or is reasonably likely to be materially adverse to the business, assets, results of operations or condition (financial or otherwise) of the Company and its subsidiaries taken as whole, on the one hand, or Parent and its subsidiaries on the other hand, other than any change or effect arising out of general economic conditions unrelated to any businesses in which the Company or any of its subsidiaries, or the Parent and its subsidiaries, is engaged. In the event of the termination and abandonment of the Merger Agreement, the Merger Agreement shall become void and have no effect, without any liability on the part of any party or its affiliates, directors, officers or shareholders, other than the provisions concerning fees and expenses (discussed below) and confidentiality. Nothing shall relieve any party from liability for any breach of the Merger Agreement. Fees and Expenses. In the event that the Merger Agreement shall be terminated pursuant to: (i) paragraph (e)(iii), above; (ii) paragraph (f)(i) or (ii) above; or (iii) paragraph (f)(iii) or (iv), above, as a result of a willful breach of any representation, warranty, covenant or agreement of the Company and, within twelve months thereafter, the Company enters into an agreement with respect to a Third Party Acquisition (as defined below), or a Third Party Acquisition occurs, involving any party (or any affiliate thereof) (x) with whom the Company (or its agents) had discussions with a view to a Third Party Acquisition, (y) to whom the Company (or its agents) furnished information with a view to a Third Party Acquisition or (z) who had submitted a proposal or expressed an interest in a Third Party Acquisition, in the case of each of clauses (x), (y) and (z) during the period commencing on October 1, 1997 and continuing until such termination; 39 The Company has agreed to pay to Parent the amount of $7.0 million as liquidated damages (the "Break-Up Fee"). "Third Party Acquisition" means the occurrence of any of the following events: (i) the acquisition of the Company by merger or otherwise by any person (which includes a "person" as such term is defined in Section 13(d)(3) of the Exchange Act) or entity other than Parent, Purchaser or any affiliate thereof (a "Third Party"); (ii) the acquisition by a Third Party of 30% or more of the total assets of the Company and its subsidiaries, taken as a whole; or (iii) the acquisition by a Third Party of Shares resulting in such person holding at least 30% or more of the outstanding Shares. Upon the termination of the Merger Agreement prior to the purchase of Shares by Purchaser pursuant to the Offer pursuant to paragraph (f) above (unless such termination results in payment of the Break-Up Fee), the Company shall reimburse Parent, Purchaser and their affiliates (not later than ten Business Days after submission of statements therefor) for all actual documented out- of-pocket fees and expenses, not to exceed $2.0 million, actually and reasonably incurred by any of them or on their behalf in connection with the Merger and the consummation of all transactions contemplated by the Merger Agreement (including, without limitation, filing fees, printing and mailing costs, fees payable to investment bankers, counsel to any of the foregoing, and accountants). Parent and Purchaser have provided the Company with an estimate of the amount of such fees and expenses and, if Parent or Purchaser shall have submitted a request for reimbursement, will provide the Company in due course with invoices or other reasonable evidence of such expenses upon request. The Company shall in any event pay the amount requested (not to exceed $2.0 million) within ten Business Days of such request, subject to the Company's right to demand a return of any portion as to which invoices are not received in due course. Upon the termination of the Merger Agreement pursuant to paragraph (e)(i) or (ii) above, Parent shall reimburse the Company and their affiliates (not later than ten Business Days after submission of statements therefor) for all actual documented out-of-pocket fees and expenses, not to exceed $1.0 million, actually and reasonably incurred by any of them or on their behalf in connection with the Merger and the consummation of all transactions contemplated by the Merger Agreement (including, without limitation, filing fees, printing and mailing costs, fees payable to investment bankers, counsel to any of the foregoing, and accountants). The Company has provided Parent with an estimate of the amount of such fees and expenses and, if the Company shall have submitted a request for reimbursement, will provide Parent in due course with invoices or other reasonable evidence of such expenses upon request. Parent shall in any event pay the amount requested (not to exceed $1.0 million) within ten Business Days of such request, subject to Parent's right to demand a return of any portion as to which invoices are not received in due course. Except as specifically provided in the Merger Agreement, each party has agreed to bear its own expenses in connection with the Merger Agreement and the transactions contemplated thereby. Amendment. The Merger Agreement may be amended by action taken by the Company, Parent and Purchaser at any time before or after approval of the Merger by the shareholders of the Company (if required by applicable law) but, after any such approval, no amendment shall be made which requires the approval of such shareholders under applicable law without such approval. The Merger Agreement may not be amended except by an instrument in writing signed on behalf of the parties. Extension. The Merger Agreement provides that at any time prior to the Effective Time, each party may (a) extend the time for the performance of any of the obligations or other acts of the other party or parties, (b) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document, certificate or writing delivered pursuant hereto or (c) waive compliance by the other parties 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. The failure of any party to assert any of its rights shall not constitute a waiver of such rights. Management Agreement. On February 6, 1998, Parent, Robert Snukal ("Mr. Snukal"), Sheila Snukal ("Mrs. Snukal"), Mr. Scott and Heritage entered into an Agreement (the "Management Agreement") with respect to certain aspects of the 40 ownership and management of Parent. The Management Agreement provides, among other things, that the parties will execute definitive documents prior to the consummation of the Offer, or in certain cases at the effective time of the Merger, reflecting the terms set forth in the Management Agreement. The following summary is qualified in its entirety by reference to the Management Agreement, a copy of which has been filed with the Commission as an exhibit to the Schedule 14D-1 and the Schedule 13E-3. While the parties have agreed to execute final definitive agreements consistent with the Management Agreement, such final agreements may differ in certain respects from the terms of the Management Agreement, to the favor or disfavor of any of the parties. Capitalization of Parent. The Management Agreement provides that immediately prior to the consummation of the Offer, Heritage will invest $74,500,000 in cash in Parent, and the Snukals will invest $5,000,000 in cash in Parent in order to provide a portion of the capital needed to fund Purchaser's purchase of shares in the Offer. Promptly after the Effective Time of the Merger, Mr. Scott will invest approximately $2,500,000 in cash in Parent representing the full amount of the after-tax proceeds he will receive from the cash out in the Merger of all options to purchase shares of the Company's common stock held by him and the full after-tax proceeds from payments under the Scott Pension Plan received by him from the Company (see "SPECIAL FACTORS--Interests of Certain Persons in the Offer and the Merger"), which proceeds he expects to receive on or about the date of the Merger. Mr. Scott will receive a cash bonus from Parent to cover any tax cost relating to the cash out of his Company stock options to the extent that such bonus and related deductions are tax neutral to Parent. If, for any reason, the Snukals or Mr. Scott do not make these investments in Parent, Heritage has committed to increase its investment in Parent to cover any shortfall, up to an amount which would cause its aggregate investment in Parent in connection with the Offer and the Merger to equal $82,000,000. Effective immediately prior to the consummation of the Offer, the existing outstanding stock of Parent will be reorganized into, and the new cash invested in Parent will purchase, shares of Series A Common Stock (the "Series A Stock") of Parent at an effective purchase price of $1,265 per share. At the same time, the Snukals and Mr. Scott will purchase shares of Series B Non- Voting Common Stock (the "Series B Stock") for a nominal price per share. There will be no other equity securities of Parent outstanding. The Series A Stock and the Series B Stock will have the following general characteristics. Each share of Series A Stock will be entitled to aggregate distributions of $1,265 per share plus a 22% internal rate of return thereon from the date the Offer is consummated before any distributions are made on the Series B Stock. After the foregoing amounts have been distributed in respect of the Series A Stock, each share of Series B Stock will be entitled to a distribution of the same amount as was distributed in respect of each share of Series A Stock. After all of the foregoing distributions, the Series A Stock and Series B Stock will share any remaining proceeds on a pro rata basis. As of immediately prior to the consummation of the Offer, the Series A Stock will be owned as follows: Heritage will own 78,240 shares, the Snukals and certain other current stockholders of Parent will own 17,780 shares, and Mr. Scott will own 1,980 shares and will have an option to acquire 2,000 additional shares for a nominal price. As of the consummation of the Offer, the Series B Stock will be owned as follows: the Snukals will own 6,125 shares and Mr. Scott will own 4,649 shares. The Series B Stock will be subject to repurchase at cost by Parent upon a change of control of Parent, an initial public offering of its shares or other similar events (each, a "Trigger Event"), with the precise number of shares repurchased to be determined on a sliding scale based on the value of Parent's common equity at the Trigger Event in relation to certain value targets at various dates in the future. Under this arrangement, the holders of the Series B Stock will retain more shares of Series B Stock at the time of the Trigger Event the higher the value of Parent is at that time. Corporate Governance. The Management Agreement provides that the Board of Directors of Parent will, immediately prior to the consummation of the Offer, include one director designated by Mr. Scott (expected to be Mr. Scott) and two directors (but not less than 25% of the total number of directors) designated by Mr. Snukal. All other directors of Parent will be designated by Heritage. 41 Stock Transfer Restrictions and Rights. The Management Agreement provides for stock transfer restrictions on shares of stock of Parent. The non-Heritage stockholders of Parent may not transfer their shares for four years after the consummation of the Offer except for certain estate planning transfers or, in the case of Mr. Snukal, until such time as he is terminated without cause by Parent. After the expiration of any such applicable period, Parent and the other stockholders of Parent will have a right of first refusal on transfers by the non-Heritage stockholders, except for estate planning transfers. If Heritage transfers its shares of Parent Stock in a transaction constituting a Trigger Event (other than an initial public offering of Parent), the other stockholders will have the right to participate on a pro rata basis with Heritage in such transfers. Heritage will also have the right to require all other stockholders to transfer their shares in a transaction constituting a Trigger Event. Registration Rights. The Management Agreement also provides that Heritage will have the right to require Parent on two occasions to effect the registration of Parent shares held by it under the Securities Act. The Snukals will have the right to cause Parent to effect one demand registration, in which Mr. Scott will have the right, at his election, to share on a pro rata basis. Employment Agreements for Key Management. The Management Agreement provides that immediately prior to the consummation of the Offer (or, in the case of Mr. Scott, at the effective time of the Merger), Parent will enter into new five year Employment Agreements with each of the Snukals and with Mr. Scott. In the case of Mr. Scott, the new Employment Agreement will not trigger any payment under the Company's Special Severance Pay Plan. Under the Employment Agreements with Parent, Mr. Snukal will serve as Chief Executive Officer of Parent, Mr. Scott will serve as Chairman of Parent, Mrs. Snukal will serve as Executive Vice President of Parent, and each will have duties consistent with such titles as specified by Parent's Board. Mr. Snukal will be entitled to a base salary at an annual rate of $500,000, and will be eligible for an annual bonus of up to $500,000 based upon the achievement of certain financial targets. Mrs. Snukal will be entitled to a base salary at an annual rate of $225,000, and will be eligible for an annual bonus of up to $125,000, based upon the achievement of certain financial targets. Mr. Scott will be entitled to a base salary at an annual rate of $450,000, and will be eligible for an annual bonus of up to $350,000 based upon the achievement of certain financial targets. All of the foregoing base salaries will be subject to annual consumer price index adjustments. The employment of each of Mr. Snukal, Mrs. Snukal and Mr. Scott may be terminated at any time by Parent's Board of Directors with or without cause. In the case of termination without cause (other than on death or disability), Parent will continue to pay their base salary (plus an additional $25,000 in the aggregate, in the case of such termination of both Mr. and Mrs. Snukal) for the duration of their scheduled term of employment. If Mr. Snukal is terminated without cause, Mrs. Snukal may, at her option, deem her employment to have been terminated without cause and receive the severance referred to in the preceding sentence. In the case of Mr. Scott, his severance will be reduced by the amount, if any, he is then due under the Company's Special Severance Pay Plan. The Employment Agreements will contain customary definitions of cause, confidentiality provisions and a three-year noncompetition covenant. 10. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES. The receipt of cash for Shares pursuant to the Offer or the Merger will be a taxable transaction for United States federal income tax purposes. In general, a shareholder will recognize gain or loss for United States federal income tax purposes equal to the difference between the amount of cash received in exchange for the Shares sold and such shareholder's adjusted tax basis in such Shares. Such gain or loss will be capital gain or loss if the Shares constitute capital assets in the hands of the shareholder. Pursuant to recently enacted legislation, in the case of an individual holder of Shares, any such capital gain generally will be subject to a maximum United States federal income tax rate of (a) 20% if the holder's holding period in such shares was more than 18 months at the Effective Time, and (b) 28% if the holder's holding period was more than one year but not more than 18 months at the Effective Time or at the time of consummation of the Offer. Any such capital loss will be subject to certain limitations on deductibility for United States federal income tax purposes. 42 THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF SHAREHOLDERS, SUCH AS FINANCIAL INSTITUTIONS, BROKER-DEALERS, SHAREHOLDERS WHO ACQUIRED SHARES PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE AS COMPENSATION, INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES, FOREIGN CORPORATIONS AND PERSONS WHO RECEIVED PAYMENTS IN RESPECT OF OPTIONS OR WARRANTS TO ACQUIRE SHARES. THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE OFFER AND THE MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF THE UNITED STATES ALTERNATIVE MINIMUM TAX, STATE AND LOCAL, AND FOREIGN TAX LAWS. 43 THE TENDER OFFER 1. TERMS OF THE OFFER; EXPIRATION DATE. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), Purchaser will accept for payment and pay for all (or in certain circumstances, the Revised Minimum Number of) Shares validly tendered prior to the Expiration Date (as defined herein) and not withdrawn, as described under "THE TENDER OFFER--Withdrawal Rights". The term "Expiration Date" means 12:00 Midnight, New York City time, on March 13, 1998, unless and until Purchaser, in its reasonable judgment (but subject to the terms and conditions of the Merger Agreement), shall have extended the period during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by Purchaser, shall expire. The Offer is subject to the Minimum Condition and to certain other conditions. See "THE TENDER OFFER--Certain Conditions of the Offer". Consummation of the Merger is subject to the satisfaction or waiver of certain conditions, including the approval and adoption of the Merger and the Merger Agreement by the affirmative vote of the holders of the outstanding Shares, if required. Purchaser expressly reserves the right, in its sole discretion (but subject to the terms and conditions of the Merger Agreement), at any time and from time to time, to extend for any reason the period of time during which the Offer is open, including the failure of any of the conditions specified in "THE TENDER OFFER--Certain Conditions of the Offer" to be satisfied, by giving oral or written notice of such extension to the Depositary. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the rights of a tendering shareholder to withdraw his Shares. See "THE TENDER OFFER--Withdrawal Rights". Subject to the applicable regulations of the Commission, Purchaser also expressly reserves the right, in its sole discretion (but subject to the terms and conditions of the Merger Agreement), at any time and from time to time, (a) to delay acceptance for payment of, or, regardless of whether such Shares were theretofore accepted for payment, payment for, any Shares in order to comply with any applicable laws, (b) to terminate the Offer and not accept for payment any Shares upon the failure of any of the conditions specified in "THE TENDER OFFER--Certain Conditions of the Offer" to be satisfied and (c) to waive any condition or otherwise amend the Offer in any respect, by giving oral or written notice of such delay, termination, waiver or amendment to the Depositary and by making a public announcement thereof. If Purchaser extends the Offer, if Purchaser (whether before or after its acceptance for payment of the Shares) is delayed in its acceptance for payment of or payment for any Shares validly tendered and not withdrawn in the Offer or if Purchaser is unable to accept for payment or pay for such Shares pursuant to the Offer for any reason, then, without prejudice to Purchaser's rights under the Offer, the Depositary may retain tendered Shares on behalf of Purchaser, and such Shares may not be withdrawn except to the extent tendering shareholders are entitled to withdrawal rights as described in "THE TENDER OFFER--Withdrawal Rights". Purchaser acknowledges that (a) Rule 14e-1(c) under the Exchange Act requires Purchaser to pay the consideration offered or to return the Shares tendered promptly after the termination or withdrawal of the Offer and (b) Purchaser may not delay acceptance for payment of, or payment for (except as provided in clause (a) above), any Shares upon the occurrence of any of the conditions specified in "THE TENDER OFFER--Certain Conditions of the Offer" without extending the period of time during which the Offer is open. The Merger Agreement provides that Purchaser shall not, without the prior written consent of the Company, make any change in the terms or conditions of the Offer which would change the form of consideration to be paid, decrease the Offer Price or the number of Shares sought in the Offer, or impose additional or broadened conditions to the Offer other than those set forth in the Merger Agreement (it being agreed that a waiver by Purchaser of any condition, in its discretion, shall not be deemed to be adverse to the holders of Shares). 44 The Merger Agreement provides that if on any scheduled expiration date of the Offer all conditions to the Offer shall not have been satisfied or waived, the Offer may be extended by Purchaser from time to time without the consent of the Company (i) if at the scheduled expiration date of the Offer any of the conditions to the Offer shall not have been satisfied or waived, until such time as such conditions are satisfied or waived, (ii) for any period required by any rule, regulation, interpretation or position of the Commission or the staff thereof applicable to the Offer or (iii) for any other reason for not more than ten days beyond the latest expiration date applicable under the preceding clauses (i) or (ii) if on such expiration date there shall not have been tendered that number of Shares which, together with Shares then owned directly or indirectly by Purchaser, would equal at least 90% of the outstanding Shares. Purchaser has also agreed in the Merger Agreement to extend the time of the Offer to no later than July 31, 1998 if the conditions to the Offer are not satisfied at the expiration date thereof but are reasonably capable of being satisfied by such date. Purchaser has also agreed in the Merger Agreement that, in the event the Minimum Condition is not satisfied on or before the tenth business day after all other conditions to the offer have been satisfied, (A) the Minimum Condition shall be automatically amended to mean that a number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would equal not less than 49.9% of the Shares, shall have been validly tendered and not withdrawn prior to the expiration of the Offer, and (B) Purchaser will amend the Offer to provide that Purchaser will purchase, on a pro rata basis in the Offer, that number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would equal 49.9% of the Shares (it being understood that Purchaser shall not in any event be required to accept for payment, or pay for, any Shares if less than 49.9% of the Shares are tendered pursuant to the Offer and not withdrawn at the expiration of the Offer). Any extension, delay, termination, waiver or amendment will be followed as promptly as practicable by public announcement thereof, such announcement, in the case of an extension to be made no later than 9:00 a.m., New York City time, on the next business day (as defined herein) after the previously scheduled Expiration Date. Subject to applicable law (including Rules 14d-4(c) and 14d-6(d) under the Exchange Act, which require that material changes be promptly disseminated to shareholders in a manner reasonably designed to inform them of such changes) and without limiting the manner in which Purchaser may choose to make any public announcement, Purchaser shall have no obligation to publish, advertise or otherwise communicate any such public announcement other than by issuing a press release to the Dow Jones News Service. If (subject to the terms and conditions of the Merger Agreement) Purchaser makes a material change in the terms of the Offer or the information concerning the Offer, or if Purchaser waives a material condition of the Offer, Purchaser will extend the Offer to the extent required by Rules 14d- 4(c) and 14d-6(d) under the Exchange Act. The minimum period during which the Offer must remain open following material changes in the terms of the Offer or information concerning the Offer, other than a change in price or a change in percentage of securities sought, will depend upon the facts and circumstances, including the relative materiality of the changed terms or information. In the Commission's view, an offer should generally remain open for a minimum of five business days from the date a material change is first published, sent or given to shareholders. With respect to a change in price or a change in percentage of securities sought (other than an increase in the number of Shares sought not in excess of 2% of the outstanding Shares), a minimum 10- business-day period is required to allow for adequate dissemination to shareholders and investor response. As used in this Offer to Purchase, "business day" has the meaning set forth in Rule 14d-1 under the Exchange Act. Accordingly, if, prior to the Expiration Date, Purchaser decreases the number of Shares being sought, or increases or decreases the consideration offered pursuant to the Offer, and if the Offer is scheduled to expire at any time earlier than the period ending on the 10th business day from the date that notice of such increase or decrease is first published, sent or given to holders of Shares, the Offer will be extended at least until the expiration of such 10-business-day period. Subject to the terms of the Merger Agreement, if, prior to the Expiration Date, Purchaser should decide to increase the Offer Price, such increase in the Offer Price will be applicable to all shareholders whose Shares are accepted for payment pursuant to the Offer, whether or not such Shares were tendered prior to the date of such increase, and, if at the time notice of such increase in the Offer Price is first published, sent or given to holders of such Shares, the Offer is scheduled to expire at any time earlier than the period ending on the 10th business 45 day from and including the date that such notice is first so published, sent or given, the Offer will be extended at least until the expiration of such 10- business-day period. The Company has provided Purchaser with the Company's shareholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase and the related Letter of Transmittal will be mailed to record holders of Shares whose names appear on the Company's shareholder list, and will be furnished, for subsequent transmittal to beneficial owners of Shares, to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the shareholder list or, if applicable, who are listed as participants in a clearing agency's security position listing. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will purchase, by accepting for payment, and will pay for, any and all (or in certain circumstances, the Revised Minimum Number of) Shares which are validly tendered prior to the Expiration Date (and not properly withdrawn in accordance with "THE TENDER OFFER--Withdrawal Rights") promptly after the later to occur of (a) the Expiration Date and (b) the satisfaction or waiver of the conditions set forth in "THE TENDER OFFER-- Certain Conditions of the Offer". Purchaser expressly reserves the right, in its discretion, to delay acceptance for payment of, or, subject to applicable rules of the Commission, payment for, Shares in order to comply, in whole or in part, with any applicable law. In all cases, payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of (a) the Share Certificates or timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Shares, if such procedure is available, into the Depositary's account at a "Book-Entry Transfer Facility" pursuant to the procedures set forth in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares", (b) the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, or, in the case of a book-entry transfer, an Agent's Message (as defined herein) and (c) any other documents required by the Letter of Transmittal. The term "Agent's Message" means a message, transmitted by a Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the Shares, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that Purchaser may enforce such agreement against the participant. For purposes of the Offer, Purchaser will be deemed to have accepted for payment, and thereby purchased, Shares validly tendered and not properly withdrawn if, as and when Purchaser gives oral or written notice to the Depositary of Purchaser's acceptance of such Shares for payment. Payment for Shares accepted pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payments from Purchaser and transmitting payments to such tendering shareholders. Under no circumstances will interest on the purchase price for Shares be paid by Purchaser, regardless of any delay in making such payment. Upon the deposit of funds with the Depositary for the purpose of making payments to tendering shareholders, Purchaser's obligation to make such payment shall be satisfied and tendering shareholders must thereafter look solely to the Depositary for payment of amounts owed to them by reason of the acceptance for payment of Shares pursuant to the Offer. Purchaser will pay any stock transfer taxes incident to the transfer to it of validly tendered Shares, except as otherwise provided in Instruction 6 of the Letter of Transmittal, as well as any charges and expenses of the Depositary and the Information Agent. If any tendered Shares are not accepted for payment for any reason pursuant to the terms and conditions of the Offer, or if Share Certificates are submitted evidencing more Shares than are tendered, Share Certificates evidencing unpurchased Shares will be returned, without expense to the tendering shareholder (or, in the case of Shares tendered by book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility pursuant to the procedure set forth in "THE TENDER OFFER--Procedures for Accepting the Offer and 46 Tendering Shares", such Shares will be credited to an account maintained at such Book-Entry Transfer Facility), as promptly as practicable following the expiration or termination of the Offer. 3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES. Valid Tender of Shares. In order for Shares to be validly tendered pursuant to the Offer, the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (in the case of any book-entry transfer) and any other required documents, must be received by the Depositary at its address set forth on the back cover of this Offer to Purchase prior to the Expiration Date, and either (a) the Share Certificates evidencing tendered Shares must be received by the Depositary at one of such addresses or Shares must be tendered pursuant to the procedure for book-entry transfer described below and a Book- Entry Confirmation must be received by the Depositary, in each case, prior to the Expiration Date, or (b) the tendering shareholder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. Book-Entry Transfer. The Depositary will establish an account with respect to the Shares at a Book-Entry Transfer Facility for purposes of the Offer within two business days after the date of this Offer to Purchase, and any financial institution that is a participant in either of the Book-Entry Transfer Facilities' systems may make book-entry delivery of Shares by causing the Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at a Book-Entry Transfer Facility in accordance with a Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Shares may be effected through book-entry transfer at a Book-Entry Transfer Facility, the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message in connection with a book-entry delivery of Shares, and any other required documents must, in any case, be transmitted to and received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date or the tendering shareholder must comply with the guaranteed delivery procedures described below. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Signature Guarantee. Signatures on all Letters of Transmittal must be guaranteed by a firm which is a bank, broker, dealer, credit union, savings association or other entity that is a member in good standing of the Securities Transfer Agents Medallion Program (each, an "Eligible Institution"), unless the Shares tendered thereby are tendered (a) by a registered holder of Shares who has not completed either the box entitled "Special Delivery Instructions" or the box entitled "Special Payment Instructions" on the Letter of Transmittal or (b) for the account of an Eligible Institution. See Instruction 1 of the Letter of Transmittal. If a Share Certificate is registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made, or a Share Certificate not accepted for payment or not tendered is to be returned, to a person other than the registered holder(s), then the Share Certificate must be endorsed or accompanied by appropriate stock powers, in either case, signed exactly as the name(s) of the registered holder(s) appear on the Share Certificate, with the signature(s) on such Share Certificate or stock powers guaranteed as described above. See Instructions 1 and 5 of the Letter of Transmittal. Guaranteed Delivery. If a shareholder desires to tender Shares pursuant to the Offer and such shareholder's Share Certificates are not immediately available or time will not permit all required documents to 47 reach the Depositary prior to the Expiration Date or the procedure for book- entry transfer cannot be completed on a timely basis, such Shares may nevertheless be tendered if all the following conditions are satisfied: (a) the tender is made by or through an Eligible Institution; (b) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Purchaser herewith, is received by the Depositary as provided below prior to the Expiration Date; and (c) in the case of a guaranteed delivery of Shares, the Share Certificates for all tendered Shares, in proper form for transfer, or a Book-Entry Confirmation, together with a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signature guarantee (or, in the case of a book-entry transfer, an Agent's Message) and any other documents required by such Letter of Transmittal, are received by the Depositary within three Nasdaq Stock Market, Inc. trading days after the date of execution of the Notice of Guaranteed Delivery. Any Notice of Guaranteed Delivery may be delivered by hand or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in the Notice of Guaranteed Delivery. Notwithstanding any other provision hereof, payment for Shares purchased pursuant to the Offer will, in all cases, be made only after timely receipt by the Depositary of (a) the Share Certificates evidencing such Shares, or a Book-Entry Confirmation of the delivery of such Shares, if available, (b) a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) or, in the case of a book-entry transfer, an Agent's Message and (c) any other documents required by the Letter of Transmittal. Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tendered Shares pursuant to any of the procedures described above will be determined by Purchaser, in its sole discretion, whose determination will be final and binding on all parties, and which discretion may be delegated to the Depositary or other persons. In addition, Purchaser's or Purchaser's designees, interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. None of Parent, Purchaser, the Company, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or will incur any liability for failure to give any such notification. Purchaser reserves the absolute right to reject any or all tenders of any Shares determined by it not to be in proper form or if the acceptance for payment of, or payment for, such Shares may, in the opinion of Purchaser's counsel, be unlawful. Purchaser also reserves the absolute right, in its sole discretion, to waive any of the conditions of the Offer or any defect or irregularity in any tender with respect to Shares of any particular shareholder, whether or not similar defects or irregularities are waived in the case of other shareholders. No tender of Shares will be deemed to have been validly made until all defects and irregularities have been cured or waived. Appointment as Proxy. By executing a Letter of Transmittal, as set forth above, a tendering shareholder irrevocably appoints designees of Purchaser as such shareholder's proxies, each with full power of substitution, to the full extent of such shareholder's rights with respect to the Shares tendered by such shareholder and accepted for payment by Purchaser (and any and all noncash dividends, distributions, rights, other Shares, or other securities issued or issuable in respect of such Shares on or after February 6, 1998). All such proxies shall be considered coupled with an interest in the tendered Shares. This appointment will be effective if, when and only to the extent that Purchaser accepts such Shares for payment pursuant to the Offer. Upon such acceptance for payment, all prior proxies given by such shareholder with respect to such Shares and other securities will, without further action, be revoked, and no subsequent proxies may be given. The designees of Purchaser will, with respect to the Shares and other securities for which the appointment is effective, be empowered to exercise all voting and other rights of such shareholder as they, in their sole discretion, may deem proper at any annual, special, adjourned or postponed meeting of the Company's shareholders, by written consent or otherwise, and Purchaser reserves the right to require that, in order for Shares or other securities to be deemed validly tendered, immediately upon Purchaser's acceptance for payment of such Shares, Purchaser must be able to exercise full voting rights with respect to such Shares. 48 Purchaser's acceptance for payment of Shares tendered pursuant to the Offer will constitute a binding agreement between the tendering shareholder and Purchaser upon the terms and subject to the conditions of the Offer. 4. WITHDRAWAL RIGHTS. Tenders of Shares made pursuant to the Offer are irrevocable except that such Shares may be withdrawn at any time prior to the Expiration Date, and, unless theretofore accepted for payment by Purchaser pursuant to the Offer, may also be withdrawn at any time after April 13, 1998. If Purchaser extends the Offer, is delayed in its acceptance for payment of Shares or is unable to accept Shares for payment pursuant to the Offer for any reason, then, without prejudice to Purchaser's rights under the Offer, the Depositary may, nevertheless, on behalf of Purchaser, retain tendered Shares, and such Shares may not be withdrawn except to the extent that tendering shareholders are entitled to withdrawal rights as described in the paragraph below. Any such delay will be by an extension of the Offer to the extent required by law. For a withdrawal to be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover page of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn, and the name of the registered holder of such Shares if different from that of the person who tendered such Shares. If Share Certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on such Share Certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution, unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in "THE TENDER OFFER-- Procedures for Accepting the Offer and Tendering Shares", any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares. Any Shares properly withdrawn will thereafter be deemed not to have been validly tendered for purposes of the Offer. However, withdrawn Shares may be re-tendered at any time prior to the Expiration Date by following one of the procedures described in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares". 5. PRICE RANGE OF SHARES. The Shares are listed and principally traded on the Nasdaq National Market under the symbol "SUMC". The following table sets forth, for the quarters indicated, the high and low sales prices per Share on the Nasdaq National Market.
DATE HIGH LOW ---- ------- ------- FISCAL 1996: First Quarter............................................. $25.500 $16.750 Second Quarter............................................ 24.500 19.375 Third Quarter............................................. 24.000 16.500 Fourth Quarter............................................ 25.750 19.250 FISCAL 1997: First Quarter............................................. $24.500 $18.250 Second Quarter............................................ 22.000 12.250 Third Quarter............................................. 16.500 10.500 Fourth Quarter............................................ 16.000 12.000 FISCAL 1998: First Quarter............................................. $16.125 $13.000 Second Quarter............................................ 18.250 14.000 Third Quarter (through February 10, 1998)................. 20.375 14.500
49 On February 6, 1998, the last trading day prior to the announcement of the signing of the Merger Agreement, the closing price per Share as reported on the Nasdaq National Market was $18 3/8. The average sale price of the Shares for the 20 days prior to the public announcement of the proposed transaction was $16.33. As of February 12, 1998, no cash dividends were paid by the Company on the Shares or declared as payable on a future date. As of February 12, 1998, there were approximately 36 holders of record of the Shares. SHAREHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE SHARES. 6. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; EXCHANGE LISTING AND EXCHANGE ACT REGISTRATION. The purchase of Shares pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and could reduce the number of holders of Shares, which could adversely affect the liquidity and market value of any remaining Shares held by the public. It is expected that, following the Offer, a large percentage of the outstanding Shares will be owned by Purchaser. Possible Effects of the Offer on the Market for the Shares. The purchase of Shares pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and could adversely affect the liquidity and market value of the remaining Shares held by the public. The purchase of Shares pursuant to the Offer can also be expected to reduce the number of holders of Shares. Purchaser cannot predict whether the reduction in the number of Shares that might otherwise trade publicly would have an adverse or beneficial effect on the market price for or marketability of the Shares or whether it would cause future market prices to be greater or less than the Offer Price therefor. Stock Quotation. Depending upon the number of Shares purchased pursuant to the Offer, the Shares may no longer meet the requirements of the National Association of Securities Dealers, Inc. (the "NASD") for continued inclusion in the Nasdaq National Market, which require that an issuer have at least 200,000 publicly held shares, held by at least 400 stockholders or 300 stockholders of round lots, with a market value of at least $1,000,000, and have net tangible assets of at least $1,000,000 or $4,000,000, depending on profitability levels during the issuer's four most recent fiscal years. If these standards are not met, the Shares might nevertheless continue to be included in The Nasdaq Stock Market, with quotations published in the NASD Automatic Quotation System ("NASDAQ") "additional list" or in one of the "local lists". However, if the number of holders of the Shares were to fall below 300, or if the number of publicly held Shares were to fall below 100,000 or there were not at least two registered and active market makers for the Shares, the NASD's rules provide that the Shares would no longer be "qualified" for the Nasdaq Stock Market reporting, and The Nasdaq Stock Market would cease to provide any quotations. Shares held directly or indirectly by directors, officers or beneficial owners of more than 10% of the Shares are not considered as being publicly held for this purpose. If, as a result of the purchase of Shares pursuant to the Offer or otherwise, the Shares no longer meet the requirements of the NASD for continued inclusion in the Nasdaq National Market or in any other tier of The Nasdaq Stock Market and the Shares are no longer included in the Nasdaq National Market or in any other tier of The Nasdaq Stock Market, as the case may be, the market for Shares could be adversely affected. In the event that the Shares no longer meet the requirements of the NASD for continued inclusion in any tier of The Nasdaq Stock Market, it is possible that the Shares would continue to trade in the over-the-counter market and that price quotations would be reported by other sources. The extent of the public market for the Shares and the availability of such quotations would, however, depend upon the number of holders of Shares remaining at such time, the interests in maintaining a market in Shares on the part of securities firms, the possible termination of registration of the Shares under the Exchange Act, as described below, and other factors. Margin Regulations. The Shares may currently be "margin securities" under the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which would have the effect, among other things, of allowing brokers to extend credit on the collateral of such Shares for the purpose of buying, carrying or trading in securities ("Purpose Loans"). Depending upon factors, such as the number of 50 record holders of the Shares and the number and market value of publicly held Shares, following the purchase of Shares pursuant to the Offer, the Shares might no longer constitute "margin securities" for purposes of the Federal Reserve Board's margin regulations and, therefore, could no longer be used as collateral for Purpose Loans made by brokers. In addition and in any event, if registration of the Shares under the Exchange Act were terminated, the Shares would no longer constitute "margin securities". Exchange Act Registration. The Shares are currently registered under the Exchange Act. The purchase of the Shares pursuant to the Offer may result in the Shares becoming eligible for de-registration under the Exchange Act. Such registration may be terminated upon application by the Company to the Commission if the Shares are not listed on a national securities exchange and there are fewer than 300 record holders of the Shares. The termination of registration of the Shares under the Exchange Act would substantially reduce the information required to be furnished by the Company to holders of Shares and to the Commission, and would make certain provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b) of the Exchange Act, the requirement of furnishing a proxy statement in connection with meetings of shareholders meetings pursuant to Section 14(a) of the Exchange Act, and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions, no longer applicable to the Shares. In addition, "affiliates" of the Company and persons holding "restricted securities" of the Company may be deprived of the ability to dispose of such securities pursuant to Rule 144 promulgated under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the "Securities Act"). If registration of the Shares under the Exchange Act were terminated, the Shares would no longer be eligible for reporting on The Nasdaq National Market. 7. CERTAIN INFORMATION CONCERNING THE COMPANY. Except as otherwise set forth herein, the information concerning the Company contained in this Offer to Purchase, including financial information and projections, has been furnished by the Company or has been taken from or based upon publicly available documents and records on file with the Commission and other public sources. Neither Purchaser nor Parent assumes any responsibility for the accuracy or completeness of the information concerning the Company furnished by the Company or contained in such documents and records, or for any failure by the Company to disclose events which may have occurred or may affect the significance or accuracy of any such information but which are unknown to Purchaser or Parent. General. The Company is a California corporation with its principal executive offices located at 2600 West Magnolia Blvd., Burbank, CA 91505. The Company principally operates skilled nursing care centers and assisted living centers located in California, Texas and Arizona. The skilled nursing care centers provide subacute, rehabilitative, specialty medical and skilled nursing care. The assisted living centers provide room and board, social and minor medical services in a secure environment and, in selected situations, provide care to early stage Alzheimer's residents. The Company also operates pharmacies which service skilled nursing care centers, assisted living centers and acute hospitals, both affiliated and non-affiliated in Southern California and Texas. In addition, the Company manages subacute care units in acute hospitals. The Company is incorporated under the laws of the State of California. At December 31, 1997, the Company operated 36 skilled nursing care centers with 4,872 beds. Twenty-nine centers are in California with 1,515 beds; 22 centers are in Texas with 3,207 beds and one center is in Arizona with 150 beds. Within its skilled nursing care centers, the Company has established separate units for specialty medical care and subacute: 15 units are dedicated to Alzheimer's and 36 units are for patients requiring services for such complex medical needs as oncology, pulmonary cardiac complications, wounds, respiratory therapy and intensive physical, speech and occupational therapies. At December 31, 1997, the Company operated five assisted living centers with 475 beds in California. Included in three of the centers are units dedicated to the needs of early stage Alzheimer's residents. 51 At December 31, 1997, the Company operated two pharmacies in Southern California and through a joint venture, operates one in Texas. The pharmacies provide pharmaceutical products and services to 87 non-affiliated skilled nursing care centers, assisted living centers and acute hospitals located in Southern California and Texas. The pharmacies also provide products and services to the Company's skilled nursing care and assisted living centers. The Company manages subacute units in three acute hospitals. Directors and Officers. The name, address, principal occupation or employment, five-year employment history, and citizenship of each director and executive officer of the Company is set forth in Schedule II hereto. Financial Information. Set forth below is certain selected summary consolidated financial information relating to the Company and its subsidiaries which has been excerpted or derived from the audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended June 30, 1997 (the "Company's 10-K") and the unaudited financial statements contained in the Company's Quarterly Report on Form 10-Q, as amended, for the quarter ended December 31, 1997 (the "Company's 10-Q"). More comprehensive financial information is included in the Company's 10-K, the Company's 10-Q and other documents filed by the Company with the Commission. The financial information that follows is qualified in its entirety by reference to such reports and other documents, including the financial statements and related notes contained therein. Such reports and other documents may be examined and copies may be obtained from the offices of the Commission in the manner set forth below. SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED SIX MONTHS ENDED JUNE 30, DECEMBER 31, ----------------- ----------------- 1997 1996 1997 1996 -------- -------- -------- -------- CONSOLIDATED INCOME STATEMENT DATA Net revenues.............................. $197,927 $176,062 $108,507 $ 95,088 Income before provision for income taxes.. 188 11,761 4,681 853 Net income................................ 69 7,309 2,832 516 Earnings per share basic................................... 0.01 1.08 0.42 0.08 diluted................................. 0.01 1.06 0.41 0.08 CONSOLIDATED BALANCE SHEET Total assets.............................. $250,516 $223,052 $267,420 $239,014 Working capital........................... 12,648 13,906 11,384 15,118 Property and Equipment (less accumulated depreciation and amortization)........... 181,193 164,923 194,553 173,489 Long-term debt (including current portion)................................. 121,452 110,374 129,754 120,939 Shareholder's equity...................... 81,412 81,286 84,721 81,802
- -------- Ratio Earnings to Fixed Charges; Book Value Per Share. The Company's ratio of earnings to fixed charges for the fiscal year ended June 30, 1997 was 1.74. The ratio of earnings to fixed charges for the fiscal year ended June 30, 1996 was 2.99. The ratio of earnings to fixed charges for the six months ended December 31, 1997 was 2.14. The Company's book value per Share was $11.29 as of June 30, 1997, $11.18 as of June 30, 1996 and $11.73 as of December 31, 1997. Certain Company Projections. In connection with Parent's and Purchaser's due diligence review of the Company and in the course of the negotiations between the Company, Parent and Purchaser described in "SPECIAL FACTORS--Background of the Offer, and the Merger" which led to the execution of the Merger Agreement, the Company provided Parent and Purchaser with certain projections of future operating performance of the Company which Parent and Purchaser believe are not publicly available. Such projections, which were prepared in the course of the Company's normal budget and planning process in June 1997, cover the five- year 52 period beginning with 1998. Such information included, among other things, the Company's projection of net revenues, earning before interest, taxes, depreciation and amortization ("EBITDA") and net income as follows:
YEAR ENDED JUNE 30, -------------------------------------------- 1998 1999 2000 2001 2002 -------- -------- -------- -------- -------- (IN THOUSANDS) Total net revenues.............. $236,100 $255,300 $269,600 $282,700 $296,000 EBITDA(1)....................... 30,400 34,000 36,200 37,900 38,700 Net income(1)................... 7,600 10,200 11,800 13,100 13,900
- -------- (1) During the time negotiations with Parent were underway, the Company revised downward its EBITDA and net income projections for fiscal 1998 to $29,600 and $6,400, respectively, to reflect the Company's actual results of operations for the quarter ended December 31, 1997. THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE HARBOR" EXEMPTION FOR FORWARD-LOOKING STATEMENTS TO ENCOURAGE COMPANIES TO PROVIDE PROSPECTIVE INFORMATION ABOUT THEIR BUSINESSES, PROVIDED THAT SUCH STATEMENTS ARE IDENTIFIED AS FORWARD-LOOKING AND ACCOMPANIED BY MEANINGFUL CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. THE INFORMATION SET FORTH ABOVE IS FORWARD-LOOKING AND IS MADE PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE COMPANY DOES NOT AS A MATTER OF COURSE MAKE PUBLIC ANY PROJECTIONS AS TO FUTURE PERFORMANCE OR EARNINGS, AND THE PROJECTIONS SET FORTH ABOVE ARE INCLUDED IN THIS OFFER TO PURCHASE ONLY BECAUSE THE INFORMATION WAS MADE AVAILABLE TO PARENT AND PURCHASER BY THE COMPANY. THE COMPANY HAS INFORMED PARENT AND PURCHASER THAT THESE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH THE PUBLISHED GUIDELINES OF THE COMMISSION OR THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTS REGARDING PROJECTIONS AND FORECASTS. THE COMPANY HAS ALSO INFORMED PARENT AND PURCHASER THAT ITS INTERNAL FINANCIAL FORECASTS (UPON WHICH THE PROJECTIONS PROVIDED TO THE PARENT AND THE PURCHASER WERE BASED IN PART) ARE, IN GENERAL, PREPARED SOLELY FOR INTERNAL USE AND ARE SUBJECTIVE IN MANY RESPECTS AND THUS SUSCEPTIBLE TO VARIOUS INTERPRETATIONS AND PERIODIC REVISION BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENTS. PROJECTED INFORMATION OF THIS TYPE IS BASED ON ESTIMATES AND ASSUMPTIONS WHICH THEMSELVES ARE BASED ON EVENTS AND CIRCUMSTANCES THAT HAVE NOT TAKEN PLACE AND ARE INHERENTLY SUBJECT TO SIGNIFICANT FINANCIAL, MARKET, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO PREDICT AND MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, PURCHASER OR PARENT. THE PROJECTIONS WERE PREPARED IN JUNE 1997, AND, ACCORDINGLY DUE TO THE PASSAGE OF TIME AND CHANGES IN CIRCUMSTANCES, MANY OF THE ASSUMPTIONS ON WHICH THEY WERE BASED MAY NO LONGER BE VALID. MANY OF THE ASSUMPTIONS UPON WHICH THE FOREGOING PROJECTIONS WERE BASED, NONE OF WHICH WERE APPROVED BY PARENT OR PURCHASER, ARE DEPENDENT UPON ECONOMIC FORECASTING (BOTH GENERAL AND SPECIFIC TO THE COMPANY'S BUSINESS), WHICH IS INHERENTLY UNCERTAIN AND SUBJECTIVE. AMONG OTHER THINGS, THE COMPANY'S FUTURE RESULTS OF OPERATIONS MAY BE IMPACTED BY CHANGES IN MEDICARE RATE REIMBURSEMENT RULES, THE IMPACT OF THE PROSPECTIVE PAYMENT SYSTEM, CHANGES IN CENSUS AND QUALITY MIX AT THE COMPANY'S FACILITIES, CHANGES IN STATE HEALTH CARE REGULATORY REQUIREMENTS AND OTHER MATTERS. THEREFORE, IT IS EXPECTED THAT THERE WILL BE DIFFERENCES BETWEEN THE ACTUAL AND PROJECTED RESULTS AND THAT THE ACTUAL RESULTS MAY BE 53 MATERIALLY HIGHER OR LOWER THAN THOSE PROJECTED. NONE OF PARENT, PURCHASER OR THE COMPANY ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OR VALIDITY OF ANY OF SUCH PROJECTIONS. INCLUSION OF THE FOREGOING PROJECTIONS SHOULD NOT BE REGARDED AS AN INDICATION THAT PARENT, PURCHASER, THE COMPANY OR ANY OTHER PERSON WHO RECEIVED SUCH INFORMATION CONSIDERS IT AN ACCURATE PREDICTION OF FUTURE EVENTS, AND NEITHER PURCHASER NOR PARENT HAS RELIED ON THEM AS SUCH. NONE OF PARENT, PURCHASER OR THE COMPANY INTENDS TO PUBLICLY UPDATE OR OTHERWISE PUBLICLY REVISE THE PROJECTIONS SET FORTH ABOVE. THE INDEPENDENT ACCOUNTANTS FOR THE COMPANY, PARENT AND PURCHASER HAVE NOT EXAMINED, REVIEWED OR COMPILED THESE PROJECTIONS AND ACCORDINGLY DO NOT EXPRESS AN OPINION OR ANY OTHER FORM OF ASSURANCE WITH RESPECT TO THEM. Additional Information. The Company is subject to the informational filing requirements of the Exchange Act, and, in accordance therewith, is required to file periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Information as of particular dates concerning the Company's directors and officers, their remuneration, Options granted to them, the principal holders of the Company's securities and any material interest of such persons in transactions with the Company is required to be disclosed in proxy statements distributed to the Company's shareholders and filed with the Commission. Such reports, proxy statements and other information should be available for inspection at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and also should be available for inspection at the Commission's regional offices located at Seven World Trade Center, 13th floor, New York, New York 10048 and the Citicorp Center, 500 West Madison Street, Suite 400, Chicago, Illinois 60661-2511. Copies of such materials may also be obtained by mail, upon payment of the Commission's prescribed rates, by writing to its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material may also be accessed electronically by means of the Commission's World Wide Web site on the internet at http://www.sec.gov. 8. CERTAIN INFORMATION CONCERNING PURCHASER AND PARENT. Purchaser. Purchaser is a newly formed Delaware corporation organized in connection with the Offer and the Merger and has not carried on any activities other than in connection with the Offer and the Merger. The principal offices of Purchaser are located at 11900 W. Olympic Boulevard, Suite 680, Los Angeles, CA 90064. All interests in Purchaser are or will be owned by Parent. Until immediately prior to the time that Purchaser purchases Shares pursuant to the Offer, it is not anticipated that Purchaser will have any significant assets or liabilities or engage in activities other than those incident to its formation and capitalization and the transactions contemplated by the Offer and the Merger. Purchaser has been organized by Parent as a Delaware corporation and has minimal assets and capitalization. Parent. Parent is a Delaware corporation with its principal executive offices located at 11900 W. Olympic Boulevard, Suite 680, Los Angeles, CA 90064. Parent, through its subsidiaries, is engaged in the Business of operating skilled nursing facilities and therapy businesses. Currently, Parent operates a total of nine facilities, with an aggregate of 1,227 beds. All of Parent's skilled nursing facilities are located in the Los Angeles, California area. Parent's therapy businesses serve facilities throughout California. The name, citizenship, business address, principal occupation or employment and five-year employment history for each of the directors and executive officers of Parent, Purchaser and Heritage are set forth in Schedule I hereto. Except as set forth in this Offer to Purchase, neither Parent nor Purchaser nor, to the best knowledge of Parent and Purchaser, any of the persons listed in Schedule I hereto, or any associate or majority owned 54 subsidiary of such persons, beneficially owns any equity security of the Company, and none of Parent nor Purchaser, nor, to the best knowledge of Parent and Purchaser, any of the other persons referred to above, or any of the respective directors, executive officers or subsidiaries of any of the foregoing, has effected any transaction in any equity security of the Company during the past 60 days. Except as set forth in this Offer to Purchase, neither Parent nor Purchaser, nor, to the best knowledge of Parent and Purchaser, any of the persons listed in Schedule I hereto, has any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Company, including, without limitation, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any securities of the Company, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss, or the giving or withholding of proxies. Except as set forth in this Offer to Purchase, neither Parent nor Purchaser, nor, to the best knowledge of Parent and Purchaser, any of the persons listed in Schedule I hereto has had any transactions with the Company, or any of its executive officers, directors or affiliates that would require reporting under the rules of the Commission. Except as set forth in this Offer to Purchase, there have been no contacts, negotiations or transactions between Parent or Purchaser, or their respective subsidiaries, or, to the best knowledge of Parent or Purchaser, any of the persons listed in Schedule I hereto, on the one hand, and the Company or its executive officers, directors or affiliates, on the other hand, concerning a merger, consolidation or acquisition, tender offer or other acquisition of securities, election of directors, or a sale or other transfer of a material amount of assets. 9. SOURCE AND AMOUNT OF FUNDS. The total amount of funds required by the Purchaser to consummate the Offer and the Merger, to refinance certain outstanding indebtedness of the Company and of the Parent, to pay related fees and expenses, and to provide for the working capital needs of the Parent and its subsidiaries, is estimated to be approximately $332 million. The Offer and the Merger are not conditioned on obtaining financing. The Purchaser expects that it will obtain such funds from capital contributions to Purchaser by the Parent. An aggregate of $82 million of the funds required to consummate the Offer and the Merger will be obtained from equity investments in Parent by its current and future stockholders. It is expected that $74.5 million of these funds will be provided by Heritage, $5 million of these funds will be provided by the Snukals and $2.5 million of these funds will be provided by Mr. Scott. If, for any reason, the Snukals or Mr. Scott do not make these investments in Parent, Heritage has committed to increase its investment in Parent to cover any shortfall, up to an amount which would cause the aggregate equity investment in Parent in connection with the Offer and the Merger to equal $82 million. See "SPECIAL FACTORS--The Merger and Related Agreements". The Parent has received a letter (together with the related Summary of Terms, the "Commitment Letter") dated February 6, 1998 from Bank of Montreal ("BMO"), pursuant to which BMO has committed to provide the Purchaser and the Parent with financing in the aggregate amount of up to $250 million, which shall be the exclusive financing for the transactions except as expressly provided in the Commitment Letter. A copy of the Commitment Letter is filed as an exhibit to the Schedule 14D-1 and incorporated herein by reference, and the following summary of the Commitment Letter (including the Summary of Terms, which forms a part thereof) is qualified in its entirety by reference thereto. BMO has committed to fund the entire amount of the credit facilities described in the Commitment Letter, subject to the conditions described therein. Although not a condition to funding, BMO proposes to form one or more syndicates of financial institutions and other investors (collectively with BMO, the "Lenders"), who shall be reasonably acceptable to the Parent, to join with BMO in providing the financing. BMO will act as agent for the Lenders (the "Agent"). The commitment of the Lenders, which, after syndication will be several and not joint, will be allocated among the following facilities: (i) a non-revolving stock acquisition facility to be extended to the Purchaser in an amount equal to the lesser of $80 million and 50% of the fair market value of the shares of Company stock pledged as security ("Facility A"), for the sole purpose of acquiring the capital stock of the 55 Company; (ii) a $30 million term loan to be extended to the Parent for the purpose of refinancing existing indebtedness of the Parent ("Facility B"); and (iii) Facility C to be extended to the Parent in an aggregate amount of up to $250 million ("Facility C"). Facility C will consist of (i) a $30 million revolving credit/term loan facility (the "Revolving Credit Tranche"), with a $4 million sublimit for letters of credit (with BMO as the issuing bank), (ii) a $50 million 6 year term loan facility ("Term Loan Tranche One"), (iii) a $90 million 8 year term loan facility ("Term Loan Tranche Two"), and (iv) an $80 million 6 month bridge loan facility (the "Bridge Loan Tranche"). The proceeds of Facility C will be used to refinance the Facility A and Facility B indebtedness, to refinance certain indebtedness of the Company, to pay fees and expenses not to exceed $28 million and to fund working capital and capital expenditure needs of the Parent and its subsidiaries and for other general corporate purposes. Facility A and Facility B will each mature on the earlier of August 7, 1998 and the effective date of the Merger. The Revolving Credit Tranche will mature 6 years after closing of Facility C. Term Loan Tranche One and Term Loan Tranche Two will be payable in installments as set forth in the Commitment Letter with a final maturity of 6 years from the Facility C closing for Term Loan Tranche One and 8 years from the Facility C closing for Term Loan Tranche Two. The Bridge Loan Tranche will mature 6 months from the Facility C closing, subject to extension for an additional 8 years upon payment of an extension fee equal to 3% of the principal amount so extended and provided there is not then any default. Extension of the Bridge Loan Tranche is also subject to the issuance of warrants (with customary antidilution protection, registration rights and certain so-called tag-along rights) on each 6 month anniversary that the Bridge Loan Tranche remains outstanding beyond its original 6 month term, which warrants shall be exercisable for nominal consideration for percentages of the fully diluted common equity of the Parent of between 1% and 3.5% on each such 6 month anniversary date (not to exceed 20% in the aggregate). Facility C is also subject to mandatory prepayment out of the net cash proceeds of certain asset sales, issuance of equity, subordinated debt or senior debt securities, as well as out of 85% of excess cash flow if a specified leverage ratio is exceeded. Term Loan Tranche two is subject to optional prepayment with a premium of 2% in the first year after closing, a premium of 1% in the second year after closing and at par thereafter. There is no premium applicable to prepayment of Term Loan Tranche One. The Bridge Loan Tranche shall be subordinate in right of payment to the other Facility C Tranches and will be issued pursuant to a separate credit agreement. Net cash proceeds of the issuance of subordinated debt will be applied first to the reduction of the Bridge Loan Tranche, with any excess applied to the Term Loan Tranche One and Term Loan Tranche Two in accordance with the Commitment Letter. The credit documents relating to the respective Facilities will contain customary representations, warranties, covenants (including covenants which may limit the ability of the Parent to pay dividends), events of default, remedies and provisions for changes in capital adequacy and capital requirements, reserves, indemnification rights and provisions for the payment of expenses. The closing of Facility A and Facility B will be subject to the satisfaction of the following conditions (as well as other customary conditions to closing): (i) the Purchaser shall have had tendered to it that percentage of the capital stock of the Company as shall be required to approve a merger under applicable law and shall have accepted the tender of not less than 49.9% of the capital stock of the Company, (ii) the Purchaser shall have received a cash equity contribution of not less than $82 million, (iii) the negotiation, execution and delivery of loan, security and guarantee documentation reasonably satisfactory to the Agent and the Purchaser, (iv) the perfection of a first lien on the collateral securing the applicable facility, (v) receipt of acceptable resolutions, opinions and other closing documents, (vi) there shall have been no amendments to the Merger Agreement, all conditions precedent to the Purchaser's obligations thereunder shall have been satisfied and none of such conditions shall have been waived without BMO's consent, and (vii) Facility A shall have closed not later than March 6, 1998, although no borrowing is required to have been made by that date. The closing of Facility C will be subject to the satisfaction of the following conditions (as well as other customary conditions to closing): (i) the negotiation, execution and delivery of definitive loan, security and guarantee documentation reasonably satisfactory to the Agent and the Parent, (ii) all conditions to the Merger set forth in the Merger Agreement shall have been satisfied without waiver and the Merger shall have been 56 consummated with the survivor being a wholly-owned subsidiary of the Parent, (iii) the corporate, capital and ownership structure of the Parent and its subsidiaries shall be as previously described to the Agent, (iv) the Lenders shall have received satisfactory certification from officers of the Parent as to the financial condition and solvency of the Parent and its subsidiaries; (v) receipt by the Agent of satisfactory opinions of counsel, corporate resolutions, certificates and other documents as the Agent may reasonably require, and evidence of the perfection of the first priority liens on the collateral securing Facility C, other than owned real property, leaseholds and certain assets subject to third party consents, all as more particularly described in the Commitment Letter, and (vi) closing shall have occurred not later than August 7, 1998. The Commitment Letter provides that BMO shall be paid the following non- refundable fees (subject to certain adjustments as set forth in the Commitment Letter) in consideration of the issuance of the commitment: (i) $150,000 paid upon acceptance of the Commitment Letter by the Parent, (ii) $150,000 payable upon execution of the documentation for Facility A and Facility B, (iii) $900,000 payable upon the initial funding of Facility A, (iv) $450,000 payable upon the initial funding of Facility B, (v) $900,000 payable upon the initial funding of Facility C, which fee shall be increased to $1,350,000 if there has been no funding of Facility B, (vi) $500,000 less any amounts paid under clauses (i) and (ii) above upon the termination of the Merger Agreement pursuant to any of the sections referred to in Section 7.3(a) thereof, such fee to be payable upon (but only upon) receipt by the Parent of compensation pursuant to such Section 7.3(a) in at least the amount of such fee, and (vii) $1,600,000 upon the funding of the Bridge Loan Tranche (as defined below). The interest rates on Facility A and Facility B loans will be, at the borrower's election, either the Alternate Base Rate (defined as the higher of BMO's base rate and the Federal Funds rate plus 1/2% per annum) plus 175 bp.s or the applicable LIBOR (for one, two, three or six month LIBOR loans, as selected by the Borrower, subject to availability) plus 275 bp.s. By the terms of Facility C, the Parent may elect to have the interest rate on loans outstanding under the Revolving Credit Tranche and Term Loan Tranche One be the Alternate Base Rate or the applicable LIBOR, in each case plus an applicable margin which will vary between 175 bp.s and 275 bp.s for LIBOR loans and between 75 bp.s and 175 bp.s for Alternate Base Rate loans, depending upon the ratio of the sum of the Parent's total funded debt plus 8 times its operating rents to EBITDAR (the "Modified Leverage Ratio"). The interest rate on Term Loan Tranche Two loans will be the applicable LIBOR rate plus a margin of either 275 bp.s or 300 bp.s depending upon the Modified Leverage Ratio. The interest rate on the Bridge Loan Tranche loans will be, at the Parent's election, either the applicable LIBOR plus 550 bp.s for the first three months and 650 bp.s thereafter or the Alternate Base Rate plus the margin which would be applicable to Term Loan Tranche One loans less 100 bp.s. The Purchaser and the Parent, as the case may be, will pay a commitment fee of 50 bp.s on the unused portion of the Revolving Credit Tranche, payable quarterly in arrears. During the continuance of an event of default, a default interest rate shall apply equal to 2% above the rate otherwise in effect. Facility A will be secured by a first lien on all shares of capital stock of the Company acquired by the Purchaser and will be guaranteed by the Parent. Facility B, if drawn, will be secured by a first lien on all equity securities owned by the Parent in its subsidiaries. The lien on the subsidiaries' equity will also cross collateralize Facility A if, but only if, Facility B is drawn. Facility C (other than the Bridge Loan Tranche) will be secured by a first lien on all of the assets, tangible and intangible (subject to perfecting liens on real property owned and leased, and obtaining third party consents, on a post-closing basis), of the Parent and its subsidiaries, including all equity interests in subsidiaries, and will be guaranteed by all subsidiaries of the Parent. The Bridge Loan Tranche will be unsecured. The Purchaser and the Parent anticipate that Facility A and Facility B will be repaid with the proceeds of Facility C. The Parent anticipates that its obligations under Facility C will be repaid from a variety of sources, including, without limitation, internally generated funds, bank refinancing, proceeds from the potential disposition of assets and the public or private sale of debt or equity securities. The source and allocation of various methods of repayment will be determined and may be modified by the Parent based on market conditions and such other factors as the Parent may deem appropriate at the time. 57 10. DIVIDENDS AND DISTRIBUTIONS. As of the date hereof, the Company has not declared or paid any cash dividends or made any cash distributions. Pursuant to the Merger Agreement, the Company will not prior to the Merger, without the prior written consent of Parent or Purchaser, split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or redeem or otherwise acquire any shares of capital stock of, securities convertible into or exercisable for, or options to acquire equity securities of, the Company or any securities of any of its subsidiaries. Payment of dividends and distributions by the Company is subject to certain restrictions contained in agreements in respect of the Company's credit arrangements. 11. CERTAIN CONDITIONS OF THE OFFER. Purchaser is not required to accept for payment or pay for, and shall delay the acceptance for payment of, or the payment for, any Shares and, if required pursuant to the terms of the Merger Agreement, shall extend the Offer by one or more extensions until July 31, 1998, and may terminate the Offer at any time after July 31, 1998, if (i) immediately prior to the expiration of the Offer (as extended in accordance with the Offer), the Minimum Condition shall not have been satisfied, (ii) any applicable waiting period under the HSR Act shall not have expired or been terminated or (iii) prior to the acceptance for payment of Shares, Purchaser makes a determination (which shall be made in good faith) that any of the following conditions exist: (a) there shall have been any action taken, or any statute, rule, regulation, judgment, order or injunction promulgated, enacted, entered, enforced or deemed applicable to the Offer, or any other action shall have been taken, by any state or federal government or governmental authority or by any U. S. court, other than the routine application to the Offer or the Merger of waiting periods under the HSR Act, that (i) restrains, prohibits, or makes illegal the acceptance for payment of, or the payment for, some or all of the Shares or otherwise prohibits consummation of the Offer or the Merger, (ii) restrains, prohibits, or imposes material limitations on, the ability of Purchaser to acquire or hold or to exercise effectively all rights of ownership of the Shares, including, without limitation, the right to vote any Shares purchased by Purchaser on all matters properly presented to the shareholders of the Company, or effectively to control in any material respect the business, assets or operations of the Company, its subsidiaries, Purchaser or any of their respective affiliates, or (iii) otherwise has a Material Adverse Effect on the Company, Parent or Purchaser; or there shall be any litigation or suit pending by any person or governmental authority seeking to do any of the foregoing; or (b) (i) the representations and warranties of the Company set forth in the Merger Agreement (without giving effect to any "materially" limitations or references to "Material Adverse Effect" set forth therein) shall not be true and correct in any material respect as of the date of the Merger Agreement and as of consummation of the Offer as though made on or as of such date, but only if the respects in which the representations and warranties made by the Company are inaccurate and would in the aggregate have a Material Adverse Effect on the Company, (ii) the Company shall have breached or failed to comply in any material respect with any of its obligations under the Merger Agreement or (iii) any material adverse changes shall have occurred that have had a Material Adverse Effect on the Company; or (c) it shall have been publicly disclosed that any person (which includes a "person" as such term is defined in Section 13(d)(3) of the Exchange Act) other than Parent, Purchaser, any of their affiliates, or any group of which any of them is a member, shall have acquired beneficial ownership of more than 30% of the outstanding Shares or shall have entered into a definitive agreement or an agreement in principle with the Company with respect to a tender offer or exchange offer for any Shares or a merger consolidation or other business combination with or involving the Company, any of its subsidiaries or any of their material assets; or (d) the Merger Agreement shall have been terminated in accordance with its terms; 58 (e) prior to the purchase of Shares pursuant to the Offer, the Company Board shall have withdrawn or modified (including by amendment of the Schedule 14D-9) in a manner adverse to Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger or shall have recommended another offer, or shall have adopted any resolution to effect any of the foregoing which, in the good faith judgment of Purchaser in any such case, and regardless of the circumstances (including any action or omission by Purchaser) giving rise to any such condition, makes it inadvisable to proceed with such acceptance for payment; or (f) any authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any governmental entity, required in order to consummate the Offer or the Merger or to permit the Company and its subsidiaries to conduct their businesses after the Offer and the Merger as currently conducted, shall not have been filed, granted, given, occurred or satisfied. 12. CERTAIN LEGAL MATTERS; REGULATORY APPROVALS. General. Based upon its examination of publicly available information with respect to the Company and the review of certain information furnished by the Company to Parent and discussions of representatives of Parent with representatives of the Company during Parent's investigation of the Company, neither Purchaser nor Parent is aware of any license or other regulatory permit that appears to be material to the business of the Company and its subsidiaries, taken as a whole, which might be adversely affected by the acquisition of Shares by Purchaser pursuant to the Offer or, except as set forth below, of any approval or other action by any domestic (federal or state) or foreign governmental, administrative or regulatory authority or agency which would be required prior to the acquisition of Shares by Purchaser pursuant to the Offer. Should any such approval or other action be required, it is Purchaser's present intention to seek such approval or action. Except as described under "THE TENDER OFFER--Certain Conditions to the Offer", Purchaser does not currently intend to delay the purchase of Shares tendered pursuant to the Offer pending the outcome of any such action or the receipt of any such approval (subject to Purchaser's right to decline to purchase Shares if any of the conditions described under "THE TENDER OFFER--Certain Conditions to the Offer" shall have occurred). There can be no assurance that any such approval or other action, if needed, would be obtained without substantial conditions or that adverse consequences might not result to the business of the Company, Purchaser or Parent or that certain parts of the businesses of the Company, Purchaser or Parent might not have to be disposed of or held separate or other substantial conditions complied with in order to obtain such approval or other action or in the event that such approval was not obtained or such other action was not taken. Purchaser's obligation under the Offer to accept for payment and pay for Shares is subject to certain conditions, including conditions relating to the legal matters discussed herein. See Section 11. State Takeover Laws. The Company's principal executive offices are located in, and the Company is incorporated under the laws of, the State of California, which currently has no takeover statute that would apply to the Offer or to the Merger. However, there can be no assurances that California will not, prior to the completion of the Offer, adopt such a statute. Under California Law, the Merger may not be accomplished for cash paid to the Company's shareholders if Purchaser or Parent owns directly or indirectly more than 50% but less than 90% of the then outstanding Shares unless either all the shareholders consent or the Commissioner of Corporations of the State of California approves, after a hearing, the terms and conditions of the Merger and the fairness thereof. The purpose of the Offer is to obtain 90% or more of the Shares and to enable Parent and Purchaser to acquire control of the Company. In the event the Minimum Condition is not satisfied on or before the tenth business day after all other conditions to the Offer have been satisfied, Purchaser has agreed that (A) the Minimum Condition shall be automatically amended to mean that a number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would equal not less than 49.9% of the Shares, shall have been validly tendered and not withdrawn prior to the expiration of the Offer, and (B) Purchaser will amend the Offer to provide that Purchaser will purchase, on a pro rata basis in the Offer, that number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would equal 49.9% of the Shares (it being understood that Purchaser shall 59 not in any event be required to accept for payment, or pay for, any Shares if less than 49.9% of the Shares are tendered pursuant to the Offer and not withdrawn at the expiration of the Offer). In the event that Purchaser acquires the Revised Minimum Number of Shares, it may have, as a practical matter the ability to ensure approval of the Merger by the Company's shareholders. A number of other states have adopted laws and regulations applicable to attempts to acquire securities of corporations which are incorporated, or have substantial assets, shareholders, principal executive offices or principal places of business, or whose business operations otherwise have substantial economic effects, in such states. In Edgar v. MITE Corp., the Supreme Court of the United States invalidated on constitutional grounds the Illinois Business Takeover Statute, which, as a matter of state securities law, made takeovers of corporations meeting certain requirements more difficult. However, in 1987, in CTS Corp. v. Dynamics Corp. of America, the Supreme Court held that the State of Indiana may, as a matter of corporate law and, in particular, with respect to those aspects of corporate law concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without the prior approval of the remaining shareholders. The state law before the Supreme Court was by its terms applicable only to corporations that had a substantial number of shareholders in the state and were incorporated there. Purchaser does not know whether any of these laws will, by their terms, apply to the Offer or the Merger and has not complied with any such laws. Should any person seek to apply any state takeover law, Purchaser will take such action as then appears desirable, which may include challenging the validity or applicability of any such statute in appropriate court proceedings. In the event it is asserted that one or more state takeover laws are applicable to the Offer or the Merger, and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer, Purchaser might be required to file certain information with, or receive approvals from, the relevant state authorities. In addition, if enjoined, Purchaser might be unable to accept for payment any Shares tendered pursuant to the Offer, or be delayed in continuing or consummating the Offer and the Merger. In such case, Purchaser may not be obligated to accept for payment any Shares tendered. See "THE TENDER OFFER--Certain Conditions of the Offer." Antitrust. Under the HSR Act and the rules that have been promulgated thereunder by the Federal Trade Commission (the "FTC"), certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division of the Department of Justice (the "Antitrust Division") and the FTC and certain waiting period requirements have been satisfied. The acquisition of Shares by Purchaser pursuant to the Offer are subject to such requirements. Pursuant to the HSR Act, Heritage, as ultimate parent of Purchaser and the Company intend to file Premerger Notification and Report Forms in connection with the purchase of Shares pursuant to the Offer with the Antitrust Division and the FTC on or about February 13, 1998. Under the provisions of the HSR Act applicable to the Offer, the purchase of Shares pursuant to the Offer may not be consummated until the expiration of a 15-calendar day waiting period following the filing by Heritage. Assuming such filing is made on such date, the waiting period under the HSR Act applicable to the purchase of Shares pursuant to the Offer will expire at 11:59 p.m., New York City time, on February 28, 1998, unless such waiting period is earlier terminated by the FTC and the Antitrust Division or extended by a request from the FTC or the Antitrust Division for additional information or documentary material prior to the expiration of the waiting period. Pursuant to the HSR Act, Heritage intends to request early termination of the waiting period applicable to the Offer. There can be no assurance, however, that the 15-day HSR Act waiting period will be terminated early. If either the FTC or the Antitrust Division were to request additional information or documentary material from Heritage or the Company with respect to the Offer, the waiting period with respect to the Offer would expire at 11:59 p.m., New York City time, on the tenth calendar day after the date of substantial compliance by Heritage or the Company with such request. Thereafter, the FTC or the Antitrust Division must obtain a court order to prevent Purchaser from consummating the acquisition of Shares pursuant to the Offer. If the acquisition of Shares is delayed pursuant to a request by the FTC or the Antitrust Division for additional information or documentary material pursuant to the HSR Act, the Offer will be extended if at such time the conditions to the Offer described under "THE 60 TENDER OFFER--Certain Conditions to the Offer" and reasonably capable of being satisfied by July 31, 1998, and, in any event, the purchase of and payment for Shares will be deferred until 10 days after the request is substantially complied with, unless the extended period expires on or before the date when the initial 15-day period would otherwise have expired, or unless the waiting period is sooner terminated by the FTC and the Antitrust Division. Only one extension of such waiting period pursuant to a request for additional information is authorized by the HSR Act and the rules promulgated thereunder, except by court order. Any such extension of the waiting period will not give rise to any withdrawal rights not otherwise provided for by applicable law. It is a condition to the Offer that the waiting period applicable under the HSR Act to the Offer expire or be terminated. See "THE TENDER OFFER--Certain Conditions to the Offer." The FTC and the Antitrust Division frequently scrutinize the legality under the antitrust laws of transactions such as the proposed acquisition of Shares by Purchaser pursuant to the Offer. At any time before or after the purchase of Shares pursuant to the Offer by Purchaser, the FTC or the Antitrust Division could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the purchase of Shares pursuant to the Offer or seeking the divestiture of Shares purchased by Purchaser or the divestiture of substantial assets of Purchaser, Parent, the Company or their respective subsidiaries. Private parties and state attorneys general may also bring legal action under federal or state antitrust laws under certain circumstances. Based upon an examination of information available to Purchaser and Parent relating to the businesses in which Parent and the Company and their respective subsidiaries are engaged, the Company, Parent and Purchaser believe that the Offer will not violate the antitrust laws. Nevertheless, there can be no assurance that a challenge to the Offer on antitrust grounds will not be made or, if such a challenge is made, what the result would be. Federal and State Healthcare Regulatory Authorities. The Company owns, operates and/or manages skilled nursing facilities, assisted living facilities and pharmacies. These facilities are operated in Arizona, California and Texas. The regulatory requirements of these jurisdictions require certain notices of or approvals prior to certain changes of ownership or control of management of any facilities or services. These regulatory requirements include, without limitation, those providing for licensure, participation in the Medicaid program, as well as federal laws regarding participation in the Medicare and Medicaid programs. To the extent that the consummation of the Offer or the Merger is determined to constitute any such change in ownership, control or management of the facilities under the applicable regulatory requirements, consummation of the Offer and the Merger would be subject to compliance with the regulatory requirements of the applicable state, as well as any applicable federal laws, and receipt, to the extent applicable, of any required approvals or other authorization. The state and federal requirements are subject to interpretation by the various agencies. Medicare. Pursuant to Federal Medicare Program Standards, the providers must notify the Medicare program as promptly as possible upon initiating negotiations for a change of ownership, but in no event later than 15 working days after the transaction causing the change in ownership occurs. When a provider undergoes a change in ownership, the provider must also file a final cost report no later than 45 days following the change in ownership. According to Medicare Program Standards, a transfer of corporate stock or a merger of another corporation into the provider or into the parent corporation of a provider does not constitute a change in ownership, and accordingly no Medicare filing requirement is anticipated with respect to the Offer or the Merger. Arizona. Under applicable Arizona law, neither the consummation of the Offer, the Merger nor the change of officers or directors of the Company or its subsidiaries requires any preapproval or reporting. California. Under applicable California laws, because the facilities and businesses of the Company are licensed through its wholly-owned subsidiaries, the Company is not required to obtain any approval of the Offer or the Merger, or make any report to any applicable California governmental agencies prior to the consummation of the Offer or the Merger. However, each subsidiary of the Company holding a California skilled nursing facility license will be required to submit a written application to the California Department of Health Services ("DHS") for any anticipated change of the officers or directors of the subsidiary at least thirty days prior to the anticipated date of change of officers or directors. California statutory law provides that DHS, upon receipt, shall approve or 61 disapprove the application for change of officers or directors within thirty days, unless with just cause DHS extends the application review process. However, according to DHS, despite the statutory requirement, if the entity submitting an application for change of officers or directors is not informed by DHS within 30 days of the application that the application is either approved or disapproved, the application is deemed by DHS to be approved. Disapproval by DHS of any subsidiary's request to permit an individual to serve as a new officer or director of a skilled nursing facility will require the subsidiary to submit a new application until DHS approval (or deemed approval) is secured. Each subsidiary of the Company holding a pharmacy license will be required to give notice to the applicable regulatory authorities prior to a change of officers or directors. Texas. Under applicable Texas law, the consummation of the Offer, the Merger and the change of officers or directors of Summit or its subsidiaries will not require any approval of or notification to any state governmental agencies in charge of licensing prior to the consummation of the Offer or the Merger with respect to any facility licensed in Texas by a subsidiary of the Company. Such approval will, however, be required with respect to any facilities licensed by the Company. Currently, the Company holds licenses for three of its skilled nursing facilities in Texas which, if they continue to be held by the Company at the consummation of the Offer or Merger may require change of ownership approval by the state to the Offer or the Merger. The Company has previously sought approval to change ownership of these three facilities to its subsidiaries. In one case, the change of ownership application was approved and is expected to proceed pending completion of routine paper work. The application for change of ownership of the other facilities was not approved pending correction of certain deficiencies that were found by the state agency. It is not possible now to predict whether one or more change of ownership applications will be approved or completed before the consummation of the Offer or the Merger. If one or more are not approved, the consummation of the Offer or the Merger could ultimately result in the loss of license for one or more of those facilities, and it is expected that under conditions to the Offer described in "THE TENDER OFFER--Certain Conditions of the Offer", the consummation of the Offer and the Merger may not occur until such approval was obtained. The need for such approval could result in substantial delay in the consummation of the Offer or could result in the conditions to the Offer not being satisfied. See "THE TENDER OFFER--Certain Conditions of the Offer." 13. FEES AND EXPENSES. Except as set forth below, Purchaser will not pay any fees or commissions to any broker, dealer or other person for soliciting tenders of Shares pursuant to the Offer. The Merger Agreement provides, except in certain cases in which the Merger is not consummated, as summarized under "SPECIAL FACTORS--The Merger Agreement and Related Agreements", that all fees, costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby shall be paid by the party incurring such fees, costs and expenses, whether or not the transactions contemplated by the Merger Agreement are consummated. Sutro is acting as Dealer Manager in connection with the Offer and has provided certain financial advisory services in connection with the acquisition of the Company. Parent has agreed to pay Sutro a fee of $150,000 for its services as Dealer Manager and a fee of approximately $3,545,000 for financial advisory services. If the Merger Agreement is terminated under circumstances requiring the Company to pay a Termination Fee to Parent, Parent has agreed to pay Sutro an amount equal to $1,000,000. Parent has also agreed to reimburse Sutro for all out-of-pocket expenses incurred by Sutro, including the reasonable fees and disbursements of legal counsel, and to indemnify Sutro against certain liabilities and expenses in connection with its engagement. Purchaser and Parent have retained Morrow & Co., Inc., as the Information Agent, and Harris Trust Company of New York, as the Depositary, in connection with the Offer. The Information Agent may contact holders of Shares by mail, telephone, telex, telecopy, telegraph and personal interview, and may request banks, brokers, dealers and other nominee shareholders to forward materials relating to the Offer to beneficial owners. As compensation for acting as Information Agent, Purchaser will pay Morrow & Co., Inc. a reasonable and customary fee and Morrow & Co., Inc. will also be reimbursed for certain out-of-pocket expenses and may be 62 indemnified against certain liabilities and expenses in connection with the Offer, including certain liabilities under the United States federal securities laws. Purchaser will pay the Depositary reasonable and customary compensation for its services, plus reimbursement for out-of-pocket expenses, and will indemnify the Depositary against certain liabilities and expenses in connection therewith, including under United States federal securities laws. Brokers, dealers, commercial banks and trust companies will be reimbursed by Purchaser for customary handling and mailing expenses incurred by them in forwarding material to their customers. The following is an estimate of expenses to be incurred in connection with the Offer and the Merger: EXPENSES TO BE PAID BY PURCHASER AND ITS AFFILIATES: Printing and Mailing................................................ $ 125,000 Advertising......................................................... $ 75,000 Filing Fees......................................................... $ 28,600 Financial Advisor................................................... $3,545,000 Dealer-Manager Fees................................................. $ 150,000 Depositary Fees..................................................... $ 25,000 Information Agent Fees.............................................. $ 10,000 Legal Fees.......................................................... $ 900,000 ---------- Total............................................................. $4,858,600 ========== EXPENSES TO BE PAID BY THE COMPANY: Financial Advisor................................................... $2,300,000 Legal Fees.......................................................... $ 510,000 Miscellaneous....................................................... $ 31,000 ---------- Total............................................................. $2,841,000 ==========
14. MISCELLANEOUS. Purchaser is not aware of any jurisdiction where the making of the Offer is prohibited by any administrative or judicial action pursuant to any valid United States state statute. If Purchaser becomes aware of any such valid United States state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, Purchaser will make a good faith effort to comply with any such United States state statute. If, after such good faith effort, Purchaser cannot comply with any such United States state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by one or more registered brokers or dealers licensed under the laws of such jurisdiction. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF PARENT, PURCHASER OR THE COMPANY NOT CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. Parent and Purchaser have filed the Schedule 14D-1 and the Schedule 13E-3, and the Company has filed the Schedule 14D-9. The Company's recommendation with respect to the Offer and other information required to be disseminated to shareholders of the Company pursuant to Rule 14d-9 under the Exchange Act is contained in this Offer to Purchase. Such statements, which furnish certain additional information with respect to the Offer, may be examined and copies may be obtained at the same places and in the same manner set forth in "THE TENDER OFFER--Certain Information Concerning the Company" (except that they will not be available at 63 regional offices of the Commission). The Schedule 14D-1 and the Schedule 13E- 3, including exhibits, may be inspected at, and copies may be obtained from, the same places and in the same manner as set forth in "THE TENDER OFFER-- Certain Information Concerning the Company" (except that they will not be available at the regional offices of the Commission). FV-SCC ACQUISITION CORP. February 13, 1998 64 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF PURCHASER, PARENT AND HERITAGE 1. Directors and Executive Officers of Purchaser. The following table sets forth the name, current business address, citizenship and present principal occupation or employment, and material occupations, positions, offices or employments, and business addresses thereof for the past five years of each person currently expected to be a director or executive officer of Purchaser. Each such individual is a citizen of the United States and has held the positions as set forth below for the past five years. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with Purchaser.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT, MATERIAL POSITIONS HELD NAME AND ADDRESS DURING THE PAST FIVE YEARS ---------------- ----------------------------------- 1. Robert M. Snukal Mr. Snukal has served as Chairman, Chief Executive Fountain View, Inc. Officer, President and a Director of Parent and its 11900 W. Olympic Blvd. subsidiaries for the past five years. Mr. Snukal is Suite 680 President, Treasurer and a Director of Purchaser. Los Angeles, CA 90049 2. Michel Reichert Mr. Reichert has served as General Partner, President and Heritage Partners, Inc. Director of Heritage Partners Management Company, Inc. 30 Rowes Wharf since December 1993. Mr. Reichert is a Member and Manager Suite 300 of HF Partners II, L.L.C. which is the General Partner of Boston, MA 02110 Heritage. He is also a Director of Parent and Purchaser. From 1988 to December 1993, Mr. Reichert served as Managing Director of BancBoston Capital. 3. Mark J. Jrolf Mr. Jrolf has served as Partner and Vice President of Heritage Partners, Inc. Heritage Partners Management Company, Inc. since February 30 Rowes Wharf 1997, and as a Vice President from September 1996 to Suite 300 January 1997. Mr. Jrolf is a Member of HF Partners II, Boston, MA 02110 L.L.C. which is the General Partner of Heritage. He is also a Director of Parent and Purchaser. From September 1993 to September 1996, Mr. Jrolf served as an Engagement Manager at McKinsey & Co.
I-1 2. Directors and Executive Officers of Parent. The following table sets forth the name, current business address, citizenship and present principal occupation or employment, and material occupations, positions, offices or employments, and business addresses thereof for the past five years of each director and executive officer of Parent. Unless otherwise indicated, each such individual is a citizen of the United States and has held his or her present position as set forth below for the past five years. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with Parent. Effective immediately prior to the consummation of the Offer, Mr. Abrahams will resign as a director of Parent, Mr. Scott will become a director of Parent (see Schedule II), and Peter Z. Hermann and Michael F. Gilligan will become directors of Parent (see Part 3 of this Schedule I).
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT, MATERIAL POSITIONS HELD NAME AND ADDRESS DURING THE PAST FIVE YEARS ---------------- ----------------------------------- 1. Robert M. Snukal See Part 1 of this Schedule I. 2. Sheila S. Snukal Mrs. Snukal has served as Vice President/Director of Fountain View, Inc. Operations and a Director of Parent and its subsidiaries 11900 W. Olympic Blvd. for the past five years. Suite 680 Los Angeles, CA 90049 3. Michel Reichert See Part 1 of this Schedule I. Heritage Partners, Inc. 30 Rowes Wharf Suite 300 Boston, MA 02110 4. Mark J. Jrolf See Part 1 of this Schedule I. Heritage Partners, Inc. 30 Rowes Wharf Suite 300 Boston, MA 02110 5. Keith Abrahams Mr. Abrahams has served for the past three years as Chief Fountain View, Inc. Financial Officer and currently as President of 11900 W. Olympic Blvd. Locomotion Therapy, Inc., a subsidiary of Parent. Before Suite 680 that, he was a partner of Wilshire Economic Services, a Los Angeles, CA 90049 litigation support firm. He is currently a Director of Parent.
I-2 3. Directors and Executive Officers of Heritage. The following table sets forth the name, current business address, citizenship and present principal occupation or employment, and material occupations, positions, offices or employments, and business addresses thereof for the past five years of each director and executive officer of Heritage. The current business address of each individual is Heritage Partners, Inc. 30 Rowes Wharf, Suite 300, Boston, MA 02110. Unless otherwise indicated, each such individual is a citizen of the United States and has held his or her present position as set forth below for the past five years. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with Heritage.
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT, MATERIAL POSITIONS HELD NAME AND ADDRESS DURING THE PAST FIVE YEARS ---------------- ----------------------------------- 1. Michel Reichert See Part 1 of this Schedule I. 2. Peter Z. Hermann Mr. Hermann has served as General Partner, Vice President and Director of Heritage Partners Management Company, Inc. since December 1993. Mr. Hermann is a Member and a Manager of HF Partners II, L.L.C. which is the General Partner of Heritage. From September 1979 to December 1993, Mr. Hermann served as a Director of BancBoston Capital. 3. Michael F. Gilligan Mr. Gilligan has served as General Partner, Vice President and Director of Heritage Partners Management Company, Inc. since December 1993. Mr. Gilligan is a Member and a Manager of HF Partners II, L.L.C. which is the General Partner of Heritage. Prior to December 1993, Mr. Gilligan was with BancBoston Capital. 4. Mark J. Jrolf See Part 1 of this Schedule I. 5. T. Brook Parker Mr. Parker has served as Partner of Heritage Partners Management Company, Inc. since February 1997, and a Vice President from January 1994 to January 1997. Mr. Parker is a Member of HF Partners II, L.L.C. which is the General Partner of Heritage. From June 1992 to December 1993, Mr. Parker served as an Assistant Vice President of BancBoston Capital.
I-3 SCHEDULE II DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Directors and Executive Officers of the Company. The following table, which contains information taken from the Company's Proxy Statement dated January 12, 1998 filed with the Commission, sets forth the name, current business address, citizenship and present principal occupation or employment, and material occupations, positions, offices or employments and business addresses thereof for the past five years of each director and executive officer of the Company. The current business address of each person is 2600 W. Magnolia Boulevard, Burbank, California, 91505. Each such person is a citizen of the United States and has held his or her present position as set forth below for the past five years. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with the Company. The following table gives certain information as to each person who is a director:
DIRECTOR NAME AGE SINCE ---- --- -------- William C. Scott............................................... 60 1986 Donald J. Amaral............................................... 45 1991 William J. Casey............................................... 52 1993 John A. Brende................................................. 50 1993 Gary L. Massimino.............................................. 61 1995
Mr. Scott became Chief Executive Officer of the Company in May 1994 and Chairman of the Board in December 1995. Mr. Scott served as President of the Company from December 1985 until January 1996 and held the office of Chief Operating Officer from December 1985 until May 1994. Mr. Scott served as Senior Vice President of Summit Health Ltd. ("SHL"), the Company's former parent company, from December 1985 until its acquisition by OrNda Health Corp. ("OrNda") in April 1994. Mr. Scott is a director of Fairfield Communities, Inc. Mr. Amaral has been President and Chief Executive Officer of Coram Healthcare Corp since October of 1995. From April 1994 until August 31, 1995, Mr. Amaral served as President and Chief Operating Officer of OrNda. Mr. Amaral served as President and Chief Executive Officer of SHL from October 1989 and Chief Executive Officer of SHL from October 1991 until April 1994, when OrNda acquired SHL. Mr. Amaral served as Chairman of the Board of the Company from May 1994 until December 1995 and as the Company's Chief Executive Officer from May 1991 to May 1994. Mr. Casey is Chief Executive Officer of William J. Casey, Inc., and has served as a consultant in the healthcare industry, specializing in hospital management evaluation, hospital planning, managed care contracting and turnaround services. From 1986 to the present, Mr. Casey has also served as Contract Administrator for Emergency Department Physicians' Medical Group, Inc. and affiliated medical groups, which provide physician services to non- governmental facilities. From 1988 to the present, Mr. Casey has served as Contract Administrator for NP Medical Group, Inc., which provides physician services to governmental facilities. Mr. Casey also serves as a director of Coram Healthcare Corp. and TriCo Bancshares. Mr. Brende is Chairman, President and Chief Executive Officer of J.A.B. Industries, Inc., a real estate development and construction company, which is wholly-owned by him, as well as managing partner in various real estate partnerships. Mr. Massimino is a financial consultant. He served as Executive Vice President and Chief Financial Officer of Regency Health Services, Inc. from April 1994 until December 31, 1995. He was Executive Vice President and Chief Financial Officer of Care Enterprises, Inc. from February 1990 until April 1994. II-1 The executive officers, who are not also directors are:
NAME POSITION AGE ---- -------- --- David G. Schumacher, President and Chief Operating Officer 41 Jr. ..................... Derwin L. Williams........ Sr. Vice President-Finance, Chief Financial 60 Officer and Treasurer Michael H. Martel......... Sr. Vice President-Marketing 35 John L. Farber............ Vice President-Controller, Chief Accounting 47 Officer and Secretary
David G. Schumacher, Jr., has been President and Chief Operating Officer of Summit Care Corporation since January 1, 1997 and previously served as Sr. Vice President-Operations and Chief Operating Officer from January 1, 1996. Prior to joining the Company, Mr. Schumacher was the Vice President of Operations at Arbor Health Care Company. He also spent ten years in various operations capacities at Manor Care. Derwin L. Williams was appointed Vice President-Finance and Chief Financial Officer of the Company on July 1, 1993, Treasurer on May 10, 1994 and Senior Vice President-Finance on December 8, 1995. Previously he has served in the same position at three other nursing home companies: Hallmark Health Service, Inc. from November 1989 to February 1992; Care Enterprises from April 1980 to August 1987; and Flagg Industries, Inc. from June 1978 to March 1980. Mr. Williams has also served in various capacities specializing in Medicare reimbursement for the Company in 1992 and 1993 and for Beverly Enterprises in 1988 and 1989. He is also a certified public accountant. Michael H. Martel was appointed Senior Vice President-Marketing in March 1995. Prior to joining the Company, Mr. Martel was Vice President-Marketing for Arbor Health Care Company from August 1992 to March 1995. Mr. Martel served as Regional Director of Marketing for the acute care rehabilitation division of National Medical Enterprises from April 1988 to August 1992. John L. Farber was appointed Vice President-Controller, Chief Accounting Officer and Secretary on June 2, 1997. Prior to joining the Company, Mr. Farber was Vice President of Finance at FHP Insurance Company and Director of Finance at FHP International Corporation from September 1990 to May 1997. Mr. Farber also served in financial executive positions in two other companies from September 1979 to August 1990. He is also a certified public accountant. II-2 BENEFICIAL OWNERSHIP OF COMMON STOCK. The following table, which contains information taken from the Company's Proxy Statement dated January 12, 1998 filed with the Commission, sets forth certain information regarding the ownership of the Shares by each person known by the Company to be the beneficial owner of more than 5% of the outstanding Shares, each director of the Company, the Chief Executive Officer of the Company, the four most highly compensated officers of the Company and all executive officers and directors of the Company as a group. All such persons, other than Purchaser and Parent may receive cash in the Offer or the Merger as shareholders.
PERCENT NAME OF BENEFICIAL OWNER OR NUMBER OF OF IDENTITY OF GROUP(1) SHARES CLASS --------------------------- --------- ------- J. P. Morgan & Co., Incorporated(2)........................ 1,218,900 17.9 60 Wall Street New York, NY 10260 Franklin Resources, Inc.(3)................................ 1,050,800 15.4 777 Mariners Island Boulevard San Mateo, CA 94403 Baron Capital Group, Inc.(4)............................... 714,925 10.5 BAMCO, Inc. Baron Capital Management, Inc. Baron Capital, Inc. 767 Fifth Avenue--24th Floor New York, NY 10153 William C. Scott(5)........................................ 171,000 2.5 David G. Schumacher, Jr.(5)................................ 23,000 * Derwin L. Williams(5)...................................... 36,500 * Michael H. Martel(5)....................................... 21,000 * Donald J. Amaral(5)........................................ 7,500 * John A. Brende(5).......................................... 9,500 * William J. Casey(5)........................................ 10,500 * Gary L. Massimino.......................................... 7,000 * All directors and executive officers as a group(5)......... 286,000 4.2
- -------- * Less than 1%. (1) Except where otherwise indicated, each person has sole voting and investment power over the Common Stock shown as beneficially owned, subject to community property laws where applicable. Except where otherwise indicated, each person's address is c/o Summit Care Corporation, 2600 West Magnolia Boulevard, Burbank, California 91505-3031. (2) Based on an amendment to a report on Schedule 13G filed by J.P. Morgan & Co., Incorporated ("J.P. Morgan") with the Commission on December 31, 1996. J.P. Morgan or its subsidiaries have sole power to dispose of all of the shares shown as beneficially owned by them and sole power to vote 888,800 of the shares. (3) Based on an amendment to a report on Schedule 13G filed by Franklin Resources, Inc. ("Franklin") with the Commission on December 10, 1997. Franklin or its subsidiaries have sole power to vote and to dispose of all of the shares shown as beneficially owned by them. (4) Based on an amendment to a report on Schedule 13G filed by Baron Capital Group, Inc. ("Baron") with the Commission on July 9, 1997. Baron or its subsidiaries have sole power to vote and dispose of all of the shares shown as beneficially owned by them. II-3 (5) Includes shares which such persons have the right to acquire within 60 days of the date of this Proxy Statement pursuant to the exercise of outstanding stock options, of which 10,000 shares are attributable to each of Messrs. Scott and Schumacher, 4,000 shares are attributable to Mr. Williams, 5,000 shares are attributable to Mr. Martel, 1,000 shares are attributable to each of Messrs. Amaral, Brende and Casey, and 32,000 shares are attributable to all directors and executive officers as a group. As described in "SPECIAL FACTORS--Interests of Certain Persons in the Offer and the Merger", all Existing Stock Options will vest as of the Effective Time of the Merger, and will be cashed-out for their net value in the Merger. If all Existing Stock Options were treated as outstanding in the foregoing table, the beneficial ownership of certain of the persons listed on that table would be greater. II-4 ANNEX A OPINION OF DLJ DONALDSON, LUFKIN & JENRETTE Donaldson, Lufkin & Jenrette Securities Corporation 2121 Avenue of the Stars, Suite 3000 . Los Angeles, CA 00067-5014 . (310) 282- 6161 February 6, 1998 Board of Directors Summit Care Corporation 2600 West Magnolia Burbank, CA 91505-3031 Dear Sirs: You have requested our opinion as to the fairness from a financial point of view to the stockholders of Summit Care Corporation (the "Company") of the consideration to be received by such stockholders pursuant to the terms of the Agreement and Plan of Merger, dated as of February 6, 1998 (the "Agreement"), by and among Fountain View, Inc., Heritage Fund II, LP, the Company and Target Acquisition Corp. ("Acquisition"), a wholly owned subsidiary of Fountain View, Inc. Pursuant to the Agreement, Acquisition will commence a tender offer for any and all outstanding shares of the Company's common stock at a price of $21.00 per share. The tender offer is to be followed by a merger of Acquisition with and into the Company in which the shares of all stockholders who did not tender would be converted into the right to receive an amount in cash equal to the price per share paid in the tender offer. In arriving at our opinion, we have reviewed the draft dated February 5, 1998 of the Agreement and the exhibits thereto. We also have reviewed financial and other information that was publicly available or furnished to us by the Company including information provided during discussions with management. Included in the information provided during discussions with management were certain financial projections of the Company for the period beginning June 30, 1997 and ending June 30, 2002 prepared by the management of the Company. In addition, we have compared certain financial and securities data of the Company with various other companies whose securities are traded in public markets, reviewed the historical stock prices and trading volumes of the common stock of the Company, reviewed prices and premiums paid in certain other business combinations and conducted such other financial studies, analyses and investigations as we deemed appropriate for purposes of this opinion. In rendering our opinion, we have relied upon and assumed the accuracy and completeness of all of the financial and other information that was available to us from public sources, that was provided to us by the Company or its representatives, or that was otherwise reviewed by us. With respect to the financial projections supplied to us, we have assumed that they have been reasonably prepared on the basis reflecting the best currently available estimates and judgments of the management of the Company as to the future operating and financial performance of the Company. We have not assumed any responsibility for making an independent evaluation any assets or liabilities or for making any independent verification of any of the information reviewed by us. We have relied as to certain legal matters on advice of counsel to the Company. Our opinion is necessarily based on economic, market, financial and other conditions as they exist on, and on the information made available to us as of, the date of this letter. It should be understood that, although subsequent developments may affect this opinion, we do not have any obligation to update, revise or reaffirm this opinion. Our opinion does not address the relative merits of the proposed transaction and the other business strategies being considered by the Company's Board of Directors, nor does it address the Board's decision to proceed with the proposed transaction. Our opinion does not constitute a recommendation to any stockholder as to whether such stockholder should tender in the tender offer or how such stockholder should vote on the proposed transaction. A-1 Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its investment banking services, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. Based upon the foregoing and such other factors as we deem relevant, we are of the opinion that the consideration to be received by the stockholders of the Company pursuant to the Agreement is fair to such stockholders from a financial point of view. Very truly yours, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By: _________________________________ David Dennis Managing Director A-2 ANNEX B CALIFORNIA BUSINESS CORPORATION LAW 1300. (a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day before the first announcement of the terms of the proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed action, but adjusted for any stock split, reverse stock split, or share dividend which becomes effective thereafter. (b) As used in this chapter, "dissenting shares" means shares which come within all of the following descriptions: (1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100 or (B) listed on the list of OTC margin stocks issued by the Board of Governors of the Federal Reserve System, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in subparagraph (A) or (B) if demands for payment are filed with respect to 5 percent or more of the outstanding shares of that class. (2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in subparagraph (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger; provided, however, that subparagraph (A) rather than subparagraph (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting. (3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301. (4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1302. (c) As used in this chapter, "dissenting shareholder" means the recordholder of dissenting shares and includes a transferee of record. 1301. (a) If, in the case of a reorganization, any shareholders of a corporation have a right under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares for cash, such corporation shall mail to each such shareholder a notice of the approval of the reorganization by its outstanding shares (Section 152) within 10 days after the date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of the price determined by the corporation to represent the fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise the shareholder's right under such sections. The statement of price constitutes an offer by the corporation to purchase at the price stated any dissenting shares as defined in subdivision (b) of Section 1300, unless they lose their status as dissenting shares under Section 1309. (b) Any shareholder who has a right to require the corporation to purchase the shareholder's shares for cash under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the corporation to purchase such shares shall make written demand upon the corporation for the purchase of such shares and payment to the shareholder in cash of their fair market value. The demand is not effective for any B-1 purpose unless it is received by the corporation or any transfer agent thereof (1) in the case of shares described in clause (i) or (ii) of paragraph (1) of subdivision (b) of Section 1300 (without regard to the provisos in that paragraph), not later than the date of the shareholders' meeting to vote upon the reorganization, or (2) in any other case within 30 days after the date on which the notice of the approval by the outstanding shares pursuant to subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (c) The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the corporation purchase and shall contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the announcement of the proposed reorganization or short-form merger. The statement of fair market value constitutes an offer by the shareholder to sell the shares at such price. 1302. Within 30 days after the date on which notice of the approval by the outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the shareholder shall submit to the corporation at its principal office or at the office of any transfer agent thereof, (a) if the shares are certificated securities, the shareholder's certificates representing any shares which the shareholder demands that the corporation purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of appropriate denomination so stamped or endorsed or (b) if the shares are uncertificated securities, written notice of the number of shares which the shareholder demands that the corporation purchase. Upon subsequent transfers of the dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the shares. 1303. (a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between the corporation and the holders thereof shall be filed with the secretary of the corporation. (b) Subject to the provisions of Section 1306, payment of the fair market value of dissenting shares shall be made within 30 days after the amount thereof has been agreed or within 30 days after any statutory or contractual conditions to the reorganization are satisfied, whichever is later, and in the case of certificated securities, subject to surrender of the certificates therefor, unless provided otherwise by agreement. 1304. (a) If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation, within six months after the date on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint. (b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two or more such actions may be consolidated. (c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares is in issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares. 1305. (a) If the court appoints an appraiser or appraisers, they shall proceed forthwith to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of them, shall make and file a report in the office of the clerk of the court. Thereupon, on the motion of any party, the report shall be submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it. B-2 (b) If a majority of the appraisers appointed fail to make and file a report within 10 days from the date of their appointment or within such further time as may be allowed by the court or the report is not confirmed by the court, the court shall determine the fair market value of the dissenting shares. (c) Subject to the provisions of Section 1306, judgment shall be rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares which any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest thereon at the legal rate from the date on which judgment was entered. (d) Any such judgment shall be payable forthwith with respect to uncertificated securities and, with respect to certificated securities, only upon the endorsement and delivery to the corporation of the certificates for the shares described in the judgment. Any party may appeal from the judgment. (e) The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys' fees, fees of expert witnesses and interest at the legal rate on judgments from the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301). 1306. To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5. 1307. Cash dividends declared and paid by the corporation upon the dissenting shares after the date of approval of the reorganization by the outstanding shares (Section 152) and prior to payment for the shares by the corporation shall be credited against the total amount to be paid by the corporation therefor. 1308. Except as expressly limited in this chapter, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless the corporation consents thereto. 1309. Dissenting shares lose their status as dissenting shares and the holders thereof cease to be dissenting shareholders and cease to be entitled to require the corporation to purchase their shares upon the happening of any of the following: (a) The corporation abandons the reorganization. Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable attorneys' fees. (b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or are surrendered for conversion into shares of another class in accordance with the articles. (c) The dissenting shareholder and the corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the shares, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six months after the date on which notice of the approval by the outstanding shares or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholder's demand for purchase of the dissenting shares. B-3 1310. If litigation is instituted to test the sufficiency or regularity of the votes of the shareholders in authorizing a reorganization, any proceedings under Sections 1304 and 1305 shall be suspended until final determination of such litigation. 1311. This chapter, except Section 1312, does not apply to classes of shares whose terms and provisions specifically set forth the amount to be paid in respect to such shares in the event of a reorganization or merger. 1312. (a) No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof; but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization. (b) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, subdivision (a) shall not apply to any shareholder of such party who has not demanded payment of cash for such shareholder's shares pursuant to this chapter; but if the shareholder institutes any action to attack the validity of the reorganization or short- form merger or to have the reorganization or short-form merger set aside or rescinded, the shareholder shall not thereafter have any right to demand payment of cash for the shareholder's shares pursuant to this chapter. The court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded shall not restrain or enjoin the consummation of the transaction except upon 10 days' prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member. (c) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, in any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, (1) a party to a reorganization or short-form merger which controls another party to the reorganization or short-form merger shall have the burden of proving that the transaction is just and reasonable as to the shareholders of the controlled party, and (2) a person who controls two or more parties to a reorganization shall have the burden of proving that the transaction is just and reasonable as to the shareholders of any party so controlled. B-4 Manually signed facsimile copies of the Letter of Transmittal will be accepted. The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each shareholder of the Company or such shareholder's broker, dealer, bank, trust company or other nominee to the Depositary at one of its addresses set forth below. The Depositary for the Offer is: HARRIS TRUST COMPANY OF NEW YORK By Mail: By Facsimile: By Hand and Overnight Courier: Harris Trust Company of Harris Trust Company of New York New York Harris Trust Company of Wall Street Station By Facsimile: New York P.O. Box 1023 (212) 701-7636 88 Pine Street New York, NY 10268-1023 or (212) 701-7637 19th Floor New York, NY 10005 Confirm Receipt of Facsimile by Telephone: (212) 701-7624 Questions and requests for assistance or for additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Information Agent at its telephone numbers and location listed below. You may also contact your broker, dealer, bank, trust company or other nominee for assistance concerning the Offer. The Information Agent for the Offer is: MORROW & CO., INC. 909 Third Avenue 20th Floor New York, NY 10022 (212) 754-8000 Toll Free (800) 566-9061 Banks and Brokerage Firms please call: (800) 662-5200 The Dealer Manager for the Offer is: LOGO 11150 Santa Monica Boulevard Suite 1500 Los Angeles, CA 90025 (415) 445-8323 EX-99.A.2 3 FORM OF LETTER OF TRANSMITTAL Exhibit (a)(2) LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK OF SUMMIT CARE CORPORATION PURSUANT TO THE OFFER TO PURCHASE DATED FEBRUARY 13, 1998 BY FV-SCC ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF FOUNTAIN VIEW, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MARCH 13, 1998, UNLESS THE OFFER IS EXTENDED. 1 THE DEPOSITARY FOR THE OFFER IS: HARRIS TRUST COMPANY OF NEW YORK By Mail: By Hand and Overnight Courier: By Facsimile: Wall Street Station 88 Pine Street (212) 701-7636 P.O. Box 1023 19th Floor or (212) 701-7637 New York, NY 10268-1023 New York, NY 10005 Confirm Receipt of Facsimile by Telephone: (212) 701-7624 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by shareholders of Summit Care Corporation either if certificates ("Share Certificates") evidencing shares of common stock, no par value per share (the "Shares"), are to be forwarded herewith or if delivery of Shares is to be made by book-entry transfer to an account maintained by Harris Trust Company of New York (the "Depositary") at The Depository Trust Company ("DTC") or the Philadelphia Depository Trust Company ("PDTC" and individually with DTC, the "Book-Entry Transfer Facilities" and individually a "Book-Entry Transfer Facility") pursuant to the book-entry transfer procedure described in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase (as defined below). DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Purchaser (as defined in the Offer to Purchase) reserves the right to require that it receive such certificates prior to accepting Shares for payment. Payment for Shares tendered and purchased pursuant to the Offer will be made only after timely receipt by the Depositary of, among other things, such certificates, if such certificates have been distributed to holders of Shares. Shareholders whose Share Certificates are not immediately available or who cannot deliver their Share Certificates and all other documents required hereby to the Depositary prior to the Expiration Date (as defined in "THE TENDER OFFER--Terms of the Offer; Expiration Date" of the Offer to Purchase) or who cannot complete the procedure for delivery by book-entry transfer on a timely basis and who wish to tender their Shares must do so pursuant to the guaranteed delivery procedure described in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. See Instruction below. 2 [_]CHECK HERE IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE DEPOSITARY'S ACCOUNT AT A BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution: ________________________________________________ Check Box of Book-Entry Transfer Facility: (Check One) [_]DTC [_]PDTC Account Number ______________________ Transaction Code Number ________________ [_]CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY (PLEASE INCLUDE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED DELIVERY) AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s): ______________________________________________ Window Ticket Number (if any): ________________________________________________ Date of Execution of Notice of Guaranteed Delivery: ___________________________ Name of Institution which Guaranteed Delivery: ________________________________ If Delivered by Book-Entry Transfer, Check Box of Book-Entry Transfer Facility and Provide Account Number and Transaction Code Number: [_]DTC [_]PDTC Account Number ______________________ Transaction Code Number ________________ DESCRIPTION OF SHARES TENDERED - -------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) (PLEASEFILL IN, IF BLANK) CERTIFICATE(S) TENDERED (ATTACH ADDITIONAL LIST IF NECESSARY) - ------------------------------------------------------------------------------------------------------ TOTAL NUMBER OF SHARES NUMBER OF CERTIFICATE REPRESENTED BY SHARES NUMBER(S)* CERTIFICATE(S)* TENDERED** ---------------- --------------- ----------- ---------------- --------------- ----------- ---------------- --------------- ----------- ---------------- --------------- ----------- ---------------- --------------- ----------- ---------------- --------------- ----------- TOTAL SHARES.. - -----------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- * Need not be completed by stockholders tendering by book-entry transfer. ** Unless otherwise indicated it will be assumed that all Shares described above are being tendered. See Instruction 4. NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE INSTRUCTIONS SET FORTH IN THIS LETTER OF TRANSMITTAL CAREFULLY. 3 LADIES AND GENTLEMEN: The undersigned hereby tenders to FV-SCC Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of Fountain View, Inc., a Delaware corporation ("Parent"), the above-described shares of common stock, no par value per share (the "Shares"), of Summit Care Corporation, a California corporation (the "Company"), pursuant to Purchaser's offer to purchase all outstanding Shares, at a price of $21.00 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated February 13, 1998 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, together with the Offer to Purchase, each as amended or supplemented from time to time, together constitute the "Offer"). Subject to, and effective upon, acceptance for payment of the Shares tendered herewith, in accordance with the terms of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the undersigned hereby sells, assigns and transfers to, or upon the order of, Purchaser all right, title and interest in and to all the Shares that are being tendered hereby (and any and all dividends, distributions, rights, other Shares or other securities issued or issuable in respect of such Shares or declared, paid or distributed in respect of such Shares on or after February 13, 1998 (collectively, "Distributions")), and irrevocably appoints the Depositary the true and lawful agent and attorney-in- fact of the undersigned with respect to such Shares and all Distributions, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (a) deliver certificates for such Shares (individually, a "Share Certificate") and all Distributions, or transfer ownership of such Shares and all Distributions on the account books maintained by a Book-Entry Transfer Facility, together, in either case, with all accompanying evidence of transfer and authenticity to, or upon the order of Purchaser, (b) present such Shares and all Distributions for transfer on the books of the Company and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares and all Distributions, all in accordance with the terms and subject to the conditions of the Offer. By executing this Letter of Transmittal, the undersigned irrevocably appoints Robert M. Snukal and Michel Reichert as proxies of the undersigned, each with full power of substitution, to the full extent of the undersigned's rights with respect to the Shares tendered by the undersigned and accepted for payment by Purchaser (and any and all Distributions). All such proxies shall be considered coupled with an interest in the tendered Shares. This appointment will be effective if, when, and only to the extent that, Purchaser accepts such Shares for payment pursuant to the Offer. Upon such acceptance for payment, all prior proxies given by the undersigned with respect to such Shares, Distributions and other securities will, without further action, be revoked, and no subsequent proxies may be given. The individuals named above as proxies will, with respect to the Shares, Distributions and other securities for which the appointment is effective, be empowered to exercise all voting and other rights of the undersigned as they in their sole discretion may deem proper at any annual, special, adjourned or postponed meeting of the Company's shareholders, by written consent or otherwise, and Purchaser reserves the right to require that, in order for Shares, Distributions or other securities to be deemed validly tendered, immediately upon Purchaser's acceptance for payment of such Shares Purchaser must be able to exercise full voting rights with respect to such Shares. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered hereby and all Distributions, that the undersigned own(s) the Shares tendered hereby within the meaning of Rule 14e-4 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that such tender of Shares complies with Rule 14e-4 under the Exchange Act, and that when such Shares are accepted for payment by Purchaser, Purchaser will acquire good, marketable and unencumbered title thereto and to all Distributions, free and clear of all liens, restrictions, charges and encumbrances, and that none of such Shares and Distributions will be subject to any adverse claim. The undersigned, upon request, shall execute and deliver all additional documents deemed by the Depositary or Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered 4 hereby and all Distributions. In addition, the undersigned shall remit and transfer promptly to the Depositary for the account of Purchaser all Distributions in respect of the Shares tendered hereby, accompanied by appropriate documentation of transfer, and, pending such remittance and transfer or appropriate assurance thereof, Purchaser shall be entitled to all rights and privileges as owner of each such Distribution and may withhold the entire purchase price of the Shares tendered hereby or deduct from such purchase price, the amount or value of such Distribution as determined by Purchaser in its sole discretion. No authority herein conferred or agreed to be conferred shall be affected by, and all such authority shall survive, the death, dissolution, insolvency, bankruptcy or incapacity of the undersigned. All obligations of the undersigned hereunder shall be binding upon the heirs, personal representatives, executors, administrators, receivers, trustees in bankruptcy and successors and assigns of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. The undersigned understands that tenders of Shares pursuant to any one of the procedures described in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase and in the Instructions hereto will constitute the undersigned's acceptance of the terms and conditions of the Offer. Purchaser's acceptance for payment of Shares tendered pursuant to the Offer will constitute a binding agreement between the undersigned and Purchaser upon the terms and subject to the conditions of the Offer. The undersigned recognizes that under certain circumstances set forth in the Offer to Purchase, Purchaser may not be required to accept for payment any of the Shares tendered hereby. Unless otherwise indicated herein in the box entitled "Special Payment Instructions", please issue the check for the purchase price of all Shares purchased, and return all Share Certificates evidencing Shares not purchased or not tendered, in the name(s) of the registered holder(s) appearing above under "Description of Shares Tendered". Similarly, unless otherwise indicated in the box entitled "Special Delivery Instructions", please mail the check for the purchase price of all Shares purchased and all Share Certificates evidencing Shares not tendered or not purchased (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing above under "Description of Shares Tendered". In the event that the boxes entitled "Special Payment Instructions" and "Special Delivery Instructions" are both completed, please issue the check for the purchase price of all Shares purchased and return all Share Certificates evidencing Shares not purchased or not tendered in the name(s) of, and mail such check and Share Certificates to, the person(s) so indicated. Unless otherwise indicated herein in the box entitled "Special Payment Instructions", please credit any Shares tendered hereby and delivered by book-entry transfer, but which are not purchased, by crediting the account at the Book-Entry Transfer Facility designated above. The undersigned recognizes that Purchaser has no obligation, pursuant to the Special Payment Instructions, to transfer any Shares from the name of the registered holder(s) thereof if Purchaser does not accept for payment any of the Shares tendered hereby. 5 SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7 OF THIS LETTER OF TRANSMITTAL) To be completed ONLY if Share Certificates not tendered or not purchased and/or the check for the purchase price of Shares purchased are to be issued in the name of someone other than the undersigned, or if Shares delivered by book-entry transfer which are not purchased are to be returned by credit to an account maintained at a Book-Entry Transfer Facility other than that designated above. Issue check and/or certificates to: ................................ Name ............................................................... (PLEASE PRINT) Address ............................................................ .................................................................... (ZIP CODE) .................................................................... (TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER) (ALSO COMPLETE SUBSTITUTE FORM W-9 BELOW) [_]Credit unpurchased Shares delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below: Check appropriate Box [_]DTC [_]PDTC .................................................................... (ACCOUNT NUMBER) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7 OF THIS LETTER OF TRANSMITTAL) To be completed ONLY if certificates for Shares not tendered or not purchased and/or the check for the purchase price of Shares purchased are to be sent to someone other than the undersigned, or to the undersigned at an address other than that shown above. Mail check and/or certificates to: ................................. Name: .............................................................. (PLEASE PRINT) Address ............................................................ .................................................................... (ZIP CODE) .................................................................... (TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER) .................................................................... SIGN HERE (ALSO COMPLETE SUBSTITUTE FORM W-9 ON REVERSE) (SIGNATURE(S) OF STOCKHOLDER(S)) Dated: , 1998 6 (Must be signed by registered holder(s) exactly as name(s) appear(s) on Share Certificate(s) or on a security position listing or by person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please provide the following information. See Instruction 5 of this Letter of Transmittal.) Name(s) ............................................................ (PLEASE PRINT) Capacity (Full Title) .............................................. Address ............................................................ .................................................................... (ZIP CODE) Daytime Area Code and Telephone Number ( ) ....................... .................................................................... Tax Identification or Social Security Number (COMPLETE SUBSTITUTE FORM W-9 ON REVERSE) GUARANTEE OF SIGNATURE(S) (IF REQUIRED--SEE INSTRUCTIONS 1 AND 5 OF THIS LETTER OF TRANSMITTAL) Authorized Signature: .............................................. Name: .............................................................. (PLEASE PRINT) Title: ............................................................. Name of Firm: ...................................................... Address ............................................................ .................................................................... (ZIP CODE) Area Code and Telephone Number: .................................... Dated: , 1998 7 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. Guarantee of Signatures. Except as otherwise provided below, all signatures on this Letter of Transmittal must be guaranteed by a firm which is a bank, broker, dealer, credit union, savings association, or other entity that is a member in good standing of the Securities Transfer Agent's Medallion Program (each, an "Eligible Institution"). No signature guarantee is required on this Letter of Transmittal (a) if this Letter of Transmittal is signed by the registered holder(s) (which term, for purposes of this document, shall include any participant in a Book-Entry Transfer Facility whose name appears on a security position listing as the owner of Shares) of Shares tendered herewith, unless such holder(s) has completed either the box entitled "Special Delivery Instructions" or the box entitled "Special Payment Instructions", or (b) if such Shares are tendered for the account of an Eligible Institution. See Instruction 5. If a Share Certificate is registered in the name of a person other than the signer of this Letter of Transmittal, or if payment is to be made, or a Share Certificate not accepted for payment or not tendered is to be returned, to a person other than the registered holder(s), then the Share Certificate must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on the Share Certificate, with the signature(s) on such Share Certificate or stock powers guaranteed as described above. See Instruction 5. 2. Delivery of Letter of Transmittal and Share Certificates. This Letter of Transmittal is to be used either if Share Certificates are to be forwarded herewith or if Shares are to be delivered by book-entry transfer pursuant to the procedure set forth in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. Share Certificates evidencing all tendered Shares, or confirmation of a book-entry transfer of such Shares, if such procedure is available, into the Depositary's account at a Book-Entry Transfer Facility pursuant to the procedures set forth in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase, together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message, as defined below) and any other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth herein prior to the Expiration Date (as defined in "THE TENDER OFFER--Terms of the Offer; Expiration Date" of the Offer to Purchase). If Share Certificates are forwarded to the Depositary in multiple deliveries, a properly completed and duly executed Letter of Transmittal must accompany each such delivery. Shareholders whose Share Certificates are not immediately available, who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date or who cannot complete the procedure for delivery by book-entry transfer on a timely basis may tender their Shares pursuant to the guaranteed delivery procedure described in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Purchaser herewith, must be received by the Depositary prior to the Expiration Date; and (iii) in the case of a guarantee of Shares, the Share Certificates, in proper form for transfer, or a confirmation of a book-entry transfer of such Shares, if such procedure is available, into the Depositary's account at a Book-Entry Transfer Facility, together with a properly completed and duly executed Letter of Transmittal (or manually signed facsimile thereof) with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message), and any other documents required by this Letter of Transmittal, must be received by the Depositary within three New York Stock Exchange, Inc. trading days after the date of execution of the Notice of Guaranteed Delivery, all as described in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. The term "Agent's Message" means a message, transmitted by a Book-Entry Transfer Facility to, and received by the Depositary and forming the part of a Book- Entry Confirmation, which states that a Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the Shares, that such participant has received and agrees to be bound by the terms of this Letter of Transmittal and that the Purchaser may enforce such agreement against the participant. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH A BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. 8 No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be purchased. By execution of this Letter of Transmittal (or a facsimile hereof), all tendering shareholders waive any right to receive any notice of the acceptance of their Shares for payment. 3. Inadequate Space. If the space provided herein under "Description of Shares Tendered" is inadequate, the Share Certificate numbers, the number of Shares evidenced by such Share Certificates and the number of Shares tendered should be listed on a separate schedule and attached hereto. 4. Partial Tenders. (Not applicable to shareholders who tender by book-entry transfer.) If fewer than all the Shares evidenced by any Share Certificate delivered to the Depositary herewith are to be tendered hereby, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered." In such cases, new Share Certificate(s) evidencing the remainder of the Shares that were evidenced by the Share Certificates delivered to the Depositary herewith will be sent to the person(s) signing this Letter of Transmittal, unless otherwise provided in the box entitled "Special Delivery Instructions," as soon as practicable after the expiration or termination of the Offer. All Shares evidenced by Share Certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. Signatures on Letter of Transmittal; Stock Powers and Endorsements. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the Share Certificates evidencing such Shares without alteration, enlargement or any other change whatsoever. If any Share tendered hereby is owned of record by two or more persons, all such persons must sign this Letter of Transmittal. If any of the Shares tendered hereby are registered in the names of different holders, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of such certificates. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, no endorsements of Share Certificates or separate stock powers are required, unless payment is to be made to, or Share Certificates evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), in which case, the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares tendered hereby, the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signatures on such Share Certificate(s) and stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any Share Certificate(s) or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to Purchaser of such person's authority so to act must be submitted. 6. Stock Transfer Taxes. Except as otherwise provided in this Instruction 6, Purchaser will pay all stock transfer taxes with respect to the sale and transfer of any Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price of any Shares purchased is to be made to, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued in the name of, a person other than the registered holder(s), the amount of any stock transfer taxes (whether imposed on the registered holder(s), such other person or otherwise) payable on account of the transfer to such other person will be deducted from the purchase price of such Shares purchased, unless evidence satisfactory to Purchaser of the payment of such taxes, or exemption therefrom, is submitted. EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE SHARE CERTIFICATE(S) EVIDENCING THE SHARES TENDERED HEREBY. 9 7. Special Payment and Delivery Instructions. If a check for the purchase price of any Shares tendered hereby is to be issued, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be issued, in the name of a person other than the person(s) signing this Letter of Transmittal or if such check or any such Share Certificate is to be sent to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal but at an address other than that shown in the box entitled "Description of Shares Tendered," the appropriate boxes on this Letter of Transmittal must be completed. Shares tendered hereby by book-entry transfer may request that Shares not purchased be credited to such account maintained at a Book-Entry Transfer Facility as such shareholder may designate in the box entitled "Special Payment Instructions". If no such instructions are given, all such Shares not purchased will be returned by crediting the account at a Book-Entry Transfer Facility designated herein as the account from which such Shares were delivered. 8. Requests for Assistance or Additional Copies. Requests for assistance may be directed to the Information Agent at its addresses or telephone numbers set forth below. Additional copies of the Offer to Purchase, this Letter of Transmittal, the Notice of Guaranteed Delivery and the Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 may be obtained from the Information Agent or from brokers, dealers, commercial banks or trust companies. 9. Substitute Form W-9. Each tendering shareholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN") on the Substitute Form W-9 which is provided under "Important Tax Information" below, and to certify, under penalties of perjury, that such number is correct and that such shareholder is not subject to backup withholding of federal income tax. If a tendering shareholder has been notified by the Internal Revenue Service that such shareholder is subject to backup withholding, such shareholder must cross out item (2) of the Certification box of the Substitute Form W-9, unless such shareholder has since been notified by the Internal Revenue Service that such shareholder is no longer subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering shareholder to 31% federal income tax withholding on the payment of the purchase price of all Shares purchased from such shareholder. If the tendering shareholder has not been issued a TIN and has applied for one or intends to apply for one in the near future, such shareholder should write "Applied For" in the space provided for the TIN in Part I of the Substitute Form W-9, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31% on all payments of the purchase price to such shareholder until a TIN is provided to the Depositary. 10. Lost, Destroyed or Stolen Certificates. If any certificate(s) representing Shares has been lost, destroyed or stolen, the shareholder should promptly notify the Depositary. The shareholder will then be instructed as to the steps that must be taken in order to replace the certificate(s). This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed certificates have been followed. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE HEREOF), PROPERLY COMPLETED AND DULY EXECUTED, WITH ANY REQUIRED SIGNATURE GUARANTEES, OR AN AGENT'S MESSAGE (TOGETHER WITH SHARE CERTIFICATES OR CONFIRMATION OF BOOK- ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A PROPERLY COMPLETED AND DULY EXECUTED NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE. 10 IMPORTANT TAX INFORMATION Under the federal income tax law, a shareholder whose tendered Shares are accepted for payment is required by law to provide the Depositary (as payer) with such shareholder's correct TIN on Substitute Form W-9 below. If such shareholder is an individual, the TIN is such shareholder's social security number. If the Depositary is not provided with the correct TIN, the shareholder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, payments that are made to such shareholder with respect to Shares purchased pursuant to the Offer may be subject to backup withholding of 31%. Certain shareholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such individual must submit a statement, signed under penalties of perjury, attesting to such individual's exempt status. Forms of such statements can be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies with respect to a shareholder, the Depositary is required to withhold 31% of any payments made to such shareholder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments that are made to a shareholder with respect to Shares purchased pursuant to the Offer, the shareholder is required to notify the Depositary of such shareholder's correct TIN by completing the form below certifying (a) that the TIN provided on Substitute Form W-9 is correct (or that such shareholder is awaiting a TIN), and (b) that (i) such shareholder has not been notified by the Internal Revenue Service that such shareholder is subject to backup withholding as a result of a failure to report all interest or dividends or (ii) the Internal Revenue Service has notified such shareholder that such shareholder is no longer subject to backup withholding. WHAT NUMBER TO GIVE THE DEPOSITARY The shareholder is required to give the Depositary the social security number or employer identification number of the record holder of the Shares tendered hereby. If the Shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. If the tendering shareholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, the shareholder should write "Applied For" in the space provided for the TIN in Part I, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I and the Depositary is not provided with a TIN within 60 days, the Depositary will withhold 31% of all payments of the purchase price to such shareholder until a TIN is provided to the Depositary. 11 PAYER'S NAME: HARRIS TRUST COMPANY OF NEW YORK PART 1--PLEASE PROVIDE YOUR TIN Social Security SUBSTITUTE IN THE BOX AT RIGHT AND CERTIFY Number FORM W-9 BY SIGNING AND DATING BELOW. OR ______________ Employer Identification Number DEPARTMENT OF THE -------------------------------------------------------- TREASURY INTERNAL REVENUE SERVICE PART 2--Check the box if you are NOT subject to backup withholding under the provisions of section 3406(a)(1)(C) of the Internal Revenue Code because (1) you are exempt from backup withholding, or (2) you have not been notified that you are subject to backup withholding as a result of failure to report all interest or dividends or (3) the Internal Revenue Service has notified you that you are no longer subject to backup withholding. [_] CERTIFICATION--UNDER THE PENAL- PART 3 -- Awaiting TIES OF PERJURY, I CERTIFY THAT TIN [_] THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT, AND COMPLETE. PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) SIGNATURE ______________ DATE ___ -------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. 12 Questions and requests for assistance or for additional copies of the Offer to Purchase, the Letter of Transmittal and other tender offer materials may be directed to the Information Agent at its telephone numbers and location listed below: MORROW & CO., INC. 909 THIRD AVENUE 20TH FLOOR NEW YORK, NY 10022 (212) 754-8000 TOLL FREE (800) 566-9061 BANKS AND BROKERAGE FIRMS PLEASE CALL: (800) 662-5200 13 EX-99.A.3 4 FORM OF NOTICE OF GUARANTEED DELIVERY EXHIBIT (a)(3) NOTICE OF GUARANTEED DELIVERY FOR TENDER OF SHARES OF COMMON STOCK OF SUMMIT CARE CORPORATION TO FV-SCC ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF FOUNTAIN VIEW, INC (NOT TO BE USED FOR SIGNATURE GUARANTEES) This Notice of Guaranteed Delivery, or one substantially in the form hereof, must be used to accept the Offer (as defined below) if (i) certificates ("Share Certificates") evidencing shares of common stock, no par value per share (the "Shares"), of Summit Care Corporation, a California corporation (the "Company"), are not immediately available, (ii) time will not permit all required documents to reach Harris Trust Company of New York, as Depositary (the "Depositary"), prior to the Expiration Date (as defined in "THE TENDER OFFER--Terms of the Offer; Expiration Date" of the Offer to Purchase (as defined below)) or (iii) the procedure for book-entry transfer cannot be completed on a timely basis. This Notice of Guaranteed Delivery may be delivered by hand or transmitted by telegram, facsimile transmission or mail to the Depositary. See "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. THE DEPOSITARY FOR THE OFFER IS: HARRIS TRUST COMPANY OF NEW YORK By Mail: By Facsimile: By Hand and Overnight Courier: Wall Street Station (212) 701-7636 P.O. Box 1023 or (212) 701-7637 88 Pine Street 19th Floor New York, NY 10268-1023 Confirm Receipt of New York, NY 10005 Facsimile by Telephone: (212) 701-7624 DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THIS FORM IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE SIGNATURE BOX ON THE LETTER OF TRANSMITTAL. Ladies and Gentlemen: The undersigned hereby tenders to FV-SCC Acquisition Corp., a Delaware corporation formed by Fountain View, Inc., a Delaware corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated February 13, 1998 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), receipt of each of which is hereby acknowledged, the number of Shares specified below pursuant to the guaranteed delivery procedures described in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. Number of Shares: _____________________ Certificate Nos. (if available): __________________________________________ Check one box if Shares will be tendered by book-entry transfer to an account maintained by Harris Trust Company of New York at: the Depository Trust Company [_] Philadelphia Depository Trust Company [_] Account Number: _______________________ Dated: , 1998 Name(s) of Record Holder(s): ______________________________________________ PLEASE PRINT Address(es): ______________________________________________________________ ZIP CODE Area Code and Tel. No.: _______________ GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, hereby (a) represents that the tender of Shares effected hereby complies with Rule 14e-4 of the Securities Exchange Act of 1934, as amended, and (b) guarantees delivery to the Depositary, at one of its addresses set forth above, of certificates evidencing the Shares tendered hereby in proper form for transfer, or confirmation of book-entry transfer of such Shares into the Depositary's accounts at The Depository Trust Company or the Philadelphia Depository Trust Company with delivery of a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees, or an Agent's Message (as defined in "THE TENDER OFFER--Acceptance for Payment and Payment for Shares" of the Offer to Purchase), and any other documents required by the Letter of Transmittal within three (3) Nasdaq Stock Market, Inc. trading days after the date of execution of this Notice of Guaranteed Delivery. The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the Letter of Transmittal and certificates for Shares to the Depositary within the time period shown herein. Failure to do so could result in financial loss to such Eligible Institution. PLEASE PRINT Name of Firm: _____________________________________________________________ AUTHORIZED SIGNATURE --------------------------------------------------------------------------- ADDRESS ZIP CODE Name: _____________________________________________________________________ TITLE Area Code and Tel. No.: _____________ Date: , 1998 NOTE: DO NOT SEND SHARE CERTIFICATES WITH THIS NOTICE. SHARE CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. EX-99.A.4 5 FORM OF LETTER TO BROKERS, DEALERS ETAL. Exhibit (a)(4) OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF SUMMIT CARE CORPORATION PURSUANT TO THE OFFER TO PURCHASE DATED FEBRUARY 13, 1998 AT $21.00 NET PER SHARE BY FV-SCC ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF FOUNTAIN VIEW, INC. - -------------------------------------------------------------------------------- THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MARCH 13, 1998, UNLESS THE OFFER IS EXTENDED. - -------------------------------------------------------------------------------- February 13, 1998 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been appointed by FV-SCC Acquisition Corp., a Delaware corporation ("Purchaser"), and a wholly owned subsidiary of Fountain View, Inc., a Delaware corporation ("Parent"), to act as Dealer Manager in connection with the Purchaser's offer to purchase all outstanding shares of common stock, no par value per share (the "Shares"), of Summit Care Corporation, a California corporation (the "Company"), at a price of $21.00 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase dated February 13, 1998 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer") enclosed herewith. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER SUCH NUMBER OF SHARES WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD CONSTITUTE NOT LESS THAN 90% OF THE SHARES THEN OUTSTANDING (THE "MINIMUM CONDITION"). IN THE EVENT THE MINIMUM CONDITION IS NOT SATISFIED ON OR BEFORE THE TENTH BUSINESS DAY AFTER ALL OTHER CONDITIONS TO THE OFFER HAVE BEEN SATISFIED (THE "INITIAL EXPIRATION DATE"), (A) THE MINIMUM CONDITION SHALL BE AUTOMATICALLY AMENDED TO MEAN THAT A NUMBER OF SHARES (THE "REVISED MINIMUM NUMBER") WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD EQUAL NOT LESS THAN 49.9% OF THE SHARES THEN OUTSTANDING (CALCULATED AS OF THE INITIAL EXPIRATION DATE) SHALL HAVE BEEN VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER, AND (B) PURCHASER WILL 1 AMEND THE OFFER TO PROVIDE THAT PURCHASER WILL PURCHASE, ON A PRO RATA BASIS IN THE OFFER, THAT NUMBER OF SHARES WHICH, TOGETHER WITH THE SHARES THEN OWED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD EQUAL 49.9% OF THE SHARES THEN OUTSTANDING (CALCULATED AS OF THE INITIAL EXPIRATION DATE). For your information and for forwarding to your clients for whom you hold Shares registered in your name or in the name of your nominee, or who hold Shares registered in their own names, we are enclosing the following documents: 1. Offer to Purchase, dated February 13, 1998; 2. Letter of Transmittal to be used by holders of Shares in accepting the Offer and tendering Shares; 3. Notice of Guaranteed Delivery to be used to accept the Offer if the certificates evidencing such Shares (the "Share Certificates") are not immediately available or time will not permit all required documents to reach Harris Trust Company of New York (the "Depositary") prior to the Expiration Date (as defined in the Offer to Purchase) or the procedure for book-entry transfer cannot be completed on a timely basis; 4. A letter to shareholders of the Company from Gary L. Massimino, Chairman of the Special Committee of the Board of Directors of the Company, together with a Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission by the Company; 5. A letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer; 6. Guidelines of the Internal Revenue Service for Certification of Taxpayer Identification Number on Substitute Form W-9; and 7. Return envelope addressed to the Depositary. A complete description of the Offer and information relative thereto is contained in the foregoing materials. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will purchase, by accepting for payment, and will pay for, any and all (or in certain circumstances, the Revised Minimum Number of) Shares validly tendered prior to the Expiration Date and not withdrawn promptly after the later to occur of (i) the Expiration Date and (ii) the satisfaction or waiver of the conditions set forth in "THE TENDER OFFER-- Certain Conditions of the Offer" of the Offer to Purchase. For purposes of the Offer, Purchaser will be deemed to have accepted for payment, and thereby purchased, tendered Shares if, as and when Purchaser gives oral or written notice to the Depositary of Purchaser's acceptance of such Shares for payment. In all cases, payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of (i) the Share Certificates or timely confirmation of a book-entry transfer of such Shares, if such procedure is available, into the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company or pursuant to the procedures set forth in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase, (ii) the Letter of Transmittal (or facsimile thereof), properly completed and duly executed, or an Agent's Message (as defined in "THE TENDER OFFER--Acceptance for Payment and Payment for Shares" of the Offer to Purchase) and (iii) any other documents required by the Letter of Transmittal. Purchaser will not pay any fees or commissions to any broker or dealer or any other person (other than the Dealer Manager as described in "THE TENDER OFFER--Fees and Expenses" of the Offer to Purchase) in connection with the solicitation of tenders of Shares pursuant to the Offer. Purchaser will, however, upon request, reimburse you for customary mailing and handling expenses incurred by you in forwarding the enclosed materials to your clients. Purchaser will pay any stock transfer taxes incident to the transfer to it of validly tendered Shares, except as otherwise provided in Instruction 6 of the Letter of Transmittal. 2 YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MARCH 13, 1998, UNLESS THE OFFER IS EXTENDED. In order to take advantage of the Offer, a duly executed and properly completed Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, should be sent to the Depositary, and certificates evidencing the tendered Shares should be delivered or such Shares should be tendered by book-entry transfer, all in accordance with the instructions set forth in the Letter of Transmittal and the Offer to Purchase. If holders of Shares wish to tender Shares, but it is impracticable for them to forward their certificates or other required documents prior to the Expiration Date, a tender may be effected by following the guaranteed delivery procedures specified in "THE TENDER OFFER--Procedures for Accepting Offer and Tendering Shares" of the Offer to Purchase. Any inquiries you may have with respect to the Offer should be addressed to the Information Agent at one of its addresses and telephone numbers set forth on the back cover page of the Offer to Purchase. Additional copies of the enclosed materials may be obtained by calling the Information Agent, Morrow & Co., Inc., telephone (800) 566-9061 (Toll Free), or from brokers, dealers, commercial banks or trust companies. Very truly yours, LOGO NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS AN AGENT OF PARENT, PURCHASER, THE DEALER MANAGER, THE DEPOSITARY OR THE INFORMATION AGENT, OR ANY AFFILIATE OF ANY OF THE FOREGOING, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE DOCUMENTS ENCLOSED AND THE STATEMENTS CONTAINED THEREIN. 3 EX-99.A.5 6 FORM OF LETTER TO CLIENTS Exhibit (a)(5) OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF SUMMIT CARE CORPORATION PURSUANT TO THE OFFER TO PURCHASE DATED FEBRUARY 13, 1998 AT $21.00 NET PER SHARE BY FV-SCC ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF FOUNTAIN VIEW, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MARCH 13, 1998, UNLESS THE OFFER IS EXTENDED. February 13, 1998 To Our Clients: Enclosed for your consideration is an Offer to Purchase, dated February 13, 1998 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer") in connection with the Offer by FV-SCC Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of Fountain View, Inc., a Delaware corporation ("Parent"), to purchase all outstanding shares of common stock, no par value per share (the "Shares"), of Summit Care Corporation, a California corporation (the "Company"), at a price of $21.00 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer. Shareholders whose certificates evidencing Shares ("Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other documents required by the Letter of Transmittal to the Depositary prior to the Expiration Date (as defined in "THE TENDER OFFER--Terms of the Offer; Expiration Date" of the Offer to Purchase) or who cannot complete the procedure for delivery by book-entry transfer to the Depositary's account at a Book-Entry Transfer Facility (as defined in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase) on a timely basis and who wish to tender their Shares must do so pursuant to the guaranteed delivery procedure described in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" of the Offer to Purchase. See Instruction 2 of the Letter of Transmittal. Delivery of documents to a Book- Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures does not constitute delivery to the Depositary. THE MATERIAL IS BEING SENT TO YOU AS THE BENEFICIAL OWNER OF SHARES HELD BY US FOR YOUR ACCOUNT BUT NOT REGISTERED IN YOUR NAME. WE ARE THE HOLDER OF RECORD OF SHARES HELD BY US FOR YOUR ACCOUNT. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. 1 We request instructions as to whether you wish to have us tender on your behalf any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer. Your attention is invited to the following: 1. The tender price is $21.00 per Share, net to the seller in cash without interest. 2. The Offer and withdrawal rights will expire at 12:00 Midnight, New York City time, on Friday, March 13, 1998, unless the Offer is extended. 3. The Offer is being made for all outstanding Shares; provided, however, that if the number of Shares tendered and not withdrawn, together with the Shares owned directly or indirectly by Purchaser, is less than 90% of the Shares outstanding, the Offer will be amended to provide for the purchase, on a pro rata basis, of that number of Shares which, together with the Shares owned directly or indirectly by Purchaser, would equal 49.9% of the Shares outstanding. 4. The Board of Directors of the Company, acting on the unanimous recommendation of a special committee of independent directors of the Board of Directors of the Company, has, by the unanimous vote of all directors present with one director absent during the vote, (a) determined that the Merger Agreement and the transactions contemplated thereby (including the Offer and the Merger) are fair to and in the best interests of the Company and the shareholders of the Company, (b) approved and adopted the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, and (c) recommends the acceptance of the Offer by shareholders of the Company. 5. The Offer is conditioned upon, among other things, there being validly tendered and not withdrawn prior to the expiration of the Offer such number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would constitute not less than 90% of the Shares then outstanding (the "Minimum Condition"). In the event the Minimum Condition is not satisfied on or before the tenth business day after all other conditions to the Offer have been satisfied (the "Initial Expiration Date"), (A) the Minimum Condition shall be automatically amended to mean that a number of shares (the "Revised Minimum Number") which, together with the Shares then owned directly or indirectly by Purchaser, would equal not less than 49.9% of the Shares then outstanding (calculated as of the Initial Expiration Date) shall have been validly tendered and not withdrawn prior to the expiration of the Offer, and (B) Purchaser will amend the Offer to provide that Purchaser will purchase, on a pro rata basis in the Offer, that number of Shares which, together with the Shares then owed directly or indirectly by Purchaser, would equal 49.9% of the Shares then outstanding (calculated as of the Initial Expiration Date). 6. Tendering shareholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the purchase of Shares by Purchaser pursuant to the Offer. The Offer is made solely by the Offer to Purchase and the related Letter of Transmittal and is being made to all holders of Shares. Purchaser is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If Purchaser becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, Purchaser will make a good faith effort to comply with such state statute. If, after such good faith effort, Purchaser cannot comply with such state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by the Dealer Manager or one or more registered brokers or dealers licensed under the laws of such jurisdiction. 2 If you wish to have us tender any or all of your Shares, please so instruct us by completing, executing and returning to us the instruction form contained in this letter. An envelope in which to return your instructions to us is enclosed. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise specified on the instruction form set forth in this letter. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE OFFER. 3 INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF SUMMIT CARE CORPORATION The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase, dated February 13, 1998, and the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), in connection with the offer by FV-SCC Acquisition Corp., a Delaware corporation ("Purchaser"), a wholly owned subsidiary of Fountain View, Inc., a Delaware corporation ("Parent"), to purchase all outstanding shares of common stock, no par value per share (the "Shares"), of Summit Care Corporation, a California corporation (the "Company"). This will instruct you to tender to Purchaser the number of Shares indicated below (or, if no number is indicated in either appropriate space below, all Shares) held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer. SIGN HERE Number of Shares to ------------------------------------------- be Tendered*: ------------------------------------------- Shares Signature(s) ------------------------------------------- ------------------------------------------- Account Number: ___ Please Type or Print Name(s) Here Dated: , 1998 ------------------------------------------- Please Type or Print Address(es) Here ------------------------------------------- ------------------------------------------- Area Code And Telephone Number ------------------------------------------- Taxpayer Identification Or Social Security Number - ---------------- * Unless otherwise indicated, it will be assumed that all Shares held by us for your account are to be tendered. 4 EX-99.A.6 7 FORM OF SUBSTITUTE FORM W-9 Exhibit (a)(6) GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.-- Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer. - ----------------------------------- -----------------------------------
GIVE THE TAXPAYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF-- - --------------------------------------------- 1. An individual's account The individual 2. Two or more individuals The actual owner (joint account) of the account or, if combined funds, the first individual on the account(1) 3. Custodian account of a The minor(2) minor (Uniform Gift to Minors Act) 4.a. The usual revocable The grantor- savings trust account trustee(1) (grantor is also trustee) b. So-called trust account The actual that is not a legal or owner(1) valid trust under State law 5. Sole proprietorship The owner(3) 9. A valid trust, estate, The legal entity or pension trust (Do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(4) - ---------------------------------------------
GIVE THE TAXPAYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF-- -- 7. Corporate account The corporation 8. Religious, charitable, The organization or educational organization account 9. Partnership account The partnership 10. Association, club, or The organization other tax-exempt organization 11. A broker or registered The broker or nominee nominee 12. Account with the The public Department of entity Agriculture in the name of a public entity (such as a state or local government, school district, or prison) that receives agricultural program payments --
(1) List first and circle the name of the person whose number you furnish. If only one person on a joint account has an SSN, that person's number must be furnished. (2) Circle the minor's name and furnish the minor's social security number. (3) Show your individual name. You may also enter your business or "doing business as" name. You may use either your social security number or your employer identification number. (4) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when there is more than one name listed, the number will be considered to be that of the first name listed. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 Note: Section references are to the Internal Revenue Code unless otherwise noted. OBTAINING A NUMBER If you do not have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card (for individuals), or Form SS-4, Application for Employer Identification Number (for businesses and all other entities), at the local office of the Social Security Administration or the Internal Revenue Service (the "IRS") and apply for a number. PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING The following is a list of payees exempt from backup withholding and for which no information reporting is required. For interest and dividends, all listed payees are exempt except item (9). For broker transactions, payees listed in items (1) through (13) and a person registered under the Investment Advisors Act of 1940 who regularly acts as a broker are exempt. Payments subject to reporting under sections 6041 and 6041A are generally exempt from backup withholding only if made to payees described in items (1) through (7), except a corporation (other than certain hospitals described in Regulations section 1.6041-3(c)) that provides medical and health care services or bills and collects payments for such services is not exempt from backup withholding or information reporting. Only payees described in items (1) through (5) are exempt from backup withholding for barter exchange transactions and patronage dividends. (1) An organization exempt from tax under section 501(a), or an IRA, or a custodial account under section 403(b)(7), if the account satisfies the requirements of section 401(f)(2). (2) The United States or any of its agencies or instrumentalities. (3) A state, the District of Columbia, a possession of the United States, or any of their political subdivisions or instrumentalities. (4) A foreign government or any of its political subdivisions, agencies or instrumentalities. (5) An international organization or any of its agencies or instrumentalities. (6) A corporation. (7) A foreign central bank of issue. (8) A dealer in securities or commodities required to register in the United States, the District of Columbia or a possession of the United States. (9) A futures commission merchant registered with the Commodity Futures Trading Commission. (10) A real estate investment trust. (11) An entity registered at all times during the tax year under the Investment Company Act of 1940. (12) A common trust fund operated by a bank under section 584(a). (13) A financial institution. (14) A middleman known in the investment community as a nominee or listed in the most recent publication of the American Society of Corporate Secretaries, Inc., Nominee List. (15) A trust exempt from tax under section 664 or described in section 4947. Payments of dividends and patronage dividends that generally are exempt from backup withholding include the following: . Payments to nonresident aliens subject to withholding under section 1441. . Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident alien partner. . Payments of patronage dividends not paid in money. . Payments made by certain foreign organizations. . Section 404(k) payments made by an ESOP. Payments of interest that generally are exempt from backup withholding include the following: . Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payor. . Payments of tax-exempt interest (including exempt-interest dividends under section 852). . Payments described in section 6049(b)(5) to non-resident aliens. . Payments on tax-free covenant bonds under section 1451. . Payments made by certain foreign organizations. . Payments of mortgage interest to you. Exempt payees described above should file substitute Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER. IF YOU ARE A NON-RESIDENT ALIEN OR A FOREIGN ENTITY NOT SUBJECT TO BACKUP WITHHOLDING, FILE WITH PAYER A COMPLETED INTERNAL REVENUE FORM W-8 (CERTIFICATE OF FOREIGN STATUS). Payments that are not subject to information reporting are also not subject to backup withholding. For details, see sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A and 6050N and the regulations promulgated thereunder. PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payors who must report the payments to the IRS. The IRS uses the numbers for identification purposes. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail to furnish your correct taxpayer identification number to a requester, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.A.7 8 SUMMARY ADVERTISEMENT, WALL STREET JOURNAL EXHIBIT (a)(7) SUMMARY ADVERTISEMENT This announcement is neither an offer to purchase nor a solicitation of an offer to sell Shares (as defined below). The Offer (as defined below) is made solely by the Offer to Purchase of Purchaser dated February 13, 1998 ("Offer to Purchase") and the related Letter of Transmittal and is being made to all holders of Shares. The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. Purchaser (as defined below) may, in its discretion, however, take such action as it may deem necessary to make the Offer in any jurisdiction and extend the Offer to holders of Shares in such jurisdiction. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by one or more registered brokers or dealers licensed under the laws of such jurisdiction. NOTICE OF OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF SUMMIT CARE CORPORATION AT $21.00 NET PER SHARE BY FV-SCC ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF FOUNTAIN VIEW, INC. FV-SCC Acquisition Corp., a Delaware corporation ("Purchaser"), formed by Fountain View, Inc., a Delaware corporation ("Parent"), is offering to purchase all outstanding shares of common stock, no par value per share (the "Shares"), of Summit Care Corporation, a California corporation (the "Company"), at a price of $21.00 per Share, net to the seller in cash (the "Offer Price"), without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal (which together constitute the "Offer"). The purpose of the Offer is to enable Purchaser to acquire the entire equity interest in the Company. Following consummation of the Offer, Purchaser intends to effect the Merger (as defined below) described below. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MARCH 13, 1998, UNLESS THE OFFER IS EXTENDED. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the expiration of the Offer a number of Shares which, together with Shares then owned directly or indirectly by Purchaser would constitute not less than 90% of the outstanding Shares then outstanding (the "Minimum Condition"), (ii) any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 applicable to the purchase of the Shares pursuant to the Offer shall have expired or been terminated and (iii) the satisfaction of the other conditions described in the Offer to Purchase. The Offer is not subject to any financing contingency. In the event the Minimum Condition is not satisfied on or before the tenth business day after all other conditions to the Offer have been satisfied (the "Initial Expiration Date"), (A) the Minimum Condition shall be automatically amended to mean that a number of Shares (the "Revised Minimum Number") which, together with the Shares then owned directly or indirectly by Purchaser, would equal not less than 49.9% of the Shares then outstanding (calculated as of the Initial Expiration Date) shall have been validly tendered and not withdrawn prior to the expiration of the Offer, and (B) Purchaser will amend the Offer to provide that Purchaser will purchase, on a pro rata basis in the Offer, that number of Shares which, together with the Shares then owned directly or indirectly by Purchaser, would equal 49.9% of the outstanding Shares (calculated as of the Initial Expiration Date) (it being understood that Purchaser shall not in any event be required to accept for payment, or pay for, any Shares if less than the Revised Minimum Number of Shares are tendered pursuant to the Offer and not withdrawn at the expiration of the Offer). THE BOARD OF DIRECTORS OF THE COMPANY (THE "COMPANY BOARD"), ACTING ON THE UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS (THE "SPECIAL COMMITTEE"), BY THE UNANIMOUS VOTE OF ALL DIRECTORS PRESENT (WITH WILLIAM C. SCOTT ("MR. SCOTT"), WHO, UPON CONSUMMATION OF THE MERGER, WILL BECOME CHAIRMAN OF THE BOARD, AN EXECUTIVE OFFICER AND A SHAREHOLDER OF PARENT, ABSENT DURING THE VOTE), (A) HAS DETERMINED THAT THE MERGER AGREEMENT (AS DEFINED BELOW) AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, ARE FAIR TO AND IN THE BEST INTEREST OF THE COMPANY AND THE SHAREHOLDERS OF THE COMPANY, (B) HAS APPROVED AND ADOPTED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, AND (C) RECOMMENDS ACCEPTANCE OF THE OFFER BY SHAREHOLDERS OF THE COMPANY. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of February 6, 1998, by and among the Company, Purchaser, Parent and Heritage Fund II, L.P. (the "Merger Agreement"). The Merger Agreement provides that, among other things, as promptly as practicable after the purchase of Shares pursuant to the Offer and the satisfaction of the other conditions set forth in the Merger Agreement, and in accordance with the relevant provisions of the California General Corporation Law (the "CGCL"), Purchaser will be merged with and into the Company (the "Merger"). Following consummation of the Merger, the Company will continue as the surviving corporation (the "Surviving Corporation") and will be a wholly owned subsidiary of Parent. At the effective time of the Merger, each Share outstanding immediately prior thereto (other than Shares held by the Company or owned by Parent, or any direct or indirect wholly owned subsidiary of Parent or of the Company which will be canceled and extinguished without consideration, and other than Shares held by shareholders who shall have demanded and perfected appraisal rights under the CGCL) will be canceled and converted automatically into the right to receive the Offer Price, without interest. The Merger Agreement is more fully described in the Offer to Purchase. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), Purchaser will accept for payment and pay for all Shares validly tendered prior to the Expiration Date (as defined herein) and not withdrawn, as described in the Offer to Purchase. The term "Expiration Date" means 12:00 Midnight, New York City time, on Friday, March 13, 1998, unless and until Purchaser, in its sole discretion (but subject to the terms and conditions of the Merger Agreement), shall have extended the period during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by Purchaser, shall expire. The Offer is subject to the Minimum Condition and to certain other conditions. See the Offer to Purchase. For purposes of the Offer, Purchaser will be deemed to have accepted for payment, and thereby purchased, Shares validly tendered and not properly withdrawn if, as and when Purchaser gives oral or written notice to Harris Trust Company of New York, as Depositary (the "Depositary"), of Purchaser's acceptance of such Shares for payment. In all cases, upon the terms and subject to the conditions of the Offer, payment for Shares accepted pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering shareholders for the purpose of receiving payments from Purchaser and transmitting payments to such tendering shareholders. Under no circumstances will interest on the purchase price for Shares be paid by Purchaser, regardless of any extension of the Offer or delay in making such payment. Upon the deposit of funds with the Depositary for the purpose of making payments to tendering shareholders, Purchaser's obligation to make such payment shall be satisfied and tendering shareholders must thereafter look solely to the Depositary for payments of amounts owed to them by reason of the acceptance for payment of Shares pursuant to the Offer. Purchaser will pay any stock transfer taxes incident to the transfer to it of validly tendered Shares, except as otherwise provided in Instruction 6 of the Letter of Transmittal, as well as any charges and expenses of the Depositary and Morrow & Co., Inc., as Information Agent. Purchaser expressly reserves the right, in its sole discretion (but subject to the terms and conditions of the Merger Agreement), at any time and from time to time, to extend for any reason the period of time during which the Offer is open, including the failure of any of the conditions specified in the Offer to Purchase to be satisfied, by giving oral or written notice of such extension to the Depositary. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer, subject to the rights of a tendering shareholder to withdraw such shareholder's Shares. See the Offer to Purchase. Without the consent of the Company Board, Purchaser may (A) extend the Offer, if at the scheduled expiration date of the Offer any of the conditions to the Offer shall not have been satisfied or waived, until such time as such conditions are satisfied or waived, (B) extend the Offer for any period required for any rule, regulation, interpretation or position of the United States Securities and Exchange Commission or the staff thereof applicable to the Offer or (iii) extend the Offer for any reason on one or more occasions for an aggregate period of not more than ten (10) Business Days beyond the latest expiration date that would otherwise be permitted under clause (A) or (B) of this sentence if on such expiration date there shall not have been tendered that number of Shares which, together with Shares then owned directly or indirectly by Purchaser, would equal at least ninety percent (90%) of the Shares. Purchaser 2 shall, if all of the conditions of the Offer are not satisfied on any scheduled expiration date of the Offer, provided that all such conditions are reasonably capable of being satisfied prior to July 31, 1998, extend the Offer from time to time until such conditions are satisfied or waived. Purchaser shall not, however, be required to extend the Offer beyond July 31, 1998. Except as otherwise provided in the Offer to Purchase, tenders of Shares made pursuant to the Offer are irrevocable. Shares tendered pursuant to the Offer may be withdrawn at any time prior to 12:00 Midnight, New York City time, on Friday, March 13, 1998 (or if Purchaser shall have extended the period of time for which the Offer is open, at the latest time and date at which the Offer, as so extended by Purchaser, shall expire) and unless theretofore accepted for payment and paid for by Purchaser pursuant to the Offer, may also be withdrawn at any time after April 13, 1998. In order for a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase. Any notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn, and, if certificates for Shares have been tendered, the name of the registered holder of the Shares as set forth in the tendered certificate, if different from that of the person who tendered such Shares. If certificates for Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then prior to the physical release of such certificates, the serial numbers shown on such certificates evidencing the Shares to be withdrawn must be submitted to the Depositary and the signature on the notice of withdrawal must be guaranteed by a firm which is a bank, broker, dealer, credit union, savings association or other entity that is a member in good standing of the Securities Transfer Agent's Medallion Program (an "Eligible Institution"), unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedures for book-entry transfer set forth in Section 3 of the section of the Offer to Purchase entitled "THE TENDER OFFER", any notice of withdrawal must also specify the name and number of the account at the appropriate Book-Entry Transfer Facility to be credited with the withdrawn Shares and otherwise comply with such Book-Entry Transfer Facility's procedures. Withdrawal of tenders of Shares may not be rescinded, and any Shares properly withdrawn will be deemed not to be validly tendered for purposes of the Offer. Withdrawn Shares may, however, be retendered by repeating one of the procedures set forth in Section 3 of the section of the Offer to Purchase entitled "THE TENDER OFFER" at any time before the Expiration Date. Purchaser, in its sole judgment, will determine all questions as to the form and validity (including time of receipt) of notices of withdrawal, and such determination will be final and binding. The information required to be disclosed by Rule 14d-6(e)(1)(vii) of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. The Company has provided Purchaser with the Company's shareholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. The Offer to Purchase, the related Letter of Transmittal and other relevant materials will be mailed to record holders of Shares and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the shareholder list, or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. THE OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. Questions and requests for assistance or for additional copies of the Offer to Purchase, the Letter of Transmittal or other tender offer materials may be directed to the Information Agent at the address and telephone numbers set forth below, and copies will be furnished promptly at Purchaser's expense. No fees or commissions will be paid to brokers, dealers or other persons for soliciting tenders of Shares pursuant to the Offer. The Information Agent for the Offer is: Morrow & Co. 909 Third Avenue 20th Floor New York, NY 10022 (212) 754-8000 Banks and Brokerage Firms please call: (800) 662-5200 or TOLL-FREE (800) 566-9061 The Dealer Manager for the Offer is: SUTRO & CO. INCORPORATED 201 California Street San Francisco, CA 94111 (415) 445-8323 (310) 914-7799 February 13, 1998 4 EX-99.A.8 9 TEXT OF PRESS RELEASE EXHIBIT (a)(8) LETTERHEAD OF MORGEN-WALKE ASSOCIATES, INC. FOR: SUMMIT CARE CORPORATION APPROVED BY: William Scott Chairman, President & Chief Executive Officer (818) 841-8750 For Immediate Release CONTACT: Morgen-Walke Associates (212) 850-5600 Investor Contact: June Filingeri/Jennifer Miller Press contact: David Sassoon SUMMIT CARE ANNOUNCES TERMS OF MERGER AGREEMENT AND REPORTS FISCAL 1998 SECOND QUARTER AND SIX-MONTH RESULTS BURBANK, CA, February 9, 1998 -- Summit Care Corporation (Nasdaq: SUMC) and Fountain View, Inc., a privately-held skilled nursing care company based in Los Angeles, California today announced that they have entered into a definitive merger agreement for Fountain View to acquire Summit Care. Summit Care also announced its results for the second quarter of fiscal 1998. According to the terms of the merger agreement, Summit Care shareholders will receive $21.00 per share in cash for a total purchase price of approximately $274 million, including the assumption of approximately $130 million of Summit Care debt. On February 13, 1998, Fountain View will commence a cash tender offer for all outstanding shares of Summit Care stock at $21.00 per share. Following consummation of the tender offer, Summit Care will be merged with a wholly owned subsidiary of Fountain View, and each remaining outstanding share of Summit Care will be converted in the merger into $21.00 in cash. SUMMIT CARE ANNOUNCES TERMS AND RESULTS Page 2 Fountain View has received a commitment from Heritage Fund II, L.P. for $82 million of the equity financing necessary to complete the transaction and a bank financing commitment from Bank of Montreal covering an additional $250 million. Completion of the tender offer and the merger are subject to customary conditions to closing, including the receipt of any applicable regulatory approvals and the expiration of any applicable regulatory waiting periods. Gary L. Massimino, Chairman of the Special Committee of the Board of Directors of Summit Care, said: "After a very thorough and extensive process, we concluded that a sale of Summit Care to Fountain View for $21 in cash per share represented the best strategic alternative for Summit Care and its shareholders, and represented the highest value reasonably obtainable." The Special Committee was formed by the Summit Care Board for the purpose of considering the proposed transaction and other strategic alternatives. In connection with their deliberations regarding the transaction, Donaldson Lufkin & Jenrette, Summit Care's financial advisor, has advised both the Special Committee and the Board of Directors of Summit Care that the consideration to be received by the shareholders of Summit Care in the transaction is fair from a financial point of view. Following the merger, William C. Scott, Summit Care's Chairman and Chief Executive Officer, will join Fountain View as its Chairman and as an investor. Mr. Robert Snukal will continue as Fountain View's Chief Executive Officer. Sutro & Co. Incorporated is serving as exclusive financial advisor to Fountain View in connection with the acquisition, and will act as dealer-manager for the tender offer. Michel Reichert, Managing General Partner of Heritage Partners Inc., commented: "Our business plan of creating a large, national skilled nursing home and assisted living company is well underway with the acquisition of Summit Care by Fountain View Inc., a Heritage portfolio company since August of 1997. The two organizations have strong operating and managerial synergies and we are excited about the opportunities for our new equity investment." SUMMIT CARE ANNOUNCES TERMS AND RESULTS Page 3 Mr. Snukal said: "We at Fountain View look forward to the opportunities presented by this acquisition. Fountain View and Summit make a fine geographical fit in California, and allow us to pursue our strategy of offering high acuity care settings to our HMO customers." Mr. Scott commented: "We are very pleased by the value realized by Summit Care's shareholders as a result of this transaction. We are also pleased to be joining with Heritage Partners and Fountain View management in this new venture." Summit Care Corporation also reported results for the fiscal 1998 second quarter and six months ended December 31, 1997. For the second quarter of fiscal 1998, net income was $1,202,000, or $0.18 per share, compared with a net loss of $1,049,000, or $0.15 per share in the second quarter of 1997, which included a special charge of $2,420,000, or $0.35 per share. Basic and diluted earnings per share are the same in each respective quarter for fiscal 1998 and 1997. Revenues increased 8% to $53,972,000 compared with $50,181,000 before the special charge in last year's second quarter. For the six months of fiscal 1998, net income was $2,832,000, or $0.41 per diluted share, compared with net income for the first six months of 1997 of $516,000, or $0.08 per diluted share including the special charge. Revenues increased 10% to $108,507,000 compared with $99,088,000 before the special charge in the same period last year. In the fiscal 1998 second quarter, nursing center occupancy was 87.5%, quality mix was 67.5%, and gross specialty, subacute, and pharmacy revenues as a percentage of gross revenues was 52.6%. This compares with 84.9%, 69.5%, and 54.9% respectively for the second quarter of last year. SUMMIT CARE ANNOUNCES TERMS AND RESULTS Page 4 For the first six months of fiscal 1998, nursing center occupancy was 88.0%, quality mix was 68.3%, and gross specialty, subacute, and pharmacy revenues as a percentage of gross revenues was 53.8%. This compares with 84.5%, 69.7%, and 55.1% respectively for the first six months of last year. Commenting on the quarter, Mr. Scott said: "Our second quarter results primarily reflect a decrease in Medicare and private pay patients at ten of our California centers. The majority of this decrease occurred in October, with some improvement above October levels in November and December. Overall, results for our Texas nursing centers and pharmacy operations were ahead of the prior year in both the second quarter and six month periods." Summit Care Corporation provides quality health services including, rehabilitative care, infusion therapy and other ancillary services in 36 skilled nursing care centers and 5 assisted living centers with 5,347 beds located in California, Texas and Arizona. The Company also operates three full service pharmacies and manages sub-acute care units in acute hospitals. The preceding forward looking statements involve a number of risks and uncertainties. Among other factors that could cause actual results to differ materially are the following: the impact of future funding or policy changes adopted by Medicare or Medicaid; the impact of future Medicare audits; the impact of competition upon census and pricing (including managed care pricing pressures); changes in patient mix between Medicare, Medicaid and private pay patients; and the risk factors listed from time to time in the Company's SEC reports, including, but not limited to, the report on Form 10-K for the year ended June 30, 1997. SUMMIT CARE CORPORATION Consolidated Operating Results (In Thousands, Except Per Share Data)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31 DECEMBER 31 1997 1996/1/ 1997 1996/1/ ---- ------- ---- ------- Revenues $ 53,972 $46,181 $108,507 $95,088 Income before income taxes $ 1,986 $(1,734) $ 4,681 $ 853 Net income $ 1,202 $(1,049) $ 2,832 $ 516 ======== ======= ======== ======= Earnings per share: Basic $ 0.18 $ (0.15) $ 0.42 $ 0.08 ======== ======= ======== ======= Diluted $ 0.18 $ (0.15) $ 0.41 $ 0.08 ======== ======= ======== ======= Average number of shares outstanding: Basic 6,802 6,775 6,789 6,774 ===== ===== ===== ===== Diluted 6,860 6,841 6,835 6,854 ===== ===== ===== =====
/1/ Includes a special charge to revenues and income before income taxes of $4,000,000 and to net income of $2,420,000, or $0.35 per share. EX-99.B 10 COMMITMENT LETTER Exhibit (b) February 6, 1998 Mr. Michel Reichert Mr. Robert Snukal, President Managing General Partner Fountain View, Inc. Heritage Partners Management Company, Inc. 11900 First Olympic Blvd. 30 Rowes Wharf Suite 680 Suite 300 Los Angeles, California Boston, MA 02440 Re: $250,000,000 Credit Facilities Dear Sirs: We are pleased to advise you that Bank of Montreal ("BMO") has approved and commits to the extension of the full amount of the credit facilities (the "Facilities") as described in the attached Summary of Terms, to finance the acquisition of Summit Care Corporation, refinance certain debt of Fountain View and Summit and provide for the working capital and general corporate needs of the merged entities on the general terms and subject to the conditions set forth in this letter and in the Summary of Terms. By executing this letter, you acknowledge that this letter (including the Summary of Terms) is the only agreement between us with respect to the Facilities and sets forth the entire understanding of the parties with respect thereto and agree that you shall accept the Facilities as the exclusive financing for this transaction except as explicitly provided below. This letter and, the Summary of Terms may be changed only pursuant to a writing signed by each of the parties hereto. This commitment shall terminate, and we shall have no obligation to extend any Facility if (1) we have not received the accepted copy of this commitment together with the initial non refundable deposit on or before 5:00 p.m., Pacific Standard Time on February 6, 1998 (this commitment shall not be deemed to have been accepted in the event that you purport to accept the same subject to any change in its terms); (2) Facility A does not for any reason close by March 6, 1998; (3) any statements, information, materials, representations or warranties furnished to us in connection with the transactions contemplated hereby prove untrue or inaccurate in any respect which would have a Material Adverse Effect; or (4) there is a failure to satisfy the applicable conditions precedent specified herein or in the Summary of Terms. The term "Material Adverse Effect" means any change or effect that is or is Mr. Michel Reichert February 6, 1998 Page 2 reasonably likely to be materially adverse to the business, assets, results of operations or condition (financial or otherwise) of the applicable Borrower and its subsidiaries, taken as a whole. The determination of whether an inaccuracy or untruthfulness results in a Material Adverse Effect shall be made as though the untruthful or inaccurate information or statement had been correct when made and then changed to be as was actually the case at the time. By accepting this commitment it is agreed that BMO will be responsible for all aspects of the arrangement of the Facilities. We expect to form one or more syndicates of financial institutions and other investors (collectively with us the "Lenders") to join us in entering into the Facilities at or after closing. You agree to assist us in forming any such syndicate and to provide us and the other Lenders, promptly upon request, with all information deemed necessary by them to complete successfully the syndication, including, but not limited to (i) an information package for delivery to potential syndicate members and participants and (ii) information and projections prepared by you or your advisors relating to the transactions described herein, all as reasonably requested by us. You further agree to make the appropriate officers and representatives of the Borrowers available to participate in informational meetings for potential syndicate members and participants at such times and places as we may reasonably request. In connection with the transactions contemplated hereby, you and your representatives have furnished to us information and financial projections. You agree to supplement and update such information and projections from time to time until completion of the syndication, to the extent necessary or desired by us in our reasonable discretion. In arranging and syndicating the Facilities, we may be using and relying upon such information and projections. You further agree, whether or not the transactions contemplated hereby are closed, to indemnify and hold harmless BMO and its affiliates and each director, officer, employee and agent thereof and the other financial institutions and investors which may be offered the opportunity to participate in this financing and each affiliate and each director, officer, employee and agent thereof (the "Indemnified Parties") from and against any and all losses, claims, damages, expenses or liabilities to which any thereof may become subject, insofar as such losses, claims, damages, expenses or liabilities (or actions, suits or proceeding, including any inquiry or investigation or claims in respect thereof) arise out of, in any way relate to, or result from a claim in respect of the transactions described herein or the financing contemplated hereby (whether or not any Indemnified Party is a party to any action or proceeding out of which any such losses, claims, damages, expenses or liabilities arise), and to reimburse the Indemnified Parties, upon demand, for any reasonable expenses (legal or otherwise) incurred by any thereof or in connection with investigating, preparing to defend, defending or otherwise participating in any such claim, action or proceeding related to any such loss, claim, damage or liability, except that the you shall not be obligated to indemnify, hold harmless or reimburse an Indemnified Party for any such losses, claims, Mr. Michel Reichert February 6, 1998 Page 3 damages, expenses or liabilities to the extent that the same are determined in a final judgment by a court of competent jurisdiction to have resulted primarily from the gross negligence or willful misconduct of the Indemnified Party seeking such indemnity or from our breach of this agreement. Additionally, you agree to reimburse BMO for all costs and expenses of BMO incurred in conjunction with the negotiation, preparation, execution and delivery of the Facilities, and all costs and expenses incurred by BMO in the syndication of the Facilities or in connection with performing their due diligence in connection with the Facilities, whether or not the Facilities are closed. You agree to pay the following fees to us in consideration of our issuance of this commitment and as a condition to fundings under the contemplated facilities, such fees to be non-refundable and to be due and payable as and when specified below: First, $150,000 upon your acceptance of this commitment; Second, $150,000 upon execution of the documentation for Facility A or Facility B; Third, $900,000 upon the initial funding under Facility A; Fourth, $450,000 upon the initial funding under Facility B; Fifth, $900,000 upon the initial funding under Facility C; but if there has been no funding under Facility B, this fee shall be increased to $1,350,000; Sixth, $500,000 less any amount previously paid under clauses first and second above upon the termination of the Merger Agreement pursuant to any of the sections thereof referred to in Section 7.3(a) thereof, such fee to be payable upon (but only upon) receipt by Fountain View of compensation pursuant to Section 7.3(a) in at least such amount; and Seventh, $1,600,000 upon the funding of the Bridge Loan Tranche, subject to the limitations set forth below. The fee specified in clause Third above equals 1 1/2% of the amount of Facility A but with a credit given for fees theretofore paid under clauses First and Second, the fee specified in clause Fourth above equals 1 1/2% of the amount of Facility B, and the fee specified in clause Fifth above equals 1 1/2% of the aggregate amount of Facility C exclusive of the Bridge Loan Tranche but with a credit being given for fees theretofor paid under clauses First through Fourth and the fee specified in clause Seventh above equals 2% of the Bridge Loan Tranche. If prior to the execution of definitive documentation for any Facility you determine that your financing need which such Facility is designated to meet has been reduced and, as a consequence, the maximum amount of such Facility is reduced the fee payable with respect to such Facility shall be correspondingly reduced to equate with the principles set forth in the immediately preceding sentence. If, however, you elect to take a substitute bridge loan as discussed in the paragraph immediately following, such substitute bridge loan is in an amount greater than $80,000,000 and as a result you reduce the amount of any of the other tranches of Facility C, a fee shall still be payable in respect of the amount by which Facility C is reduced as a result of the increase in the amount of the bridge loan Mr. Michel Reichert February 6, 1998 Page 4 but such fee shall be computed at the rate of 1% as to the portion of such reduction which does not exceed $40,000,000. Those fees specified above as being payable upon the funding or documentation of a particular Facility shall also be payable upon the funding of any alternate or substitute source of financing for the funding need intended to be met by such Facility (but shall not be due and payable in the event that neither the Facility in question nor substitute or alternative financing is funded) except in the circumstances with respect to the Bridge Loan Tranche specified below. If the Facility C Borrower obtains an at least $80,000,000 bridge loan prior to the funding of the Bridge Loan Tranche and in substitution therefor, the substitute bridge loan is on economic terms more favorable to the Facility C Borrower than the Bridge Loan Tranche, requires no principal payments prior to 8-1/2 years from closing, is subject to subordination provisions acceptable to the Agent and is subject to covenants, events of default and other terms reasonably satisfactory to the Agent (the Agent acknowledging that it will evaluate such terms solely on the basis of their acceptability from the perspective of senior lenders holding the other Tranches of Facility C and you acknowledging that it would be reasonable for the Agent to require that the terms applicable to such substitute Bridge Loan be less restrictive than the equivalent terms applicable to Facility C) you shall pay BMO a fee of $600,000 upon the funding thereof and you shall then not be obligated to pay the fee for the Bridge Loan Tranche provided for in clause seventh above. This letter and our commitments hereunder are for the sole benefit of you and the Borrowers, and only you and the Borrowers may rely on this letter and our commitments contained herein. In no event shall BMO have any obligation to any other party with respect to any provision of this letter or the Summary of Terms. We are pleased to be able to offer these Facilities to you and are prepared to devote the human and other resources to these transactions which will be necessary to assure an expeditious closing. If you are in agreement with the terms of this letter, please indicate your acceptance by signing below on the enclosed copy of this letter and returning the same to us, together with the initial $150,000 fee. Very truly yours. Bank of Montreal By /s/ Daniel A. Brown Daniel A. Brown Its Managing Director Mr. Michel Reichert February 6, 1998 Page 5 By /s/ Jeffery Titus Jeffrey Titus Its Director Accepted and agreed to in all respects this 6 day of February, 1998. Heritage Partners Management Company, Inc. By /s/ T. Brook Parker Its Partner Fountain View, Inc. By /s/ Robert Snukal Its President Bank of Montreal February 1998 Everest (Summit & Fountain View)Summary of Indicative Terms & Conditions Borrowers: Facility A: A new wholly owned subsidiary ("Acquisition Sub") of Fountain View, Inc. ("Fountain View") formed for the sole purpose of acquiring the capital stock of Summit Care Corporation ("Summit Care"). Facility B: Fountain View. Facility C: Fountain View. Agent: Bank of Montreal Lenders: Syndicates of financial institutions (including the Agent) and other investors arranged by the Agent, which shall be reasonably acceptable to the Borrower and the Agent (collectively, the "Lenders"). Different syndicates may be formed for different Facilities and Tranches. Facilities and Facility Amounts: Facility A: A non-revolving stock acquisition facility in an amount equal to the lesser of (i) $80,000,000, or (ii) 50% of the fair market value of security pledged. Facility B: A $30,000,000 term loan. Facility C: An aggregate amount of up to $250,000,000 will be available as follows: Revolving Credit Tranche: $30,000,000 Revolving/Term facility with a $4.0 Million sub limit for Letters of Credit (LC's). LC's will be issued by Bank of Montreal (in such capacity, the "Fronting Bank"), and each Lender will purchase an irrevocable and unconditional participation in each LC. Term Loan One Tranche: $50,000,000 6-year term loan facility Term Loan Two Tranche: $90,000,000 8-year term loan facility Bridge Loan Tranche: $80,000,000 6 month bridge loan facility Term and Maturity: Facility A: August 7, 1998 or, if earlier, the date of merger of Acquisition Sub into Summit Care. Facility B: August 7, 1998 or, if earlier, the date of merger of Acquisition Sub into Summit Care. Revolving Credit Tranche: Six years from Closing. Term Loan One Tranche: In installments as set forth below. Final maturity six years from Closing. Term Loan Two Tranche: In installments as set forth below. Final maturity 8 years from closing. Bridge Loan Tranche: Six months from Closing, extendable upon maturity if not in default for 8 years upon payment of an extension fee equal to 3% of the amount extended. Availability/Scheduled Amortization: Revolving Credit Tranche: Loans under the Revolving Credit Facility ("Revolving Credit Loans", and together with the Term Loans, the "Loans") may be made, and Letters of Credit may be issued subject to availability under the aggregate committed amount for the Revolving Credit Facility. The Term Loans will be available in a single borrowing at Closing. The Term Loans will be subject to quarterly amortization of principal, based upon the annual amounts shown below (the Scheduled Amortization):
Tranche A Tranche B Amortization Amortization ---------------------- ------------- - ----------------------------------------------- Year 1 $ 0 $ 0 - ----------------------------------------------- Year 2 $ 5,000,000 $ 1,000,000 - ----------------------------------------------- Year 3 $ 5,000,000 $ 1,000,000 - ----------------------------------------------- Year 4 $13,333,333 $ 1,000,000 - ----------------------------------------------- Year 5 $13,333,333 $ 1,000,000 - ----------------------------------------------- Year 6 $13,333,333 $11,750,000 - ----------------------------------------------- Year 7 $ 0 $33,250,000 - ----------------------------------------------- Year 8 $ 0 $41,000,000 - ----------------------------------------------- Total $50,000,000 $90,000,000 - -----------------------------------------------
The Bridge Loan Tranche will be available in a single borrowing at Closing. Mandatory Prepayments and Commitment Reductions: Facility A: Mandatory prepayments to be made as necessary to maintain Borrowings within the Facility Amount. Facility B: None Facility C: Borrower shall prepay the loans and the commitments under the Facility which shall be reduced in amounts equal to the net cash proceeds received from: (i) 100% of Assets Sales (subject to a basket and reinvestment authority to be determined) of the Borrower or its subsidiaries; (ii) 100% of the issuance of equity securities of the Borrower or its subsidiaries. (iii) 100% of the issuance of senior debt securities of the Borrower or its subsidiaries; (iv) 100% of the issuance of subordinated debt securities; to be applied first to the reduction of the Bridge Loan Tranche, with excess applied to reduce the Term Loans. (v) 85% of excess cash flow [to be determined] if the Maximum Leverage Ratio is greater than 4.5x. Prepayments shall be applied pro rata to reduce Term Loan One and Term Loan Two and within each Term Loan pro rata with respect to each remaining installment of principal; provided however, that with respect to clause (iv) above the net cash proceeds from the Subordinated Debt shall be applied first to the Bridge Loan Tranche. Holders of the Term Loan Two notes may, so long as there is a principal balance outstanding with respect to Term Loan One, decline to accept any mandatory prepayment described above and, under such circumstances, all amounts that would otherwise be used to prepay Term Loan Two above shall be used to prepay Term Loan One. In the event the Term Loan Facilities shall have been completely repaid, the mandatory payments described above shall be applied to permanently reduce the amount available under the Revolving Credit Facility. Term Loan Two callable at a 2% premium in loan year one, 1% premium in loan year two and at par thereafter. Purpose: Proceeds of Facility A will be used to purchase shares (including those to be issued under option) of Summit Care in connection with a tender offer by Acquisition Sub. The total purchase price for all such shares and options shall not exceed $161,000,000. Proceeds of Facility B will be used to refinance indebtedness of Fountain View. Proceeds of Facility C will be used to (i) refinance Facility A and Facility B; (ii) refinance the outstanding principal balance of certain existing indebtedness of Summit Care; (iii) pay fees and expenses incurred in connection with the acquisition, merger and refinancing not to exceed $28,000,000; and (iv) to fund the working capital, and capital expenditure needs of Fountain View and its subsidiaries and for general corporate purposes. Security/Guarantees: Facility A: Perfected first lien on all capital stock of Summit acquired by the Acquisition Sub. Facility A fully guaranteed by Fountain View, with guarantee supported by Facility B collateral if but only if Facility B is activated. Facility B: Perfected first lien on equity in all Fountain View subsidiaries. Facility C: The Revolver and Term Loans will have a perfected first lien on all of the assets, both tangible and intangible, including without limitation cash, cash equivalents, inventory, accounts receivable, property, plant and equipment, intangibles, bank accounts, instruments, securities, contract rights and other agreements, and the stock of or other equity interest in all currently owned or to be acquired subsidiaries. Facility C will be fully guaranteed by all existing and future subsidiaries of Fountain View. The guarantees shall be secured by a perfected first lien on all assets of the subsidiaries. Receipt of liens on real property and leaseholds and on certain assets where a third party consent is required not a closing condition (see below). The Bridge Loan Tranche will be unsecured. Interest Rate: Facility A, Facility B and the Facility C Tranches shall bear interest and L/C fees as set forth on Addendum I hereto. If an Event of Default (as defined) has occurred and is continuing, the otherwise applicable rates shall be increased by 2.0% per annum. Special Bridge Note Provisions If the Bridge Notes are extended from their original six month maturity then on each semiannual anniversary thereof when any of the Bridge Notes are outstanding Fountain View shall issue warrants (with a nominal exercise price) to purchase common stock of Fountain View equal to the following percentages of the equity of Fountain View (on a fully diluted basis), with such warrants to have anti-dilution protection and to be the exercisable at any time within five years after issuance and with the capital stock to be received upon exercise to, if Fountain View is then a public company, be either fully registered or to be subject to one demand registration right and piggyback registration rights and with the warrant holders to have ratable tag along rights in the event of a private equity sale by the Borrower or the Heritage Group (but not transfers within the Heritage Group) and in the event of a public offering:
On each Semiannual Anniversary Date of the Warrants Equal to the Following Percentage of Equity Capital are to be Extension Delivered if the Bridge Notes are then Outstanding - -------------------------------------------------------------------------------------------------------------------- 6 Mo. 1% - -------------------------------------------------------------------------------------------------------------------- 12 Mo. 1% - -------------------------------------------------------------------------------------------------------------------- 18 Mo. 1% - -------------------------------------------------------------------------------------------------------------------- 24 Mo. 2.5% - -------------------------------------------------------------------------------------------------------------------- 30 Mo. 2.5% - -------------------------------------------------------------------------------------------------------------------- 36 Mo. 2.5% - -------------------------------------------------------------------------------------------------------------------- 42 Mo. 3.0% - -------------------------------------------------------------------------------------------------------------------- 48 Mo. 3% - -------------------------------------------------------------------------------------------------------------------- 54 Mo. 3.5% - -------------------------------------------------------------------------------------------------------------------- 60 & thereafter -0- - --------------------------------------------------------------------------------------------------------------------
The Bridge Notes shall be subordinate in right of payment to the prior payment of all other obligations in respect of Facility C pursuant to written subordination provisions acceptable to BMO. The Bridge Notes will be issued under a separate Credit or Note Purchase Agreement which will contain representations, covenants, and events of default no more restrictive than those contained in the Credit Agreement for the balance of Facility C. Commitment (Non-Use) Fee: As set forth in Addendum I hereto. Administration Fee: $50,000 per year, payable upon closing of Facility C and each anniversary thereafter. Conditions Precedent to Closing: The initial funding of the Credit Facilities will be subject to satisfaction of the following conditions precedent: Facilities A and B: 1. Acquisition Sub shall have had tendered to it that percentage of the capital stock of Summit Care as shall be required to approve a merger under applicable law and shall have accepted the tender of not less than 49.9% of the capital stock of Summit Care. 2. Acquisition Sub shall have received not less than $82,000,000 of cash equity capital. 3. Negotiation, execution and delivery of reasonably acceptable loan, security and guarantee documentation; perfection of lien on Summit Care stock. 4. Receipt of acceptable resolutions, opinions and other closing showings. 5. There shall have been no amendments to the agreement and plan of merger among Summit Care, Fountain View, Acquisition Sub and Heritage Fund II, L.P., dated as of February 6, 1998, or to the exhibits and schedules thereto in the form delivered to BMO (collectively, the "Merger Agreement"), all conditions precedent to Acquisition Sub's obligations to acquire the capital stock of Summit Care thereunder shall have been satisfied and none of such conditions shall have been waived without the consent of the BMO. Facility C: 1 The negotiation, execution and delivery of definitive documentation with respect to the Credit Facility reasonably satisfactory to the Agent. 2. All conditions to the merger of Acquisition Sub and Summit Care set forth in the Merger Agreement shall have been satisfied without waiver. 3. Consummation of the merger of Summit Care and Acquisition Sub with the survivor of such merger being a wholly owned subsidiary of Fountain View. 4. The corporate capital and ownership structure of Fountain View and subsidiaries shall be as heretofore described to the Agent. 5. Officer certification as to the financial condition and solvency of the Fountain View and its subsidiaries. 6. The Agent shall have received (a) satisfactory opinions of counsel to Fountain View and its subsidiaries(which shall cover, among other things, authority, legality, validity, binding effect and enforceability of the documents for the Credit Facility the fact that Summit Care and Acquisition Sub have merged and that any governmental approvals or consents or withholdings of objection, to the merger and change of control of Summit Care have been obtained) and such corporate resolutions, certificates and other documents as the Agent shall reasonably require and (b) satisfactory evidence that the Agent (on behalf on the Lenders) holds a perfected, first priority lien in all collateral for the Credit Facility (other than real property and leaseholds and certain assets subject to third party consents see -- "other covenants" below), subject to no other liens except for permitted liens to be determined. 7. Closing to occur and conditions set forth above to be satisfied by August 7, 1998. Representations & Warranties: (all Facilities and as to the applicable Borrower and its Subsidiaries) Usual and customary for transactions of this type, to include without limitation: (i) corporate status; (ii) corporate power and authority/enforceability; (iii) no violation of law or contracts or organizational documents; (iv) no material litigation; (v) correctness of specified financial statements and no material adverse change; (vi) no required governmental or third party approvals; (vii) use of proceeds/compliance with margin regulations; (viii) status under Investment Company Act; (ix) ERISA; (x) environmental matters; (xi) perfected liens and security interests; and (xiii) payment of taxes. Financial Covenants: (Facility C only) Facility C shall provide for the following financial covenants as to Fountain View and its Subsidiaries: 1. Maintenance on a quarterly basis of a inimum Fixed Charge Coverage Ratio (defined as EBITDAR less maintenance capital expenditures less cash taxes divided by the sum of Interest Expense plus Rental Expense plus scheduled principal repayments) of not less than 1.15 to 1. 2. Maintenance on a rolling four quarter basis of a (i) Maximum Leverage Ratio (defined as the sum of Total Adjusted Funded Debt (i.e., funded debt + 8x operating rent) divided by EBITDAR) of less than that specified below. Ratios will be tested semiannually as of June 30 and December 31 and adjusted pro- forma to include acquisitions. (ii) Senior Modified Leverage Ratio (defined as the sum of Senior Adjusted Funded Debt divided by EBITDAR) of less than that specified below:
For Test Dates Falling AdjustedTotal Debt AdjustedSenior Debt in the Period - ----------------------------------------------------------------- Closing - 12/31/98 6.75 5.0 - ----------------------------------------------------------------- 1/99 - 6/30/99 6.25 4.50 - ----------------------------------------------------------------- 7/99 - 12/99 5.75 4.25 - ----------------------------------------------------------------- 1/00 - 6/30/00 5.30 4.00 - ----------------------------------------------------------------- 7/00 - 12/31/00 5.0 3.75 - ----------------------------------------------------------------- 1/01 - 6/30/01 4.75 3.75 - ----------------------------------------------------------------- 7/01 - 12/31/01 4.50 3.25 - ----------------------------------------------------------------- Thereafter less than 4.25 less than 3.0 - -----------------------------------------------------------------
3. Maintenance at all times of a Minimum Net Worth of 90% of Net Worth as of Closing, stepping up by 75% of positive net income and 100% of the net proceeds of any equity offering (and conversions of debt into equity). Other Covenants: (all Facilities and as to the applicable Borrower and its Subsidiaries) Usual and customary for transactions of this type, to include without limitation: (i) delivery of financial statements and other reports (including submission of pro- forma convenant compliance prior to the acquisition); (ii) delivery of compliance certificates; (iii) notices of default, material litigation and material governmental and environmental proceedings; (iv) compliance with laws; (v) payment of taxes; (vi) maintenance of insurance; (vii) limitation on liens; (viii) limitations on future mergers, consolidations, joint ventures, partnerships; (ix) prohibition on sale of or substantial part of assets; (x) limitations on incurrence of debt; (xi) limitations on dividends, stock redemptions and the redemption and/or prepayment of other debt; (xii) limitations on investments and acquisitions; (xiii) limitation on capital expenditures; (xiv) ERISA; and (xv) limitation on transactions with affiliates (xvi) negative pledge with certain exceptions for equipment financing; (xvii) change of control provisions; (xviii) no amendment or waiver of conditions or terms of Merger Agreement. Debt and lien limitations in Credit Agreement for Facility B to permit present long-term capitalized lease and mortgage liabilities of existing Fountain View subsidiaries (but not the continuation of the present Union Bank facility) and a basket to be negotiated; Credit Agreement for Facility C to permit present approximately $25,300,000 of mortgages and capitalized leases plus an additional basket to be determined. Facility C Credit Agreement will also provide that Fountain View and its subsidiaries will within 60 days of the closing of Facility C provide first mortgages on all real property and leasehold interests of Fountain View and its subsidiaries, together with acceptable title insurance, environmental reports, and, if required, appraisals, all at the expense of Fountain View. BMO agrees (i) that as to properties presently mortgaged to it to secure its Summit Care credit facility, any defects or objections to title shown on title insurance policies held by BMO shall be acceptable for this financing and any environmental conditions contained in environmental reports delivered to it in connection with such financing shall be deemed acceptable (except to the extent, if any, that BMO required remediation as a condition of acceptability and Summit Care has failed to remediate as required) and (ii) only Phase 1 environmental assessments shall be required unless such Phase 1 assessments reveal the potential existence of environmental issues that will pose a threat to health and safety or to the use of the premises in question for its intended purposes or which would materially detract from the overall value of all real property to be mortgaged (in which case further environmental work and remediation may be required) and defects and objections to title not securing indebtedness and which do not detract from the ability of Fountain View and its subsidiaries to use the properties for their intended purposes or materially detract from the overall value of all real property to be mortgaged will be treated as acceptable. Up to 5 leased nursing home properties of Fountain View and its subsidiaries may be excepted from this mortgage requirement if in order to obtain such a mortgage a consent of a lessor or other party is required and Fountain View certifies that it has been unable to obtain such consent or it is unable to obtain same without payment of a fee (other than a de minimus fee in the nature of a processing fee and an ageement to pay any costs and expenses of the consenting party). The Agent acknowledges that certain other assets of the Facility C Borrower and its subsidiaries (not including receivables, inventory and equity interests in subsidiaries) may not be assignable without the consent of third parties (i.e., parties other than the Facility C Borrower and its subsidiaries) and the Agent agrees that receipt of such third party consents and the grant of liens on such assets shall not be a condition to closing or funding under Facility C. However, the Facility C Borrower and its subsidiaries will within 60 days of closing obtain such consents and provide the Agent with perfected first liens on such assets except that if such consents are unobtainable or obtainable only upon the payment of fees (other than a de minimus fee in the nature of a processing fee or agreement to reimburse the consenting party for its costs and expenses) the receipt of such consent shall be waived if the assets in question do not represent a material part (in value) of the contemplated collateral package for Facility C. The Agent further acknowledges that governmental licenses, permits and authorizations may be nonassignable and to that extent no assignment will be required if all material governmental licenses, permits and consents required to operate the business of the Facility C Borrower and its subsidiaries are held by entities all of the equity interest in which has been pledged to the Agent. Events of Default/ Remedies: (all Facilities and as to the applicable Borrower and its Subsidiaries) Usual and customary in transactions of this nature, and to include, without limitation, (i) nonpayment of principal, interest, fees or other amounts, (ii) violation of covenants (iii) inaccuracy of representations and warranties, (iv) cross-default to other material agreements and indebtedness, (v) bankruptcy, (vi) material judgments, (vii) ERISA, (viii) actual or asserted invalidity of any loan documents or security interest, (ix) change in control of the applicable Borrower or its subsidiaries. Indemnification: Customary for financings of this nature. The Borrowers shall indemnify the Lenders from the against all losses, liabilities, claims, damages or expenses relating to their loans, the Borrower's use of loan proceeds or the commitments, including but not limited to reasonable attorney's fees and settlements costs. This indemnification shall survive and continue for the benefit of the Lenders at all times after the Borrower's acceptance of the Lenders' commitment for the Credit Facility, notwithstanding any failure of the Credit Facility to close. Assignments/ Participations: Each Lender will be permitted to make assignments to other financial institutions approved by the Borrower and the Agent, which approval shall not be unreasonably withheld. Lenders will be permitted to sell participations with voting rights limited to significant matters such as changes in amount, rate, and maturity date. An assignment fee of $3,500 is payable by the Lender to the Agent upon any such assignment occurring (including, but not limited to an assignment by a Lender to another Lender). Expenses: Borrowers will pay all reasonable costs and expenses associated with the underwriting, preparation, due diligence, administration, syndication and enforcement of all documents executed in connection with the Credit Facility, including without limitation, the reasonable legal fees of the Agent's Counsel, local counsel, title insurance and search charges, and fees of environmental and appraisal experts, regardless of whether or not the Credit Facility is closed. Governing Law: Illinois (Borrower's counsel opinions as to the enforceability of loan documents may be expressed as though they were governed by California law). Agent Counsel: Chapman & Cutler, Chicago Addendum I Commitment Fee: A per annum Commitment Fee (calculated on the basis of actual number of days elapsed in a year of 360 days) on the unused portion of Facility A and the Revolving Credit Facility shall commence to accrue on the closing of Facility A and the Revolving Credit Facility respectively and shall be paid quarterly in arrears. The Commitment Fee shall be subject to the adjustments as set forth in the pricing grid below. Interest Rates: All Loans shall bear interest at a rate equal to LIBOR plus the applicable LIBOR Spread or the Alternate Base Rate (defined as the higher of (i) BMO's Base Rate and (ii) the Federal Funds rate plus 1/2%). The Borrower may select interest periods of 1, 2, 3 or 6 months for LIBOR loans, subject to availability. A penalty rate shall apply on all loans in the event of default at a rate per annum of 2% above the applicable interest rate. Facility A: Pricing for Facility A and Facility B will be that set forth for Tier I below. Facility B Pricing: The LIBOR and Alternate Base Rate margins (in basis points) for The Revolving Credit Facility and the Term Loan One Facility will be subject to performance pricing adjustments commencing from Closing, and shall be based upon the Borrower's maximum Modified Leverage Ratio, as set forth below:
Tier Modified LIBOR Base Unused Leverage Ratio Margin Rate Fee - -------------------------------------------------------- I greater than=6.00x 275.0 175.0 .50 - -------------------------------------------------------- II greater than=5.50x 250.0 150.0 .50 - -------------------------------------------------------- III greater than=5.00x 225.0 125.0 .50 - -------------------------------------------------------- IV greater than=4.50x 200.0 100.0 .50 - -------------------------------------------------------- V greater than=4.00x 175.0 75.0 .50 - --------------------------------------------------------
L/C rates would equate to the relevant pricing grid above. In addition to these L/C rates, the Borrower shall pay the Agent for its own account a per annum facing fee of .125% on the outstanding amount of all standby Letters of Credit. The standby letter of credit facing fee shall be due quarterly in arrears. Modified Leverage Ratio equals Total Funded Debt + (8 X Operating Rents)/EBITDAR Pricing on the Term Loan Two (in basis points)will be as follows:
Leverage Libor Margin - ----------- ------------ greater than = 5.00x 300.0 - ----------------------------------------- less than 5.00x 275.0 - -----------------------------------------
Bridge Loan: Pricing on the Bridge Loan Tranche will be Libor plus 5.50% for the first three months and LIBOR + 6.50% thereafter with alternate base rate margins 1% below the above. Cost and Yield Protection: The usual for transactions and facilities of this type, including, without limitation, in respect of prepayments, changes in capital adequacy and capital requirements or their interpretation, illegality, unavailability, reserves without proration or offset. DS1.391315.1 EX-99.C.1 11 AGREEMENT AND PLAN OF MERGER Exhibit (c)(1) EXECUTION COPY ================================================================================ AGREEMENT AND PLAN OF MERGER AMONG SUMMIT CARE CORPORATION, FOUNTAIN VIEW, INC., FV-SCC ACQUISITION CORP. AND HERITAGE FUND II, L.P. DATED AS OF FEBRUARY 6, 1998 ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE 1 THE OFFER......................................................... 1 Section 1.1. The Offer................................................. 1 Section 1.2. Company Action............................................ 4 Section 1.3. Boards of Directors and Committees; Section 14(f)......... 5 ARTICLE 2 THE MERGER........................................................ 6 Section 2.1. The Merger................................................ 6 Section 2.2. Effective Time............................................ 6 Section 2.3. Closing of the Merger..................................... 7 Section 2.4. Effects of the Merger..................................... 7 Section 2.5. Articles of Incorporation and Bylaws...................... 7 Section 2.6. Directors................................................. 7 Section 2.7. Officers.................................................. 7 Section 2.8. Conversion of Shares...................................... 7 Section 2.9. Shares of Dissenting Holders.............................. 8 Section 2.10. Exchange of Certificates................................. 9 Section 2.11. Company Stock Options.................................... 10 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY..................... 11 Section 3.1. Organization and Qualification; Subsidiaries.............. 11 Section 3.2. Capitalization of the Company and its Subsidiaries........ 12 Section 3.3. Authority Relative to this Agreement; Consents and Approvals............................................. 13 Section 3.4. SEC Reports; Financial Statements......................... 14 Section 3.5. Information Supplied...................................... 14 Section 3.6. Consents and Approvals; No Violations..................... 15 Section 3.7. No Default................................................ 15 Section 3.8. No Undisclosed Liabilities; Absence of Changes............ 15 Section 3.9. Litigation................................................ 16 Section 3.10. Compliance with Applicable Law........................... 16 Section 3.11. Employee Plans........................................... 17 Section 3.12. Environmental Laws and Regulations....................... 17 Section 3.13. Tax Matters.............................................. 17 Section 3.14. Brokers.................................................. 18 Section 3.15. Related Party Transactions............................... 18 Section 3.16. Restrictions on Business Activities...................... 18 Section 3.17. No Other Representations or Warranties................... 18 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION.......... 19 Section 4.1. Organization.............................................. 19 Section 4.2. Authority Relative to this Agreement...................... 19 Section 4.3. Information Supplied...................................... 20 i Page ---- Section 4.4. Consents and Approvals; No Violations..................... 20 Section 4.5. No Default................................................ 20 Section 4.6. Availability of Financing................................. 21 Section 4.7. No Prior Activities....................................... 21 Section 4.8. Brokers................................................... 21 Section 4.9. No Other Representations or Warranties.................... 21 ARTICLE 5 COVENANTS......................................................... 22 Section 5.1. Conduct of Business of the Company........................ 22 Section 5.2. Other Potential Acquirers................................. 24 Section 5.3. Access to Information..................................... 25 Section 5.4. Shareholders Meeting...................................... 25 Section 5.5. Additional Agreements; Reasonable Efforts................. 26 Section 5.6. Consents.................................................. 26 Section 5.7. Public Announcements...................................... 26 Section 5.8. Indemnification; Directors' and Officers' Insurance....... 27 Section 5.9. Notification of Certain Matters........................... 27 Section 5.10. Employee Matters......................................... 28 Section 5.11. SEC Filings.............................................. 28 Section 5.12. Guarantee of Performance................................. 29 Section 5.13. Financing Commitment..................................... 29 Section 5.14. Efforts re Other Financing Commitment.................... 29 Section 5.15. Notice of Certain Events................................. 29 Section 5.16. Parent Stock Option; Exercise; Adjustments............... 29 ARTICLE 6 CONDITIONS TO CONSUMMATION OF THE MERGER.......................... 31 Section 6.1. Conditions to Each Party's Obligations to Effect the Merger................................................ 31 ARTICLE 7 TERMINATION; AMENDMENT; WAIVER.................................... 32 Section 7.1. Termination............................................... 32 Section 7.2. Effect of Termination..................................... 33 Section 7.3. Fees and Expenses......................................... 33 Section 7.4. Amendment................................................. 35 Section 7.5. Extension; Waiver......................................... 35 ARTICLE 8 MISCELLANEOUS..................................................... 35 Section 8.1. Nonsurvival of Representations and Warranties............. 35 Section 8.2. Entire Agreement; Assignment.............................. 36 Section 8.3. Validity.................................................. 36 Section 8.4. Notices................................................... 36 Section 8.5. Governing Law............................................. 37 Section 8.6. Construction; Interpretation.............................. 37 Section 8.7. Parties in Interest....................................... 37 Section 8.8. Severability.............................................. 38 Section 8.9. Specific Performance...................................... 38 Section 8.10. Counterparts............................................. 38 ii TABLE OF DEFINED TERMS ----------------------
Term Cross Reference in Agreement Page - ---- ---------------------------- ---- Acquisition...................................... Preamble........................ 1 Acquisition Proposal............................. Section 5.2..................... 23 Agreement........................................ Preamble........................ 1 Business Day..................................... Section 1.1(a).................. 2 Certificates..................................... Section 2.10(a)................. 8 CGCL............................................. Section 1.2(a).................. 4 Closing.......................................... Section 2.3..................... 7 Closing Date..................................... Section 2.3..................... 6 Commitment....................................... Section 4.6..................... 20 Company.......................................... Preamble........................ 1 Company Board.................................... Recitals........................ 1 Company Common Stock............................. Section 2.8(a).................. 1 Company Dissenting Shares........................ Section 2.9(a).................. 8 Company ERISA Plans.............................. Section 3.11.................... 16 Company Permits.................................. Section 3.10.................... 16 Company Plan..................................... Section 2.12.................... 10 Company Securities............................... Section 3.2(a).................. 12 Company Stock Option(s).......................... Section 2.12.................... 10 DGCL............................................. Section 2.1..................... 6 Effective Time................................... Section 2.2..................... 7 Employee Severance Plan.......................... Section 3.8..................... 15 Environmental Claim.............................. Section 3.12(a)................. 17 Environmental Laws............................... Section 3.12(a)................. 16 ERISA............................................ Section 3.11.................... 16 Exchange Act..................................... Section 1.1(a).................. 2 Exchange Agent................................... Section 2.10(a)................. 8 Exercise Notice.................................. Section 5.16(a)................. 28 Financial Adviser................................ Section 1.2(a).................. 4 Governmental Entity.............................. Section 3.6..................... 14 Heritage......................................... Preamble........................ 1 HSR Act.......................................... Section 3.6..................... 14 Lien............................................. Section 3.2(b).................. 12 Material Adverse Effect (Company)................ Section 3.1(b).................. 11 Material Adverse Effect (Parent)................. Section 4.1(a).................. 18 Merger........................................... Section 2.1..................... 6 Merger Agreement................................. Recitals........................ 1 Merger Consideration............................. Section 2.8(a).................. 7 Minimum Condition................................ Section 1.1(a).................. 2 Offer............................................ Recitals........................ 1 Offer Documents.................................. Section 1.1(d).................. 3 Option Closing Date.............................. Section 5.16(d)................. 29 Option Price..................................... Section 5.16(a)................. 28
iii Term Cross Reference in Agreement Page - ---- ---------------------------- ---- Option Shares.................................... Section 5.16(a)................. 28 Parent........................................... Preamble........................ 1 Parent Option.................................... Section 5.16(a)................. 28 Per Share Amount................................. Recitals........................ 1 Proxy Statement.................................. Section 5.4(a).................. 24 Schedule 14D-9................................... Section 1.2(b).................. 4 SEC.............................................. Section 1.1(b).................. 2 SEC Reports...................................... Section 3.4(a).................. 13 Securities Act................................... Section 3.4(a).................. 13 Shareholders Meeting............................. Section 5.4(a).................. 24 Shares........................................... Section 2.8(a).................. 7 Subsidiary(ies).................................. Section 3.1(b).................. 11 Surviving Corporation............................ Section 2.1..................... 6 Taxes............................................ Section 3.13.................... 17 Third Party...................................... Section 7.3(a).................. 33 Third Party Acquisition.......................... Section 7.3(a).................. 32
iv AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of the 6th day of February, 1998 (this "Agreement"), is made by and among SUMMIT CARE CORPORATION, a California corporation (the "Company"), FOUNTAIN VIEW, INC., a Delaware corporation ("Parent"), FV-SCC ACQUISITION CORP., a Delaware corporation and a wholly owned subsidiary of Parent ("Acquisition") and, with respect to Sections 5.7, 5.13 and 5.14 hereof, HERITAGE FUND II, L.P., a Delaware limited partnership ("Heritage"). R E C I T A L S --------------- WHEREAS, the Board of Directors of the Company (the "Company Board") has, in light of and subject to the terms and conditions set forth herein, (i) determined that each of the Offer (as defined in the recitals) and the Merger (as defined in Section 2.1) is fair to, and in the best interests of, its shareholders and (ii) approved and adopted this Agreement, an Agreement of Merger in the form attached as Exhibit A (the "Merger Agreement") and the --------- transactions contemplated hereby and resolved to recommend acceptance of the Offer and approval and adoption of this Agreement by the shareholders of the Company; WHEREAS, in furtherance thereof, it is proposed that Acquisition shall commence a tender offer (the "Offer") to acquire all of the outstanding shares of common stock, no par value per share, of the Company (Company Common Stock") at a price equal to $21.00 per share (such amount, or any greater amount per share paid pursuant to the Offer, being hereinafter referred to as the "Per Share Amount"), net to the seller in cash, in accordance with the terms and subject to the conditions provided herein; A G R E E M E N T ----------------- NOW, THEREFORE, in consideration of the premises and the mutual promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company, Parent and Acquisition hereby agree as follows: ARTICLE 1 THE OFFER SECTION 1.1. THE OFFER. --------- (a) Provided that this Agreement shall not have been terminated in accordance with Section 7.1 and none of the events or conditions set forth in Annex A shall have occurred and be existing, as promptly as practicable after, - ------- but in no event later then five (5) Business Days after, the public announcement of the execution of this Agreement by the parties hereto, Acquisition shall commence (within the meaning of the Rule 14d-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Offer for all the outstanding shares of Company Common Stock, at the Per Share Amount. Acquisition shall use all commercially reasonable efforts to consummate the Offer. Acquisition shall accept for payment all outstanding shares of Company Common Stock which have been validly tendered and not withdrawn pursuant to the Offer at the earliest time following the expiration of the Offer that all conditions to the Offer shall have been satisfied or waived by Acquisition. The obligation of Acquisition to accept for payment, purchase and pay for shares of Company Common Stock tendered pursuant to the Offer shall be subject only to the conditions set forth in Annex A and to the further condition that a number of ------- shares of Company Common Stock which, together with shares of Company Common Stock then owned directly or indirectly by Acquisition, would equal not less than ninety percent (90%) of the shares of Company Common Stock then outstanding shall have been validly tendered and not withdrawn prior to the expiration date of the Offer (the "Minimum Condition"). Acquisition expressly reserves the right to increase the price per share of Company Common Stock payable in the Offer or to make any other changes in the terms and conditions of the Offer (provided that, unless previously approved by the Company in writing, no change may be made which decreases the Per Share Amount payable in the Offer, which changes the form of consideration to be paid in the Offer, which reduces the maximum number of shares of Company Common Stock to be purchased in the Offer, which imposes conditions to the Offer in addition to those set forth in Annex A or ------- which broadens the scope of such conditions except as provided in clause (c) of this Section 1.1). It is agreed that the conditions set forth in Annex A are for the sole benefit of Acquisition and may be asserted by Acquisition regardless of the circumstances giving rise to any such condition (including any action or inaction by Acquisition) or may be waived by Acquisition, in whole or in part at any time and from time to time, in its sole discretion. The failure by Acquisition at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. Any determination (which shall be made in good faith) by Acquisition with respect to any of the foregoing conditions (including, without limitation, the satisfaction of such conditions) shall be final and binding on the parties. The Per Share Amount shall be paid net to the seller in cash, less any required withholding of taxes, upon the terms and subject to such conditions of the Offer. The Company agrees that no shares of Company Common Stock held by the Company or any of its subsidiaries will be tendered in the Offer. "Business Day" means any day other than Saturday, Sunday or a federal holiday. (b) Subject to the terms and conditions hereof, the Offer shall expire at midnight, New York City time, on the date that is twenty (20) Business Days after the Offer is commenced; provided, however, that without the consent of the Company Board, Acquisition may (i) extend the Offer, if at the scheduled expiration date of the Offer any of the conditions to the Offer shall not have been satisfied or waived, until such time as such conditions are satisfied or waived, (ii) extend the Offer for any period required for any rule, regulation, interpretation or position of the Securities and Exchange Commission ("SEC") or the staff thereof applicable to the Offer or (iii) extend the Offer for any reason 2 on one or more occasions for an aggregate period of not more than ten (10) Business Days beyond the latest expiration date that would otherwise be permitted under clause (i) or (ii) of this sentence if on such expiration date there shall not have been tendered that number of shares of Company Common Stock which, together with shares of Company Common Stock then owned directly or indirectly by Acquisition, would equal at least ninety percent (90%) of the shares of Company Common Stock. Acquisition agrees that if all of the conditions to the Offer set forth in Annex A are not satisfied on any scheduled expiration date of the Offer then, provided that all such conditions are reasonably capable of being satisfied prior to July 31, 1998, Acquisition shall extend the Offer from time to time until such conditions are satisfied or waived, provided that Acquisition shall not be required to extend the Offer beyond July 31, 1998. Subject to the terms and conditions of the Offer and this Agreement, Acquisition shall accept for payment, and pay for, all shares of Company Common Stock validly tendered and not withdrawn pursuant to the Offer that Acquisition becomes obligated to accept for payment and pay for pursuant to the Offer, as promptly as practicable after the expiration of the Offer. (c) In the event that the Minimum Condition is not satisfied on or before the tenth (10th) Business Day after all other conditions set forth in Annex A ------- have been satisfied (the "Initial Expiration Date"), (i) the Minimum Condition shall be automatically amended to mean that a number of shares of Company Common Stock which, together with shares of Company Common Stock then owned directly or indirectly by Acquisition, would equal not less than forty-nine and nine-tenths percent (49.9%) of the outstanding shares of Company Common Stock (calculated as of the Initial Expiration Date) shall have been validly tendered and not withdrawn prior to the expiration date of the Offer, as extended as provided in clause (ii)(B) below, and (ii) Acquisition shall forthwith amend the Offer (A) to provide that Acquisition will purchase, on a pro rata basis in the Offer, that number of shares of Company Common Stock which, together with shares of Company Common Stock then owned directly or indirectly by Acquisition, would equal forty-nine and nine-tenths percent (49.9%) of the outstanding shares of Company Common Stock (calculated as of the Initial Expiration Date) and (B) to extend the Offer for a period of not less than ten (10) Business Days following the public announcement of such amendment of the Offer (the Offer, as so amended, being sometimes hereinafter referred to as the "49.9% Offer"). (d) As soon as practicable after the public announcement of the receipt of the Commitment and the satisfaction or waiver of the Diligence Condition, Acquisition shall file with the SEC a Tender Offer Statement on Schedule 14D-1 with respect to the Offer which will reflect the existence of this Agreement (together with any supplements or amendments thereto and any other related documents, including, if required, a Schedule 13E-3, collectively the "Offer Documents"). The Offer Documents will comply in all material respects with the provisions of applicable federal securities laws. The information provided and to be provided by the Company, Parent and Acquisition for use in the Offer Documents shall not, on the date filed with the SEC and on the date first published or sent or given to the Company's shareholders, as the case may be, 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 3 which they were made, not misleading. Parent, Acquisition and the Company each agrees to correct promptly any information provided by it for use in the Offer Documents if and to the extent that it shall have become false or misleading in any material respect and Acquisition further agrees to take all steps necessary to cause the Offer Documents as so corrected to be filed with the SEC and to be disseminated to holders of shares of Company Common Stock, in each case as and to the extent required by applicable federal securities laws and the securities laws of the State of California. SECTION 1.2. COMPANY ACTION. -------------- (a) The Company hereby approves of and consents to the Offer and represents and warrants that the Company Board, at a meeting duly called and held, has, subject to the terms and conditions set forth herein, (i) determined that this Agreement and the transactions contemplated hereby, including the Offer and the Merger, are fair to, and in the best interests of, the shareholders of the Company, (ii) approved this Agreement and the transactions contemplated hereby, including the Offer and the Merger, in all respects and that such approval constitutes approval of the Offer, this Agreement and the Merger for purposes of Section 1201 of the California General Corporation Law (the "CGCL"), and similar provisions of any other similar state statutes that might be deemed applicable to the transactions contemplated hereby, and (iii) resolved to recommend that the shareholders of the Company accept the Offer, tender their shares of Company Common Stock thereunder to Acquisition and approve and adopt this Agreement and the Merger; provided, however, that such recommendation may be withdrawn, modified or amended to the extent that the Company Board by a majority vote determines in its good faith judgment, based on the advice of counsel, that it is required to do so in the exercise of its fiduciary duties under the CGCL. The Company consents to the inclusion of such recommendation and approval in the Offer Documents. The Company further represents and warrants that Donaldson, Lufkin & Jenrette (the "Financial Adviser") has delivered to the Company Board its written opinion, dated as of the date hereof, that the cash consideration to be received by the shareholders of the Company pursuant to the Offer and the Merger is fair to such shareholders. The Company has been authorized by the Financial Adviser to permit, subject to the prior review and consent by the Financial Adviser (such consent not to be unreasonably withheld), the inclusion of the fairness opinion (or a reference thereto) in the Schedule 14D-9 and, if required, the Schedule 13E-3 (each, as defined in Section 1.2(b)). (b) Contemporaneously with the commencement of the Offer as provided in Section 1.1, the Company hereby agrees to file with the SEC a Solicitation/ Recommendation Statement on Schedule 14D-9 pertaining to the Offer (together with any amendments or supplements thereto, the "Schedule 14D-9") containing the recommendation described in Section 1.2(a), and to promptly mail the Schedule 14D-9 to the shareholders of the Company. The Schedule 14D-9 will comply in all material respects with the provisions of applicable federal securities laws and, on the date filed with the SEC and on the date first published, sent or given to the Company's shareholders, shall not 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 4 of the circumstances under which they were made, not misleading, except that no representation is made by the Company with respect to information supplied by Parent or Acquisition in writing for inclusion in the Schedule 14D-9. The Company, Parent and Acquisition each agrees to correct promptly any information provided by it for use in the Schedule 14D-9 if and to the extent that it shall have become false or misleading in any material respect and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and disseminated to the holders of shares of Company Common Stock, in each case as and to the extent required by applicable federal securities laws. Notwithstanding anything to the contrary in this Agreement, if the Company Board by majority vote determines in its good faith judgment, based on the advice of counsel, that it is required in the exercise of its fiduciary duties to withdraw, modify or amend the recommendation of the Board, such withdrawal, modification or amendment shall not constitute a breach of this Agreement, provided that the Company complies with the provisions of Section 7.3. (c) In connection with the Offer, the Company will promptly furnish to Parent and Acquisition mailing labels, security position listings and any available listing or computer files containing the names and addresses of the record holders of shares of Company Common Stock as of a recent date and shall furnish Acquisition with such additional information and assistance (including, without limitation, updated lists of shareholders, mailing labels and lists of securities positions) as Acquisition or its agents may reasonably request in communicating the Offer to the record and beneficial holders of shares of Company Common Stock. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Merger, Parent, Acquisition and their affiliates, associates, agents and advisors shall use the information contained in any such labels, listings and files only in connection with the Offer and the Merger, and, if this Agreement shall be terminated, will deliver to the Company all copies of such information then in their possession. SECTION 1.3. BOARDS OF DIRECTORS AND COMMITTEES; SECTION 14(F). ------------------------------------------------- (a) Promptly upon the purchase by Acquisition of shares of Company Common Stock pursuant to the Offer and from time to time thereafter, Acquisition shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Company Board as will give Acquisition representation on the Company Board equal to the product of the number of directors on the Board (giving effect to any increase in the number of directors pursuant to this Section 1.3) and the percentage that such number of shares of Company Common Stock so purchased bears to the total number of outstanding shares of Company Common Stock on a fully diluted basis, and the Company shall use its reasonable best efforts to, upon request by Acquisition, promptly, at the Company's election, either increase the size of the Board or secure the resignation of such number of directors as is necessary to enable Acquisition's designees to be elected to the Company Board and to cause Acquisition's designees to be so elected. At such times, the Company will use its reasonable best efforts to cause persons designated by Acquisition to constitute the same percentage as is on the Company Board of (i) each 5 committee of the Company Board (other than any committee of the Company Board established to take action under this Agreement), (ii) each board of directors of each subsidiary of the Company and (iii) each committee of each such board. Notwithstanding the foregoing, Parent and Acquisition agree that, until the consummation of the Merger, Parent and Acquisition will not cause the removal of Messrs. Brende, Casey or Massimino from the Board of Directors of the Company and shall permit such persons to remain as members of the Special Committee of the Board of Directors responsible for addressing on behalf of the Company any issues that arise under this Agreement between the Company, on the one hand, and Parent and Acquisition, on the other hand. (b) The Company's obligation to appoint designees to the Company Board shall be subject to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The Company shall promptly take all action required pursuant to such Section and Rule in order to fulfill its obligations under this Section 1.3 and shall include in the Schedule 14D-9 such information with respect to the Company and its officers and directors as is required under such Section and Rule in order to fulfill its obligations under this Section 1.3. Acquisition will furnish to the Company in writing and be solely responsible for any information with respect to itself and its nominees, officers, directors and affiliates required by such Section and Rule. (c) Following the election or appointment of Acquisition's designees pursuant to this Section 1.3 and prior to the Effective Time, if there shall be any directors of the Company who were directors as of the date hereof, any amendment of this Agreement, any termination of this Agreement by the Company, any extension by the Company of the time for the performance of any of the obligations or other acts of Acquisition or Parent or waiver of any of the Company's rights hereunder, will require the concurrence of a majority of such directors. ARTICLE 2 THE MERGER SECTION 2.1. THE MERGER. At the Effective Time (as defined below) and ---------- upon the terms and subject to the conditions of this Agreement and the Merger Agreement and in accordance with the CGCL and the Delaware General Corporation Law (the "DGCL"), Acquisition shall be merged with and into the Company (the "Merger"). Following the Merger, the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation"), and the separate corporate existence of Acquisition shall cease. SECTION 2.2. EFFECTIVE TIME. Subject to the terms and conditions set -------------- forth in this Agreement, on the Closing Date (as defined in Section 2.3), the Merger Agreement shall be duly executed and acknowledged by Acquisition and the Company and thereafter delivered to the Secretary of State of the State of California for filing pursuant to the CGCL, and a Certificate of Merger in such form as required by, and executed in accordance with, the relevant provisions of the DGCL shall be filed with the Secretary of State of the State of Delaware. The Merger shall become effective upon the later to occur 6 of such filings (the time the Merger becomes effective being referred to herein as the "Effective Time"). SECTION 2.3. CLOSING OF THE MERGER. The closing of the Merger (the --------------------- "Closing") shall take place at a time and on a date to be specified by the parties, which shall be no later than the second Business Day after satisfaction (or waiver) of the latest to occur of the conditions precedent set forth in Article 6 (the "Closing Date"), at the offices of Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, California 90071, unless another time, date or place is agreed to in writing by the parties. SECTION 2.4. EFFECTS OF THE MERGER. The Merger shall have the effects --------------------- set forth in the CGCL and the DGCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and Acquisition shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Acquisition shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 2.5. ARTICLES OF INCORPORATION AND BYLAWS. The Articles of ------------------------------------ Incorporation of the Company in effect at the Effective Time shall be the Articles of Incorporation of the Surviving Corporation until amended in accordance with applicable law. The Bylaws of the Company in effect at the Effective Time shall be the Bylaws of the Surviving Corporation until amended in accordance with applicable law. SECTION 2.6. DIRECTORS. The directors of Acquisition at the Effective --------- Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation until such director's successor is duly elected or appointed and qualified. SECTION 2.7. OFFICERS. The officers of Acquisition at the Effective -------- Time shall be the initial officers of the Surviving Corporation, each to hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation until such officer's successor is duly elected or appointed and qualified. SECTION 2.8. CONVERSION OF SHARES. -------------------- (a) At the Effective Time, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (individually a "Share" and, collectively, the "Shares") (other than (i) Shares held by the Company or any subsidiaries of the Company, (ii) Shares held by Parent, Acquisition or any other subsidiary of Parent and (iii) Company Dissenting Shares (as defined in Section 2.9(a))) shall, by virtue of the Merger and without any action on the part of Parent, Acquisition, the Company or the holder thereof, be converted into and shall become the right to receive a cash payment per Share, without interest, equal to the Per Share Amount (the "Merger Consideration") upon the surrender of the certificate representing such Share. 7 (b) At the Effective Time, each issued and outstanding share of the common stock, par value $21.00 per share, of Acquisition shall be converted into one share of common stock, no par value per share, of the Surviving Corporation. (c) At the Effective Time, each Share held by the Company as treasury stock or held by Parent, Acquisition or any subsidiary of Parent, Acquisition or the Company immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of Parent, Acquisition, the Company or the holder thereof, be canceled, retired and cease to exist, and no consideration shall be delivered with respect thereto. SECTION 2.9. SHARES OF DISSENTING HOLDERS. ---------------------------- (a) Notwithstanding anything to the contrary contained in this Agreement, any holder of Shares with respect to which dissenters' rights, if any, are granted by reason of the Merger under the CGCL and who does not vote in favor of the Merger and who otherwise complies with Chapter 13 of the CGCL ("Company Dissenting Shares") shall not be entitled to receive any Merger Consideration pursuant to Section 2.8(a), unless such holder fails to perfect, effectively withdraws or loses his or her right to dissent from the Merger under the CGCL. Such holder shall be entitled to receive only the payment provided for by Chapter 13 of the CGCL. If any such holder so fails to perfect, effectively withdraws or loses his or her dissenters' rights under the CGCL, each Company Dissenting Share of such holder shall thereupon be deemed to have been converted, as of the Effective Time, into the right to receive the Per Share Amount pursuant to Section 2.8(a). (b) Any payments relating to Company Dissenting Shares shall be made solely by the Surviving Corporation and no funds or other property have been or will be provided by Acquisition, Parent or any of Parent's other direct or indirect subsidiaries for such payment, nor shall the Company make any payment with respect to, or settle or offer to settle, any such demands. (c) The Company shall give Acquisition prompt notice of any demands received by the Company for the payment of fair value for shares, and Acquisition shall have the right to participate in all negotiations and proceedings with respect to such demands. SECTION 2.10. EXCHANGE OF CERTIFICATES. ------------------------ (a) ChaseMellon Shareholder Services, or another bank or trust company designated by Parent and reasonably acceptable to the Company, shall act as the exchange agent (in such capacity, the "Exchange Agent"), for the benefit of the holders of Shares, for the exchange of a certificate or certificates which immediately prior to the Effective Time represented Shares (the "Certificates") that were converted into the right to receive the Per Share Amount pursuant to Section 2.8(a), all in accordance with this Article 2. Parent will make available to the Exchange Agent from time to time the Merger Consideration to be paid in respect of the Shares. 8 (b) As soon as reasonably practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of 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 Exchange Agent and shall be in such form and have such other provisions as Parent and the Company may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for a cash payment of the proper Merger Consideration pursuant to Section 2.8(a). Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by Parent and Acquisition, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor by check an amount equal to (A) the Per Share Amount, multiplied by (B) the number of Shares represented by such Certificate, which such holder has the right to receive pursuant to the provisions of this Article 2, and the Certificate so surrendered shall forthwith be canceled. No interest shall be paid or accrued on any Merger Consideration upon the surrender of any Certificates. In the event of a transfer of ownership of Shares which is not registered in the transfer records of the Company, payment of the proper Merger Consideration may be paid to a transferee if the Certificate representing such Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer or other taxes required as a result of such payment to a Person other than the registered holder of such shares have been paid. Until surrendered and exchanged as contemplated by this Section 2.10, each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender an amount equal to (A) the Per Share Amount, multiplied by (B) the number of Shares represented by such Certificate, as contemplated by this Section 2.10. (c) In the event that any Certificate shall have been lost, stolen or destroyed, the Exchange Agent shall pay, upon the making of an affidavit of that fact by the holder thereof, the proper Merger Consideration as may be required pursuant to this Section 2.10, provided, however, that Parent may, in its discretion, require the delivery of a suitable bond and/or indemnity. (d) The Merger Consideration paid upon the surrender for exchange of Shares in accordance with the terms hereof shall be deemed to have been paid in full satisfaction of all rights pertaining to such Shares, subject, however, to the Surviving Corporation's obligation to pay any dividends or make any other distributions with a record date prior to the Effective Time which may have been declared or made by the Company on such Shares in accordance with the terms of this Agreement or prior to the date hereof and which remain unpaid at the Effective Time, and there shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of the Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article 2. (e) Any portion of the Merger Consideration which remains undistributed to the shareholders of the Company for six months after the Effective Time shall be delivered 9 to Parent, upon demand, and any shareholders of the Company who have not theretofore complied with this Article 2 shall thereafter look only to Parent for payment of their claim for any Merger Consideration. (f) Notwithstanding Section 2.11(e), neither Parent nor the Company shall be liable to any holder of Shares for any Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (g) Any amounts remaining unclaimed by holders of Shares two years after the Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity) shall to the extent permitted by applicable law, become the property of Parent free and clear of any claim or interest of any Person previously entitled thereto. (h) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 2.10(a) to pay for shares for which dissenters' rights have been perfected shall be returned to the Parent upon demand. SECTION 2.11. COMPANY STOCK OPTIONS. --------------------- (a) At the Effective Time, each outstanding option to purchase shares of Company Common Stock (a "Company Stock Option" or collectively, "Company Stock Options") issued pursuant to the Summit Care Corporation Stock Option Plan, as amended, of the Company (the "Company Plan"), whether vested or unvested, shall be converted into and shall become the right to receive a cash payment per Company Stock Option, without interest, determined by multiplying (i) the excess, if any, of the Per Share Amount over the applicable per share exercise price of such Company Stock Option (without taking into account whether such Company Stock Option was in fact exercisable at such time), by (ii) the number of shares of Company Common Stock into which such Company Stock Option was exercisable immediately prior to the Effective Time (less any amounts required to be deducted pursuant to any applicable income and employment tax withholding requirements). At the Effective Time, all Company Stock Options (including those options with an exercise price equal to or in excess of the Per Share Amount) shall be canceled and be of no further force or effect except for the right to receive cash to the extent provided in this Section 2.12. Prior to the Effective Time, the Company shall take all actions (including, if appropriate, amending the terms of the Company Plan) that are necessary to give effect to the transactions contemplated by this Section 2.12. (b) As soon as practicable after the Effective Time (but no later than thirty (30) days following the Effective Time), Parent shall establish a procedure to effect the surrender of Company Stock Options in exchange for the cash payment to which the holder of a Company Stock Option shall be entitled under Section 2.11(a), and, upon surrender of such Company Stock Option, Parent shall pay to the holder thereof in cash the amount, if any, to which such holder shall be entitled thereunder. 10 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Acquisition as follows: SECTION 3.1. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. -------------------------------------------- (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted. (b) Except as publicly disclosed by the Company (which, for all purposes of this Agreement, means disclosed in filings with the SEC made prior to the date hereof), the Company has no equity interests in any corporations, partnerships, limited liability companies, trusts or similar business entities. Each of the subsidiaries listed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1997 (each a "Subsidiary" and, collectively, "Subsidiaries") is a corporation or a limited partnership, as the case may be, duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a Material Adverse Effect (as defined below) on the Company. When used in connection with the Company or its Subsidiaries, the term "Material Adverse Effect" means any change or effect that is or is reasonably likely to be materially adverse to the business, assets, results of operations or condition (financial or otherwise) of the Company and its Subsidiaries taken as whole, other than any change or effect arising out of general economic conditions unrelated to any businesses in which the Company or any of its Subsidiaries is engaged. (c) Each of the Company and its Subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have, individually or in the aggregate, a Material Adverse Effect on the Company. (d) The Company has heretofore delivered to Acquisition or Parent accurate and complete copies of the Articles of Incorporation and Bylaws, as currently in effect, of the Company. 11 SECTION 3.2. CAPITALIZATION OF THE COMPANY AND ITS SUBSIDIARIES. -------------------------------------------------- (a) The authorized capital stock of the Company consists of: 100,000,000 shares of Company Common Stock, of which, as of December 31, 1997, 6,812,500 shares of Company Common Stock were issued and outstanding, and 2,000,000 shares of preferred stock, no par value per share, no shares of which are issued. All of the shares of Company Common Stock have been validly issued, and are fully paid, nonassessable and free of preemptive rights. As of December 31, 1997, approximately 909,500 shares of Company Common Stock were reserved for issuance and issuable upon or otherwise deliverable in connection with the exercise of outstanding Company Stock Options issued pursuant to the Company Plan. Since December 31, 1997, no shares of the Company's capital stock have been issued other than pursuant to Company Stock Options already in existence on such date, and, since December 31, 1997, no stock options have been granted. Except as set forth above, there are outstanding (i) no shares of capital stock or other voting securities of the Company, (ii) no securities of the Company or its Subsidiaries convertible into or exchangeable for shares of capital stock or voting securities of the Company, (iii) no options or other rights to acquire from the Company or its Subsidiaries, and no obligations of the Company or its Subsidiaries to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company, and (iv) no equity equivalents, interests in the ownership or earnings of the Company or its Subsidiaries or other similar rights (collectively, "Company Securities"). There are no outstanding obligations of the Company or its Subsidiaries to repurchase, redeem or otherwise acquire any Company Securities. (b) Except as set forth on Schedule 3.2(b) of the disclosure schedule delivered by the Company to Parent concurrently herewith (the "Disclosure Schedule") or as publicly disclosed by the Company, all of the outstanding capital stock of each Subsidiary is owned by the Company, directly or indirectly, free and clear of any Lien (as hereinafter defined) or any other limitation or restriction (including any restriction on the right to vote or sell the same, except as may be provided as a matter of law). There are no securities of the Company or its Subsidiaries convertible into or exchangeable for, no options or other rights to acquire from the Company or its Subsidiaries, and no other contract, understanding, arrangement or obligation (whether or not contingent) providing for the issuance or sale, directly or indirectly, of any capital stock or other ownership interests in, or any other securities of, any Subsidiary. There are no outstanding contractual obligations of the Company or its Subsidiaries to repurchase, redeem or otherwise acquire any outstanding shares of capital stock or other ownership interests in any Subsidiary. For purposes of this Agreement, "Lien" means, with respect to any asset (including, without limitation, any security) any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. (c) The Company Common Stock constitutes the only class of equity securities of the Company registered or required to be registered under the Exchange Act. 12 SECTION 3.3. AUTHORITY RELATIVE TO THIS AGREEMENT; CONSENTS AND APPROVALS. ------------------------------------------------------------ (a) The Company has all necessary corporate power and authority to execute and deliver this Agreement and the Merger Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the Merger Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the Company Board and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or the Merger Agreement or to consummate the transactions contemplated hereby or thereby (other than, with respect to the Merger, the approval and adoption of this Agreement and the Merger Agreement by the holders of a majority of the then outstanding shares of Company Common Stock). This Agreement has been duly and validly executed and delivered by the Company and constitutes a valid, legal and binding agreement of the Company, enforceable against the Company in accordance with its terms. (b) The Company Board has duly and validly approved, and taken all corporate actions required to be taken by the Company Board for the consummation of, the transactions, including the Offer and the Merger, contemplated hereby and by the Merger Agreement, and resolved to recommend that the shareholders of the Company approve and adopt this Agreement and the Merger Agreement; provided, however, that such approval and recommendation may be withdrawn, modified or amended in the event that the Company Board by majority vote determines in its good faith judgment, based on the advice of counsel, that the Board is required to do so in the exercise of its fiduciary duties under the CGCL. SECTION 3.4. SEC REPORTS; FINANCIAL STATEMENTS. --------------------------------- (a) The Company has filed all required forms, reports and documents with the SEC since June 30, 1995 (the "SEC Reports"), each of which has complied in all material respects with all applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the Exchange Act, each as in effect on the dates such forms, reports and documents were filed. The Company has delivered to Acquisition or Parent, in the form filed with the SEC (including any amendments thereto), (i) its Annual Reports on Form 10-K for each of the fiscal years ended June 30, 1996 and 1997, (ii) all definitive proxy statements relating to the Company's meetings of shareholders (whether annual or special) held since June 30, 1995, and (iii) all other reports or registration statements filed by the Company with the SEC since June 30, 1995. None of such forms, reports or documents, including, without limitation, any financial statements or schedules included or incorporated by reference therein, contained, when filed, any untrue statement of a material fact or omitted 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. The consolidated financial statements of the Company and its Subsidiaries included in the Annual Reports on Form 10-K referred to in the second sentence of this Section 3.4(a) and the unaudited 13 consolidated interim financial statements of the Company and its Subordinaries included in the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 fairly present, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of the Company and its Subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended (subject, in the case of the unaudited interim financial statements, to normal year-end adjustments). (b) The Company has heretofore made available to Acquisition or Parent a complete and correct copy of any amendments or modifications, which have not yet been filed with the SEC, to agreements, documents or other instruments which previously had been filed by the Company with the SEC pursuant to the Exchange Act. SECTION 3.5. INFORMATION SUPPLIED. None of the information supplied or -------------------- to be supplied by the Company for inclusion or incorporation by reference in the Offer Documents, the Schedule 13E-3 or the Proxy Statement or provided by the Company in the Schedule 14D-9 will, at the respective times that the Offer Documents, the Proxy Statement, the Schedule 13E-3 and the Schedule 14D-9 or any amendments or supplements thereto are filed with the SEC and are first published or sent or given to holders of Shares, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. SECTION 3.6. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for filings, ------------------------------------- permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Act, the Exchange Act, state securities or blue sky laws, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and applicable health care laws (federal, state and local), the filing and recordation of the Merger Agreement as required by the CGCL and the filing and recordation of a Certificate of Merger as required by the DGCL, no filing with or notice to, and no permit, authorization, consent or approval of, any court or tribunal or administrative, governmental or regulatory body, agency or authority (a "Governmental Entity") is necessary for the execution and delivery by the Company of this Agreement or the Merger Agreement or the consummation by the Company of the transactions contemplated hereby or thereby, except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings or give such notice would not have a Material Adverse Effect on the Company. Neither the execution, delivery and performance of this Agreement or the Merger Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby or thereby will (a) conflict with or result in any breach of any provision of the Articles of Incorporation or Bylaws (or similar governing documents) of the Company, (b) except as set forth on Schedule 3.6 of the Disclosure Schedule, result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement 14 or other instrument or obligation to which the Company or any of its Subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound, or (c) violate any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Company or any of its Subsidiaries or any of their respective properties or assets, except in the case of (b) or (c) for violations, breaches or defaults which would not have, individually or in the aggregate, a Material Adverse Effect on the Company. SECTION 3.7. NO DEFAULT. None of the Company or its Subsidiaries is in ---------- default or violation (and no event has occurred which with notice or the lapse of time or both would constitute a default or violation) of any term, condition or provision of (a) its Articles of Incorporation or Bylaws (or similar governing documents), (b) any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which the Company or any of its Subsidiaries is now a party or by which any of them or any of their respective properties or assets may be bound or (c) any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Company, its Subsidiaries or any of their respective properties or assets, except in the case of (b) or (c) for violations, breaches or defaults that would not have, individually or in the aggregate, a Material Adverse Effect on the Company. SECTION 3.8. NO UNDISCLOSED LIABILITIES; ABSENCE OF CHANGES. Except as ---------------------------------------------- publicly disclosed, as of September 30, 1997, none of the Company or its Subsidiaries had any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that would be required by generally accepted accounting principles to be reflected on a consolidated balance sheet of the Company and its Subsidiaries (including the notes thereto) or which would have, individually or in the aggregate, a Material Adverse Effect on the Company. Except as publicly disclosed by the Company, except for the adoption of the Summit Care Corporation Special Severance Pay Plan, a copy of which has been provided to Acquisition or Parent (the "Employee Severance Plan") and except as set forth on Schedule 3.8 of the Disclosure Schedule, since September 30, 1997, none of the Company or its Subsidiaries has incurred any liabilities of any nature, whether or not accrued, contingent or otherwise, which would have, and there have been no events, changes or effects with respect to the Company or its Subsidiaries having, individually or in the aggregate, a Material Adverse Effect on the Company. Except as publicly disclosed, except as disclosed on Schedule 3.8 and Schedule 5.1 of the Disclosure Schedule and except for the acquisition of the Briarcliff Nursing and Rehabilitation Center located at or near McAllen, Texas and the adoption of the Employee Severance Plan, since September 30, 1997, the Company and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been any event, occurrence or development or state of circumstances or facts as described in Sections 5.1(a) through 5.1(l). SECTION 3.9. LITIGATION. Except as publicly disclosed by the Company, ---------- there is no suit, claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries or any of their respective properties or assets before any Governmental Entity which would have a Material Adverse Effect on the Company or would prevent or delay the consummation of 15 the transactions contemplated by this Agreement. Except as publicly disclosed by the Company, none of the Company or its Subsidiaries is subject to any outstanding order, writ, injunction or decree which, insofar as can be reasonably foreseen in the future, would have, individually or in the aggregate, a Material Adverse Effect on the Company or would prevent or delay the consummation of the transactions contemplated hereby. SECTION 3.10. COMPLIANCE WITH APPLICABLE LAW. Except as publicly ------------------------------ disclosed by the Company, the Company and its Subsidiaries hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental Entities necessary for the lawful conduct of their respective businesses (the "Company Permits"), except for failures to hold such permits, licenses, variances, exemptions, orders and approvals which would not have, individually or in the aggregate, a Material Adverse Effect on the Company. Except as publicly disclosed by the Company, the Company and its Subsidiaries are in compliance with the terms of the Company Permits, except where the failure so to comply would not have a Material Adverse Effect on the Company. Except as publicly disclosed by the Company, the businesses of the Company and its Subsidiaries are not being conducted in violation of any law, ordinance or regulation of any Governmental Entity except that no representation or warranty is made in this Section 3.10 with respect to Environmental Laws (as defined in Section 3.12) and except for violations or possible violations which do not, and, insofar as reasonably can be foreseen, in the future will not have, individually or in the aggregate, a Material Adverse Effect on the Company. Except as publicly disclosed by the Company, no investigation or review by any Governmental Entity with respect to the Company or its Subsidiaries is pending or, to the best knowledge of the Company, threatened, nor, to the best knowledge of the Company, has any Governmental Entity indicated an intention to conduct the same, other than, in each case, those which the Company reasonably believes will not have a Material Adverse Effect on the Company. SECTION 3.11. EMPLOYEE PLANS. Except as publicly disclosed by the -------------- Company, and except for the Employee Severance Plan, there are no "employee benefit plans" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), maintained or contributed to by the Company or its Subsidiaries ("Company ERISA Plans"). The Company ERISA Plans are in compliance with the applicable provisions of ERISA and the Code, except for instances of non-compliance that would not have, individually or in the aggregate, a Material Adverse Effect on the Company. SECTION 3.12. ENVIRONMENTAL LAWS AND REGULATIONS. ---------------------------------- (a) Except as publicly disclosed by the Company, (i) each of the Company and its Subsidiaries is in compliance with all applicable federal, state and local laws and regulations relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) (collectively, "Environmental Laws"), except for non-compliance that would not have a Material Adverse Effect on the Company, which compliance includes, but is not limited to, the possession by the Company and its Subsidiaries of all material permits and other governmental authorizations required under applicable Environmental 16 Laws, and compliance with the terms and conditions thereof; (ii) since July 1, 1992, none of the Company or its Subsidiaries has received written notice of, or, to the best knowledge of the Company, is the subject of, any material action, cause of action, claim, investigation, demand or notice by any person or entity alleging liability under or non-compliance with any Environmental Law (an "Environmental Claim"); and (iii) to the best knowledge of the Company, there are no circumstances that are reasonably likely to prevent or interfere with such material compliance in the future. (b) Except as publicly disclosed by the Company, there are no Environmental Claims which would have a Material Adverse Effect on the Company that are pending or, to the best knowledge of the Company, threatened against the Company or its Subsidiaries or, to the best knowledge of the Company, against any person or entity whose liability for any Environmental Claim the Company or any of its Subsidiaries has or may have retained or assumed either contractually or by operation of law. SECTION 3.13. TAX MATTERS. The Company and its Subsidiaries have ----------- accurately prepared and duly filed with the appropriate federal, state, local and foreign taxing authorities all tax returns, information returns and reports required to be filed with respect to the Company and its Subsidiaries and have paid in full or made adequate provision for the payment of all Taxes (as defined below). Neither the Company nor any of its Subsidiaries is delinquent in the payment of any Taxes. As used herein, the term ("Taxes") means all federal, state, local and foreign taxes, including, without limitation, income, profits, franchise, employment, transfer, withholding, property, excise, sales and use taxes (including interest and penalties thereon and additions thereto). SECTION 3.14. BROKERS. No broker, finder or investment banker (other ------- than the Financial Advisor and the Company's former financial advisor, SBC Warburg Dillon Read, true and correct copies of whose engagement agreements have been provided to Acquisition or Parent) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of the Company. SECTION 3.15. RELATED PARTY TRANSACTIONS. Since June 30, 1995, neither -------------------------- the Company nor any officer or director of the Company has engaged in any transactions required to be disclosed by the Company in its SEC Reports pursuant to Item 404 of Regulation S-K promulgated under the Exchange Act, except as have been publicly disclosed by the Company or disclosed herein. SECTION 3.16. RESTRICTIONS ON BUSINESS ACTIVITIES. There is no ----------------------------------- judgment, injunction, order or decree binding upon the Company or any of its Subsidiaries which has or could reasonably be expected to have the effect of prohibiting or materially impairing any business practice of the Company or any of its Subsidiaries, any acquisition of property by the Company or any of its Subsidiaries or the conduct of business by the Company or any of its Subsidiaries as currently conducted. 17 SECTION 3.17. NO OTHER REPRESENTATIONS OR WARRANTIES. No -------------------------------------- representations or warranties have been made by or on behalf of the Company or any of its Subsidiaries in connection with the Merger and the transactions contemplated by this Agreement other than those expressly set forth in this Article 3. Without limiting the generality of the foregoing, no representations or warranties are being made with respect to financial projections or the future financial performance or prospects of the Company, its Subsidiaries or their respective businesses. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND ACQUISITION Parent and Acquisition hereby represent and warrant to the Company as follows: SECTION 4.1. ORGANIZATION. ------------ (a) Each of Parent and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its businesses as now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a Material Adverse Effect (as defined below) on Parent. When used in connection with Parent or Acquisition, the term "Material Adverse Effect" means any change or effect that is or is reasonably likely to be materially adverse to the business, assets, results of operations or condition (financial or otherwise) of Parent and its subsidiaries, taken as a whole, other than any change or effect arising out of general economic conditions unrelated to any businesses in which Parent or any of its subsidiaries is engaged. (b) Parent has heretofore delivered to the Company accurate and complete copies of the Articles of Incorporation and Bylaws, as currently in effect, of Parent and Acquisition. Each of Parent and its subsidiaries is duly qualified or licensed and in good standing to do business in each jurisdiction in which the property owned, leased or operated by it or the nature of the business conducted by it makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing would not have a Material Adverse Effect on Parent. SECTION 4.2. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and ------------------------------------ Acquisition has all necessary corporate power and authority to execute and deliver this Agreement and the Merger Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the Merger Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by the boards of directors of Parent and Acquisition and by Parent as the sole shareholder of Acquisition, and no other corporate proceedings on the part of Parent or Acquisition are necessary to authorize this Agreement or the Merger Agreement or to consummate the transactions contemplated hereby or thereby. This Agreement has 18 been duly and validly executed and delivered by each of Parent and Acquisition and constitutes a valid, legal and binding agreement of each of Parent and Acquisition, enforceable against each of Parent and Acquisition in accordance with its terms. SECTION 4.3. INFORMATION SUPPLIED. None of the information supplied or -------------------- to be supplied by Heritage, Parent or Acquisition for inclusion or incorporation by reference in the Offer Documents, the Schedule 14D-9, the Schedule 13E-3, or the Proxy Statement will, at the respective times that the Offer Documents, the Schedule 14D-9, the Schedule 13E-3, the Proxy Statement, or any amendments or supplements thereto, are filed with the SEC and are first published or sent or given to holders of shares of Company Common Stock, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. Section 4.4. CONSENTS AND APPROVALS; NO VIOLATIONS. Assuming the truth ------------------------------------- and accuracy of the Company's representations and warranties contained in Section 3.6, except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Act, the Exchange Act, state securities or blue sky laws, the HSR Act and applicable state health care laws, the filing and recordation of the Merger Agreement as required by the CGCL and the filing and recordation of a Certificate of Merger as required by the DGCL, no filing with or notice to, and no permit, authorization, consent or approval of, any Governmental Entity is necessary for the execution and delivery by Parent or Acquisition of this Agreement or the Merger Agreement or the consummation by Parent or Acquisition of the transactions contemplated hereby or thereby, except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings or give such notice would not have a Material Adverse Effect on Parent or on the ability of Parent or Acquisition to consummate the Offer or the Merger. Neither the execution, delivery and performance of this Agreement or the Merger Agreement by Parent or Acquisition nor the consummation by Parent or Acquisition of the transactions contemplated hereby or thereby will (i) conflict with or result in any breach of any provision of the respective certificate or articles of incorporation or Bylaws (or similar governing documents) of Parent or Acquisition or any of Parent's subsidiaries, (b) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Parent or Acquisition or any of Parent's subsidiaries is a party or by which any of them or any of their respective properties or assets may be bound or (c) violate any order, writ, injunction, decree, law, statute, rule or regulation applicable to Parent or Acquisition or any of Parent's subsidiaries or any of their respective properties or assets, except in the case of (b) or (c) for violations, breaches or defaults which would not have a Material Adverse Effect on Parent or on the ability of Parent or Acquisition to consummate the Offer or the Merger. SECTION 4.5. NO DEFAULT. None of Parent or any of its subsidiaries is ---------- in default or violation (and no event has occurred which with notice or the lapse of time or both 19 would constitute a default or violation) of any term, condition or provision of (a) its certificate or articles of incorporation or Bylaws (or similar governing documents), (b) any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Parent or any of its subsidiaries is now a party or by which any of them or any of their respective properties or assets may be bound or (c) any order, writ, injunction, decree, law, statute, rule or regulation applicable to Parent, its subsidiaries or any of their respective properties or assets, except in the case of (b) or (c) for violations, breaches or defaults that would not have a Material Adverse Effect on Parent. SECTION 4.6. AVAILABILITY OF FINANCING. Parent and Acquisition have ------------------------- received a valid and enforceable commitment from Heritage to provide $82 million of the funds necessary to purchase shares of Company Common Stock in the Offer and/or the Merger, which commitment is conditioned only upon the satisfaction of Parent's and Acquisition's conditions to consummation of the Offer contained herein and the other conditions specified in Section 5.13. Parent and Acquisition have received a commitment letter from Bank of Montreal, a copy of which is attached hereto as Exhibit B (the "Commitment"), covering not less than --------- $248 million of the funds necessary to purchase all of the shares of Company Common Stock outstanding on a fully diluted basis in the Offer and/or the Merger, to refinance existing Company and Subsidiary indebtedness and to pay any and all of the costs and expenses incurred and to be incurred by Parent and Acquisition in connection with the transactions contemplated by this Agreement. Parent hereby guaranties the performance by Acquisition of its obligations under this Agreement. SECTION 4.7. NO PRIOR ACTIVITIES. Except for obligations incurred in ------------------- connection with its incorporation or organization, the making of the Offer or the negotiation and consummation of this Agreement and the transactions contemplated hereby, Acquisition has neither incurred any obligation or liability or engaged in any business or activity of any type or kind whatsoever or entered into any agreement or arrangement with any person or entity. SECTION 4.8. BROKERS. Except for Sutro & Co., no broker, finder or ------- investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of Parent or Acquisition. SECTION 4.9. NO OTHER REPRESENTATIONS OR WARRANTIES. No -------------------------------------- representations or warranties are made by or on behalf of Parent or Acquisition in connection with the transactions contemplated by this Agreement other than those expressly set forth in this Article 4. Without limiting the generality of the foregoing, no representations or warranties are being made with respect to financial projections or the future financial performance or prospects of Parent, Acquisition or their businesses. 20 ARTICLE 5 COVENANTS SECTION 5.1. CONDUCT OF BUSINESS OF THE COMPANY. Except as ---------------------------------- contemplated by this Agreement, during the period from the date hereof to the Effective Time, the Company Board will not permit the Company or its any of its Subsidiaries to conduct their operations otherwise than in the ordinary course of business consistent with past practice. Without limiting the generality of the foregoing, and except as otherwise expressly provided in this Agreement, prior to the Effective Time, the Company will not, without the prior written consent of Parent or Acquisition, and will not permit any of its Subsidiaries to: (a) amend its Articles of Incorporation or Bylaws (or other similar governing instrument); (b) amend or modify (except as contemplated herein) the terms of the Company Plan or authorize for issuance, issue, sell, deliver or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to purchase or otherwise) any stock of any class or any other securities or equity equivalents (including, without limitation, any stock options or stock appreciation rights), except for the issuance or sale of shares of Company Common Stock pursuant to the exercise of Company Stock Options; (c) split, combine or reclassify any shares of its capital stock, declare, set aside or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock, or redeem or otherwise acquire any Company Securities or any securities of its Subsidiaries; (d) except in connection with the exercise of purchase options under existing leases, (i) incur or assume any long-term or short-term debt or issue any debt securities, except for borrowings under existing lines of credit in the ordinary course of business and in amounts not material to the Company and its Subsidiaries taken as a whole and except for indebtedness not exceeding $250,000 in the aggregate; (ii) except as described in Schedule 5.1 of the Disclosure Schedule, assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person, except in the ordinary course of business consistent with past practice and in amounts not material to the Company and its Subsidiaries taken as a whole and except for obligations of its Subsidiaries; (iii) except for investments not exceeding $500,000 in the aggregate, make any loans, advances or capital contributions to, or investments in, any other person (other than to its Subsidiaries of the Company or customary loans or advances to employees in the ordinary course of business consistent with past practice and in amounts not material to the maker of such loan or advance); (iv) except as described in Schedule 5.1 of the Disclosure Schedule, pledge or otherwise encumber shares of capital stock of the Company or its Subsidiaries; or (v) except as described in Schedule 5.1 of the Disclosure Schedule, mortgage or pledge any of its 21 material assets, tangible or intangible, or create or suffer to exist any material Lien thereupon except for Liens securing indebtedness not exceeding $250,000 in the aggregate; (e) except as may be required by law or as contemplated by this Agreement and except in connection with the hiring of officers (to replace any officer who retires or is terminated for any reason) or employees in the ordinary course of business, enter into, adopt or amend or terminate any bonus, profit sharing, compensation, severance, termination, stock option, stock appreciation right, restricted stock, performance unit, stock equivalent, stock purchase agreement, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement, trust, plan, fund or other arrangement for the benefit or welfare of any director, officer or employee in any manner, or (except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expense to the Company, except as required under existing agreements and except for the payment of bonuses and severance payments in the ordinary course of business generally consistent with past practice) increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan and arrangement as in effect as of the date hereof (including, without limitation, the granting of stock appreciation rights or performance units); (f) except as described in Schedule 5.1 of the Disclosure Schedule or with the consent of Parent or Acquisition, which consent will not be unreasonably withheld, acquire, sell, lease or dispose of any assets outside the ordinary course of business or any assets which have a value in excess of $5.0 million; (g) except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting principles or practices used by it; (h) except in connection with the exercise of purchase options under existing leases, (i) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or any equity interest therein (except for transactions having an aggregate value not exceeding $500,000 in the aggregate); (ii) authorize or make any new capital expenditure or expenditures which, individually, is in excess of $250,000 or, in the aggregate, are in excess of $1.0 million; provided, however, that none of the foregoing shall limit any capital expenditure already included in the Company's 1998 capital expenditure budget previously provided to Parent or Acquisition; or (iii) enter into or amend any contract, agreement, commitment or arrangement providing for the taking of any action that would be prohibited hereunder; (i) make any tax election or settle or compromise any income tax liability material to the Company and its Subsidiaries taken as a whole; 22 (j) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business of liabilities reflected or reserved against in, or contemplated by, the consolidated financial statements (or the notes thereto) of the Company and its Subsidiaries at September 30, 1997 or incurred in the ordinary course of business consistent with past practice; (k) settle or compromise any pending or threatened suit, action or claim relating to the transactions contemplated hereby; or (l) take, or agree in writing or otherwise to take, any of the actions described in Sections 5.1(a) through 5.1(k) or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue or incorrect as of the date when made. SECTION 5.2. OTHER POTENTIAL ACQUIRERS. The Company, its affiliates and ------------------------- their respective officers, directors, employees, representatives and agents shall immediately cease any existing discussions or negotiations, if any, with any parties (other than the parties to this Agreement) conducted heretofore with respect to any offer or proposal for a merger or other business combination involving the Company or any of its Subsidiaries or the acquisition of all or any material portion of the assets of, or any equity interest in, the Company or its Subsidiaries or any business combination with the Company or its Subsidiaries (each an "Acquisition Proposal"). The Company may, directly or indirectly, furnish information and access, in each case only in response to unsolicited requests therefor, to any corporation, partnership, limited liability company or other entity or group pursuant to confidentiality agreements on terms no less favorable to the Company than the confidentiality agreement that has been entered into by and between the Company and Parent, and may participate in discussions and negotiate with such entity or group concerning any merger, sale of assets, sale of shares of capital stock or similar transaction involving the Company or any Subsidiary or division thereof, if such entity or group has submitted a written proposal to the Company Board relating to any such transaction and the Company Board by a majority vote determines in its good faith judgment, based on the advice of counsel, that it is required to do so in the exercise of its fiduciary duties under the CGCL. The Company Board shall promptly (and in no event later than 24 hours after receipt of the relevant Acquisition Proposal) notify (which notice shall be provided orally and in writing and shall identify the Person making the relevant Acquisition Proposal and set forth material terms thereof) Acquisition after (i) the Company has received any Acquisition Proposal or (iii) one of Messrs. Brende, Casey or Massimino has actual knowledge that any Person has taken concrete steps that could reasonably be expected to result in an Acquisition Proposal, and thereafter shall keep Parent and Acquisition promptly advised of any development with respect thereto. Except as set forth above, neither the Company or any of its affiliates, nor any of its or their respective officers, directors, employees, representatives or agents, shall, directly or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information to, any corporation, partnership, limited liability company or other entity or group (other than Parent and Acquisition, any affiliate or associate of Parent and 23 Acquisition or any designees of Parent and Acquisition) concerning any merger, sale of assets, sale of shares of capital stock or similar transaction involving the Company, any Subsidiary or any division of the Company or any Subsidiary; provided, however, that nothing herein shall prevent the Company Board from taking, and disclosing to the Company's shareholders, a position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender offer; and provided further, however, that nothing herein shall prevent the Board from making such disclosure to the Company's shareholders as, in the good faith judgment of the Company Board, is required in the exercise of its fiduciary duties under the CGCL, provided that the Company complies with the provisions of Section 7.3. SECTION 5.3. ACCESS TO INFORMATION. --------------------- (a) Between the date hereof and the Effective Time, the Company will provide to Parent and Acquisition and their authorized representatives reasonable access to all employees, plants, offices, warehouses and other facilities and to all books and records of the Company and its Subsidiaries, will permit Parent and Acquisition to make such inspections as Parent and Acquisition may reasonably require and will cause the Company's officers and those of its subsidiaries to furnish Parent and Acquisition with such financial and operating data and other information with respect to the business and properties of the Company and its Subsidiaries as Parent or Acquisition may from time to time reasonably request. (b) Each of Parent and Acquisition will hold and will cause its consultants and advisors to hold in confidence all documents and information concerning the Company and its Subsidiaries furnished to Parent or Acquisition in connection with the transactions contemplated by this Agreement pursuant to the terms of that certain Confidentiality Agreement entered into between the Company and Heritage dated October 31, 1997. SECTION 5.4. SHAREHOLDERS MEETING. -------------------- (a) If a vote of the Company's shareholders is required by law, the Company will, as promptly as practicable following the acceptance for payment of shares of Company Common Stock by Acquisition pursuant to the Offer, take, in accordance with applicable law and its articles of incorporation and by-laws, all action necessary to convene a meeting of holders of shares of Company Common Stock (the "Shareholders Meeting") to consider and vote upon the approval of this Agreement. The Company shall, promptly following the acceptance for payment of shares of Company Common Stock by Parent pursuant to the Offer, prepare and file with the SEC a proxy statement for the solicitation of a vote of holders of shares of Company Common Stock approving the Merger (the "Proxy Statement"), which shall include the recommendation of the Company Board that shareholders of the Company vote in favor of the approval and adoption of this Agreement and the written opinion of the Financial Advisor that the cash consideration to be received by the shareholders of the Company pursuant to the Merger is fair to such shareholders from a financial point of view. The Company shall use all reasonable efforts to have the Proxy Statement cleared by the SEC as promptly as practicable after such 24 filing, and promptly thereafter mail the Proxy Statement to the shareholders of the Company. The Company shall also use its best efforts to obtain all necessary state securities law or "blue sky" permits and approvals required in connection with the Merger and to consummate the other transactions contemplated by this Agreement and will pay all expenses incident thereto. Notwithstanding the foregoing, if Parent, Acquisition and/or any other subsidiary of Parent shall acquire at least 90% of the outstanding shares of Company Common Stock, the parties shall take all necessary and appropriate action to cause the Merger to become effective as soon as practicable after the expiration of the Offer without a Shareholders Meeting in accordance with Section 1110 of the CGCL. (b) Parent and Acquisition agree to cause all shares of Company Common Stock purchased pursuant to the Offer and all other shares of Company Common Stock owned by Parent, Acquisition or any Subsidiary of Parent to be voted in favor of the Merger. SECTION 5.5. ADDITIONAL AGREEMENTS; REASONABLE EFFORTS. Subject to the ----------------------------------------- terms and conditions herein provided, each party agrees to use all commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things reasonably necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, (a) cooperation in the preparation and filing of the Offer Documents, the Schedule 14D-9, the Schedule 13E-3, the Proxy Statement, any filings that may be required under the HSR Act and any amendments thereto; (b) the taking of all action reasonably necessary, proper or advisable to secure any necessary consents under existing debt obligations of the Company and its Subsidiaries or to amend the notes, indentures or agreements relating thereto to the extent required by such notes, indentures or agreements or redeem or repurchase such debt obligations; (c) contesting any legal proceeding relating to the Offer or the Merger and (d) the execution of any additional instruments, including the Merger Agreement, necessary to consummate the transactions contemplated hereby. Subject to the terms and conditions of this Agreement, Parent and Acquisition agree to use all reasonable efforts to cause the Effective Time to occur as soon as practicable after the shareholder vote with respect to the Merger. In case at any time after the Effective Time any further action is necessary to carry out the purposes of this Agreement, the proper officers and directors of each party hereto shall take all such necessary action. SECTION 5.6. CONSENTS. Parent, Acquisition and the Company each will -------- use all commercially reasonable efforts to obtain consents of all third parties and Governmental Entities necessary, proper or advisable for the consummation of the transactions contemplated by this Agreement. SECTION 5.7. PUBLIC ANNOUNCEMENTS. Parent, Acquisition and the Company, -------------------- as the case may be, will consult with one another before issuing any press release or otherwise making any public statements with respect to the transactions contemplated by this Agreement, including, without limitation, the Offer or the Merger, and shall not issue any such press release or make any such public statement prior to such consultation, 25 except as may be required by applicable law or by obligations pursuant to any listing agreement with the New York Stock Exchange, Inc. or the NASDAQ Stock Market, as determined by Parent, Acquisition or the Company, as the case may be. SECTION 5.8. INDEMNIFICATION; DIRECTORS' AND OFFICERS' INSURANCE. --------------------------------------------------- (a) Parent and Acquisition agree that all rights to indemnification or exculpation now existing in favor of the directors, officers, employees and agents of the Company and its Subsidiaries as provided in their respective charters or bylaws (or other similar governing instruments) or otherwise in effect as of the date hereof with respect to matters occurring prior to the Effective Time shall survive the Merger and shall continue in full force and effect. To the maximum extent permitted by the CGCL, such indemnification shall be mandatory rather than permissive and the Surviving Corporation shall advance expenses in connection with such indemnification (subject to the Surviving Corporation's receipt of an undertaking by the indemnified party to return such advanced expenses to the Surviving Corporation if it is determined by a final, non-appealable order of a court of competent jurisdiction that such indemnified party is not entitled to retain such advanced expenses). (b) Parent shall cause the Surviving Corporation to maintain in effect for not less than three (3) years from the Effective Time the policies of the directors' and officers' liability and fiduciary insurance most recently maintained by the Company (provided that the Surviving Corporation may substitute therefor policies of at least the same coverage containing terms and conditions which are no less advantageous to the beneficiaries thereof so long as such substitution does not result in gaps or lapses in coverage) with respect to matters occurring prior to the Effective Time; provided, however, that in satisfying its obligation under this Section, the Surviving Corporation shall not be obligated to pay premiums in excess of 150% of the amount per annum incurred by the Company in the twelve months ended December 31, 1997 with respect to such insurance, which amount has been disclosed to Parent. (c) In the event the Surviving Corporation or its successor (i) is consolidated with or merges into another 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 other person in a single transaction or a series of related transactions, then in each such case Parent shall make or cause to be made proper provision so that the successor or transferee of the Surviving Corporation shall comply in all material respect with the terms of this Section 5.8. SECTION 5.9. NOTIFICATION OF CERTAIN MATTERS . The Company shall give ------------------------------- prompt notice to Parent and Acquisition, and Parent and Acquisition shall give prompt notice to the Company, of (a) the occurrence or nonoccurrence of any event the occurrence or nonoccurrence of which would be likely to cause any representation or warranty of the notifying party contained in this Agreement to be untrue or inaccurate in any material respect as if made at the Effective Time and (b) any material failure of the notifying party to comply with or satisfy any covenant, condition or agreement to be complied with or 26 satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 5.9 shall not cure such breach or non-compliance or limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 5.10. EMPLOYEE MATTERS. ---------------- (a) Employees of the Company and its Subsidiaries shall be treated after the Merger no less favorably under Parent ERISA Plans, to the extent applicable, than other similarly situated employees of Parent and its subsidiaries. (b) For a period of one year following the Merger, Parent shall and shall cause its subsidiaries to maintain with respect to their employees who had been employed by the Company or any of its Subsidiaries prior to the Effective Time and who remain employed following the Effective Time (i) base salary or regular hourly wage rates for each such employee at not less than the rate applicable immediately prior to the Merger to such employee, and (ii) employee benefits (as defined for purposes of Section 3(3) of ERISA), other than stock option plans) which are substantially comparable in the aggregate to such employee benefits provided by the Company and its Subsidiaries immediately prior to the Merger. (c) To the extent they participate under such plans, Parent and its subsidiaries shall credit employees of the Company and its Subsidiaries for purposes of determining eligibility to participate or vesting under Parent ERISA Plans with their service prior to the Merger with the Company and its Subsidiaries to the same extent such service was counted under similar benefit plans of the Company prior to the Merger. (d) Parent and Acquisition agree to, and agree to cause the Surviving Corporation to, honor the Company's obligations to employees under the Employee Severance Plan. (e) Except as provided in paragraph (d), above, nothing contained herein shall be construed as requiring Parent or the Surviving Corporation to continue any specific plans or to continue the employment of any specific person. SECTION 5.11. SEC FILINGS. Each of Parent and the Company shall ----------- promptly provide the other party (or its counsel) with copies of all filings made by the other party or any of its subsidiaries with the SEC or any other state or federal Governmental Entity in connection with this Agreement and the transactions contemplated hereby. SECTION 5.12. GUARANTEE OF PERFORMANCE. Parent hereby guarantees the ------------------------ performance by Acquisition of its obligations under this Agreement and the indemnification obligations of the Surviving Corporation pursuant to Section 5.8(a). SECTION 5.13. FINANCING COMMITMENTS. Subject only to the satisfaction --------------------- of Parent's and Acquisition's conditions to consummation of the Offer contained herein, Heritage hereby agrees to provide to Parent and Acquisition not later than the purchase 27 under the Offer $82 million of the funds necessary to purchase shares of Company Common Stock in the Offer and/or the Merger. SECTION 5.14. EFFORTS RE OTHER FINANCING COMMITMENT. Parent, ------------------------------------- Acquisition and Heritage agree to use their commercially reasonable efforts to consummate the transactions contemplated by the Commitment and to obtain the funding contemplated thereunder and, if the Commitment is terminated for any reason, then promptly to obtain another commitment letter or letters or similar documents covering at least the same amount of funds and for the same purpose, containing conditions excusing funding that are at least as restrictive on the issuer of such commitment letter or letters as those contained in Exhibit B with --------- respect to Bank of Montreal. SECTION 5.15. NOTICE OF CERTAIN EVENTS. The Company shall ------------------------ promptly notify Acquisition, and Acquisition shall promptly notify the Company, of: (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; and (c) with respect only to the Company, any actions, suits, claims, investigations or proceedings commenced or, to the best of its knowledge, threatened which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.9 or which relate to the consummation of the transactions contemplated by this Agreement. SECTION 5.16. PARENT STOCK OPTION; EXERCISE; ADJUSTMENTS. ------------------------------------------ (a) Subject to the terms and conditions set forth herein, the Company hereby grants to Parent an irrevocable option (the "Parent Option") to purchase up to that number of authorized and unissued shares of Company Common Stock equal to 19.99% of the shares of Company Common Stock outstanding immediately prior to the exercise of the Parent Option (the "Option Shares") at a purchase price of $21.00 per Option Share (the "Option Price"). Subject to the conditions set forth in subsection (c) below, the Parent Option may be exercised by Parent, in whole or in part, at any time or from time to time after the date on which Parent has accepted for payment the shares of Company Common Stock tendered pursuant to the Offer and prior to the termination of this Agreement pursuant to Article 7. If Parent wishes to exercise the Parent Option, Parent shall send a written notice to the Company (the "Exercise Notice") specifying a date (not earlier than the next Business Day following the date such notice is given) for the closing of such purchase and containing a representation by Parent that upon the issuance and delivery of the Option Shares, there will be no further conditions precedent that need to be satisfied for Parent and Acquisition to purchase shares of Company Common Stock in the 28 Offer, and that Parent and Acquisition will take all actions required on their respective parts to purchase shares of Company Common Stock in the Offer. (b) In the event of any change in the number of issued and outstanding shares of Company Common Stock outstanding by reason of any stock dividend, stock split, split-up, recapitalization, merger or other change in the corporate or capital structure of the Company, the number of Option Shares and the Option Price shall be appropriately adjusted to restore Parent to its rights hereunder. (c) The Company's obligation to issue and deliver the Option Shares upon exercise of the Parent Option is subject only to the following conditions: (i) No preliminary or permanent injunction or other order issued by any federal or state court of competent jurisdiction in the United States prohibiting the delivery of the Option Shares shall be in effect; (ii) Any applicable waiting periods under the HSR Act, or other applicable United States or foreign Laws shall have expired or been terminated; and (iii) The number of Option Shares plus the number of shares of Company Common Stock accepted for payment by Parent pursuant to the Offer will, upon issuance of the Option Shares, constitute at least ninety percent (90%) of the issued and outstanding shares of Company Common Stock (provided, however, that, if the 49.9% Offer is in effect, the condition contained in this clause (iii) will be deemed satisfied if, after the Offer has been consummated and prior to the consummation of the Merger, any Company Stock Options have been exercised and, upon exercise of the Parent Option, the number of Option Shares to be purchased plus the number of shares of Company Common Stock purchased by Parent pursuant to the Offer and the number of shares of Company Common Stock then owned directly or indirectly by Parent will, upon issuance of the Option Shares, constitute 49.9% of the issued and outstanding shares of Company Common Stock). (d) Any closing hereunder shall take place on the date specified by Parent in its Exercise Notice delivered pursuant to subsection (a) above at 9:00 a.m., California time, or the first day thereafter on which all of the conditions in subsection (c) above are met, at the office of Company's counsel, or at such other time and place as the parties may agree (the "Option Closing Date"). On the Option Closing Date, the Company will deliver to Parent a certificate or certificates representing the Option Shares in the denominations designated by Parent in its Exercise Notice and Parent will purchase such Option Shares from the Company at a price per Option Share equal to the Option Price. Any payment made by Parent to the Company pursuant to this subsection (d) shall be made (i) by certified, cashier's or bank check or by wire transfer of immediately available funds to an account designated by the Company or (ii) by the delivery of a promissory note in the amount of the purchase price adequately secured by collateral other than the Option 29 Shares as required by Section 409 of the CGCL. The certificates representing the Option Shares may bear an appropriate legend relating to the fact that such Option Shares have not been registered under the Securities Act. ARTICLE 6 CONDITIONS TO CONSUMMATION OF THE MERGER SECTION 6.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER ----------------------------------------------------------- . The respective obligations of each party to effect the Merger is subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) this Agreement shall have been approved and adopted by the requisite vote of the shareholders of the Company; (b) no statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or enforced by any United States court or United States governmental authority which prohibits, restrains, enjoins or restricts the consummation of the Merger; (c) any waiting period applicable to the Merger and the other transactions described in the recitals to this Agreement under the HSR Act shall have terminated or expired, and any other governmental or regulatory notices or approvals required with respect to the transactions contemplated hereby shall have been either filed or received; and (d) Acquisition shall have purchased the shares of Company Common Stock pursuant to the Offer. ARTICLE 7 TERMINATION; AMENDMENT; WAIVER SECTION 7.1. TERMINATION. This Agreement may be terminated and the ----------- Offer and the Merger may be abandoned at any time prior to the Effective Time: (a) by mutual written consent of Parent, Acquisition and the Company; (b) by Parent or Acquisition or the Company if any court of competent jurisdiction in the United States or other United States governmental authority shall have issued a final order, decree or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Offer or the Merger and such order, decree, ruling or other action is or shall have become nonappealable; (c) by Parent and Acquisition if, on or prior to July 31, 1998, due to an occurrence or circumstance which would result in a failure to satisfy any of the conditions set forth in Annex A, Acquisition shall have (i) terminated the Offer ------- or (ii) failed to pay for 30 shares of Company Common Stock pursuant to the Offer; provided, however, that the right to terminate this Agreement pursuant to this clause (c) shall not be available to Parent or Acquisition if either of them has breached in any material respect its obligations under this Agreement in any manner that shall have proximately contributed to the failure referenced in this clause (c); (d) by the Company if, by July 31, 1998, Acquisition shall have failed to pay for the shares of Company Common Stock properly tendered and not withdrawn pursuant to the Offer; provided, however, that the right to terminate the Agreement pursuant to this clause (d) shall not be available to the Company if it has breached in any material respect its obligations under this Agreement that in any manner shall have proximately contributed to the failure referenced in this clause (d); (e) by the Company if (i) there shall have been a breach of any representation or warranty on the part of Parent or Acquisition set forth in this Agreement, or if any representation or warranty of Parent or Acquisition shall have become untrue, in either case which materially adversely affects (or materially delays) the consummation of the Offer, (ii) there shall have been a breach on the part of Parent or Acquisition of any of their respective covenants or agreements hereunder having a Material Adverse Effect on Parent or materially adversely affecting (or materially delaying) the consummation of the Offer, and Parent or Acquisition, as the case may be, has not cured such breach prior to the earlier of (A) ten (10) days following notice by the Company thereof and (B) two (2) Business Days prior to the date on which the Offer expires, provided that the Company has not breached any of its obligations hereunder in a manner that proximately contributed to such breach by Parent or Acquisition, or (iii) prior to the purchase of Shares pursuant to the Offer, the Company Board by a majority vote shall have determined in its good faith judgment, based on the advice of counsel, that it is required to do so in the exercise of its fiduciary duties under the CGCL, provided that such termination under this clause (iii) shall not be effective until payment of the fee required by Section 7.3(a), or (f) by Parent or Acquisition prior to the purchase of shares of Company Common Stock pursuant to the Offer if (i) the Company Board withdraws or modifies in a manner materially adverse to Parent or Acquisition its favorable recommendation of the Offer or the approval or recommendation of the Merger or shall have recommended a Third Party Acquisition, (ii) a Third Party Acquisition occurs, (iii) there shall have been a breach of any representation or warranty on the part of Company set forth in this Agreement, or any representation or warranty of Company shall have become untrue, in either case if the respects in which the representations and warranties made by the Company are inaccurate would in the aggregate have a Material Adverse Effect on the Company or materially adversely affect (or delay) the consummation of the Offer or the Merger, (iv) there shall have been a breach on the part of the Company of its covenants or agreements hereunder having, individually or in the aggregate, a Material Adverse Effect on the Company or materially adversely affecting (or materially delaying) the consummation of the Merger, and, with respect to clauses (iii) and (iv) above, the Company has not cured such breach prior to the earlier of (A) ten (10) days following notice by the Parent or Acquisition thereof and (B) two (2) Business Days prior to the 31 date on which the Offer expires, provided that, with respect to clauses (iii) and (iv) above, neither Parent or Acquisition has breached any of their respective obligations hereunder in a manner that proximately contributed to such breach by the Company or (v) Parent or Acquisition shall have discovered that any information supplied to Parent or Acquisition by the Company (excluding, for such purposes, any projections or forecasts or other forward looking information supplied by the Company), at the time provided to Parent or Acquisition, contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and such misstatement or omission would have a Material Adverse Effect on the Company. SECTION 7.2. EFFECT OF TERMINATION. In the event of the termination --------------------- and abandonment of this Agreement pursuant to Section 7.1, this Agreement shall forthwith become void and have no effect, without any liability on the part of any party or its affiliates, directors, officers or shareholders, other than the provisions of this Section 7.2 and Sections 5.3(b) and 7.3. Nothing contained in this Section 7.2 shall relieve any party from liability for any breach of this Agreement. SECTION 7.3. FEES AND EXPENSES. ----------------- (a) In the event that this Agreement shall be terminated pursuant to: (i) Section 7.1(e)(iii); (ii) Section 7.1(f)(i) or (ii); or (iii) Sections 7.1(f)(iii) or (iv) as a result of a willful breach of any representation, warranty, covenant or agreement of the Company and, within twelve (12) months thereafter, the Company enters into an agreement with respect to a Third Party Acquisition (as defined below), or a Third Party Acquisition occurs, involving any party (or any affiliate thereof) (x) with whom the Company (or its agents) had discussions with a view to a Third Party Acquisition, (y) to whom the Company (or its agents) furnished information with a view to a Third Party Acquisition or (z) who had submitted a proposal or expressed an interest in a Third Party Acquisition, in the case of each of clauses (x), (y) and (z) during the period commencing on October 1, 1997 and continuing until such termination; Parent and Acquisition would suffer direct and substantial damages, which damages cannot be determined with reasonable certainty. To compensate Parent and Acquisition for such damages, the Company shall pay to Parent the amount of $7 million as liquidated damages. It is specifically agreed that the amount to be paid pursuant to this Section 7.3(a) represents liquidated damages and not a penalty. "Third Party Acquisition" means the occurrence of any of the following events: (i) the acquisition of the Company by merger or otherwise by any person (which includes a "person" as such term is defined in Section 13(d)(3) of the Exchange Act) or entity other 32 than Parent, Acquisition or any affiliate thereof (a "Third Party"); (ii) the acquisition by a Third Party of 30% or more of the total assets of the Company and its Subsidiaries, taken as a whole; or (iii) the acquisition by a Third Party of shares of Company Common Stock resulting in such person holding at least 30% or more of the outstanding shares of Company Common Stock. (b) Upon the termination of this Agreement prior to the purchase of Shares by Acquisition pursuant to the Offer pursuant to Section 7.1(f) (unless such termination is also covered by Section 7.3(a)), the Company shall reimburse Parent, Acquisition and their affiliates (not later than ten (10) Business Days after submission of statements therefor) for all actual documented out-of-pocket fees and expenses, not to exceed $2,000,000, actually and reasonably incurred by any of them or on their behalf in connection with the Merger and the consummation of all transactions contemplated by this Agreement (including, without limitation, filing fees, printing and mailing costs, fees payable to investment bankers, counsel to any of the foregoing, and accountants). Parent and Acquisition have provided the Company with an estimate of the amount of such fees and expenses and, if Parent or Acquisition shall have submitted a request for reimbursement hereunder, will provide the Company in due course with invoices or other reasonable evidence of such expenses upon request. The Company shall in any event pay the amount requested (not to exceed $2,000,000) within ten (10) Business Days of such request, subject to the Company's right to demand a return of any portion as to which invoices are not received in due course. Nothing in this Section 7.3(b) shall relieve any party from any liability for breach of this Agreement. (c) Upon the termination of this Agreement pursuant to Sections 7.1(e)(i) or (ii), Parent shall reimburse the Company and their affiliates (not later than ten (10) Business Days after submission of statements therefor) for all actual documented out-of-pocket fees and expenses, not to exceed $1.0 million, actually and reasonably incurred by any of them or on their behalf in connection with the Merger and the consummation of all transactions contemplated by this Agreement (including, without limitation, filing fees, printing and mailing costs, fees payable to investment bankers, counsel to any of the foregoing, and accountants). The Company has provided Parent with an estimate of the amount of such fees and expenses and, if the Company shall have submitted a request for reimbursement hereunder, will provide Parent in due course with invoices or other reasonable evidence of such expenses upon request. Parent shall in any event pay the amount requested (not to exceed $1.0 million) within ten (10) Business Days of such request, subject to Parent's right to demand a return of any portion as to which invoices are not received in due course. Nothing in this Section 7.3(c) shall relieve any party from any liability for breach of this Agreement. (d) Except as specifically provided in this Section 7.3, each party shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. SECTION 7.4. AMENDMENT. This Agreement may be amended by action taken --------- by the Company, Parent and Acquisition at any time before or after approval of the Merger 33 by the shareholders of the Company (if required by applicable law) but, after any such approval, no amendment shall be made which requires the approval of such shareholders under applicable law without such approval. This Agreement may not be amended except by an instrument in writing signed on behalf of the parties. SECTION 7.5. EXTENSION; WAIVER. At any time prior to the Effective ----------------- Time, each party may (a) extend the time for the performance of any of the obligations or other acts of the other party or parties, (b) waive any inaccuracies in the representations and warranties of the other parties contained herein or in any document, certificate or writing delivered pursuant hereto or (c) waive compliance by the other parties 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. The failure of any party to assert any of its rights hereunder shall not constitute a waiver of such rights. ARTICLE 8 MISCELLANEOUS SECTION 8.1. NONSURVIVAL OF REPRESENTATIONS AND WARRANTIES. The --------------------------------------------- representations and warranties made herein shall not survive beyond the Effective Time or a termination of this Agreement. SECTION 8.2. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (a) ---------------------------- constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and (b) shall not be assigned by operation of law or otherwise; provided, however, that Acquisition may assign any or all of its rights and obligations under this Agreement to any wholly owned subsidiary of Parent, but no such assignment shall relieve Acquisition of its obligations hereunder if such assignee does not perform such obligations. SECTION 8.3. VALIDITY. If any provision of this Agreement, or the -------- application thereof to any person or circumstance, is held invalid or unenforceable, the remainder of this Agreement, and the application of such provision to other persons or circumstances, shall not be affected thereby, and to such end, the provisions of this Agreement are agreed to be severable. SECTION 8.4. NOTICES. All notices, requests, claims, demands and other ------- communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, facsimile or telex, or by registered or certified mail (postage prepaid, return receipt requested), to the other party as follows: 34 if to Parent or Acquisition: Fountain View, Inc. 11900 W. Olympic Boulevard Suite 680 Los Angeles, CA 90064 Attention: Robert Snukal - and - Heritage Partners, Inc. 30 Rowes Wharf, Suite 300 Boston, MA 02110 Attention: Michel Reichert with a copy to: Choate, Hall & Stewart Exchange Place 53 State Street Boston, MA 02109 Attention: Stephen M. L. Cohen, Esq. if to the Company to: Summit Care Corporation 2600 W. Magnolia Road Burbank, CA 91505-3031 Attention: William C. Scott with a copy to: Gibson, Dunn & Crutcher LLP 333 S. Grand Avenue Los Angeles, CA 90071 Attention: Bradford P. Weirick, Esq. or to such other address as the person to whom notice is given may have previously furnished to the other in writing in the manner set forth above. SECTION 8.5. GOVERNING LAW. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of California, without regard to the principles of conflicts of law thereof. SECTION 8.6. CONSTRUCTION; INTERPRETATION. The headings contained in ---------------------------- this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. Article, section, exhibit, schedule, annex, party, preamble and recital references are to this Agreement unless otherwise stated. No party, nor its respective counsel, shall be deemed the drafter of this Agreement for purposes of construing the provisions hereof, and all provisions of this Agreement shall be construed according to their fair meaning, and not strictly for or against any party. SECTION 8.7. PARTIES IN INTEREST. This Agreement shall be ------------------- binding upon and inure solely to the benefit of each party and its successors and permitted assigns, and except as provided in Section 8.2, nothing in this Agreement, express or implied, is 35 intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 8.8. SEVERABILITY. If any term or other provision of ------------ this Agreement is invalid, illegal or unenforceable, all other provisions of this Agreement shall remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. SECTION 8.9. SPECIFIC PERFORMANCE. The parties acknowledge that -------------------- irreparable damage would result if this Agreement were not specifically enforced, and they therefore consent that the rights and obligations of the parties under this Agreement may be enforced by a decree of specific performance issued by a court of competent jurisdiction. Such remedy shall, however, not be exclusive and shall be in addition to any other remedies, including arbitration, which any party may have under this Agreement or otherwise. SECTION 8.10. COUNTERPARTS. This Agreement may be executed in ------------ one or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 36 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed on its behalf as of the day and year first above written. ATTEST: SUMMIT CARE CORPORATION, a California corporation By: /s/ JB CONNOR By: /s/ WILLIAM C. SCOTT -------------------------------- ------------------------------- Name: JB CONNOR Name: WILLIAM C. SCOTT ------------------------------ ----------------------------- Title: Title: CHAIRMAN ----------------------------- ---------------------------- ATTEST: FOUNTAIN VIEW, INC., a Delaware corporation By: /s/ JB CONNOR By: /s/ ROBERT SNUKAL -------------------------------- ------------------------------- Name: JB CONNOR Name: ROBERT SNUKAL ------------------------------ ----------------------------- Title: Title: PRES. ----------------------------- ---------------------------- ATTEST: FV-SCC ACQUISITION CORP., a Delaware corporation By: /s/ JB CONNOR By: /s/ ROBERT M. SNUKAL -------------------------------- ------------------------------- Name: JB CONNOR Name: ROBERT M. SNUKAL ------------------------------ ----------------------------- Title: Title: PRES. ----------------------------- ---------------------------- 37 Agreed to and acknowledged with respect to Sections 5.7, 5.13, 5.14: ATTEST: HERITAGE FUND II, L.P., a Delaware limited partnership BY: HF PARTNERS II, L.L.C., as general partner By: /s/ J. B. Connor By: /s/ T. Brook Park -------------------------------- ------------------------------- Name: J. B. Connor Name: T. Brook Park ------------------------------ ----------------------------- Title: Title: Partner ----------------------------- ---------------------------- 38 ANNEX A THE CAPITALIZED TERMS USED HEREIN HAVE THE MEANINGS SET FORTH IN THE AGREEMENT AND PLAN OF MERGER TO WHICH THIS ANNEX A IS ATTACHED. Notwithstanding any other provisions of the Offer, Acquisition shall not be required to accept for payment or pay for, and shall delay the acceptance for payment of, or the payment for, any Shares and, if required pursuant to Section 1.1(b) of the Agreement, shall extend the Offer by one or more extensions until July 31 1998, and may terminate the Offer at any time after July 31, 1998, if (i) immediately prior to the expiration of the Offer (as extended in accordance with the Offer), the Minimum Condition shall not have been satisfied, (ii) any applicable waiting period under the HSR Act shall not have expired or been terminated or (iii) prior to the acceptance for payment of Shares, Acquisition makes a determination (which shall be made in good faith) that any of the following conditions exist: (a) there shall have been any action taken, or any statute, rule, regulation, judgment, order or injunction promulgated, enacted, entered, enforced or deemed applicable to the Offer, or any other action shall have been taken, by any state or federal government or governmental authority or by any U.S. court, other than the routine application to the Offer or the Merger of waiting periods under the HSR Act, that (i) restrains, prohibits, or makes illegal, the acceptance for payment of, or the payment for, some or all of the Shares or otherwise prohibits consummation of the Offer or the Merger, (ii) restrains, prohibits, or imposes material limitations on, the ability of Acquisition to acquire or hold or to exercise effectively all rights of ownership of the Shares, including, without limitation, the right to vote any Shares purchased by Acquisition on all matters properly presented to the shareholders of the Company, or effectively to control in any material respect the business, assets or operations of the Company, its subsidiaries, Acquisition or any of their respective affiliates, or (iii) otherwise has a Material Adverse Effect on the Company, Parent or Acquisition; or there shall be any litigation or suit pending by any person or governmental authority seeking to do any of the foregoing; or (b) (i) the representations and warranties of the Company set forth in the Merger Agreement (without giving effect to any "materiality" limitations or references to "Material Adverse Effect" set forth therein) shall not be true and correct in any material respect as of the date of the Merger Agreement and as of consummation of the Offer as though made on or as of such date, but only if the respects in which the representations and warranties made by the Company are inaccurate and would in the aggregate have a Material Adverse Effect on the Company, (ii) the Company shall have breached or failed to comply in any material respect with any of its obligations under the Merger Agreement or (iii) any material adverse changes shall have occurred that have had a Material Adverse Effect on the Company; or A-1 (c) it shall have been publicly disclosed that any person (which includes a "person" as such term is defined in Section 13(d)(3) of the Exchange Act) other than Parent, Acquisition, any of their affiliates, or any group of which any of them is a member, shall have acquired beneficial ownership of more than 30% of the outstanding Shares or shall have entered into a definitive agreement or an agreement in principle with the Company with respect to a tender offer or exchange offer for any Shares or a merger, consolidation or other business combination with or involving the Company, any of its subsidiaries or any of their material assets; or (d) the Merger Agreement shall have been terminated in accordance with its terms; (e) prior to the purchase of Shares pursuant to the Offer, the Company Board shall have withdrawn or modified (including by amendment of the Schedule 14D-9) in a manner adverse to Acquisition its approval or recommendation of the Offer, this Agreement or the Merger or shall have recommended another offer, or shall have adopted any resolution to effect any of the foregoing which, in the good faith judgment of Acquisition in any such case, and regardless of the circumstances (including any action or omission by Acquisition) giving rise to any such condition, makes it inadvisable to proceed with such acceptance for payment; or (f) any authorizations, consents, orders or approvals of, or declarations or filings with, or expirations of waiting periods imposed by, any governmental entity, required in order to consummate the Offer or the Merger or to permit the Company and its Subsidiaries to conduct their businesses after the Offer and the Merger as currently conducted, shall not have been filed, granted, given, occurred or satisfied. A-2 EXHIBIT A --------- MERGER AGREEMENT A-1 EXHIBIT B --------- COMMITMENT LETTER B-1 DISCLOSURE SCHEDULE TO AGREEMENT AND PLAN OF MERGER AMONG SUMMIT CARE CORPORATION, FOUNTAIN VIEW, INC., TARGET ACQUISITION CORP. AND HERITAGE FUND II, L.P. All terms used in this Disclosure Schedule to the Agreement and Plan of Merger among Target, Inc., Parent, Inc. and Target Acquisition Corp. dated as of February ____, 1998 (the "Agreement") that are not otherwise defined herein shall have the meanings given to them in the Agreement. Disclosure of information in any Schedule contained herein shall be deemed to constitute disclosure under all other Schedules. SCHEDULE 3.2(B) OWNERSHIP OF CAPITAL STOCK OF COMPANY SUBSIDIARIES We call your attention to the fact that APS-Summit Care Pharmacy, L.L.C. is not wholly owned by the Company and that, under certain circumstances, the other member of APS-Summit Care Pharmacy, L.L.C. has the right to acquire the Company's membership interest therein. We call your attention to the existence of certain restrictions on transfer of membership interests contained in the Limited Liability Company Agreement of APS-Summit Care Pharmacy, L.L.C., dated as of November 30, 1996. SCHEDULE 3.6 CONSENTS AND APPROVALS We call your attention to the fact that the provisions of that certain Third Amended and Restated Credit Agreement, dated as of December 15, 1995, between the Company, the lenders named therein and the Bank of Montreal, as a lender and the agent, as amended from time to time, contain prohibitions against the merger of the Company with or into any other entity. We call your attention to the fact that the provisions of (i) that certain Amended and Restated Note Purchase Agreement, dated as of December 15, 1995, between the Company and the note purchasers named therein, as amended from time to time, and (ii) that certain Note Purchase Agreement, dated as of December 15, 1995, between the Company and the note purchasers named therein, as amended from time to time, contain certain conditions that must be satisfied prior to the effectuation of the merger of the Company with or into any other entity, including, without limitation, the assumption by such other entity of the Company's obligations, including financial covenant obligations, under such agreements and the notes issued by the Company thereunder. The following agreements require consents to the consummation of the Offer or the Merger, require consents as a consequence of the deemed assignment of the agreements by operation of law pursuant to the Merger and/or may experience an acceleration of rights or obligations thereunder as a result of the Offer or the Merger: I. Real Property Leases: A. Oakland Manor Nursing Center: Nursing Home Lease Agreement, dated June 29, 1992, between Gotcher Construction, Inc., as Lessor, and May Joint Venture, as Lessee; Assignment Of Lease With Option To Purchase, dated September 30, 1994, by which Summit Care Corporation was substituted as Lessee; Addendum to Assignment of Lease and Option to Purchase, dated October, 1994; Consent To Assignment Of Lease dated September 26, 1994; Agreement Re Option dated September 30, 1994; Assignment and Assumption of Lease, dated September 1, 1997, by which Summit Care Texas was substituted as Lessee and Letter Agreement consenting to Assignment and Assumption of Lease dated June 27, 1997. B. Southern Manor Nursing Center: Nursing Home Lease Agreement, dated June 29, 1992, between R.W. McDonnell Construction Co., Inc., as Lessor, and May Joint Venture, as Lessee; Assignment Of Lease With Option To Purchase, dated September 30, 1994, by which Summit Care Corporation was substituted as Lessee; Addendum to Assignment of Lease and Option to Purchase dated October, 1994; Consent To Assignment Of Lease dated September 26, 1994; Agreement Re Option dated September 30, 1994; Assignment and Assumption of Lease, dated September 1 1997, by which Summit Care Texas, L.P. was substituted as Lessee and Letter Agreement consenting to Assignment and Assumption of Lease dated January 3, 1997. C. Phoenix Living Center: Lease Agreement, dated August 1, 1993, between Sierra Land Group, Inc., as Landlord, and Summit Health, Ltd, as Tenant; Sublease Agreement, dated January 4, 1994, between Summit Health Ltd., as Sublessor, and Summit Care Corporation, as Sublessee. II. The Burbank Office Building Loan Agreement, dated March 28, 1994, between the Company and Union Bank. III. Material Ancillary Agreements A. Master Therapy and Supplies Services Agreement, dated June 30, 1995, between the Company and TheraTx, Incorporated, which requires the written consent of TheraTx, Incorporated to an "assignment" or "delegation" by the Company of its rights or duties under the Agreement, but which does not define "assignment" or "delegation." B. Respiratory Therapy Management Services Agreement, dated November 1, 1996, by and between the Company and TheraCare. C. Limited Liability Company Agreement of APS-Summit Care Pharmacy, L.L.C., dated as of November 30, 1996. See Schedule 3.2(b). D. Various pharmacy service contracts between Skilled Care Pharmacy and nursing home operators, which require the prior consent of such nursing home operators to an "assignment" by Skilled Care Pharmacy of its rights and duties under the contract, but which do not define "assignment." E. Various skilled nursing services agreements between the Company or one of its affiliates and various nursing home operators and hospital operators, which require the prior consent of such nursing home or hospital operators to an "assignment" by the Company or its affiliate of its rights and duties under the agreement, but which do not define "assignment." F. Various medical care services agreements between the Company or one of its affiliates and various health maintenance organizations and health insurance plans, which require the prior consent of such health maintenance organizations or health insurance plans to an "assignment" by the Company or its affiliate of its rights and duties under the agreement, but which do not define "assignment." IV. Pursuant to the Company's Special Severance Pay Plan, dated February , 1998, as described in Schedule 3.8 (the "Employee Severance Plan"), the Company may become subject to severance payment obligations to certain employees following the consummation of the Merger. V. At a meeting of the Board of Directors of the Company held on December 19, 1997, the Board approved, effective upon a sale of the Company, the vesting of all pension benefits owing to William C. Scott under the Company's pension plan. The Board of Directors of the Company also approved the payment of $100,000 to William C. Scott upon the successful consummation of the Merger. VI. Pursuant to the terms of the Company Plan, all Company Stock Options will vest and become exercisable prior to consummation of the Merger. SCHEDULE 3.8 COMPANY LIABILITIES 1. We call your attention to the fact that the Company's liabilities as of December 31, 1997 were approximately $182,699,000. We also call your attention to the fact that the Company has an account payable to TheraTx, Incorporated as of January 31, 1998 in the amount of approximately $20,009,000. 2. We call your attention to the fact that the Company has disclosed to Parent the financial statements of the Company for the second fiscal quarter ended December 31, 1997 and that the Company and Parent agree that neither the results reflected in such financial statements nor the public disclosure of such financial statements constitutes a breach of this Agreement nor a circumstance constituting a Material Adverse Event hereunder. 3. The Company has entered into an agreement with certain of its noteholders to pay such noteholders approximately $228,000 as consideration for the waiver of certain financial covenants contained in (i) the $75,000,000 Note Purchase Agreement, dated as of December 15, 1995, among the Company and the note purchasers named therein and (ii) the $25,000,000 Amended and Restated Note Purchase Agreement, dated as of December 15, 1995, among the Company and the note purchasers named therein (amending and restating the Note Purchase Agreement, dated as of December 15, 1992, among the Company and the note purchasers named therein). 4. Blue Cross has informed the Company that it is reclaiming approximately $1,500,000 in Medicare payments previously made by Blue Cross to the Company on the grounds that the Company failed to timely obtain the requisite physician signatures authorizing such payments. Blue Cross has initiated the process of reclaiming such amounts by withholding such amounts from payments that have become due to the Company subsequent to those which are being reclaimed. The Company has sufficient reserves against the payments being reclaimed by Blue Cross and the payments will thus not have a Material Adverse Effect on the Company. 5. The Board of Directors of the Company has adopted the Employee Severance Plan. See Schedule 3.6. 6. The Board of Directors of the Company has approved the vesting of all pension benefits owing to William C. Scott effective upon a sale of the Company. The Board of Directors of the Company has also approved the payment of $100,000 to William C. Scott upon the successful consummation of the Merger. See Schedule 3.6. Schedule 5.1 CONDUCT OF THE BUSINESS OF THE COMPANY 1. We call to your attention the fact that the Company is currently undertaking a restructuring of its assets in the State of Texas, which restructuring includes, among other things, (i) the transfers of certain real property and other assets located in the State of Texas (the "Transferred Property") and currently owned by the Company and one or more of its Subsidiaries to one or more other indirect Subsidiaries of the Company; (ii) the execution of certain collateral documents pursuant to which the transferees of such Transferred Property will grant deeds of trust and other security interests in such Transferred Property to certain existing creditors of the Company; (iii) the execution by certain newly- formed Subsidiaries of the Company of guarantees securing certain currently-existing indebtedness of the Company; (iv) the execution by the Company, certain Subsidiaries of the Company and certain of the Company's creditors of amendments and waivers of certain provisions of the agreements evidencing the Company's outstanding indebtedness; and (v) the execution by the Company and certain Subsidiaries of the Company of additional documentation necessary to consummate such restructuring. 2. The Board of Directors of the Company has approved the Employee Severance Plan. See Schedule 3.6. 3. The Board of Directors of the Company has approved the acceleration of vesting of pension benefits owing to William C. Scott and the payment of $100,000 to William C. Scott upon the successful consummation of the Merger. See Schedule 3.6. EX-99.C.2 12 WILLIAM SCOTT AGREEMENT Exhibit (c)(2) AGREEMENT --------- This Agreement is entered into as of February 6, 1998 by and among Fountain View, Inc., a Delaware corporation (the "Company"), Robert Snukal ------- ("RS"), Sheila Snukal ("SS", and together with RS, the "Snukals"), William Scott -- -- ------- ("Scott") and Heritage Fund II, L.P. ("Heritage"). ----- -------- Introduction ------------ This Agreement is being entered into in connection with the proposed acquisition (the "Acquisition") of Summit Care Corporation ("Summit") by a ----------- ------ newly-formed subsidiary of the Company (the "Sub"). Heritage is making a --- commitment to invest substantial additional funds in the Company in order to effect the Acquisition, in reliance on the terms of this Agreement. The Acquisition will be structured as (i) a tender offer by the Sub for shares of Summit (the "Offer"), followed by (ii) a merger of Sub into Summit ----- (the "Merger"), pursuant to an Agreement and Plan of Merger among Summit, the ------ Company and the Sub (the "Merger Agreement"). ---------------- NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Equity Ownership and Structure. Effective immediately prior to ------------------------------ the purchase of shares pursuant to the Offer (the "Tender Closing"), the stock -------------- ownership of the Company will be restructured in the following manner, and the new investments specified below will be made, in a transaction under Sections 351 and 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the "Code"): ---- (a) Investments. Each of the parties will contribute to the Company ----------- immediately prior to the Tender Closing the following amounts (inclusive of amounts currently held in stock of the Company): (i) Heritage will invest: (A) $24,500,000 in value of Company stock already held, and (B) $74,500,000 in new cash (ii) The Snukals will invest: (A) $17,500,000 in value of Company stock already held (including Series A-3 shares previously distributed by them), and (B) $5,000,000 in new cash (iii) Scott will invest: (A) All of his Summit stock and the full amount of his after-tax option and pension proceeds received on or about the date of the Merger (approximately $2,500,000) (b) Classes of Stock. Effective immediately prior to the Tender ---------------- Closing, the existing stock of the Company will be reorganized into, and the new cash invested in the Company will purchase, shares of Series A Common Stock (the "Series A Stock") and Series B Non-Voting Common Stock (the "Series B Stock") -------------- -------------- described below, which will be the only outstanding equity securities of the Company. The Series A Stock and the Series B Stock will have the following general characteristics: (i) The Series A Stock will be entitled to receive return of capital (which means, for this purpose, the amount of cash contributed and the value of the shares exchanged for Series A Stock) plus a 22% internal rate of return before any distributions are made on the Series B Stock. (ii) After the Series A Stock has been paid the foregoing amounts, each share of Series B Stock will be entitled to a distribution of the same amount as was distributed in respect of each share of Series A Stock. (iii) After all of the foregoing distributions, the Series A Stock and Series B Stock will share any remaining proceeds on a pro rata basis. (c) Ownership of Stock. The outstanding Common Stock will be owned ------------------ as follows: (i) The Series A Stock will be owned by Heritage, the Snukals and Scott as follows: Heritage 78,240 shares Snukals 17,780 shares Scott 3,980 shares/1/ (ii) The Series B Stock will be owned by the Snukals and Scott, or their respective designees, as follows: Snukals 6,125 shares Scott 4,649 shares - -------------------- /1/ 2,000 of these shares may be in the form of nominally priced options or warrants The actual number of shares or options to be received by Scott will be adjusted to reflect the after-tax proceeds actually invested by him. -2- The Series B Stock will equal 9.73% of all outstanding shares of Common Stock of both series. The Series B Stock will be issued for nominal consideration, and it is anticipated that the holders will file Section 83(b) Elections under the Code. (d) Repurchase of Series B Stock. The Series B Stock will be subject ---------------------------- to repurchase at cost by the Company upon a Trigger Event (which term will generally have the meaning given to it in the existing Company Stockholders Agreement) on a sliding scale based on achievement of the terminal value targets for the Company's equity value (shown as Base Case, Management Case and Upside Case on Exhibit A attached hereto) upon a Trigger Event, as follows: --------- (i) If the terminal value on a Trigger Event is at or below the Base Case, all shares of Series B Stock will be repurchased. (ii) If the terminal value on a Trigger Event is at the Management Case, 3,020 shares of Series B Stock will be repurchased. (iii) If the terminal value on a Trigger Event is at or above the Upside Case, no shares of Series B Stock will be repurchased. (iv) The number of shares to be repurchased will be adjusted ratably between the Base Case and the Management Case and between the Management Case and the Upside Case, to the extent that the terminal value is between such cases on a Trigger Event. (v) Repurchases of Series B Stock will be pro rata among all holders thereof. (e) Scott Investment. Scott will contribute all of his interest in ---------------- Summit into the Company, including stock, options and after-tax pension proceeds received on or about the date of the Merger. In the case of options held by Scott, (i) these options will be cashed out in the Merger, (ii) Scott will receive a bonus from the Company to pay tax due on the options (to the extent that it is tax neutral to the Company, using corresponding tax benefit) and (ii) all net after tax option proceeds (after taking into account the foregoing bonus payment) will be invested in the Company. A portion of Scott's investment may be delayed until he receives proceeds at the Merger closing. (f) Warrants, etc. If the financing obtained to consummate the Offer ------------- or the Merger, or to refinance existing indebtedness or liabilities of the Company or Summit, includes warrants or other equity interests in the Company for the lenders or other third parties involved in such financing, or if Sutro invests in the Company, the resulting dilution will be shared ratably by all parties hereto and other stockholders of the Company. -3- (g) Option Pool. The parties intend that after the Merger the ----------- Company will put into effect a management option program to provide incentive to employees (other than RS and Scott), and which will dilute all stockholders ratably. 2. Stockholders Agreement. Immediately prior to the Tender Closing, the ---------------------- parties will enter into a new Stockholders Agreement, replacing the existing Fountain View Stockholders Agreement, the material terms of which will be as follows: (a) Board of Directors. RS will be entitled to designate two ------------------ directors (but not less than 25% of the directors) and Scott will be entitled to designate one director of the Company for such time as they hold stock of the Company. All other directors of the Company will be designated by Heritage. (b) Stock transfers. The following provisions will govern stock --------------- transfers: (i) No transfers of stock by non-Heritage stockholders will be permitted for four years after the Tender Closing, except for estate planning transfers (including transfers of Series B shares) or as described below; provided that any party whose employment is terminated without cause by the Company (other than for death or disability) will no longer be subject to such restriction, but will be subject to the restrictions in paragraph (ii) below. (ii) The Company and the other stockholders will have a right of first refusal on transfers by non-Heritage stockholders, except for estate planning transfers (including transfers of Series B shares) or as described below. (iii) Non-Heritage stockholders have tag along rights on sales by Heritage in a transaction constituting a Trigger Event, whether structured as a stock sale, merger or otherwise. (iv) Heritage has drag along rights on stock of non-Heritage stockholders in a transaction constituting a Trigger Event, whether structured as a stock sale, merger or otherwise. (c) Repurchase of Series B Shares. The following provisions will ----------------------------- govern repurchase of Series B shares: (i) The repurchase of shares of Series B shares upon a Trigger Event, based on the Terminal Value targets, as described above, will be provided for in the Stockholders Agreement. (ii) Terminal Value targets for forfeiture of Series B shares may be changed by approval of the Company's Board of Directors to reflect acquisitions and other transactions not in the ordinary course, provided that in selecting the new targets the members of the Board approving such changes believe in good faith that the new targets are -4- broadly consistent with the valuation methodology being applied in determining the initial Terminal Value targets attached to this Agreement. (d) Recapitalization. Immediately prior to consummation of a ---------------- registered initial public offering of the Company's common stock (an "IPO"), --- there will be a required recapitalization of all shares into a single class of common stock, based on their value at that time. (e) Termination. The Stockholders Agreement will terminate on an ----------- IPO. 3. Registration Rights Agreement. Immediately prior to the Tender ----------------------------- Closing, the parties will enter into a new Registration Rights Agreement, replacing the existing Fountain View Registration Rights Agreement, the material terms of which will be as follows: (a) Demand registrations. -------------------- (i) Heritage will be entitled to cause the Company to effect an IPO at any time. (ii) Heritage will have the right to effect two demand registrations. (iii) The Snukals will have the right to effect one demand registration, in which Scott will have the right, at his election, to share on a pro rata basis. (b) Piggyback and S-3 Registrations. The parties will be entitled to ------------------------------- unlimited piggyback and S-3 registrations. (c) Cutbacks. All registrations will be subject to customary -------- cutbacks. In each cutback, other than in the demand registration of the Snukals and Scott described above, shares to be included by non-Heritage stockholders will be reduced before shares of Heritage are reduced. (d) Additional Registration Rights. If a majority of the Company's ------------------------------ Board believes in good faith that additional registration rights should be granted to new investors in the Company who are acquiring, in the aggregate, at least 15% of the Company's stock, the Board may grant such rights even though such additional rights may impair or limit the rights of the parties to this Agreement. 4. Employment Agreements for Key Management. Immediately prior to the ---------------------------------------- Tender Closing (or, in the case of Scott, the effective time of the Merger), the Company will enter into new Employment Agreements with each of RS, SS and Scott, replacing their existing employment agreements with the Company and Summit (although, in the case of Scott, not in manner that triggers severance or other similar payments from Summit), respectively. These agreements will have substantially the following terms: -5- (a) Term. Each agreement will be for a scheduled term of five years ---- commencing on the Tender Closing. (b) Titles; Duties. RS will have the title "Chief Executive -------------- Officer", SS will have the title "Executive Vice President" and Scott will initially have the title "Chairman", and each will have duties consistent with such titles as specified by the Company's Board. (c) Compensation and Benefits. ------------------------- (i) RS will be entitled to a base salary at an annual rate of $500,000, and will be eligible for (A) an annual bonus of $250,000 if the Company achieves base case EBITDA and (B) up to an additional bonus of $250,000, determined ratably based on the Company's EBITDA being between the base case and the upside case. (ii) SS will be entitled to a base salary at an annual rate of $225,000, and will be eligible for an annual bonus of up to $125,000, determined ratably based on the Company's EBITDA being between the base case and the upside case. (iii) Scott will be entitled to a base salary at an annual rate of $450,000, and will be eligible for (A) an annual bonus of $200,000 if the Company achieves base case EBITDA and (B) up to an additional bonus of $150,000, determined ratably based on the Company's EBITDA being between the base case and the upside case. (iv) Salary levels will be subject to annual consumer price adjustments. (v) Base case, management case and upside case EBITDA for purposes of determining bonuses will be as set forth on Exhibit B hereto, --------- and may be changed by approval of the Company's Board of Directors to reflect acquisitions and other transactions not in the ordinary course, provided that in selecting the new EBITDA targets the members of the Board approving such changes believe in good faith that the new targets are broadly consistent with the valuation methodology being applied in determining the initial EBITDA targets attached to this Agreement. (vi) Benefits will be not less than greater of current Company or Summit benefits generally available to executives. (d) Termination. RS, SS and Scott may be terminated with or without ----------- cause. In the case of termination without cause (other than on death or disability), the Company will continue to pay their base salary (plus an additional $25,000 in the aggregate, in the case of such termination of both RS and SS) for the duration of their scheduled term of employment. If RS is terminated without cause, SS may, at her option, deem her employment to have been terminated without cause and receive the severance referred to in -6- the preceding sentence. In the case of Scott, his severance will be reduced by the amount, if any, he is then due under the Summit Special Severance Plan. (e) Other Provisions. The confidentiality, noncompetition and cause ---------------- definitions will be substantially similar to those in RS's existing Company employment agreement. 5. Snukal Leases. Immediately prior to the Tender Closing, the Snukals ------------- and the Company will amend the existing leases between the Company and them to provide as follows: (a) Approval. They will approve change of control of the Company -------- effected by the transactions described in this Agreement. (b) Future Transactions. A subsequent IPO, change of control or ------------------- other future disposition or change of ownership of the Company will not require approval of the Snukals. (c) Security Deposits. The security deposits under the leases will ----------------- increase to six months rent (from one month) on first to occur of (i) the Snukals no longer holding equity in Fountain View, (ii) the Snukals no longer being in active management of the Company (unless they voluntarily resign, other than upon death or disability), (iii) a Trigger Event (other than an IPO) or (iv) two months after an IPO. (d) Leasehold Mortgages. The Snukals will agree to grant leasehold ------------------- mortgages to lenders to the Company and/or its direct or indirect subsidiaries, until the earlier of (i) a Trigger Event (other than an IPO) or (ii) six months after an IPO. 6. Heritage Right to Act for the Company. Upon signing the Merger ------------------------------------- Agreement, and until it is terminated in accordance with its terms (if at all), Heritage will have the immediate and sole right to act for the Company and the Sub in all respects with respect to the Merger Agreement, the Offer, the Merger and all other matters in any way ancillary or related thereto. If requested by Heritage, the Snukals agree immediately to elect such additional members to the Company's Board as Heritage requests, as long as RS and SS represent not less than 25% of the Board. This Agreement constitutes an irrevocable proxy and power of attorney from the Company and the Snukals to effect all of the purposes of this Agreement, including without limitation as set forth in this Section. 7. Definitive Documents. Although this Agreement is binding on the -------------------- parties, the parties intend to replace this Agreement with final definitive agreements and instruments evidencing the provisions hereof. The parties agree that such definitive agreements will be prepared in good faith and delivered by Heritage and its counsel promptly after the date hereof. Such agreements shall be negotiated in good faith by the parties and shall be executed no later than five days thereafter. The parties agree that it is central to the parties' agreements contained in this Agreement that such definitive documents be fully executed -7- substantially in advance of the Tender Closing, and the parties agree to execute such definitive agreements and instruments even if there are matters contained in such agreements as to which the parties disagree, as long as such agreements are broadly consistent with the terms outlined in this Agreement. 8. Equitable Remedies. The parties understand and acknowledge that any ------------------ breach of this Agreement would cause irreparable injury to Heritage for which there would be no adequate remedy at law, and that, in the event of such a breach or threat thereof, Heritage shall be entitled to obtain a temporary restraining order and/or a preliminary injunction and a permanent injunction restraining the other parties to this Agreement from violating any provision hereof. 9. Obligations of Snukals with respect to other Company Stockholders. ----------------------------------------------------------------- Prior to the Tender Closing, the Snukals will cause all current stockholders of the Company, other than Heritage, to comply with the terms of this Agreement and to execute all agreements required hereby. 10. Miscellaneous. This agreement supersedes and overrides all other ------------- agreements among some or all of the parties with respect to the matters covered hereby. This Agreement shall be effective only upon the signing of the Merger Agreement, and shall have no force or effect if the Merger Agreement is not fully executed. If the Merger Agreement is terminated before the Tender Closing, this Agreement will terminate, and be of no further force or effect. This Agreement is governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts (excluding its conflicts of laws principals) and with the General Corporation Law of the State of Delaware. Jurisdiction of any litigation arising under this Agreement shall be in California. -8- IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument as of the date set forth above. /s/ Robert Snukal ---------------------------- Robert Snukal /s/ Sheila Snukal ---------------------------- Sheila Snukal /s/ William C. Scott ---------------------------- William Scott HERITAGE FUND II, L.P. By HF Partners II, L.L.C., its general partner By /s/ T. Brook Parker --------------------------- The undersigned, Karen B. Kaplan, spouse of William Scott, hereby consents to the foregoing agreement. /s/ Karen B. Kaplan ---------------------------- Karen B. Kaplan -9- EXHIBIT A Terminal Values (000)
- ------------------------------------------------ Year Base Mmgt Upside - ------------ ---------- ---------- ---------- - ------------------------------------------------ June 1998 $ 126,534 $ 136,345 $ 140,167 - ------------------------------------------------ Sept. 1998 133,101 157,055 171,750 - ------------------------------------------------ Dec. 1998 139,667 177,765 203,333 - ------------------------------------------------ March 1999 146,234 198,476 234,916 - ------------------------------------------------ June 1999 152,801 219,186 266,499 - ------------------------------------------------ Sept. 1999 173,526 243,074 298,999 - ------------------------------------------------ Dec. 1999 194,252 266,962 331,498 - ------------------------------------------------ March 2000 214,977 290,850 363,998 - ------------------------------------------------ June 2000 235,702 314,738 396,497 - ------------------------------------------------ Sept. 2000 245,053 340,397 430,655 - ------------------------------------------------ Dec. 2000 254,403 366,056 464,812 - ------------------------------------------------ March 2001 263,754 391,714 498,970 - ------------------------------------------------ June 2001 273,104 417,373 533,127 - ------------------------------------------------ Sept. 2001 287,174 450,009 577,406 - ------------------------------------------------ Dec. 2001 301,244 482,645 621,685 - ------------------------------------------------ March 2002 315,314 515,281 665,964 - ------------------------------------------------ June 2002 329,384 547,917 710,243 - ------------------------------------------------ Sept. 2002 345,976 576,531 746,058 - ------------------------------------------------ Dec. 2002 362,568 605,145 781,874 - ------------------------------------------------ March 2003 379,159 633,759 817,689 - ------------------------------------------------ June 2003 395,751 662,373 853,504 - ------------------------------------------------ Sept. 2003 420,485 716,191 938,845 - ------------------------------------------------ Dec. 2003 445,220 770,009 1,024,205 - ------------------------------------------------ March 2004 469,954 823,826 1,109,555 - ------------------------------------------------ June 2004 494,689 877,644 1,194,906 - ------------------------------------------------ Sept. 2004 525,607 948,953 1,314,396 - ------------------------------------------------ Dec. 2004 556,525 1,020,261 1,433,887 - ------------------------------------------------ March 2005 587,443 1,091,570 1,553,377 - ------------------------------------------------ June 2005 618,361 1,162,879 1,672,868 - ------------------------------------------------
-10-
- ------------------------------------------------ Year Base Mmgt Upside - ------------ ---------- ---------- ---------- - ------------------------------------------------ Sept. 2005 657,008 1,257,362 1,840,155 - ------------------------------------------------ Dec. 2005 695,656 1,351,846 2,007,441 - ------------------------------------------------ March 2005 734,304 1,446,330 2,174,728 - ------------------------------------------------ June 2005 772,951 1,540,814 2,342,015 - ------------------------------------------------ Sept. 2005 821,261 1,666,005 2,576,216 - ------------------------------------------------ Dec. 2005 869,570 1,791,196 2,810,418 - ------------------------------------------------ March 2006 917,880 1,916,388 3,044,619 - ------------------------------------------------ June 2006 966,189 2,041,579 3,278,821 - ------------------------------------------------ Sept. 2006 1,026,576 2,207,457 3,606,703 - ------------------------------------------------ Dec. 2006 1,086,963 2,373,335 3,934,585 - ------------------------------------------------ March 2007 1,147,349 2,539,214 4,262,467 - ------------------------------------------------ June 2007 1,207,736 2,705,092 4,590,349 - ------------------------------------------------ Sept. 2008 1,283,220 2,924,881 5,049,384 - ------------------------------------------------ Dec. 2008 1,358,703 3,144,669 5,508,419 - ------------------------------------------------ March 2008 1,434,187 3,364,458 5,967,454 - ------------------------------------------------ June 2008 1,509,670 3,584,247 6,426,489 - ------------------------------------------------
-11- EXHIBIT B EBITDA Targets (000)
Base Mgmt Upside ------- ------- ------- 30-JUN-99 $45,188 $47,314 $47,314 30-JUN-00 53,581 57,101 59,320 30-JUN-01 56,499 67,030 71,287 30-JUN-02 60,395 78,196 85,390 30-JUN-03 65,080 87,063 95,621
-12- EX-99.C.3 13 SUMMIT SPECIAL SEVERANCE PLAN Exhibit (c)(3) SUMMIT CARE CORPORATION SPECIAL SEVERANCE PAY PLAN ARTICLE 1. PURPOSE OF THE PLAN The Summit Care Corporation Special Severance Pay Plan (the "Plan") has been established by Summit in connection with, and effective upon the consummation of, the "Offer," as defined in and, pursuant to the Agreement and Plan of Merger, dated as of February 6, 1998 (as amended), among Summit, Fountain View, Inc. ("Fountain View"), FV-SCC Acquisition Corp. ("Acquisition Corp.") and Heritage Fund II, L.P. The Plan provides for the payment of severance benefits to Participants whose employment is terminated under the circumstances described herein. As of the Effective Date, the Plan supersedes any and all previous severance pay practices, plans or policies of Summit or any Subsidiary applicable to Participants. ARTICLE 2. DEFINITIONS 2.1 "Acquisition Corp." means FV-SCC Acquisition Corp. and any successor thereto.2.2 "Administrator" means Summit or any other person or committee designated in writing by Summit from time to time to perform all or a specified portion of the duties and responsibilities of the Administrator hereunder. 2.3 "Base Pay" means: (a) in the case of a Participant who is compensated on an hourly basis, his or her monthly base pay, determined as the product of (i) his or her highest standard hourly rate of pay (excluding overtime, holiday, vacation and any other special rates of pay -- "Excluded Pay") in effect during the Measurement Period and (ii) the number of hours he or she is regularly scheduled to work (excluding Excluded Pay) in a standard work month (determined on the basis of a regular work year of 2,080 hours), as determined by the Administrator in its sole discretion; and (b) in the case of each other Participant, his or her highest monthly rate of base salary in effect during the Measurement Period. 2.4 "Cause" for termination of a Participant's employment means such Participant's (i) dishonesty, fraud, willful misconduct or self-dealing; (ii) breach of fiduciary duty (whether or not involving personal profit); (iii) failure, neglect or refusal to perform the Participant's duties in any material respect; or (iv) conviction of a crime involving moral turpitude; provided, -------- however, that a failure to achieve or meet business objectives as defined by - ------- Summit, Fountain View or a Subsidiary, as applicable, shall not be considered cause so long as the Participant has devoted his or her best and good faith efforts and full attention to the achievement of such business objectives. 2.5 "Effective Date" means the date on which the "Offer" as defined in the Merger Agreement is consummated. 2.6 "Fountain View" means Fountain View, Inc. a Delaware corporation and, following the consummation of the Merger, parent of Summit. 2.7 "Good Reason" for termination by a Participant of his or her employment means the occurrence (without such Participant's express written consent) of any one of the following acts or failures to act by Summit, Fountain View or any Subsidiary that employs the Participant, as the case may be, unless, in the case of any act or failure to act described below, such act or failure to act is corrected prior to such Participant's Termination Date: (a) a material diminution in such Participant's title, authorities or responsibilities from those in effect immediately prior to such termination or, if greater, those in effect immediately prior to the Effective Date: (b) a reduction in such Participant's Base Pay as in effect immediately prior to the Effective Date except for across-the-board pay reductions similarly affecting all similarly situated employees of Summit and all similarly situated employees of any entity and/or person then in control of Summit. (c) the relocation of such Participant's office at which he or she is to perform his or her duties to a location that increases his or her one-way commute by more than 30 miles from his or her commute to the location at which such Participant performed his or her duties immediately prior to the Effective Date, except for required travel on Summit's business to an extent substantially consistent with his or her business travel obligations prior to the Effective Date; or (d) the failure to continue to provide such Participant with benefits substantially similar in value in the aggregate to those enjoyed by such Participant under Summit's medical, health, accident plans in which such Participant was participating immediately prior to the Effective Date, unless such Participant participates from and after the Effective Date in other comparable benefit plans generally available to employees of Summit and employees of any person then in control of Summit. 2.8 "Measurement Period" means, with respect to a Participant, the period beginning on the Effective Date and ending on such Participant's Termination Date. 2.9 "Merger" means the merger of Summit with Acquisition Corp. pursuant to the Agreement and Plan of Merger, dated as of February 6, 1998, as amended, among Summit, Fountain View, Acquisition Corp. and Heritage Fund II, L.P. 2.10 "Notice of Termination" means a written notice of termination indicating the Termination Date and delivered (i) to the Participant in the case of a termination by Fountain View, Summit or a Subsidiary and, if such termination is for Cause, specifying in reasonable detail the facts and events forming a basis for such termination and (ii) to the Administrator in the case of a termination by the Participant and, if such termination is for Good Reason, specifying in reasonable detail the facts and events forming a basis for such termination. 2.11 "Summit" means Summit Care Corporation and any successor thereto. 2.12 "Participant" means each individual who (i) is employed as of the day prior to the Effective Date by Summit or a Subsidiary and (ii) is listed on Exhibits I through VI attached hereto. 2.13 "Severance Pay" means the applicable amount determined under Section 6.1 which a Terminated Participant will be entitled to receive as severance benefits under the Plan, subject to the provisions of Article 5. 2.14 "Subsidiary" means any corporation, partnership, joint venture or entity, a majority of whose outstanding voting securities is owned, directly or indirectly, by Summit and any successor thereto. 2.16 "Term of the Plan" means the period commencing on the Effective Date and ending on the second anniversary of the Effective Date for Plan Participants. 2.17 "Terminated Participant" has the meaning set forth in Article 5. 2.18 "Termination Date" means the date as of which a Participant's employment with Summit or a Subsidiary terminates as specified in the applicable Notice of Termination, which date, in the case of any termination by Fountain View, Summit or a Subsidiary, other than any such termination for Cause, shall be thirty (30) days from the date such Notice of Termination is provided to the Participant and, in the case of any termination by the Participant, shall be thirty (30) days from the date such Notice of Termination is provided to the Administrator. ARTICLE 3. ADMINISTRATION The Plan shall be administered by the Administrator. The Administrator shall have the exclusive authority and responsibility for all matters in connection with the operation and administration of the Plan. The Administrator's powers and duties shall include, but not be limited to, the following: (i) discretionary authority to interpret and construe the Plan; (ii) discretionary authority to determine eligibility for benefits under the Plan; (iii) authorizing the payment of all benefits under the Plan; (iv) authority to engage such legal, accounting and other professional services as it may deem proper; and (v) responsibility for the compilation and maintenance of all records necessary in connection with the Plan. Decisions by the Administrator shall be final and binding upon the Company and each Participant, unless arbitrary or capricious. The Administrator shall be the Plan Administrator of the Plan for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Accordingly, it is intended that, insofar as the Administrator acts in a fiduciary capacity in the performance of any of its duties or obligations under the Plan, the standards of fiduciary conduct set forth in ERISA shall apply. ARTICLE 4. ELIGIBILITY Participation in the Plan is limited to those individuals who fall within the definition of a "Participant" as defined in Section 2.10. No other individual shall be eligible to participate in the Plan. ARTICLE 5. ENTITLEMENT TO BENEFITS If a Participant's employment with Fountain View, Summit or a Subsidiary is terminated during the Term of the Plan either (i) by Fountain View, Summit or a Subsidiary other than for Cause or (ii) by such Participant for Good Reason (such a Participant referred to herein as a "Terminated Participant"), such Terminated Participant shall be entitled to receive the greater of the -------------- applicable severance benefits described in Article 6 or the severance benefits -- to which Terminated Participant is entitled under a then effective severance program of Fountain View, but not both; provided, however that no such benefits ------------ -------- ------- shall be payable unless and until the Terminated Participant executes a standard form of general release, substantially in the form attached hereto as Exhibit A, to be furnished by Fountain View, Summit or a Subsidiary, as applicable, of all claims arising out of his or her employment with Fountain View, Summit and any Subsidiary or affiliate thereof, other than claims hereunder or for vested amounts or benefits under any other applicable plan, policy, payroll practice or policy of Fountain View, Summit or a Subsidiary. In the event a Participant's employment is terminated during the Term of the Plan by Fountain View, Summit or a Subsidiary without delivery of a Notice of Termination to the Participant, it shall be presumed for purposes of the Plan that such termination is Without Cause. In the event a Participant's employment is terminated during the Term of the Plan by the Participant without delivery of a Notice of Termination to the Administrator, it shall be presumed for purposes of the Plan that such termination is not for Good Reason. A Participant whose employment is terminated after the expiration of the Term of the Plan for any reason shall not be entitled to receive any benefits hereunder. ARTICLE 6. CASH SEVERANCE BENEFITS 6.1 Severance Pay. ------------- (a) Exempt Employees. A Terminated Participant who is classified as an ---------------- exempt employee (Exhibits I through V) immediately prior to the Effective Date will be entitled to receive severance pay under the Plan determined by taking the maximum number of months of severance pay to which the Terminated Participant is entitled as set forth below, subtracting the number of whole months in the Terminated Participant's Measurement Period and multiplying the result by the Participant's Base Pay. Title Prior to Effective Date Severance Pay --------------------------------- -------------- Senior Executives and See Exhibit I Related Positions Vice President, Regional See Exhibit II Vice President or Pharmacy President Title Prior to Effective Date Severance Pay ------------------------------ -------------- Center Administrator, Twelve months Executive Director or Corporate Main Office Department Head (Exhibit III) Directors and Related Positions (Exhibit IV) Nine months Other exempt employee Six months (Exhibit V) (b) Non-Exempt Employees. A Terminated Participant who is classified as a --- -------------------- non-exempt employee (Exhibit VI) immediately prior to the Effective Date will be entitled to receive severance pay under the Plan determined by taking the maximum number of months of severance pay to which the Terminated Participant is entitled as set forth below, subtracting the number of whole months in the Terminated Participant's Measurement Period and multiplying the result by the Participant's Base Pay. Number of Years of Service Completed Prior to Termination Severance Pay -------------------- ------------- Less than one Two months At least one but less than Three months three At least three but less than Five months five Five or more Six months 6.2 Manner and Timing of Payment. Severance benefits, if any, payable under ---------------------------- Section 6.1 shall be paid in cash, in a lump sum, less deductions required by law, within two weeks after execution of the release provided for in Article 5 above. ARTICLE 7. AMENDMENT AND TERMINATION During the Term of the Plan, Fountain View, Summit and/or Subsidiary shall have the right to amend the Plan, by resolution of the appropriate Board of Directors, in a manner that does not and will not, in any way, (i) reduce any benefits paid or that may become payable hereunder, (ii) modify the circumstances upon which a Participant is or may become eligible to receive benefits hereunder, (iii) modify the class of individuals who qualify as "Participants" hereunder or (iv) otherwise adversely affect the interests of any Participant hereunder. The Plan shall terminate upon expiration of the Term of the Plan; provided, -------- that the Plan shall continue to be administered in accordance with its terms until all benefits accrued hereunder as of such expiration date have been paid and satisfied. ARTICLE 8. NOTICES For the purpose of the Plan, notices and all other communications provided for in the Plan shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to a Participant, to the address on file with the Participant's employer and, if to the Administrator, to the address set forth below, or to such other address as either the Participant or the Administrator may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: Chairman Summit Care Corporation 2600 West Magnolia Blvd. Burbank, CA 91505 with a copy to: Senior Vice President, Human Resources _________________________ _________________________ _________________________ ARTICLE 9. CLAIMS PROCEDURE 9.1 Claim for Benefits: Written Notice of Denial. A Participant may --------------------------------------------- file with the Administrator a written claim for benefits under the Plan. The Administrator shall, within a reasonable time not to exceed thirty (30) days, unless special circumstances require an extension of time of not more than an additional twenty (20) days (in which event a Participant will be notified of the delay during the first thirty (30) day period), provide adequate notice in writing to any Participant whose claim for benefits shall have been denied, setting forth the following in a manner calculated to be understood by the Participant: (i) the specific reason or reasons for the denial; (ii) specific reference to the provision or provisions of the, Plan on which the denial is based; (iii) a description of any additional material or information required to perfect the claim, and an explanation of why such material or information is necessary; and (iv) information as to the steps to be taken in order that the detail of the claim may be reviewed. 9.2 Appeal of Denied Claim. A Participant whose claim for benefits ---------------------- shall have been denied in whole or in part, may, within thirty (30) days from the date notice is provided of the denial of the claim (unless the notice of denial grants a longer period within which to respond), appeal such denial to the Administrator. During the thirty (30) day appeal period, the Participant may, upon request, review documents pertinent to his or her claim and may submit written issues and comments to the Administrator. Failure to file such appeal within the applicable time period shall be a bar to all further proceedings with respect to the claim. 9.3 Notice of Determination of-Claim upon Appeal. The Administrator ------------------------ shall notify a Participant of its decision within thirty (30) days after an appeal is received by the Administrator, unless special circumstances require an extension of time of not more than an additional twenty (20) days (in which event a Participant will be notified of the delay during the first thirty (30) day period). Such decision shall be given in writing in a manner calculated to be understood by the Participant and shall include the following: (i) specific reasons for the decision; and (ii) specific reference to the provision or provisions of the Plan on which the decision is based. 9.4 Arbitration. Any dispute or controversy arising under or in ----------- connection with the Plan that cannot be settled through the procedures set forth in Sections 9.1 through 9.3 hereof shall be first submitted to mediation administered by the American Arbitration Association ("AAA"). In the event the dispute or controversy cannot be resolved through mediation, it shall be settled exclusively by arbitration in the location in which the Participant was employed immediately prior to the Termination Date by an arbitrator in accordance with the rules of the AAA in effect at the time of submission to arbitration. The arbitrator shall be authorized to award to either party to the arbitration reimbursement for his, her or its reasonable costs and expenses incurred in any such arbitration if such award of costs is warranted in the judgment of the arbitrator. The arbitrator's authority shall be limited to questions involving the interpretation and/or application of this Plan. The arbitrator shall not have authority to add to or modify the Plan or to award relief, monetary or otherwise, different from or in addition to that provided for by the Plan. Judgment may be entered on the arbitrator's award in any court having jurisdiction. ARTICLE 10. GENERAL PROVISIONS 10.1 Waiver; Entire Plan. No waiver by Fountain View, Summit, any ------------------- Subsidiary or any Participant at any time of any breach by any other such person of, or of any lack of compliance with, any condition or provision of the Plan to be performed by such other person shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. All other plans, policies and arrangements of Fountain View, Summit or any Subsidiary in which the Participant participates during the Term of the Plan shall be interpreted so as to avoid the duplication of benefits provided hereunder, and each Participant's participation in the Plan shall be in lieu of his or her rights under any other plan of Fountain View, Summit or any Subsidiary providing severance benefits of any kind. 10.2 No Right to Employment. Nothing contained in this Plan or any ---------------------- documents relating to the Plan shall (i) confer upon any Participant any right to continue in the employ of Fountain View, Summit or any Subsidiary or affiliate thereof, (ii) constitute any contract or agreement of employment, or (iii) interfere in any way with the right of Fountain View, Summit or any Subsidiary to reduce such Participant's compensation, to change the position held by such Participant, or terminate the employment of such Participant, with or without Cause. 10.3 No Assignment of Benefits. No right or interest of any Participant ------------------------- under the Plan shall be assignable or transferable, in whole or in part, either directly or by operation of law or otherwise, including, without limitation, by execution, levy, garnishment, attachment, pledge or in any manner; no attempted assignment or transfer thereof shall be effective; and no right or interest of any Participant under the Plan shall be subject to any obligation or liability of such Participant to any third party. When a payment is due under the Plan to a Participant who is unable to care for his or her affairs, payment may be made directly to his or her legal guardian or personal representative. 10.4 Governing Law. Except to the extent preempted by the Employee ------------- Retirement Income Security Act of 1974, as amended ("ERISA"), the Plan shall be governed by, and construed and enforced in accordance with, the laws of the State of California without reference to the principles of conflicts of law. 10.5 Severability; Validity. In the event that a court of competent ---------------------- jurisdiction determines that any provision of the Plan is in violation of any statute or public policy, only those provisions of the Plan that violate such statute or public policy shall be stricken. All provisions the Plan that do not violate any statute or public policy shall continue in full force and effect. Further, any court order striking any provision of the Plan shall modify the stricken terms as narrowly as possible to give as much effect as possible to the intentions of Summit in establishing the Plan. 10.6 Payroll and Withholding Taxes. Fountain View, Summit or a ----------------------------- Subsidiary, as applicable, shall withhold from any amounts payable to a Terminated Participant hereunder all federal, state, local and other taxes required to be withheld in connection with the benefits provided hereunder pursuant to any applicable law or regulation. 10.7 Unfunded Status of the Plan. The Plan shall be unfunded for --------------------------- purposes of ERISA and the Internal Revenue Code of 1986, as amended. Benefits under the Plan shall be paid from the general assets of Fountain View, Summit or a Subsidiary, as applicable. 10.8 Construction of the Plan. The titles to Articles and Sections are ------------------------ for general information only and the Plan is not to be construed by reference thereto. As used in the Plan, the masculine pronoun includes the feminine and, except as may otherwise be apparent from the context, the singular form includes the plural. IN WITNESS WHEREOF, Summit has caused this plan document to be executed by its duly authorized officer, this ____ day of _______________, _____. SUMMIT CARE CORPORATION By: Chairman and Chief Executive Officer EXHIBIT I SENIOR EXECUTIVES AND RELATED POSITIONS ---------------------------------------
CURRENT APPROVED RECOMMENDED SERVICE AS OF ANNUAL BASE SEVERANCE SEVERANCE NAME POSITION 10/1/97 SALARY PAYMENT AMOUNT - ---- --------- ----------------- ----------- --------- ---------- YEARS MONTHS ----- ------ SCOTT, W.C. CHAIRMAN & CEO 11 10 $ 400,000 2 YEARS $ 800,000 SCHUMACHER, D. PRESIDENT 1 8 215,000 1 YEAR 215,000 WILLIAMS, D. SR. VP, FINANCE 4 2 182,000 1 YEAR 182,000 MARTEL, M. SR. VP, 2 6 155,000 1 YEAR 155,000 MARKETING EISENREICH, H. EXEC.SEC.- W.C. 17 8 48,550 1 YEAR 48,550 SCOTT BISHOP, J. SEC. TEXAS 2 6 34,000 6 MONTHS 17,000 REGION SPARROW, R. EXEC. ASST.- D. 0 6 39,520 6 MONTHS 19,760 SCHUMACHER NASI, M. EXEC. ASST.- M. 1 11 45,859 6 MONTHS 22,930 MARTEL MEYERS, M. EXEC. ASST.- D. 1 1 37,299 6 MONTHS 18,650 WILLIAMS SPEIKER, D. EXEC. ASST. - J. 2 2 36,769 6 MONTHS 18,385 FARBER LADD, D. EXEC. ASST. - 26,520 6 MONTHS 13,260 YOEBA LIUDA ---------- -------- ---------- (11 PEOPLE) $1,220,517 $1,475,245 ========== ==========
EXHIBIT II ---------- VICE PRESIDENTS, REGIONAL VICE PRESIDENTS, PHARMACY PRESIDENT -------------------------------------------------------------
SEVERANCE SEVERANCE SERVICE AS OF CURRENT PAY PERIOD PAY NAME POSITION 10/1/97 SALARY (YEARS) AMOUNT - ---- --------- ----------------- ----------- --------- ---------- YEARS MONTHS ----- ------ MAROLDA, J. Regional Vice President I 7 10 $ 130,000 1 $ 130,000 HEWITT, M. Regional Vice President II 0 4 130,000 1 130,000 GUNDLING, R. Regional Vice President III 19 3 138,000 1 138,000 FOWLER, G. Regional Vice President IV 1 9 100,000 1 100,000 TOMERLIN, M. Regional Vice President V 1 9 95,000 1 95,000 MARTINEZ, J. Pharmacy President 6 1 137,550 1 137,550 FARBER, J. Vice President Controller 0 3 120,000 1 120,000 MEZA, J. Vice President Bldg. Serv. 35 8 77,577 1 77,577 WILLIAMS, C. Vice President Therapy Mgmt. 7 2 116,480 1 116,480 HILL, S. Vice President Training 10 8 76,901 1 76,901 TAMBA, F. Vice President Assurance 11 7 121,214 1 121,214 BROWN, T. Vice President Programs 3 11 80,000 1 80,000 ---------- ---------- (12 PEOPLE) $1,322,722 $1,322,722
2 EXHIBIT III ----------- CENTER ADMINISTRATORS, EXECUTIVE DIRECTOR AND CORPORATE MAIN OFFICE DEPARTMENT HEADS ------------------------------------------
NAME POSITION SERVICE AS OF 10/1/97 CURRENT SALARY - ---- -------- --------------------- -------------- YEARS MONTHS --------- ---------- Santiago, E. V.P. Controller-Pharmacy 1 4 $ 95,181 Hauptmann, R. V.P. Pharmacy Operations 0 7 100,000 Oliver, D. W/C Coordinator 8 9 80,122 Reimer, B. Director, Pnt. Acctg. 11 5 72,108 Stine, C. Director Corp Accounting 1 0 60,747 Gatti, J. Director Payroll Services 8 0 52,100 Saccente, M. Accounts Payable Manager 11 4 50,615 Gutierrez, S. Director, MIS 4 1 84,401 Blackford, R. Director Reimbursement 0 0 88,000 REGION I - --------- Anthony Ricci Adm.-Palm Grove 0 3 57,998 DiAnne Westbrook Adm.-Royalwood 2 2 70,000 Laurie Smith Adm.-Villa Maria 20 0 63,772 Katherine Campbell Adm.-Earlwood 0 4 61,800 Mona Fisk Adm.-Anaheim 3 6 67,699 Jacqueline Arcara Adm.-Devonshire 6 6 79,763 Rita Simms Adm.-Bay Crest 3 0 65,857 Darlene Quick Adm.-Carson 3 5 56,205 Renata Morokovich Adm.-Hemet 1 7 58,000 Polly Meza Adm.-Spring 31 1 36,540 REGION II - --------- Jennie Subnick Exec. Dir.-Fountain/ 3 8 90,619 Fountain R.C./Ashton Dana Francis Adm.-Carehouse 0 10 87,975 Karlin Garwood Adm.-Willow Creek 0 10 70,000 Jane Anderson Adm.-Woodland 7 4 79,695 Virginia Rafferty Adm.-Phoenix Liv. 1 1 69,960 April Lopez Adm.-Valley 0 6 61,800 Brian Bellentuoni Adm.-Sharon 0 1 75,000 REGION III - ---------- Cyd Lane Adm.-Coronado 9 0 80,000 Michelle Foster Adm.-Cityview 1 7 64,375 Peggy Brisgill Adm.-Colonial Manor 4 4 62,002 Debra Baumier Adm.-Guadalupe 1 9 56,945 Donna Grayson Adm.-Town & Country 9 0 52,409 Silvia Casas Adm.-Comanche Trail 2 10 53,170 Sharon McDonald Adm.-Heritage 1 2 52,430 Claudia Marberry Adm.-Lubbock 4 6 52,530
3
NAME POSITION SERVICE AS OF 10/1/97 CURRENT SALARY - ---- -------- --------------------- -------------- YEARS MONTHS --------- ---------- REGION IV - --------- Martin Hill Adm.-West Side 0 8 66,950 Joe Dennis Adm.-The Woodlands 0 0 65,000 Matthew Moore Adm.-Colonial-Tyler 0 6 62,552 Sharon Edmonson Adm.-Longview 11 1 68,128 Chris Rodrique Adm.-Beaumont 0 2 67,000 Victoria Costello Adm.-Tyler 1 1 57,750 REGION V - --------- Sharlyn Treadgill Adm.-Southwood 5 1 50,850 Laura Lea Adm.-Oakland Manor 1 4 49,468 Ronald Head Adm.-Southern Manor 0 4 56,375 Monte Hengst Adm.-Monument Hill 1 1 44,840 Kelly Carruthers Adm.-Live Oak 1 10 52,000 Cynthia Leketa Adm.-Oak Manor 0 2 50,000 Mike Koch Adm.-Oak Crest 6 6 49,400 ---------- (47 PEOPLE) $3,050,120 ==========
SEVERANCE IS 1 YEAR 4 EXHIBIT IV ---------- DIRECTORS AND RELATED POSITIONS -------------------------------
NAME POSITION SERVICE AS OF 10/1/97 CURRENT SALARY - ---- -------- --------------------- -------------- YEARS MONTHS --------- ---------- Rees, K. Dir. of Mktg.-Texas 1 2 $ 64,000 Chigaros, T. Dir. of Mktg.-Calif & AZ 0 4 92,000 Thompson, L. Dir. of Mktg.-Calif. 2 7 48,000 Tarver, L. Dir. of Mktg.-Texas 1 10 66,000 Groveman, D. Marketing 68,000 Behrnt, N. Therapy Management 0 5 67,000 Duncan, P. Therapy Management 2 2 75,168 Graber, L. Therapy Management 2 2 68,796 Appleton, N. Health Records Coord.-TX 2 0 39,330 Horsley, L. Q/A Nurse-TX 9 1 63,350 Redden, J. Q/A Nurse-TX 4 8 88,446 Shapiro, E. Q/A Nurse-TX 1 3 67,600 Schwab, J. Q/A Nurse-CA 1 2 71,400 Esmaeil, S. Q/A Nurse-CA 0 1 72,000 Jacobs, B. Corp. Activities 8 8 54,541 Christopher, Jr. C. Regional Safety Coord. 0 5 31,000 Cole, D. Tile Nurse-TX 1 11 57,000 Webb, A. Tile Nurse-TX 1 0 55,000 Hopp, J. Tile Nurse-TX 4 7 66,528 Hahn, C. Asst. Trainer 3 5 69,735 Ekiss, J. Asst. Trainer 2 0 63,336 Guidi, L. Secy - QH 35,000 Ricus Marketing 43,000 ---------- (23 PEOPLE) $1,422,230 ==========
5 EXHIBIT V --------- OTHER EXEMPT EMPLOYEES ----------------------
NAME POSITION SERVICE AS OF 10/1/97 CURRENT SALARY - ---- -------- --------------------- -------------- YEARS MONTHS --------- ---------- MIS - --- Hawley, S. Programmer/Analysis 2 6 $ 47,561 REIMBURSEMENT - ------------- Sparks, C. Reimburse. Specialist 2 4 85,700 Rossi, M. Reimburse. Specialist 57,000 OTHER - ----- Nagasaka, C. Financial Reports 1 2 51,000 Gonzales, D. Area Mktg. Dir.-TX 1 10 58,000 Fricke, L. Secretary 33,000 PATIENT ACCOUNTING - ------------------ Domaradzki, D. Supervisor, Pnt. Acctg. 19 1 42,402 Arambulo, W. Rep. Trainer, Tester 10 10 41,716 Sichmeller, D. Rep-CA 2 8 35,693 Columbus, M. Rep-CA 10 9 41,328 Banks, P. Rep-CA 1 9 41,322 Gonzalez, E. Rep-CA 0 5 38,295 Ali Mohammodi, L. Collector 30,000 Maddox, T. MCR, MGR 38,000 PATIENT ACCOUNTING - ------------------ Freeberg, J. Rep-AZ 1 2 35,000 Berotte, G. Rep-TX 3 9 35,786 Kuntz, K. Rep-TX 1 2 32,436 Neill, P. Rep-TX 8 4 34,398 Pate, M. Rep-TX 1 0 34,944 Graham, E. A/R 39,520 Scott, H. A/R 47,050 GENERAL ACCOUNTING - -------------------- Formoso, C. Sr. Staff Acct. 8 0 37,941 Rose, M. Staff Acct. 3 0 30,924 Formoso, F. Staff Acct. 7 3 36,056 Joe, D. Staff Acct. 0 9 31,350 Lam, S. Staff Acct. 2 2 32,416 --------- (26 PEOPLE) 1,068,838 =========
6 EXHIBIT VI ---------- NON EXEMPT EMPLOYEES --------------------
SEVERANCE SEVERANCE SERVICE AS OF CURRENT PAY PAY NAME POSITION 10/1/97 SALARY MONTHS AMOUNT - ---- --------- ----------------- ----------- --------- ---------- YEARS MONTHS ----- ------ Garcia, M. Lead Accts. Payable Rep. 9 2 $28,501 6 14,250 Turner, D. Accts. Payable Rep. 2 6 24,300 3 6,075 Halter, T. Accts. Payable Rep. 0 3 23,800 2 3,967 Luoma, L. Accts. Payable Rep. 1 6 24,199 3 6,050 Nunez, C. Accts. Payable Rep. 5 9 25,550 6 12,750 Riley, C. Accts. Payable Rep. 1 4 24,200 3 6,050 Seas, J. Accts. Payable Rep. 0 1 23,600 2 3,933 MIS - --- Garcia, R. Operator 1 4 30,405 3 7,601 Soleta, M. Night Operator 10 10 33,446 6 16,723 Menendez, M. Janitorial Service 9 3 24,186 6 12,093 Hildalgo, A. Janitorial Service 3 4 13,978 5 5,824 Da Silva, F. Office Services 1 9 24,297 3 6,074 Kagren, R. Receptionist 18 8 29,480 6 14,740 Buckley, C. Design 13 6 40,000 6 20,000 Burton, M. Cash/Bank Rec. 1 1 30,139 3 7,535 Moses, D. risk Mgmt. Asst. 9 4 32,971 6 16,486 Garrett B. DDE/MCR, Gen. Cash 0 3 26,000 2 4,333 Toledo, S. DDE/MCR, Refund 7 8 30,861 6 15,431 Hansberry, J. Construction 32,136 2 5,356 Nadin, C. Construction 18,990 2 3,165 PAYROLL - ------- Hoffman, A. Payroll Rep. 2 7 26,000 3 6,500
7
SEVERANCE SEVERANCE SERVICE AS OF CURRENT PAY PAY NAME POSITION 10/1/97 SALARY MONTHS AMOUNT - ---- --------- ----------------- ----------- --------- ---------- YEARS MONTHS ----- ------ Martinez, L. Payroll Rep. 0 4 26,000 2 4,427 Lemon, C. Payroll Rep. 0 0 26,561 2 4,333 Kalisz, C. Payroll Rep. 0 1 31,703 2 5,284 Puno, M. Insurance Rep. 2 7 27,437 3 6,859 Dexter, R. Office Services 3 0 25,041 5 10,434 -------- ---- -------- (26 PEOPLE) $703,731 $226,273 ======== ========
8 CONFIDENTIAL ------------ GENERAL AND SPECIAL RELEASE This General and Special Release ("Release") is given by _______________ ("Employee") to Summit Care Corporation ("Company"), to resolve amicably all matters between Employee and Company concerning Employee's separation of employment with Company. 1. Termination: Employee's employment with Company is terminated ----------- effective ____________________. 2. Severance Pay: This Release is given in consideration for receiving ------------- severance benefits under and in accordance with the Summit Care Corporation Special Severance Pay Plan (the "Plan") which is incorporated herein by this reference as if set forth in full. 3. Release: Employee (for himself/herself, his/her agents, heirs, ------- successors, assigns, executors and/or administrators) does hereby and forever release and discharge Company and its past and present parent, subsidiary and affiliated corporations, divisions or other entities, if any, as well as the successors, shareholders, officers, directors, heirs, predecessors, assigns, agents, employees, and representatives of each of them, past or present, from any and all causes of action, actions, contracts, damages, claims, liabilities, rights, interests and demands whatsoever kind or character, known or unknown, suspected to exist or not suspected to exist, which Employee has or may have against any released person or entity by reason of any and all acts, omissions, events or facts occurring or existing prior to the date of this Release, including, without limitation, all claims attributable to the employment of Employee, all claims attributable to the termination of his/her employment, and all claims arising under any federal, state or other governmental statute, regulation or ordinance or common law, such as, for example and without limitation, Title VII of the Civil Rights Acts of 1964 as amended, which prohibits discrimination on the basis of race, religion, color, sex and national origin, the Civil Rights Act of 1866, the Age Discrimination in Employment Act as amended, which prohibits discrimination on the basis of age, the California Fair Employment and Housing Act, which prohibits discrimination on the basis of race, religious creed, color, national origin, physical handicap, medical condition, marital status, sex and age, the California Labor Code, and wrongful termination claims, excepting only those obligations expressly recited to be performed hereunder and/or under the Plan. In light of the intention of Employee (for himself, herself, his/her agents, heirs, successors, assigns, executors and administrators) that this release extend to any and all claims of whatsoever kind or character, known or unknown, Employee expressly waives any and all rights granted by California Civil Code Section 1542 (or any other analogous federal and state law or regulation). Section 1542 reads as follows: Exhibit A - 1 A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HER SETTLEMENT WITH THE DEBTOR. 4. Return of All Documents and Property: Employee will return (or ------------------------------------ already has returned) to Company all property and documents of or concerning Company, however maintained. 5. Sole Document: This Release supersedes any and all prior or ------------- contemporaneous written or oral agreements, express or implied. Any modifications to this Release must be in writing to be effective. This Release shall be construed in accordance with the laws of the State of California. This Release will be interpreted in accordance with its fair meaning and not strictly for or against any party. 6. Employee's Understanding: Employee states that he/she has read this ------------------------ Release, that he/she has had sufficient time and opportunity to consider its terms, that he/she is signing it voluntarily, and that the only promises made to him/her to sign the Release are those stated above. Executed this _____ day of _______________, 199___. ---------------------------------------- Before me, the undersigned authority, on this day personally appeared ____________________, known to me to be the person whose name is subscribed to the foregoing Release, and acknowledged to me that said person executed the same for the purposes and consideration herein expressed. GIVEN UNDER MY HAND, AT OFFICE this _____ day of _______________, 199___. ---------------------------------------- Notary Public My commission expires: __________ Exhibit A - 2 -----END PRIVACY-ENHANCED MESSAGE-----