-----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, EjGAh4IfkyOf9iaJtx07nBq9MY3Acqx1ljkHsbfcXid4N0I7b1Pb6vyGU6RQqKUY DxMGUNZb2/JGE3UimwjNrA== 0000950148-98-000311.txt : 19980218 0000950148-98-000311.hdr.sgml : 19980218 ACCESSION NUMBER: 0000950148-98-000311 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980217 SROS: NASD FILER: 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-19411 FILM NUMBER: 98542001 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 10-Q 1 FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from: Commission file number 0-19411 SUMMIT CARE CORPORATION (Exact name of Registrant as specified in its charter) California 95-3656297 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2600 W. Magnolia Blvd. Burbank, California 91505-3031 (address of principal executive offices) (818) 841-8750 (Registrant's telephone number, including area code) Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by checkmark whether the Registrant (1) has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of Registrant's common stock outstanding at December 31, 1997 -- 6,812,500 ================================================================================ 2 SUMMIT CARE CORPORATION FORM 10-Q QUARTER ENDED DECEMBER 31, 1997 TABLE OF CONTENTS
Page of Form 10-Q --------- Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Income 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19
2 3 PART I SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share data)
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, 1997 1996 1997 1996 --------- --------- --------- --------- Net revenues $53,972 $46,181 $108,507 $95,088 Expenses: Salaries and benefits 24,132 22,309 47,742 43,386 Supplies 5,091 5,337 10,261 10,381 Purchased services 12,844 12,237 26,211 24,144 Provision for doubtful accounts 957 721 1,780 967 Other expenses 3,738 2,824 7,484 6,258 Rent 762 713 1,525 1,410 Depreciation and amortization 2,151 1,840 4,235 3,632 Interest (net of interest income, $169 and $371 in 1997 and $179 and $393 in 1996, respectively) 2,311 1,934 4,588 4,057 ------- ------- -------- ------- 51,986 47,915 103,826 94,235 ------- ------- -------- ------- Income (loss) before provision for income taxes 1,986 (1,734) 4,681 853 Provision (benefit) for income taxes 784 (685) 1,849 337 ------- ------- -------- ------- Net income (loss) 1,202 $(1,049) 2,832 $ 516 ======= ======= ======== ======= Earnings (loss) per share: Basic $ 0.18 $ (0.15) $ 0.42 $ 0.08 ======= ======= ======== ======= Diluted $ 0.18 $ (0.15) $ 0.41 $ 0.08 ======= ======= ======== =======
See accompanying notes. 3 4 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands)
DECEMBER 31, 1997 JUNE 30, 1997 ----------------- ------------- (Unaudited) (Note) ASSETS Current assets: Cash and cash equivalents $ 1,702 $ 3,994 Accounts receivable, less allowance for doubtful accounts: December 1997 - $2,474; June 1997 - $2,028 36,343 33,749 Supplies inventory, at cost 3,204 2,690 Other current assets 15,569 12,356 -------- -------- Total current assets 56,818 52,789 Property and equipment, at cost: Land and land improvements 20,036 19,513 Buildings and leasehold improvements 175,078 161,080 Furniture and equipment 24,361 23,978 Construction in progress 5,298 5,947 -------- -------- 224,773 210,518 Less accumulated depreciation and amortization 30,220 28,605 -------- -------- 194,553 181,913 Notes receivable, less allowance for doubtful accounts: December 1997 - $363; June 1997 - $322 6,842 6,859 Other assets 9,207 8,955 -------- -------- $267,420 $250,516 ======== ========
NOTE: The balance sheet at June 30, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 4 5 SUMMIT CARE CORPORATION CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
DECEMBER 31, 1997 JUNE 30, 1997 ----------------- ------------- (Unaudited) (Note) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Payable to bank $ 2,985 $ 4,678 Accounts payable 36,776 29,586 Employee compensation and benefits 4,622 5,877 Income taxes payable 1,051 -- -------- -------- Total current liabilities 45,434 40,141 Long-term debt 129,754 121,452 Deferred income taxes 7,511 7,511 -------- -------- Total liabilities 182,699 169,104 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 2,000 authorized shares, none issued -- -- Common stock, no par value, 100,000 authorized shares; 6,813 and 6,776 issued and outstanding, respectively 52,020 51,543 Retained earnings 32,701 29,869 -------- -------- Total shareholders' equity 84,721 81,412 -------- -------- $267,420 $250,516 ======== ========
NOTE: The balance sheet at June 30, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. 5 6 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
SIX MONTHS ENDED DECEMBER 31, 1997 1996 -------- -------- Operating activities: Net income $ 2,832 $ 516 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,235 3,632 (Increase) in accounts receivable, net (2,594) (5,027) (Increase) in supplies inventory (514) (66) (Increase) in other current assets (3,152) (1,602) Increase in accounts payable 7,190 6,805 (Decrease) increase in employee compensation and benefits (1,255) 294 Increase (decrease) in income taxes payable 1,051 (989) -------- -------- Total adjustments 4,961 3,047 -------- -------- Net cash provided by operating activities 7,793 3,563 -------- -------- Investing activities: Issuance of notes receivable (2,281) (550) Principal payments of notes receivable 2,294 253 Additions to property and equipment (6,706) (12,049) Property and equipment related to purchase of nursing center (4,209) -- (Increase) in other assets (470) (1,579) -------- -------- Net cash (used in) investing activities (11,372) (13,925) -------- -------- Financing activities: (Decrease) in payable to bank (1,693) (1,229) Principal payments on long-term debt (10,497) (8,435) Proceeds from long-term debt 13,000 19,000 Proceeds from exercise of stock options 477 -- -------- -------- Net cash provided by financing activities 1,287 9,336 -------- -------- (Decrease) in cash and cash equivalents (2,292) (1,026) Cash and cash equivalents at beginning of year 3,994 2,658 -------- -------- Cash and cash equivalents at end of the period $ 1,702 $ 1,632 ======== ========
6 7 SUMMIT CARE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) (In thousands)
SIX MONTHS ENDED DECEMBER 31, 1997 1996 ------ ----- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5,015 $ 5,161 Income taxes 808 1,654 Non cash investing and financing activities: Acquisition of nursing care center under capital lease 5,799 -- Capital lease obligation (5,799) --
See accompanying notes. 7 8 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (In thousands) 1. The unaudited financial information included herein, in the opinion of management, reflects all adjustments (all of which are of a normal recurring nature except for a special charge recorded in December 1996, see Note 5), which are considered necessary to fairly state the Company's financial position, its cash flows and the results of operations. These statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the Company's annual report filed on Form 10-K for the year ended June 30, 1997. The interim financial information herein is not necessarily representative of that to be expected for a full year. 2. Certain amounts have been reclassified to conform with fiscal 1998 presentations. 3. The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Six Months Ended December 31, December 31, 1997 1996 1997 1996 ------- ------- ------- ------- Numerator: Net income (loss) $1,202 $(1,049) $2,832 $ 516 Denominator: Denominator for basic earnings per share - weighted average shares 6,802 6,775 6,789 6,774 Effect of stock options 58 66 46 80 ------ ------- ------ ------ Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 6,860 6,841 6,835 6,854 Earnings per share: Basic $ 0.18 $ (0.15) $ 0.42 $ 0.08 ====== ======= ====== ====== Diluted $ 0.18 $ (0.15) $ 0.41 $ 0.08 ====== ======= ====== ======
8 9 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) (In thousands) 4. Other current assets consist of the following:
December 31, 1997 June 30, 1997 ----------------- ------------- Due from third-party payors $ 4,743 $ 2,491 Deferred tax assets 1,956 1,956 Notes receivable 1,257 1,253 Prepaid expenses 2,526 1,004 Income tax receivable 3,000 4,128 Other receivables 2,087 1,524 ------- ------- $15,569 $12,356 ======= =======
5. In December 1996, the Company recorded a special charge of $4,000 against revenues ($2,420 against net income) as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995 completed in the quarter ended December 31, 1996, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ended December 31, 1996. 6. In July 1997, the Company opened its fifth assisted living center with 66 beds in Orange, California, at a total cost of construction of $3,924. In September 1997, the Company exercised a purchase option in the amount of $1,871 in its lease of a 111-bed skilled nursing care center in La Grange, Texas. In November 1997, the Company opened 47 additional beds at one of its two skilled nursing care centers in Lubbock, Texas, at an approximate cost of construction of $1,900. In December 1997, the Company acquired the assets of a 194 bed skilled nursing care center in McAllen, Texas at an approximate cost of $10,058. The Company's bank line of credit was used to finance the two construction projects, the exercise of the purchase option and $4,259 of the acquisition cost of the McAllen center. The balance of the McAllen acquisition cost of $5,799 was financed with a capitalized lease obligation. 7. In December 1997, the Company amended its secured bank line of credit by reducing the commitment from $40,000 to $33,000. One of the four lenders was deleted from the credit agreement, and the revolving credit termination date was extended one year to September 30, 1999. No other terms and conditions were added, deleted or amended. 8. Recent Accounting Pronouncement: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which is effective for fiscal years ending after December 15, 1997. This Statement is not required to be applied to interim financial statements in the initial year of its application. SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial 9 10 SUMMIT CARE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) (Unaudited) (In thousands) statements. It also requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Under existing accounting standards, the Company has reported its operations as one line of business because substantially all of its revenues have been derived from its skilled nursing care centers and assisted living centers and closely related ancillary services. The Company is presently evaluating the new standard in order to determine its effect, if any, on the way the Company might report its operations in the future. 9. Subsequent Event: On February 6, 1998, the Company and Fountain View, Inc., a privately-held skilled nursing care company based in Los Angeles, California, entered into a definitive merger agreement for Fountain View to acquire the Company. According to the terms of the merger agreement, the Company's 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 the Company's debt. On February 13, 1998, Fountain View commenced a cash tender offer for all outstanding shares of the Company's stock at $21.00 per share. Following consummation of the tender offer, subject to the terms and conditions contained in the merger agreement, the Company will be merged with a wholly owned subsidiary of Fountain View, and each remaining outstanding share of the Company will be converted in the merger into $21.00 in cash. 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. 10 11 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands) RESULTS OF OPERATIONS QUARTER ENDED DECEMBER 31, 1997 COMPARED TO QUARTER ENDED DECEMBER 31, 1996 Net revenues increased $7,791 or 16.9% from $46,181 for the quarter ended December 31, 1996 to $53,972 for the quarter ended December 31, 1997. The increase occurred due to the following:
AMOUNT PERCENT ------ ------- 1. Special charge to Medicare revenues $4,000 51.4% 2. Increased census days and revenue rates 2,035 26.1 3. New beds opened in fiscal years 1997 and 1998 2,017 25.9 4. Pharmacy operations 516 6.6 5. Rehabilitative and other specialty services (777) (10.0) ------ ----- $7,791 100.0% ====== =====
In December 1996, the Company recorded a special charge of $4,000 against Medicare revenues as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ended December 31, 1996. Average occupancy was 86.7% in the second quarter ended December 31, 1997 and 84.4% in the second quarter ended December 31, 1996. Excluding newly constructed beds, the average occupancy was 89.6% in the second quarter ended December 31, 1997 and 86.3% in the same quarter last year. The Company's quality mix (revenues from Medicare, managed care and private pay patients as a percentage of gross revenues excluding pharmacy revenues) was 67.5% in the second quarter ended December 31, 1997 and 69.5% in the second quarter ended December 31, 1996. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues, before the effect of the special charge, increased from 86.5% of net revenues in the second quarter ended December 31, 1996 to 86.6% in the second quarter ended December 31, 1997. Total salaries and employee related benefits were 44.7% of net revenues in the second quarter ended December 31, 1997 compared to 44.5% of net revenues, before the effect of the special charge, in the second quarter ended December 31, 1996. Expenses increased $3,334 or 7.7% from $43,428 in the second quarter ended December 31, 1996 to $46,762 in the second quarter ended December 31, 1997 for the following reasons: 11 12 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.)
AMOUNT PERCENT ------ ------- 1. Expenses relating to new beds opened in fiscal years 1997 and 1998 $1,673 50.2% 2. Salaries and benefits 1,012 30.4 3. Other expenses 764 22.9 4. Rehabilitative and other specialty services (115) (3.5) ------ ----- $3,334 100.0% ====== =====
Income before rental, depreciation and amortization and interest expense, net of interest income, increased $4,457 or 161.9% from $2,753 in the second quarter ended December 31, 1996 to $7,210 in the second quarter ended December 31, 1997, and was 13.4% of net revenues in the second quarter ended December 31, 1997 compared to 6.0% in the second quarter ended December 31, 1996 (and 13.5% of net revenues before the special charge to revenues). Rent, depreciation and amortization and interest expense, net of interest income, increased by $737 or 16.4% from $4,487 in the second quarter ended December 31, 1996 to $5,224 in the second quarter ended December 31, 1997. Substantially all of this increase was due to interest expense related to higher debt and depreciation expense related to capital additions. The Company's effective tax rate was 39.5% of income in the second quarter ended December 31, 1997 and in the second quarter ended December 31, 1996. Net income increased $2,251 from a net loss of $1,049 in the second quarter ended December 31, 1996 to net income of $1,202 in the second quarter ended December 31, 1997. The net loss of $1,049 in the second quarter ended December 31, 1996, included $2,420 for the special charge described earlier. Net income before the special charge, decreased $169 or 12.3% from $1,371 in the second quarter ended December 31, 1996 to $1,202 in the second quarter ended December 31, 1997. 12 13 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED TO SIX MONTHS ENDED DECEMBER 31, 1996 Net revenues increased $13,419 or 14.1% from $95,088 for the six months ended December 31, 1996 to $108,507 for the six months ended December 31, 1997. The increase occurred due to the following:
AMOUNT PERCENT ------ ------- 1. Increased census days and revenue rates $4,874 36.3% 2. Special charge to Medicare revenues 4,000 29.8 3. New beds opened in fiscal years 1997 and 1998 3,973 29.6 4. Pharmacy operations 1,406 10.5 5. Rehabilitative and other specialty services (834) (6.2) ------- ----- $13,419 100.0% ======= =====
In December 1996, the Company recorded a special charge of $4,000 against Medicare revenues as a result of adjustments proposed by Medicare in connection with an audit of fiscal 1995, which would have an effect on revenues for that fiscal year, fiscal 1996 and the six months ended December 31, 1996. Average occupancy was 87.2% in the six months ended December 31, 1997 and 84.0% in the six months ended December 31, 1996. Excluding newly constructed beds, the average occupancy was 90.3% in the six months ended December 31, 1997 and 85.9% in the same period last year. The Company's quality mix (revenues from Medicare, managed care and private pay patients as a percentage of gross revenues excluding pharmacy revenues) was 68.3% in the six months ended December 31, 1997 and 69.7% in the six months ended December 31, 1996. Expenses, consisting of salaries and benefits, supplies, purchased services, provision for doubtful accounts and other expenses as a percent of net revenues, before the effect of the special charge, increased from 85.9% of net revenues in the six months ended December 31, 1996 to 86.1% in the six months ended December 31, 1997. Total salaries and employee related benefits were 44.0% of net revenues in the six months ended December 31, 1997 compared to 43.8% of net revenues, before the effect of the special charge, in the six months ended December 31, 1996. 13 14 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Expenses increased $8,342 or 9.8% from $85,136 in the six months ended December 31, 1996 to $93,478 in the six months ended December 31, 1997 for the following reasons:
AMOUNT PERCENT ------ ------- 1. Expenses relating to new beds opened in fiscal years 1997 and 1998 $3,232 38.7% 2. Salaries and benefits 2,776 33.3 3. Other expenses 1,540 18.5 4. Rehabilitative and other specialty services 794 9.5 ------ ----- $8,342 100.0% ====== =====
Income before rental, depreciation and amortization and interest expense, net of interest income, increased $5,077 or 51.0% from $9,952 in the six months ended December 31, 1996 to $15,029 in the six months ended December 31, 1997 and was 13.9% of net revenues in the six months ended December 31, 1997 compared to 10.5% in the six months ended December 31, 1996 (and 14.1% of net revenues before the special charge to revenues). Rent, depreciation and amortization and interest expense, net of interest income, increased by $1,249 or 13.7% from $9,099 in the six months ended December 31, 1996 to $10,348 in the six months ended December 31, 1997. Substantially all of this increase was due to interest expense related to higher debt and depreciation expense related to capital additions. The Company's effective tax rate was 39.5% of income in the six months ended December 31, 1997 and in the six months ended December 31, 1996. Net income increased $2,316 from $516 in the six months ended December 31, 1996 to $2,832 in the six months ended December 31, 1997. The net income of $516 for the six months ended December 31, 1996 included $2,420 for the special charge described earlier. Net income before the special charge, decreased $104 or 3.5% from $2,936 in the six months ended December 31, 1996 to $2,832 in the six months ended December 31, 1997. 14 15 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) Selected statistics are shown below:
FISCAL ------------------- INCREASE 1998 1997 (DECREASE) ------ ----- -------- Facilities in operation at: September 30 40 39 1 December 31 41 39 2 Nursing center beds at: September 30 4,631 4,629 2 December 31 4,872 4,629 243 Assisted living beds at: September 30 475 468 7 December 31 475 468 7 Total beds at: September 30 5,106 5,097 9 December 31 5,347 5,097 250 Total occupancy: First quarter 87.7% 83.6% 4.1% Second quarter 86.7% 84.4% 2.3% Nursing center occupancy: First quarter 88.6% 84.1% 4.5% Second quarter 87.5% 84.9% 2.6% Assisted living center occupancy: First quarter 79.6% 78.7% 0.9% Second quarter 79.5% 79.6% (0.1)% Percentage of revenues from private, managed care and Medicare (quality mix): First quarter 69.1% 69.9% (0.8)% Second quarter 67.5% 69.5% (2.0)% Percentage of revenues from Medicaid: First quarter 30.9% 30.1% 0.8% Second quarter 32.5% 30.5% 2.0%
15 16 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had $1,702 in cash and cash equivalents and working capital of $11,384. During the six months ended December 31, 1997, the Company's cash and cash equivalents decreased by $2,292. Net cash provided by operating activities increased $4,230 from $3,563 in the first six months of fiscal 1996 to $7,793 in the first six months of 1997. Net cash provided by operating activities, plus an increase in credit line borrowings outstanding of $9,000 and the acquisition of a capital lease of $5,799, related to the purchase of a skilled nursing care center in McAllen, Texas (see Note 6), were used principally for capital expenditures of $6,706 for existing centers, $10,008 for property and equipment related to the purchase of the skilled nursing care center described above and principal payments on long-term debt of $6,497. Accounts receivable increased $2,594 primarily due to payment delays in Medicare and Medicaid. At December 31, 1997, the Company's average accounts receivable days outstanding were 40 compared to 41 days outstanding at June 30, 1997 and December 31, 1996. Long-term debt, totaling $129,754 at December 31, 1997, consisted of mortgage indebtedness of $8,083 on three properties, $16,821 on five capitalized leases, $90,850 in senior secured debt, and credit line borrowings of $14,000. The Company believes that it has sufficient cash flow from its existing operations and from its bank line of credit to service long-term debt due within one year of $8,956 (the Company intends to borrow this amount against its bank line of credit which has a revolver extending to September 30, 1999 followed by a three year payment period), to make normal recurring capital replacements, additions and improvements of approximately $6,400 planned for the next 12 months, to develop properties over the next 12 months costing approximately $800 and to meet other long-term working capital needs and obligations. The Company expects, on a selective basis, to pursue expansion of its existing centers and the acquisition or development of additional centers in markets where demographics and competitive factors are favorable. 16 17 SUMMIT CARE CORPORATION FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONT.) (Dollars in thousands) IMPACT OF INFLATION The health care industry is labor intensive. Wages and other expenses increase more rapidly during periods of inflation and when shortages in the labor market occur. In addition, suppliers pass along rising costs in the form of higher prices. Increases in reimbursement rates under Medicaid generally lag behind actual cost increases, so that the Company may have difficulty covering them in a timely fashion. RECENT ACCOUNTING PRONOUNCEMENT See Note 8 to Consolidated Financial Statements. 17 18 PART II SUMMIT CARE CORPORATION OTHER INFORMATION QUARTER ENDED DECEMBER 31, 1997 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.45 Limited Liability Company Agreement of APS-Summit Care Pharmacy, L.L.C., dated November 30, 1996. 10.46 Robert Crone-South Texas Health Care, Inc. Agreement of Purchase and Sale of Assets of Briarcliff Nursing and Rehabilitation Center dated November 24, 1997. 10.47 Agreement and Plan of Merger Among Summit Care Corporation, Fountain View, Inc., FV-SCC Acquisition Corporation and Heritage Fund II, L.P., dated February 6, 1998. 10.48 Summit Care Corporation Special Severance Pay Plan dated February 6, 1998. (b) Reports on Form 8-K On February 11, 1998 the Company filed a current report on Form 8-K with respect to its execution of an Agreement and Plan of Merger Among Summit Care Corporation, Fountain View, Inc., FV-SCC Acquisition Corporation and Heritage Fund II, L.P., dated February 6, 1998. 18 19 SUMMIT CARE CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SUMMIT CARE CORPORATION Date: February 13, 1998 By: S/DERWIN L. WILLIAMS ------------------------------------ Derwin L. Williams Sr.Vice President - Finance, Chief Financial Officer and Treasurer (Principal Financial Officer) Date: February 13, 1998 By: S/JOHN FARBER ------------------------------------- John Farber Vice President - Controller and Secretary (Principal Accounting Officer) 19 EX-10.45 2 EXHIBIT 10.45 1 EXHIBIT 10.45 ================================================================================ LIMITED LIABILITY COMPANY AGREEMENT OF APS-SUMMIT CARE PHARMACY, L.L.C., a Delaware Limited Liability Company Dated as of November 30, 1996 ================================================================================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I - ORGANIZATIONAL MATTERS..................................... 1 1.1 Formation......................................................... 1 1.2 Name.............................................................. 1 1.3 Principal Place of Business; Other Places of Business............. 1 1.4 Purpose........................................................... 1 1.5 Certificate of Formation; Filings................................. 1 1.6 Fictitious Business Name Statements............................... 1 1.7 Designated Agent for Service of Process........................... 2 1.8 Term.............................................................. 2 ARTICLE 2 - DEFINITIONS................................................ 2 2.1 "Act"............................................................. 2 2.2 "Additional Members".............................................. 2 2.3 "Affected Member"................................................. 2 2.4 "Adjusted Capital Account Deficit"................................ 2 2.5 "Affiliate"....................................................... 2 2.6 "Agreement"....................................................... 2 2.7 "Assignee"........................................................ 3 2.8 "Bona Fide Offer"................................................. 3 2.9 "Business"........................................................ 3 2.10 "Capital Account"................................................ 3 2.11 "Capital Contributions".......................................... 4 2.12 "Cash Available for Distribution"................................ 4 2.13 "Certificate".................................................... 4 2.14 "Code"........................................................... 4 2.15 "Company"........................................................ 4 2.16 "Company Assets"................................................. 4 2.17 "Company Minimum Gain"........................................... 4 2.18 "Company Price".................................................. 4 2.19 [Intentionally deleted.)......................................... 4 2.20 "Depreciation"................................................... 4 2.21 "Economic Interest".............................................. 5 2.22 "Fundamental Change"............................................. 5 2.23 "Gross Asset Value".............................................. 6 2.24 "Immediate Family"............................................... 7 2.25 "Incapacity"..................................................... 7 2.26 "Indemnitee"..................................................... 7 2.27 "Majority in Interest"........................................... 7 2.28 "Majority of Remaining Members".................................. 7 2.29 "Member Minimum Gain"............................................ 7 2.30 "Member Nonrecourse Debt"........................................ 7 2.31 "Member Nonrecourse Deductions".................................. 7
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Page ---- 2.32 "Members"................................................. 7 2.33 "Membership Interest" or "Interest"....................... 7 2.34 "Net Profits" or "Net Losses"............................. 7 2.35 "Nonrecourse Deductions".................................. 8 2.36 "Nonrecourse Liability"................................... 8 2.37 "Non-Transferring Members"................................ 8 2.38 "Offerer"................................................. 8 2.39 "Offer"................................................... 8 2.40 "Offer by Transferor"..................................... 8 2.41 "Operating Cash Expenses"................................. 9 2.42 "Ordinary Course"......................................... 9 2.43 "Percentage Interest"..................................... 9 2.44 "Person".................................................. 9 2.45 "Recourse Liability"...................................... 9 2.46 "Regulations"............................................. 9 2.47 "Regulatory Allocations".................................. 9 2.48 "Representative".......................................... 9 2.49 "Reserves"................................................ 9 2.50 "Responsible Party"....................................... 9 2.51 "Substitute Member"....................................... 9 2.52 "Summit Care"............................................. 9 2.55 "Supermajority in Interest"............................... 9 2.54 "Terminating Capital Transaction"......................... 10 2.55 "Termination Payment"..................................... 10 2.56 "Transfer"................................................ 10 2.57 "Transferee".............................................. 10 2.58 "Transferor".............................................. 10 2.59 "Unaffected Members"...................................... 10 ARTICLE 3 - CAPITAL; CAPITAL ACCOUNTS AND MEMBERS..................... 10 3.1 Initial Capital Contributions of Members........................ 10 3.2 Additional Capital Contributions by Member...................... 10 3.3 Capital Accounts................................................ 11 3.4 Additional Members.............................................. 11 3.5 Member Capital.................................................. 11 3.6 Member Loans.................................................... 11 3.7 Liability of Members............................................ 11 ARTICLE 4 - DISTRIBUTIONS............................................. 12 4.1 Distributions of Cash Available for Distribution................ 12 4.2 Distributions Upon Liquidation.................................. 12 4.3 Withholding..................................................... 12 4.4 Distributions in Kind........................................... 13 4.5 Limitations on Distributions.................................... 13
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Page ---- ARTICLE 5 - ALLOCATIONS OF NET PROFITS AND NET LOSSES................... 13 5.1 General Allocation of Net Profits and Losses........................ 13 5.2 Regulatory Allocations.............................................. 13 5.3 Tax Allocations..................................................... 15 5.4 Other Provisions.................................................... 15 ARTICLE 6 - OPERATIONS.................................................. 16 6.1 Management........................................................ 16 6.2 Reliance By Third Parties......................................... 18 6.3 Compensation...................................................... 18 6.4 Records and Reports............................................... 18 6.5 Indemnification and Liability of the Member....................... 19 6.6 Covenant Not To Compete........................................... 20 6.7 Services.......................................................... 21 ARTICLE 7 - INTERESTS AND TRANSFERS OF INTERESTS........................ 21 7.1 Transfers......................................................... 21 7.2 Further Restrictions.............................................. 21 7.3 Rights of Assignees............................................... 22 7.4 Admissions and Withdrawals........................................ 22 7.5 Payment Upon Withdrawal of Member................................. 22 7.6 Admission of Assignees as Substitute Members...................... 22 7.7 Withdrawal of Members............................................. 23 7.8 Conversion of Membership Interest................................. 23 7.9 Right of First Refusal............................................ 23 7.10 Buy and Sell Rights............................................... 25 7.11 Option to Purchase Upon Fundamental Change........................ 26 ARTICLE 8 - DISSOLUTION, LIQUIDATION, AND TERMINATION OF THE COMPANY................................................................. 27 8.1 Limitations................................................... 27 8.2 Exclusive Causes.............................................. 27 8.3 Effect of Dissolution......................................... 27 8.4 No Capital Contribution Upon Dissolution...................... 28 8.5 Liquidation................................................... 28 ARTICLE 9 - MISCELLANEOUS............................................... 28 9.1 Amendments.......................................................... 28 9.2 Accounting and Fiscal Year.......................................... 29 9.3 Meetings............................................................ 29 9.4 Entire Agreement.................................................... 29
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Page ---- 9.5 Further Assurances............................................. 29 9.6 Notices........................................................ 29 9.7 Tax Matters.................................................... 29 9.8 Governing Law.................................................. 30 9.9 Arbitration.................................................... 30 9.10 Construction................................................... 30 9.11 Captions - Pronouns............................................ 30 9.12 Binding Effect................................................. 30 9.13 Severability................................................... 30 9.14 Confidentiality................................................ 30 9.15 Counterparts................................................... 31 9.16 No Referrals................................................... 31
iv 6 LIMITED LIABILITY COMPANY AGREEMENT OF APS-SUMMIT CARE PHARMACY, L.L.C. THIS LIMITED LIABILITY COMPANY AGREEMENT (the "AGREEMENT") is made and entered into as of the 30th day of November, 1996, by and between American Pharmaceutical Services, Inc., a Delaware corporation ("APS"), and Summit Care Pharmacy, Inc., a California corporation ("SCPI"; each of APS and SCPI are a MEMBER, as defined below) for the purpose of forming APS-Summit Care Pharmacy, L.L.C. (the "COMPANY"), a limited liability company organized under the Delaware Limited Liability Company Act (the "ACT"). ARTICLE 1 ORGANIZATIONAL MATTERS 1.1 FORMATION. The Members hereby form the Company under the Act for the purposes and upon the terms and conditions hereinafter set forth. The rights and liabilities of the Members of the Company shall be as provided in the Act, except as otherwise expressly provided herein. In the event of any inconsistency between any terms and conditions contained in this Agreement and any nonmandatory provisions of the Act, the terms and conditions contained in this Agreement shall govern. 1.2 NAME. The name of the Company shall be "APS-Summit Care Pharmacy, L.L.C." The Company may also conduct business at the same time under one or more fictitious names if a Majority in Interest determines that such is in the best interests of the Company. The Members may, upon the written consent of a Majority in Interest, change the name of the Company, from time to time, in accordance with applicable law. 1.3 PRINCIPAL PLACE OF BUSINESS; OTHER PLACES OF BUSINESS. The principal place of business of the Company is located at 2324 Ridgepoint Drive, Suite G-1, Austin, Texas 78754 or such other place within or outside the State of Delaware as a Majority in Interest may from time to time designate. The Company may maintain offices and places of business at such other place or places within or outside the State of Delaware as a Majority in Interest deems advisable. 1.4 PURPOSE. The Company shall provide institutional pharmacy services to nursing homes, retirement centers and the patients and residents residing in such facilities, and may engage in any and all other lawful business, purpose or activity in which a limited liability company may be engaged under applicable law (including, without limitation, the Act). 1.5 CERTIFICATE OF FORMATION; FILINGS. The Members shall cause to be executed and filed a Certificate of Formation in the form attached as Schedule I hereto (the "CERTIFICATE") in the Office of the Delaware Secretary of State as required by the Act. Any Member may, upon the written consent of a Majority in Interest, execute and file any duly authorized amendments to the Certificate from time to time in a form prescribed by the Act. 1.6 FICTITIOUS BUSINESS NAME STATEMENTS. Following the execution of this Agreement, fictitious business name statements shall be filed and published when and if a Majority in Interest determines it necessary. Any such statement shall be renewed as required by applicable law. 7 1.7 DESIGNATED AGENT FOR SERVICE OF PROCESS. The Company shall continuously maintain a registered office and a designated and duly qualified agent for service of process on the Company in the State of Delaware. 1.8 TERM. The Company shall commence on the date that the Certificate is filed with the Office of the Delaware Secretary of State, and shall continue until terminated pursuant to this Agreement. ARTICLE 2 DEFINITIONS Capitalized words and phrases used and not otherwise defined elsewhere in this Agreement shall have the following meanings: 2.1 "ACT" is defined in the Preamble. 2.2 "ADDITIONAL MEMBERS" means those Persons admitted to the Company pursuant to Paragraph 3.4 of this Agreement. 2.3 "AFFECTED MEMBER" is defined in Paragraph 7.11.1. 2.4 "ADJUSTED CAPITAL ACCOUNT DEFICIT" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant fiscal year, after giving effect to the following adjustments: 2.4.1 Add to such Capital Account the following items: (a) The amount, if any, that such Member is obligated to contribute to the Company pursuant to this Agreement upon liquidation of such Member's Interest; and (b) The amount that such Member is obligated to restore or is deemed to be obligated to restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c) or the penultimate sentence of each of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and 2.4.2 Subtract from such Capital Account such Member's share of the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith. 2.5 "AFFILIATE" means, with reference to a specified Person: (a) a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person, (b) any Person that is an officer, partner or trustee of, or serves in a similar capacity with respect to, the specified Person, or for which the specified Person is an officer, partner or trustee, or serves in a similar capacity, or (c) any member of the Immediate Family of the specified Person. 2.6 "AGREEMENT" is defined in the Preamble. 2 8 2.7 "ASSIGNEE" means any Person (a) to whom a Member (or assignee thereof) Transfers all or any part of its Interest, and (b) which has not been. admitted to the Company as a Substitute Member pursuant to Paragraph 7.6 of this Agreement. 2.8 "BONA FIDE OFFER" shall mean an offer in writing signed by a third party offeror or offerors (who must be a Person financially capable of carrying out the term of such Bona Fide Offer), in a form legally enforceable against such third party offeror or offerors. 2.9 "BUSINESS" means the provision of institutional pharmacy services to nursing homes, retirement centers and the patients and residents residing in such facilities, or any and all other lawful business, purpose or activity in which the Company may be engaged. 2.10 "CAPITAL ACCOUNT" means the Capital Account maintained for each Member on the Company's books and records in accordance with the following provisions: 2.10.1 To each Member's Capital Account there shall be added (a) such Member's Capital Contributions, (b) such Member's allocable share of Net Profits and any items in the nature of income or gain that are specially allocated to such Member pursuant to Article 5 hereof or other provisions of this Agreement, and (c) the amount of any Company liabilities assumed by such Member or which are secured by any property distributed to such Member. 2.10.2 From each Member's Capital Account there shall be subtracted (a) the amount of (i) cash and (ii) the Gross Asset Value of any Company Assets (other than cash) distributed to such Member (other than any payment of principal and/or interest to such Member pursuant to the terms of a loan made by the Member to the Company) pursuant to any provision of this Agreement, (b) such Member's allocable share of Net Losses and any other items in the nature of expenses or losses that are specially allocated to such Member pursuant to Article 5 or other provisions of this Agreement. 2.10.3 In the event any interest in the Company is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred interest. 2.10.4 In determining the amount of any liability for purposes of Paragraphs 2.10.1 and 2.10.2 hereof, there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. 2.10.5 The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Sections 1.704-1(b) and 1.704-2 and shall be interpreted and applied in a manner consistent with such Regulations. In the event that a Majority in Interest shall determine that it is prudent to modify the manner in which the Capital Accounts, or any additions or subtractions thereto, are computed in order to comply with such Regulations, the Members may, upon the written consent of a Majority in Interest, make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Member pursuant to Article 8 hereof upon the dissolution of the Company. Upon the written consent of a Majority in Interest, the Members shall also make (a) any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of Company capital reflected on the Company's balance sheet, as computed for book purposes, in accordance with Regulations 3 9 Section 1.704-1(b)(2)(iv)(q), and (b) any appropriate modifications in the event that unanticipated events might otherwise cause this Agreement not to comply with Regulations Sections 1.704-1(b) and 1.704-2. 2.11 "CAPITAL CONTRIBUTIONS" means, with respect to any Member, the total amount of money and the initial Gross Asset Value of property (other than money), less any liabilities of such Member assumed by the Company or any liabilities which are secured by any property contributed to the capital of the Company by such Member, whether as an initial Capital Contribution or as an additional Capital Contribution. 2.12 "CASH AVAILABLE FOR DISTRIBUTION" means, with respect to any fiscal year, all Company cash receipts (excluding the proceeds from any Terminating Capital Transaction), after deducting payments for Operating Cash Expenses, payments required to be made in connection with any loan to the Company or any other loan secured by a lien on any Company Assets, capital expenditures and any other amounts set aside for the restoration, increase or creation of reasonable Reserves. 2.13 "CERTIFICATE" means the Certificate of Formation of the Company filed under the Act in the Office of the Delaware Secretary of State for the purpose of forming the Company as a Delaware limited liability company, and any duly authorized, executed and filed amendments or restatements thereof. 2.14 "CODE" means the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law). 2.15 "COMPANY" is defined in the Preamble. 2.16 "COMPANY ASSETS" means all direct and indirect interests in real and personal property owned by the Company from time to time, and shall include both tangible and intangible property (including cash and cash equivalents). 2.17 "COMPANY MINIMUM GAIN" has the meaning set forth in Regulations Sections 1.7042(b)(2) and 1.704-2(d)(1) for the phrase "partnership minimum gain." 2.18 "COMPANY PRICE" is defined in Paragraph 7.10.1 2.19 [Intentionally deleted.] 2.20 "DEPRECIATION" means, for each fiscal year or other period, an amount equal to the federal income tax depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method agreed to by a Majority in Interest. 4 10 2.21 "ECONOMIC INTEREST" means a Person's right to share in the Net Profits, Net Losses, or similar items of, and to receive distributions from, the Company, but does not include any other rights of a Member including, without limitation, the right to vote or to participate in the management of the Company, or, except as specifically provided in this Agreement or required under the Act, any right to information concerning the business and affairs of the Company. 2.22 "FUNDAMENTAL CHANGE" means the happening of any of the following events with respect to a Member (or, in the case of SCPI, with respect to either SCPI or Summit Care), without receiving the written consent of a majority in interest of the Unaffected Members: (a) the sale of substantially all of its assets to a Person or a group of associated or affiliated Persons who are not affiliated with such Member (or, in the case of SCPI, with either SCPI or Summit Care, as the case may be); (b) the sale, issuance, exchange or other disposition of more than fifty percent (50%) of any class or series of the outstanding capital stock of such Member (or, in the case of SCPI, either SCPI or Summit Care) in one transaction or a series of related transactions to a Person or a group of associated or affiliated Persons who are not affiliated with such Member (or, in the case of SCPI, with either SCPI or Summit Care, as the case may be); (c) the dissolution or liquidation of such Member (or, in the case of SCPI, of either SCPI or Summit Care); (d) a merger or other reorganization with one or more entities in which such Member (or, in the case of SCPI, either SCPI or Summit Care) is not the surviving entity, or if such Member (or, in the case of SCPI, either SCPI or Summit Care) is the surviving entity, the ownership of fifty percent (50%) or more of its voting common stock, is held by a Person or entity not currently holding fifty percent (50%) of such voting common stock; (e) such Member (or, in the case of SCPI, either SCPI or Summit Care) becomes insolvent or makes an assignment for the benefit of creditors, or voluntary proceedings are instituted by such Member (or, in the case of SCPI, either SCPI or Summit Care) under the Bankruptcy Code as amended, or involuntary proceedings are instituted against such Member (or, in the case of SCPI, against either SCPI or Summit Care) under the Bankruptcy Code, as amended and such involuntary proceedings are not dismissed within sixty (60) days thereafter; (f) a receiver is appointed for such Member (or, in the case of SCPI, for either SCPI or Summit Care) or its assets; or (g) any other event or transaction by which effective control of such Member (or, in the case of SCPI, of either SCPI or Summit Care) is transferred to, or vested in, a Person who is not affiliated with such Member (or, in the case of SCPI, with either SCPI or Summit Care). Notwithstanding the foregoing, a public distribution of securities by a Member (or, in the case of SCPI, by either SCPI or Summit Care) shall not be deemed a Fundamental Change with respect to such Member (or, in the case of SCPI, with respect to either SCPI or Summit Care) if a majority of such Member's directors and principal officers (or, in the case of SCPI, the directors and principal officers of SCPI and Summit Care) remain in the same positions they held prior to the public distribution. 5 11 2.23 "GROSS ASSET VALUE" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: 2.23.1 The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as determined by a Majority in Interest and the contributing Member. 2.23.2 The Gross Asset Values of all Company Assets immediately prior to the occurrence of any event described in subsection (a), subsection (b), subsection (c) or subsection (d) hereof shall be adjusted to equal their respective gross fair market values, as determined by a Majority in Interest using such reasonable method of valuation as such Majority in Interest may adopt, as of the following times: (a) the acquisition of an additional interest in the Company (other than in connection with the execution of this Agreement) by a new or existing Member in exchange for more than a de minimis Capital Contribution if a Majority in Interest reasonably determines that such adjustment is necessary or appropriate to reflect the relative Economic Interests of the Members in the Company; (b) the distribution by the Company to a Member of more than a de minimis amount of Company Assets as consideration for an interest in the Company, if a Majority in Interest reasonably determines that such adjustment is necessary or appropriate to reflect the relative Economic Interests of the Members in the Company; (c) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); and (d) at such other times as a Majority in Interest shall reasonably determine necessary or advisable in order to comply with Regulations Sections 1.704-1(b) and 1.704-2. 2.23.3 The Gross Asset Values of Company Assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Gross Asset Values shall not be adjusted pursuant to this Paragraph 2.23.3 to the extent that a Majority in Interest reasonably determines that an adjustment pursuant to Paragraph 2.23.2 above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Paragraph 2.23.3. 2.23.4 If the Gross Asset Value of a Company asset has been determined or adjusted pursuant to Paragraph 2.23.1, Paragraph 2.23.2 or Paragraph 2.23.3 hereof, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such Company Asset for purposes of computing Net Profits and Net Losses. 6 12 2.24 "IMMEDIATE FAMILY" means, and is limited to, an individual Member's current spouse, parents, parents-in-law, grandparents, children, siblings, and grandchildren, or a trust or estate, all of the beneficiaries of which consist of such Member or members of such Member's Immediate Family. 2.25 "INCAPACITY" means the bankruptcy, incompetence, insanity, death, retirement, resignation, withdrawal, expulsion, or other acts resulting in dissolution under the Act or termination (other than by merger or consolidation) of any Person, any such Person being an "Incapacitated Member". 2.26 "INDEMNITEE" is defined in Paragraph 6.5.1. 2.27 "MAJORITY IN INTEREST" means Members holding, in the aggregate, a majority of the Percentage Interests held by all Members of the Company. 2.28 "MAJORITY OF REMAINING MEMBERS" means Members other than the Incapacitated Member owning (a) a majority of the profits interests in the Company held by all Members other than the Incapacitated Member, determined and allocated based on any reasonable estimate of profits from the relevant date to the projected termination of the Company and taking into account present and future allocations of profits under this Agreement as it is in effect on the relevant date, and (b) a majority of the capital interests in the Company, determined as of the relevant date under this Agreement, owned by all the Members other than the Incapacitated Member. 2.29 "MEMBER MINIMUM GAIN" means an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i) with respect to "partner minimum gain." 2.30 "MEMBER NONRECOURSE DEBT" has the meaning set forth in Regulations Section 1.704-2(b)(4) for the phrase "partner nonrecourse debt." 2.31 "MEMBER NONRECOURSE DEDUCTIONS" has the meaning set forth in Regulations Section 1.704-2(i) for the phrase "partner nonrecourse deductions." 2.32 "MEMBERS" means the Persons owning Membership Interests, including any Substitute Members and Additional Members, with each Member being referred to, individually, AS A "MEMBER." 2.33 "MEMBERSHIP INTEREST" or "INTEREST" means the entire ownership interest of a Member in the Company at any particular time, including without limitation, the Member's Economic Interest, any and all rights to vote and otherwise participate in the Company's affairs, and the rights to any and all benefits to which a Member may be entitled as provided in this Agreement, together with the obligations of such Member to comply with all of the terms and provisions of this Agreement. 2.34 "NET PROFITS" or "NET LOSSES" means, for each fiscal year or other period, an amount equal to the Company's taxable income or loss for such year or period determined in accordance with Code Section 703(a)(for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: 7 13 2.34.1 Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Net Profits or Net Losses pursuant to this Paragraph 2.34 shall be added to such taxable income or loss; 2.34.2 Any expenditure of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Net Profits or Net Losses pursuant to this Paragraph 2.34, shall be subtracted from such taxable income or loss; 2.34.3 Gain or loss resulting from any disposition of Company Assets with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Company Assets disposed of, notwithstanding that the adjusted tax basis of such Company Assets differs from its Gross Asset Value; 2.34.4 In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year; 2.34.5 To the extent an adjustment to the adjusted tax basis of any asset included in Company Assets pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1 (b)(2)(iv) (m) (4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member's Interest, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for the purposes of computing Net Profits and Net Losses; 2.34.6 If the Gross Asset Value of any Company Asset is adjusted in accordance with Paragraph 2.23 of this Agreement, the amount of such adjustment shall be taken into account in the taxable year of such adjustment as gain or loss from the disposition of such asset for purposes of computing Net Profits or Net Losses; and 2.34.7 Notwithstanding any other provision of this Paragraph 2.33, any items that are specially allocated pursuant to Paragraph 5.2 hereof shall not be taken into account in computing Net Profits or Net Losses. 2.35 "NONRECOURSE DEDUCTIONS" has the meaning set forth in Regulations Sections 1.704-2(b)(1) and 1.704-2(c). 2.36 "NONRECOURSE LIABILITY" has the meaning set forth in Regulations Sections 1.704-2(b)(3) and 1.752-1(a)(2). 2.37 "NON-TRANSFERRING MEMBERS" means, in the event an Offer by Transferor is made, all Members other than the Member making such Offer by Transferor. 2.38 "OFFERER" is defined in Paragraph 7.10.1 2.39 "OFFER" is defined in Paragraph 7.10.1. 2.40 "OFFER BY TRANSFEROR" is defined in Paragraph 7.9. 8 14 2.41 "OPERATING CASH EXPENSES" means, with respect to any fiscal period, the amount of cash disbursed in the Ordinary Course during the period, including without limitation, all cash expenses, such as advertising, promotion, property management, insurance premiums, taxes, utilities, repair, maintenance, legal, accounting, bookkeeping, computing, equipment use, travel on Company business, telephone expenses and salaries, and direct expenses of Company employees (if any) and agents while engaged in Company business. Operating Cash Expenses shall include fees paid by the Company to any Member or any Affiliate thereof permitted by this Agreement, and the actual cost of goods, materials and administrative services used for or by the Company, whether incurred by any Member, any Affiliate thereof or any non-Affiliate in performing functions set forth in this Agreement reasonably requiring the use of such goods, materials or administrative services. Operating Cash Expenses shall not include expenditures paid from Reserves. 2.42 "ORDINARY COURSE" shall mean the ordinary course of business of the Business. 2.43 "PERCENTAGE INTEREST" means, with respect to each Member, the percentage set forth opposite such Member's name on Exhibit A. attached hereto as it may be modified or supplemented from time to time pursuant to the provisions of this Agreement. 2.44 "PERSON" means and includes an individual, a corporation, a general or limited partnership, a limited liability company, a trust, an unincorporated organization, a government or any department or agency thereof, or any entity similar to any of the foregoing. 2.45 "RECOURSE LIABILITY" has the meaning set forth in Regulations Section 1.752-1(a)(1). 2.46 "REGULATIONS" means temporary and final Treasury Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding Treasury Regulations). 2.47 "REGULATORY ALLOCATIONS" is defined in Paragraph 5.2.8. 2.48 "REPRESENTATIVE" is defined in Paragraph 6.1.2. 2.49 "RESERVES" means funds set aside or amounts allocated to reserves that shall be maintained in amounts deemed sufficient by a Majority in Interest for working capital, to pay taxes, insurance, debt service, and other costs or expenses incident to the conduct of business by the Company as contemplated hereunder. 2.50 "RESPONSIBLE PARTY" is defined in Paragraph 6.5.5. 2.51 "SUBSTITUTE MEMBER" means any Person (a) to whom a Member (or assignee thereof) Transfers all or any part of its Interest and (b) which has been admitted to the Company as a Substitute Member pursuant to Paragraph 7.6. 2.52 "SUMMIT CARE" means Summit Care Corporation, a California corporation. 2.53 "SUPERMAJORITY IN INTEREST" means Members holding, in the aggregate, sixty-six percent (66%) or more of the Percentage Interests held by all Members of the Company. Until such time as there are members in addition to APS and SCPI, "Supermajority in Interest" shall mean 'Majority in Interest." 9 15 2.54 "TERMINATING CAPITAL TRANSACTION" means any sale or other disposition of all or substantially all of the assets of the Company or a related series of transactions that, taken together, result in the sale or other disposition of all or substantially all of the Company Assets. 2.55 "TERMINATION PAYMENT" is defined in Paragraph 7.5. 2.56 "TRANSFER" means, with respect to any interest in the Company, a sale, conveyance, exchange, assignment, pledge, encumbrance, gift, bequest, hypothecation or other transfer or disposition by any other means, whether for value or no value and whether voluntary or involuntary (including, without limitation, by operation of law), or an agreement to do any of the foregoing. 2.57 "TRANSFEREE" is defined in Paragraph 7.9. 2.58 "TRANSFEROR" is defined in Paragraph 7.9. 2.59 "UNAFFECTED MEMBERS" means, in the event of a Fundamental change, all Members other than the Affected Member. ARTICLE 3 CAPITAL: CAPITAL ACCOUNTS AND MEMBERS 3.1 INITIAL CAPITAL CONTRIBUTIONS OF MEMBERS. The names, addresses, initial Capital Contributions and Percentage Interests of the Members are set forth on Exhibit A attached hereto and incorporated herein. All Members acknowledge and agree that the initial Capital Contributions set forth in Exhibit A represent the amount of money and the Gross Asset Value of all property (other than money) initially contributed by the Members. 3.2 ADDITIONAL CAPITAL CONTRIBUTIONS BY MEMBERS. 3.2.1 Except as provided in Paragraphs 3.2.2 and 3.2.3, no Member shall be permitted or required to make any additional Capital Contributions to the Company. 3.2.2 If from time to time the Company requires additional capital or has capital inadequate to pay its liabilities, each as determined by a Majority in Interest, then the Members constituting such Majority in Interest shall deliver a notice to each other Member specifying the aggregate amount of the additional Capital Contribution required, a date not earlier than thirty (30) days from the date of such notice prior to which such additional Capital Contribution shall be made, and any other terms and conditions relating to such additional Capital Contribution. Upon receipt of such notice, each Member, in its discretion, shall thereafter be required to make additional Capital Contributions, on a date not later than the date set forth in the notice, on a pro rata basis in accordance with its respective Percentage Interests pursuant to such terms and conditions as are set forth in the notice. The sole remedy against a Member for failure to make the additional Capital Contribution approved by a Majority in Interest under this Paragraph 3.2.2 shall be the reduction of such Member's Percentage Interest as provided in Paragraph 3.2.3. 3.2.3 (a) If any Member fails to make its proportionate share of an additional Capital Contribution approved by a Majority in Interest as required under Paragraph 3.2.2, such 10 16 Member's Percentage Interest shall be reduced to that percentage arrived at by dividing the actual Capital Contributions made by such Member by the total Capital Contributions made by all Members (including additional Capital Contributions), and there shall be a corresponding increase to the Percentage Interest of the Members making such additional Capital Contributions. (b) In the event that any Member fails to make its proportionate share of an additional Capital Contribution approved by a Majority in Interest as required under Paragraph 3.2.2, and such failure shall continue for a period of thirty (30) days, the Members making such additional Capital Contribution shall at any time thereafter that such Capital Contribution has not been paid have the right to contribute (pro rata in accordance with the Percentage Interests held by those electing to so contribute) the delinquent Member's share of the additional Capital Contribution. In the event of such contribution by one or more Members making such additional Capital Contribution, the Percentage Interest of each such Member making such Additional Capital Contribution shall be increased to that percentage arrived at by dividing the sum of the actual Capital Contributions (including additional Capital Contributions) made by such Member on its own behalf and one hundred fifty percent (150%) of the total Capital Contributions made by such Member on behalf of the Member not making such Additional Capital Contribution, by the total Capital Contribution made by all Members. The Percentage Interest of the Member not making such additional Capital Contribution shall be correspondingly decreased. (c) In the event that a Member's Percentage Interest is diluted pursuant to this Paragraph 3.2.3, the Tax Matters Partner shall prepare a revised Exhibit A reflecting the adjusted Percentage Interests of the Members. 3.3 CAPITAL ACCOUNTS. A Capital Account shall be established and maintained for each Member in accordance with the terms of this Agreement. 3.4 ADDITIONAL MEMBERS. Following formation of the Company, the Members may, upon the written consent of a Majority in Interest, issue interests in the Company directly from the Company, and admit one or more recipients of such interests as additional Members ("ADDITIONAL MEMBERS") from time to time, on such terms and conditions and for such Capital Contributions, if any, as a Majority in Interest may determine. As a condition to being admitted to the Company, each Additional Member shall execute an agreement to be bound by the terms and conditions of this Agreement. 3.5 MEMBER CAPITAL. Except as otherwise provided in this Agreement or with the prior written consent of all of the Members: (a) no Member shall demand or be entitled to receive a return of or interest on its Capital Contributions or Capital Account, (b) no Member shall withdraw any portion of its Capital Contributions or receive any distributions from the Company as a return of capital on account of such Capital Contributions, and (c) the Company shall not redeem or repurchase the Interest of any Member. 3.6 MEMBER LOANS. No Member shall be required or permitted to make any loans or otherwise lend any funds to the Company, except with the consent of a Majority in Interest. No loans made by any Member to the Company shall have any effect on such Member's Percentage Interest, such loans representing a debt of the Company payable or collectible solely from the assets of the Company in accordance with the terms and conditions upon which such loans were made. 3.7 LIABILITY OF MEMBERS. Except as otherwise required by any non-waivable provision of the Act or other applicable law: (a) no Member shall be personally liable in any manner whatsoever 11 17 for any debt, liability or other obligation of the Company, whether such debt, liability or other obligation arises in contract, tort, or otherwise; and (b) no Member shall in any event have any liability whatsoever in excess of (i) the amount of its Capital Contributions, (ii) its share of any assets and undistributed profits of the Company, (iii) the amount of any unconditional obligation of such Member to make additional Capital Contributions to the Company pursuant to this Agreement, and (iv) the amount of any wrongful distribution to such Member, if, and only to the extent, such Member has actual knowledge (at the time of the distribution) that such distribution is made in violation of Section 18-607 of the Act. ARTICLE 4 DISTRIBUTIONS 4.1 Distributions of Cash Available for Distribution. 4.1.1 Except as otherwise provided in Article 8, Cash Available for Distribution shall be distributed to the Members only at such times as may be determined by a Majority in Interest. 4.1.2 Subject to Article 8 hereof, all distributions of Cash Available for Distribution shall be distributed to the Members pro rata in accordance with their respective Percentage Interests. 4.1.3 Notwithstanding anything to the contrary contained herein, the Company shall distribute to APS the amount of One Million Five Hundred Thousand Dollars ($1,500,000) in immediately available funds on the date that the Certificate is filed with the Office of the Delaware Secretary of State. 4.2 Distributions Upon Liquidation. Distributions made in conjunction with the final liquidation of the Company, including, without limitation, the net proceeds of a Terminating Capital Transaction, shall be applied or distributed as provided in Article 8 hereof. 4.3 Withholding. The Company may withhold distributions or portions thereof if it is required to do so by any applicable rule, regulation, or law, and each Member hereby authorizes the Company to withhold from or pay on behalf of or with respect to such Member any amount of federal, state, local or foreign taxes that a Majority in Interest determines that the Company is required to withhold or pay with respect to any amount distributable or allocable to such Member pursuant to this Agreement. Any amount paid on behalf of or with respect to a Member pursuant to this Paragraph 4.3 shall constitute a loan by the Company to such Member, which loan shall be repaid by such Member within fifteen (15) days after notice from the Company that such payment must be made unless: (i) the Company withholds such payment from a distribution which would otherwise be made to the Member or (ii) a Majority in Interest determines that such payment may be satisfied out of Cash Available For Distribution which would, but for such payment, be distributed to the Member. Any amounts withheld pursuant to this Paragraph 4.3 shall be treated as having been distributed to such Member. Each Member hereby unconditionally and irrevocably grants to the Company a security interest in such Member's Interest to secure such Member's obligation to pay to the Company any amounts required to be paid pursuant to this Paragraph 4.3. In the event that a Member fails to pay any amounts owed to the Company pursuant to this Paragraph 4.3 when due, the remaining Members may, in their respective sole and absolute discretion, elect to make the payment to the Company on behalf of such defaulting Member, and in such event shall be deemed to have loaned such amount to such defaulting Member and shall succeed to all rights and remedies of the Company as against such defaulting Member (including, without limitation, the right to receive distributions). Any amounts payable by a Member hereunder shall bear 12 18 interest at a rate equal to two percent (2%) above the "prime rate," as announced in the Wall Street Journal from time to time, or the successor to such rate if no longer published, compounded annually from the date such amount is due (i.e., fifteen (15) days after demand) until such amount is paid in full. Each Member shall take such actions as the Company shall request in order to perfect or enforce the security interest created hereunder. A Member's obligations hereunder shall survive the dissolution, liquidation, or winding up of the Company. 4.4 Distributions in Kind. No right is given to any Member to demand or receive property other than cash as provided in this Agreement. The Members may, upon the written consent of a Majority in Interest, cause the Company to make a distribution in kind of Company Assets to the Members, and such Company Assets shall be distributed in such a fashion as to ensure that the fair market value thereof is distributed and allocated in accordance with this Article 4 and Articles 5 and 8 hereof; provided, however, that no Member may be compelled to accept a distribution consisting, in whole or in part, of any Company Assets in kind unless the ratio that the fair market value of such distribution in kind bears to such Member's total distribution does not exceed the ratio that the fair market value of similar distributions in kind bear to the total distributions of other Members receiving distributions concurrently therewith (if any), except upon a dissolution and winding up of the Company. 4.5 Limitations on Distributions. Notwithstanding any provision to the contrary contained in this Agreement, neither the Company nor any Member, on behalf of the Company, shall knowingly make a distribution to any Member or the holder of any Economic Interest on account of its Membership Interest or Economic Interest (as applicable) in violation of Section 18-607 of the Act. ARTICLE 5 ALLOCATIONS OF NET PROFITS AND NET LOSSES 5.1 General Allocation of Net Profits and Losses. 5.1.1 Net Profits and Net Losses shall be determined and allocated with respect to each fiscal year of the Company as of the end of such fiscal year. Subject to the other provisions of this Agreement, an allocation to a Member of a share of Net Profits or Net Losses shall be treated as an allocation of the same share of each item of income, gain, loss or deduction that is taken into account in computing Net Profits or Net Losses. 5.1.2 Subject to the other provisions of this Article 5, Net Profits, Net Losses and any other items of income, gain, loss and deduction for any fiscal year shall be allocated in proportion to the Members' respective Percentage Interests. 5.2 Regulatory Allocations. Notwithstanding the any other provision of this Article 5, the following special allocations shall be made in the following order of priority: 5.2.1 If there is a net decrease in Company Minimum Gain during a Company taxable year, then each Member shall be allocated items of Company income and gain for such taxable year (and, if necessary, for subsequent years) in an amount equal to such Member's share of the net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g)(2). Allocations made pursuant to the previous sentence shall be made in proportion to the amounts required to be allocated to each Member pursuant thereto. This Paragraph 5.2.1 is 13 19 intended to comply with the minimum gain chargeback requirement of Regulations Section 1.704-2(f) and shall be interpreted consistently therewith. 5.2.2 If there is a net decrease in Member Minimum Gain attributable to a Member Nonrecourse Debt during any Company taxable year, each Member who has a share of the Member Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such taxable year (and, if necessary, subsequent years) in an amount equal to such Member's share of the net decrease in Member Nonrecourse Debt, determined in a manner consistent with the provisions of Regulations Section 1.704-(i)(4). Allocations made pursuant to the previous sentence shall be made in proportion to the amounts required to be allocated to each Member pursuant thereto. This Paragraph 5.2.2 is intended to comply with the partner nonrecourse debt minimum gain chargeback requirement of Regulations Section 1.704-2(i)(4) and shall be interpreted consistently therewith. 5.2.3 If any Members unexpectedly receive an adjustment, allocation, or distribution of the type contemplated by Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of income and gain shall be allocated to all such Members (in proportion to the amounts of their respective Adjusted Capital Account Deficits) in an amount and manner sufficient to eliminate, to the extent required by the Regulation, the Adjusted Capital Account Deficit of such Members as quickly as possible. It is intended that this Paragraph 5.2.3 qualify and be construed as a "qualified income offset" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(d). 5.2.4 If the allocation of Net Loss to a Member as provided in Paragraph 5.1 hereof would create or increase an Adjusted Capital Account Deficit, there shall be allocated to such Member only that amount of Net Loss as will not create or increase an Adjusted Capital Account Deficit. The Net Loss that would, absent the application of the preceding sentence, otherwise be allocated to such Member shall be allocated to the other Members in accordance with their relative Percentage Interests, subject to the limitations of this Paragraph 5.2.4. 5.2.5 To the extent that an adjustment to the adjusted tax basis of any Company Asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of its Interest, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Members in accordance with their interests in the Company in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Members to whom such distribution was made in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies. 5.2.6 The Nonrecourse Deductions for each taxable year of the Company shall be allocated to the Members in proportion to their Percentage Interests. 5.2.7 The Member Nonrecourse Deductions shall be allocated each year to the Member that bears the economic risk of loss (within the meaning of Regulations Section 1.752-2) for the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). 14 20 5.2.8 The allocations set forth in Paragraphs 5.2.1, 5.2.2, 5.2.3, 5.2.4, 5.2.5, 5.2.6 and 5.2.7 hereof (the "REGULATORY ALLOCATIONS") are intended to comply with certain requirements of Regulations Sections 1.704-1(b) and 1.704-2(i). Notwithstanding the provisions of Paragraph 5.1.2, the Regulatory Allocations shall be taken into account in allocating other items of income, gain, loss and deduction among the Members so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Regulatory Allocations had not occurred. In the event that the Code or any Regulations require allocations of items of income, gain, loss, deduction or credit different from those set forth in this Article 5, the Company is hereby authorized to make new allocations in reliance on the Code and such Regulations, provided that such new allocations shall be subject to the prior written approval of a Majority in Interest. Furthermore, to the extent permitted by the Code or Regulations, any such new allocations shall be considered Regulatory Allocations subject to this Paragraph 5.2.8. 5.3 TAX ALLOCATIONS. 5.3.1 Except as provided in Paragraph 5.3.2 hereof, for income tax purposes under the Code and the Regulations each Company item of income, gain, loss and deduction shall be allocated between the Members as its correlative item of "book" income, gain, loss or deduction is allocated pursuant to this Article 5. 5.3.2 Tax items with respect to Company Assets that are contributed to the Company with a Gross Asset Value that varies from its basis in the hands of the contributing Member immediately preceding the date of contribution shall be allocated between the Members for income tax purposes pursuant to Regulations promulgated under Code Section 704(c) so as to take into account such variation. The Company shall account for such variation under any method approved under Code Section 704(c) and the applicable Regulations as chosen by a Majority in Interest including, without limitation, the 'traditional method" as described in Regulations Section 1.704-3(b). If the Gross Asset Value of any Company Asset is adjusted pursuant to Paragraph 2.23, subsequent allocations of income, gain, loss and deduction with respect to such Company Asset shall take account of any variation between the adjusted basis of such Company Asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations promulgated thereunder under any method approved under Code Section 704(c) and the applicable Regulations as chosen by a Majority in Interest. Allocations pursuant to this Paragraph 5.3.2 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Net Profits, Net Losses and any other items or distributions pursuant to any provision of this Agreement. 5.4 OTHER PROVISIONS. 5.4.1 For any fiscal year during which any part of a Membership Interest or Economic Interest is transferred between the Members or to another Person, the portion of the Net Profits, Net Losses and other items of income, gain, loss, deduction and credit that are allocable with respect to such part of a Membership Interest or Economic Interest shall be apportioned between the transferor and the transferee under any method allowed pursuant to Section 706 of the Code and the applicable Regulations as determined by a Majority in Interest. 15 21 5.4.2 For purposes of determining a Member's proportional share of the Companys' "excess nonrecourse liabilities" within the meaning of Regulations Section 1.752-3(a)(3), each Member's interest in Net Profits shall be such Member's Percentage Interest. 5.4.3 The Members acknowledge and are aware of the income tax consequences of the allocations made by this Article 5 and hereby agree to be bound by the provisions of this Article 5 in reporting their shares of Net Profits, Net Losses and other items of income, gain, loss, deduction and credit for federal, state and local income tax purposes. ARTICLE 6 OPERATIONS 6.1 MANAGEMENT. 6.1.1 The Company shall be a member-managed limited liability company within the meaning of the Act. All Members shall be entitled to participate in the management and control of the day-to-day operation and business affairs of the Company. Each Member shall have the authority to bind the Company, and, except as otherwise provided herein, shall have the power, on behalf of the Company, to do all things necessary or convenient to carry out the business and affairs of the Company. Notwithstanding anything to the contrary contained herein, any action taken by any Member on behalf of the Company without the requisite approval of the other Members as required herein, shall constitute a breach of this Agreement by such Member. 6.1.2 Each of APS and SCPI is a duly organized and validly existing corporation, acting by and through its respective Board of Directors and elected and authorized officers. Each of APS and SCPI may delegate a single officer to serve as its representative with respect to the matters and affairs of the Company (each, a "Representative" and together, "Representatives"). Each Representative shall be provided with copies of any and all papers, documents and correspondences to or from the Company, including, without limitation, financial statements, balance sheets, contracts, reports, filings, tax returns, legal notices and notices from any governmental authority or agency. As its initial Representative, SCPI designates Jesse Martinez. APS designates Terry Davis as its initial Representative. 6.1.3 Subject to Paragraph 6.1.l and the limitations set forth in Paragraph 6.1.5,and except as otherwise expressly provided in this Agreement, all actions by or on behalf of the Company may be taken upon the prior written approval of a Majority in Interest. By way of illustration and not by way of limitation, and subject to the limitations set forth in the preceding sentence, the Company shall have the power and authority from time to time, upon the prior written approval of a Majority in Interest, to do the following: (a) to oversee the operations of the Business and to manage and maintain all personal and real property in which the Company has an interest; (b) to incur expenditures on behalf of the Company in connection with the operation of the Business; (c) to employ and dismiss from employment employees, agents and consultants of the Business in the Ordinary Course; 16 22 (d) to enter into, execute, amend, supplement, acknowledge and deliver contracts, agreements, leases or other instruments in connection with the operation of the Business; (e) to establish and maintain one or more bank accounts for the Company in such bank or banks having assets of at least Twenty-five Million Dollars ($25,000,000); (f) to the extent that funds of the Company are available, to pay expenses, debts and obligations of the Company; and (g) to perform all normal business functions, and otherwise operate and manage the business and affairs of the Company, in accordance with and as limited by this Agreement. 6.1.4 The Company may, from time to time, hire such employees as are deemed necessary by the Members for the efficient operation of the Company's day-to-day business operations, which employees shall be granted such powers and authority as determined by the Members. 6.1.5 Notwithstanding the provisions of Paragraphs 6.1.2, 6.1.3 and 6.1.4 or any other provision of this Agreement (but subject to Paragraph 6.1.1) the Company may not take any of the following actions without the written consent of a Supermajority in Interest: (a) approve any Terminating Capital Transaction; (b) sell, mortgage, encumber, pledge as security for borrowing, lease or otherwise transfer or dispose of (i) the Business or any portion thereof or (ii) any of the assets of the Company or the Business except in the Ordinary Course; (c) incur any indebtedness other than trade indebtedness to vendors and suppliers in the Ordinary Course; (d) employ or compensate any Person in connection with the business of the Company, except in the Ordinary Course; (e) lend money or give credit on behalf of the Company or release or discharge any debt or liability owing to the Company, except in the Ordinary Course; (f) cause the Company to become a surety, guarantor or endorser for any Person; (g) enter into, amend or otherwise modify any agreement, oral or written, including without limitation any employment agreement, consulting agreement or other similar agreement, on behalf of the Company with any Member or any Affiliate of any Member, and including, without limitation, this Agreement or the Certificate; or 17 23 (h) participate in a reorganization, merger or consolidation with one or more entities in which the Company is not the surviving entity, or if Company is the surviving entity, if the ownership of fifty percent (50%) or more of its membership interest is held by entities other than the Company, or the acquisition of beneficial ownership of fifty percent (50%) or more of the voting stock or other ownership interest in any Member (or, in the case of SCPI, of either SCPI or Summit Care) by any person or entity not currently holding fifty percent (50%) or more of such interest. 6.2 RELIANCE BY THIRD PARTIES. Any Person dealing with the Company or any Member may rely upon a certificate signed by any Member as to: (a) the identity of any Member of the Company; (b) the existence or non-existence of any fact or facts which constitute a condition precedent to acts by a Member or in any other manner germane to the affairs of the Company; (c) the Persons who are authorized to execute and deliver any instrument or document for or on behalf of the Company; or (d) any act or failure to act by the Company or as to any other matter whatsoever involving the Company or any Member. 6.3 COMPENSATION. 6.3.1 Except for the reimbursements provided for in Paragraph 6.3.2, no Member shall be entitled to compensation for actions taken on behalf of the Company or in connection with this Agreement. 6.3.2 Subject to the approval of a Majority in Interest, to be obtained on a monthly basis, to the extent not otherwise provided for in any agreement contemplated in Paragraph 6.3.1, each Member shall be entitled to reimbursement on a monthly basis from the Company for all out-of-pocket costs and expenses incurred by it, in its reasonable discretion, for or on behalf of the Company. 6.3.3 Compensation for the Representatives and any office created under Paragraph 6.1.3 shall be determined by a Supermajority in Interest. 6.4 RECORDS AND REPORTS. 6.4.1 The Members shall cause to be kept, at the principal place of business of the Company, or at such other location as a Majority in Interest shall reasonably deem appropriate, full and proper ledgers, other books of account, and records of all receipts and disbursements, other financial activities, and the internal affairs of the Company for at least the current and past four fiscal years. 6.4.2 The Members shall also cause to be sent to each Member of the Company, the following: 18 24 (a) within ninety (90) days following the end of each fiscal year of the Company, a report that shall include all necessary information required by the Members for preparation of their federal, state and local income or franchise tax or information returns, including each Member's pro rata share of Net Profits, Net Losses and any other items of income, gain, loss and deduction for such fiscal year; and (b) a copy of the Company's federal, state and local income tax or information returns for each fiscal year, concurrent with the filing of such returns. 6.4.3 Members (personally or through an authorized representative) may, for purposes reasonably related to their Interests, examine and copy (at their own cost and expense) the books and records of the Company at all reasonable business hours. 6.5 INDEMNIFICATION AND LIABILITY OF THE MEMBERS. 6.5.1 The Company shall indemnify and hold harmless each Member, its Affiliates, and subsidiaries, and all officers, directors, employees, shareholders and agents of any of the foregoing (individually, an "INDEMNITEE") to the full extent permitted by law from and against any and all losses, claims, demands, costs, damages, liabilities, expenses of any nature (including attorneys' fees and disbursements), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, civil, criminal, administrative or investigative, in which the Indemnitee may be involved, or threatened to be involved as a party or otherwise, relating to the performance or nonperformance of any act concerning the activities of the Company, if (i) the Indemnitee acted in good faith and in a manner he believed to be in, or not contrary to, the best interests of the Company, and (ii) the Indemnitee's conduct did not constitute gross negligence or willful misconduct. The termination of an action, suit or proceeding by judgment, order, settlement, or upon a plea of nolo contendere or its equivalent, shall not, in and of itself, create a presumption or otherwise constitute evidence that the Indemnitee acted in a manner contrary to that specified in clauses (i) or (ii) above. 6.5.2 Any indemnification provided hereunder shall be satisfied solely out of the assets of the Company, as an expense of the Company. No Member shall be subject to personal liability by reason of these indemnification provisions. 6.5.3 The provisions of this Paragraph 6.5 are for the benefit of the Indemnitees and shall not be deemed to create any rights for the benefit of any other Person. 6.5.4 Neither a Member, nor the subsidiaries nor Affiliates of any Member nor the officers, directors, employees or agents of any of the foregoing shall be liable to the Company or to any other Member for any losses sustained or liabilities incurred as a result of any act or omission of any Member or any such other Person if (i) the act or failure to act of the Member or such other Person was in good faith and in a manner he believed to be in, or not contrary to, the best interests of the Company, and (ii) the conduct of the Member or such other Person did not constitute gross negligence or willful misconduct. 6.5.5 To the extent that a Member, or any Affiliate or subsidiary of any Member, or any officer, director, employee or agent of any of the foregoing (each, a "RESPONSIBLE PARTY") 19 25 has, at law or in equity, duties (including, without limitation, fiduciary duties) to the Company, or to any other Member or other Person bound by the terms of this Agreement, such Responsible Parties acting in accordance with this Agreement shall not be liable to the Company, any Member, or any such other Person for its good faith reliance on the provisions of this Agreement. The provisions of this Agreement, to the extent that they restrict the duties of a Responsible Party otherwise existing at law or in equity, are agreed by all parties hereto to replace such other duties to the greatest extent permitted under applicable law. 6.5.6 Whenever a Responsible Party is required or permitted to make a decision, take or approve an action, or omit to do any of the foregoing: (a) in its discretion, under a similar grant of authority or latitude, or without an express standard of behavior (including, without limitation, standards such as "reasonable" or "good faith"), then such Responsible Party shall be entitled to consider only such interests and factors, including its own, as it desires, and shall have no duty or obligation to consider any other interests or factors whatsoever, or (b) with an express standard of behavior (including, without limitation, standards such as "reasonable" or "good faith"), then such Responsible Party shall comply with such express standard but shall not be subject to any other, different or additional standard imposed by this Agreement or otherwise applicable law. 6.6 COVENANT NOT TO COMPETE. No Member (for the purposes of this Paragraph 6.6, the term "Member" shall include Summit Care) shall (and each Member shall cause each of its officers, directors, partners, shareholders, and owners not to), directly or indirectly, (i) engage in a business concerned in whole or part with providing pharmacy services in competition with the Business of the Company in the County of Travis, State of Texas, or (ii) be or become interested in any Person engaged in a business concerned in whole or part with providing pharmacy services in competition with the Business of the Company in the County of Travis, State of Texas as a partner, shareholder, principal, trustee, employee, consultant or in any other relationship or capacity. Members agree to maintain in confidence, and not to disclose to any third party, any ideas, methods, developments, inventions, improvements and business plans and information which are the confidential information of the Company. In the event the agreement in this Paragraph 6.6 shall be determined by any court of competent jurisdiction to be unenforceable by reason of its extending for too great a period of time or over too great a geographical area or by reason of its being too extensive in any other respect, it shall be interpreted to extend only over the maximum period of time for which it may be enforceable and/or over the maximum geographical area as to which it may be enforceable and/or to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action. Members acknowledge that a breach of the covenants contained in this Paragraph 6.6 will cause irreparable damage to the Company, the exact amount of which will be difficult to ascertain, and that the remedies at law for any such breach will be inadequate. Accordingly, the Members agree that if any Member breaches the covenant contained in this Paragraph 6.6, in addition to any other remedy which may be available at law or in equity, the Company shall be entitled to specific performance and injunctive relief, without posting bond or other security. Except as set forth below, the provisions of this Paragraph 6.6 shall survive for so long as the Company is in existence and no longer. Notwithstanding the preceding sentence, the provisions of this Paragraph 6.6 shall terminate and cease to apply (i) immediately upon the withdrawal of either APS or SCPI as a Member with the consent of the other, as contemplated by the second sentence of Paragraph 7.4 hereof and (ii) on November 30, 1998 in the event that either APS or SCPI withdraws from the Company (A) prior to November 30, 1998 and (B) without the consent of the other party; provided, however, that in the event either APS or SCPI exercises its buy/sell right under Paragraph 7.10 hereof, 20 26 the provisions of the first two paragraphs of this Paragraph 6.6 shall apply to the selling party only (as though the buying party were the Company) and shall terminate on the date that is the second (2nd) anniversary of the closing of the sale contemplated by Paragraph 7.10 hereof 6.7 SERVICES. Subject to the other provisions of this Article VI, APS shall provide to the Company without charge administrative support services reasonably requested by the Company to maintain operations in the ordinary course of business, including, without limitation, payroll, accounting and risk management services. ARTICLE 7 INTERESTS AND TRANSFERS OF INTERESTS 7.1 TRANSFERS. No Member or Assignee may Transfer all or any portion of its Membership Interest or Economic Interest (or beneficial interest therein) without the prior written consent of a Majority in Interest. Any purported Transfer which is not in accordance with this Agreement shall be null and void. 7.2 FURTHER RESTRICTIONS. Notwithstanding any contrary provision in this Agreement, any otherwise permitted Transfer shall be null and void if: (a) such Transfer would cause a technical termination of the Company for federal or state, if applicable, income tax purposes; (b) such Transfer would, in the opinion of counsel to the Company, cause the Company to cease to be classified as a partnership for federal or state income tax purposes; (c) such Transfer requires the registration of such Interest to be transferred pursuant to any applicable federal or state securities laws; (d) such Transfer causes the Company to become a "Publicly Traded Partnership," as such term is defined in Sections 469(k)(2) or 7704(b) of the Code; (e) such Transfer subjects the Company to regulation under the Investment Company Act of 1940, the Investment Advisers Act of 1940 or the Employee Retirement Income Security Act of 1974, each as amended; (f) such Transfer results in a violation of applicable laws or any applicable regulation, rule or policy of any federal, state or local entity; (g) such Transfer causes the revaluation or reassessment of the value of any Company Asset resulting in a material amount of federal, state or local tax liability; (h) all approvals and authorizations required in connection with such Transfer have not been obtained; (i) such Transfer is made to any Person who lacks the legal right, power or capacity to own such Interest to be transferred; or 21 27 (j) the Company does not receive written instruments (including, without limitation, copies of any instruments of Transfer and such Assignee's consent to be bound by this Agreement as an Assignee) that are in a form satisfactory to a Majority in Interest on or prior to the closing of such Transfer. 7.3 RIGHTS OF ASSIGNEES. Until such time, if any, as a transferee of any permitted Transfer pursuant to this Article 7 is admitted to the Company as a Substitute Member pursuant to Paragraph 7.6: (i) such transferee shall be an Assignee only, and only shall receive, to the extent transferred, the distributions and allocations of income, gain, loss, deduction, credit, or similar item to which the Member which transferred its Interest would be entitled, and (ii) such Assignee shall not be entitled or enabled to exercise any other rights or powers of a Member, such other rights, including, without limitation, management and voting rights, remaining with the transferring Member. In such a case, the transferring Member shall remain a Member even if it has transferred its entire Economic Interest to one or more Assignees. In the event any Assignee desires to make a further assignment of any Economic interest, such Assignee shall be subject to all of the provisions of this Agreement to the same extent and in the same manner as any Member desiring to make such an assignment. 7.4 ADMISSIONS AND WITHDRAWALS. No Person shall be admitted to the Company as a Member except in accordance with Paragraph 3.4 (in the case of Persons obtaining an interest in the Company directly from the Company) or Paragraph 7.6 (in the case of transferees in a permitted Transfer of an interest in the Company from another Person). Except as otherwise specifically set forth in Paragraph 7.7, no Member shall be entitled to retire or withdraw from being a Member of the Company without the written consent of a Majority in Interest. Any purported admission or withdrawal which is not in accordance with this Agreement shall be null and void. 7.5 PAYMENT UPON WITHDRAWAL OF MEMBER. If any Member withdraws from the Company with the consent of a Majority in Interest (other than pursuant to Paragraph 7.7), then such Member automatically shall receive from the Company a payment equal to the Member's Capital Account balance as adjusted as of the effective date of the written election of withdrawal (the "TERMINATION PAYMENT"). The Termination Payment shall be paid on the effective date of the written election of withdrawal. If any Member attempts to withdraw from the Company (other than pursuant to Paragraph 7.7) without the consent of a Majority in Interest, such withdrawing Member shall not be entitled to any Termination Payment or any other compensation whatsoever in consideration for its terminated Membership Interest. 7.6 ADMISSION OF ASSIGNEES AS SUBSTITUTE MEMBERS. 7.6.1 An Assignee shall become a Substitute Member only if and when each of the following conditions are satisfied: (a) the assignor of the Interest transferred sends written notice to each Member requesting the admission of the Assignee as a Substitute Member and setting forth the name and address of the Assignee, the Percentage Interest transferred, and the effective date of the Transfer; (b) a Majority in Interest consents in writing to such admission; and (c) the Members receive from the Assignee (i) such information concerning the Assignee's financial capacities and investment experience as may 22 28 reasonably be requested by the Members, and (ii) written instruments (including, without limitation, copies of any instruments of Transfer and such Assignee's consent to be bound by this Agreement as a Substitute Member) that are in a form satisfactory to the Members. (d) at the request of a Majority in Interest, an opinion of counsel to Assignee is delivered, acceptable to a Majority in Interest, with respect to the validity, binding effect and enforceability of the assignment, of this Agreement against such Assignee and such other matters as a Majority in Interest shall reasonably request. 7.6.2 Upon the admission of any Substitute Member, the Tax Matters Partner shall amend Exhibit A to reflect the name, address and Percentage Interest, corresponding to such Substitute Member and to eliminate or adjust, if necessary, the name, address and Percentage Interest corresponding to the predecessor of such Substitute Member. 7.7 WITHDRAWAL OF MEMBERS. If a Member has transferred all of its Membership Interest to one or more Assignees, then such Member shall automatically be deemed withdrawn from the Company, with no further action by any party required, if and when all such Assignees have been admitted as Substitute Members in accordance with this Agreement. 7.8 CONVERSION OF MEMBERSHIP INTEREST. Upon the Incapacity of a Member (and the subsequent continuation of the business of the Company pursuant to Paragraph 8.2(c), such Incapacitated Member's Membership Interest shall automatically be converted to an Economic Interest only, and such Incapacitated Member (or its executor, administrator, trustee or receiver, as applicable) shall thereafter be deemed an Assignee for all purposes hereunder, with the same Economic Interest as was held by such Incapacitated Member prior to its Incapacity, but without any other rights of a Member unless the holder of such Economic Interest is admitted as a Substitute Member pursuant to Paragraph 7.6. 7.9 RIGHT OF FIRST REFUSAL. 7.9.1 RECEIPT OF BONA FIDE OFFER. If any Member shall receive a Bona Fide Offer to purchase any or all of its Membership Interest, and it is willing to accept such Bona Fide Offer, then such Member shall make the offer described in Paragraph 7.9.2 (the "Offer by Transferor"). 7.9.2 OFFER BY TRANSFEROR. The Offer by Transferor shall consist of a written offer to Transfer all of the Membership Interest proposed to be Transferred by the transferor (the "Transferor") and shall be given to the Company and to the remaining Members. The Offer by Transferor shall include a statement of intention to Transfer and shall disclose all the terms of the proposed Transfer, including the name and address of the transferee under the Bona Fide Offer (the "Transferee"), and shall be accompanied by a copy of the Bona Fide Offer. 7.9.3 ACCEPTANCE OF OFFER BY TRANSFEROR. Within thirty (30) days after its receipt of the Offer by Transferor, the Company may, at its option, elect to purchase all of the Membership Interest proposed to be Transferred. The decision of the Company as to the acceptance or non-acceptance of said offer shall be determined by a majority in interest of the Non-Transferring Members. If the Company does not elect to purchase the Membership Interest proposed to be Transferred pursuant to the Offer by Transferor, the Company shall, within five (5) business days following delivery of written notice of its election to the Transferor, or within five (5) days following 23 29 the expiration of the above-described thirty (30)-day period, deliver written notice of its election to the Non-Transferring Members. The Non-Transferring Members may, within forty-five (45) days after the receipt of said notice from the Company, at the Non-Transferring Members' option, purchase all of the Membership Interests proposed to be Transferred pursuant to the Offer by Transferor, pro rata in accordance with the Percentage Interests held by the Members electing to purchase such Membership Interests. The Non-Transferring Members shall exercise their election to purchase by giving written notice of such election to the Transferor and to the Company. In either event, such notice of election shall specify a date for the closing of the purchase, which shall be not more than thirty (30) days after the date of such notice. If any consideration to be received by the Transferor under the Bona Fide Offer is property other than cash, the time periods for acceptance of the Offer by Transferor by the Company, or the Non-Transferring Members, and the closing date shall be extended and shall begin running effective the day after the fair market value of such consideration is determined in accordance with Paragraph 7.9.4. 7.9.4 PURCHASE PRICE. The purchase price for the Membership Interest proposed to be Transferred pursuant to the Offer by Transferor shall in no event exceed the purchase price stated in the Bona Fide Offer. If any consideration to be received by the Transferor under the Bona Fide Offer is property other than cash, the value shall be computed on the basis of the fair market value of such non-cash consideration. Such fair market value shall be determined by agreement among the Transferor and either the Non-Transferring Members purchasing such Interest, or the Company, as applicable, or if they are unable to agree, as determined by the average of the appraisals of two (2) independent qualified appraisers, one being selected by the Transferor and the other by the Non-Transferring Members purchasing such Interest, the cost of such appraisal being shared equally by Transferor and the Company. 7.9.5 CLOSING OF PURCHASE. The closing of the purchase contemplated by Paragraph 7.9.3 shall take place at the principal office of the Company. The Company or the Non-Transferring Members shall have the option of paying the purchase price on the same terms as the Bona Fide Offer or as follows: ten percent (10%) down payment in cash at closing and the balance by a promissory note, payable in twelve (12) equal, quarterly annual installments of principal, plus interest on the unpaid balance, with the first installment due ninety (90) days after the closing, and each successive installment paid on the first (lst) day of every third month thereafter. The promissory note shall bear interest at a rate equal to two percent (2%) above the "prime rate," as announced in the Wall Street Journal from time to time, or the successor to such rate if such rate is no longer published, and shall provide that: (i) the maker shall have the privilege of prepaying all or any part thereof, at any time, without penalty; and (ii) a default in any payment shall cause the remaining unpaid balance to become due and payable immediately. The promissory note shall be secured by a pledge of all of the Membership Interests being purchased. If the maker of the promissory note is the Company, such promissory note shall be personally endorsed by the remaining Members. 7.9.6 TRANSFER AFTER OFFER. If the Membership Interests are not purchased by the Company or the Non-Transferring Members as provided in this Article 7, the Transferor shall, for a period of three (3) months after the earlier to occur of (i) the date of any written notice given by all Non-Transferring Members of their election not to purchase such Membership Interest and (ii) the date on which the period during which the Non-Transferring Members may elect to purchase such Membership Interest expires, be free to Transfer the Membership Interests to the Transferee, upon the terms disclosed in the Offer by Transferor. 7.9.7 PROHIBITED TRANSFERS VOID. 24 30 (i) Any purported Transfer in violation of this Agreement shall be null and void and shall not transfer any interest in, or title to, the Membership Interests transferred to the purported Transferee. The Company shall not be required to treat as owner of the Membership Interests, or to pay distributions to, any Transferee to whom any of such Membership Interests shall have been purportedly sold or Transferred. (ii) In addition, and without in any way intending to validate, approve or otherwise render a Transfer in violation of this Agreement other than null and void, the Company first, and the remaining Members (pro rata in accordance with the Percentage Interests held by those electing the option to purchase hereinafter described) second, shall have the option to purchase all or any portion of the Membership Interests attempted to be transferred to a Transferee in violation of a restriction on Transfer contained in this Agreement for the price and on the same terms and conditions described in Paragraphs 7.9.4 and 7.9.5; provided, however, that the Company and the Non-Transferring Members may pay the purchase price by delivery of a promissory note representing the entire purchase price. To exercise this option, the Company must give the Transferee written notice within thirty (30) days after the Company is notified of the purported Transfer. In the event the Company does not elect to exercise this option, the Company shall, within ten (10) business days following the expiration of the foregoing thirty (30)-day period, notify the Non-Transferring Members of its election. The Non-Transferring Members must give the Transferee written notice, within thirty (30) days following the receipt of notice from the Company, of their election to purchase all or any portion of the Membership Interest purportedly held by the Transferee. The Transferee's sale obligation pursuant to this paragraph may be specifically enforced by the Company or any Non-Transferring Member. 7.10 BUY AND SELL RIGHTS. 7.10.1 Any Member (the "Offeror") may, at any time, make a buy-sell offer (the "Offer") to any other Member (the "Offeree") by notifying the Offeree in writing of the exercise of this right, and stating in such notice the gross sales price for the Company, as determined by the Offeror (the "Company Price"), which Company Price shall be used in the calculation procedures set forth in Paragraph 7.10.2 hereof, and the terms under which the Offeror is willing either to buy all of the Membership Interest owned by the Offeree or to sell to the Offeree all of the Membership Interest owned by the Offeror, with the price and any terms being the same for both the purchase and the sale. Except as set forth in Paragraph 7.10.2, the Offer shall not be revocable once the aforesaid notice has been delivered to the Offeree. 7.10.2 Within thirty (30) days after receipt by the Offeree of the Offeror's written notice of the Offer, the Offeree shall send the Offeror a written notice stating whether the Offeree elects (i) to purchase from the Offeror all of the Offeror's Membership Interest, at the price (as determined pursuant hereto) and under the terms stated in the Offer, or (ii) to sell to the Offeror all of the Offeree's Membership Interest at the price (as determined pursuant hereto) and under the terms stated in the Offer. If the Offeree shall fail to notify the Offeror whether he elects to buy or sell within the time period specified above, such failure shall be deemed to be an election to sell all Membership Interest owned by the Offeree to the Offeror at the price (as determined pursuant hereto) and under the terms specified in the Offer. The Offeror shall be entitled to revoke the Offer by giving the Offeree written notice of the withdrawal prior to the earlier of (i) the date the Offeree gives the Offeror written notice of his election to purchase or to sell pursuant to this Paragraph, or (ii) the date on which the Offeree shall be deemed to have elected to sell his Membership Interest to 25 31 the Offeror. The price payable to the Offeror or the Offeree, as the case may be, shall be the product of the Company Price and the Percentage Interest held by the selling Member. 7.10.3 The closing of the sale contemplated by this Paragraph 7.10 shall be held at the principal office of the Company (or at such other place as the Offeror and the Offeree may in writing agree) no later than thirty (30) days after the expiration of the notice period specified in Paragraph 7.10.2. Unless otherwise stated in the Offer, the purchasing Member shall deliver payment in full in cash for the purchase of the Membership Interest. A Member selling its Interest pursuant to 7.10.2 hereof shall deliver all appropriate documents of transfer at closing and shall convey its Membership Interest to the buying Member, or its nominee, free and clear of all liens, claims, encumbrances or other charges of any kind whatsoever. In the event the Membership Interest is conveyed to a nominee of the buying Member, the admission of such nominee to the Company as a successor to the selling Member shall occur, and for all purposes shall be deemed to have occurred immediately prior to the transfer by the selling Member of its Membership Interest. 7.11 OPTION TO PURCHASE UPON FUNDAMENTAL CHANGE. 7.11.1 In the event of the occurrence of a Fundamental Change with respect to a Member (the "Affected Member"), the Company shall have the option to purchase from the Affected Member, and the Affected Member shall sell to the Company upon the exercise of such option, all of the Membership Interest owned by the Affected Member. The Company may exercise such option upon the consent of a majority in interest of the Unaffected Members. If the Company does not elect to exercise the option provided herein, the Unaffected Members may, at the option of such Unaffected Members purchase all Membership Interest of the Affected Member which the Company does not elect to purchase. Such options shall be exercised by either the Company or the Unaffected Members by giving written notice to the Affected Member within ninety (90) days after the receipt of notice to the Company and the Unaffected Members of the occurrence of such Fundamental Change. 7.11.2 PURCHASE PRICE. The purchase price of the Membership Interest to be purchased pursuant to Paragraph 7.11.1 shall be the book value of such Membership Interest, including previous adjustments contemplated by the definition of Gross Asset Value, as of the last day of the month preceding the date of the Fundamental Change, as determined by the regularly employed outside accountant serving the Company at such time, or if none, by a public accountant selected by the Company and the Affected Member, or if they are unable to agree, by a public accountant chosen by two public accountants, one being selected by the Affected Member and one by the Company. At any time after the date of this Agreement, the Members shall have the right to agree unanimously upon the value of the Membership Interest of each Member and determine the purchase price of each Membership Interest for purposes of Paragraph 7.11.1, in which event, the Tax Matters Partner shall place the purchase price of each Membership Interest on Exhibit A attached hereto, which shall be initialed by all of the Members. The purchase price so determined shall be reviewed by the Members each year or at any other time determined by all of the Members and shall either be confirmed or adjusted by the unanimous agreement of all Members. If all Members are unable to agree with respect to the purchase price of any Membership Interest, the Tax Matters Partner shall delete such purchase price from Exhibit A. In the event the Members allow a period of eighteen (18) months to lapse without either revaluing or confirming such purchase price or are unable to unanimously agree on the revaluing or confirmation of such purchase price, the purchase price shall then become the book value of the Membership Interest as appraised by the Company's 26 32 regularly employed outside accountant or such other accountant as may be selected pursuant to the above-described procedure. 7.11.3 PAYMENT OF PURCHASE PRICE. The purchase price under this Paragraph 7.11 shall be payable in cash at closing. 7.11.4 CLOSING. The closing of any purchase and sale under Paragraph 7.11.1 shall take place at the office of the Company at a date designated by the Company, or the Unaffected Members, as applicable, which shall not be more than ninety (90) days after the date of determination of the purchase price of the Membership Interest as set forth in Paragraph 7.11.2. ARTICLE 8 DISSOLUTION, LIQUIDATION, AND TERMINATION OF THE COMPANY 8.1 LIMITATIONS. The Company may be dissolved, liquidated, and terminated only pursuant to the provisions of this Article 8, and the parties hereto do hereby irrevocably waive any and all other rights they may have to cause a dissolution of the Company or a sale or partition of any or all of the Company Assets. 8.2 EXCLUSIVE CAUSES. Notwithstanding the Act, the following and only the following events shall cause the Company to be dissolved, liquidated, and terminated: (a) Any transaction the result of which is the ownership of one hundred percent (100%) of all the Membership Interests of the Company by a single Member, unless such Member elects to continue the business of the Company by admitting another Member within thirty (30) days thereafter; (b) The occurrence of a Terminating Capital Transaction; (c) The Incapacity of any Member, unless a Majority of Remaining Members votes to continue the Company within ninety (90) days following the occurrence of any such Incapacity; (e) The written consent of a Majority in Interest; (f) Judicial dissolution; or (g) Upon the seventh (7th) anniversary of the date of this Agreement. Any dissolution of the Company other than as provided in this Paragraph 8.2 shall be a dissolution in contravention of this Agreement. 8.3 EFFECT OF DISSOLUTION. The dissolution of the Company shall be effective on the day on which the event occurs giving rise to the dissolution, but the Company shall not terminate until it has been wound up and its assets have been distributed as provided in Paragraph 8.5 of this Agreement. Notwithstanding the dissolution of the Company, prior to the termination of the Company, the business of the Company and the affairs of the Members, as such, shall continue to be governed by this Agreement. 27 33 8.4 NO CAPITAL CONTRIBUTION UPON DISSOLUTION. Each Member shall look solely to the assets of the Company, its Capital Contribution thereto, its Capital Account and its share of Net Profits or Net Losses for all distributions with respect to the Company, and shall have no recourse therefor (upon dissolution or otherwise) against any other Member. Accordingly, in the event the Company is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(H)(g), if any Member has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which the liquidation occurs), then such Member shall have no obligation to make any Capital Contribution with respect to such deficit, and such deficit shall not be considered a debt owed to the Company or to any other person for any purpose whatsoever. 8.5 LIQUIDATION. 8.5.1 Upon dissolution of the Company, the Members shall liquidate the assets of the Company, and after allocating (pursuant to Article 5 of this Agreement) all income, gain, loss and deductions resulting therefrom, shall apply and distribute the proceeds thereof as follows: (a) First, to the payment of the obligations of the Company, to the expenses of liquidation, and to the setting up of any Reserves for contingencies which a Majority in Interest may consider necessary. (b) Thereafter, to the Members in accordance with the positive balances in the Members' respective Capital Accounts, determined after taking into account all Capital Account adjustments for the Company taxable year during which such liquidation occurs (other than those made as a result of the distributions set forth in this Paragraph 8.5.1(b) of this Agreement), by the end of the taxable year in which such liquidation occurs or, if later, within 90 days after the date of the liquidation. 8.5.2 Notwithstanding Paragraph 8.5.1 of this Agreement, in the event that a Majority in Interest determines that an immediate sale of all or any portion of the Company Assets would cause undue loss to the Members, in order to avoid such loss to the extent not then prohibited by the Act, the Members may either defer liquidation of and withhold from distribution for a reasonable time any Company Assets except those necessary to satisfy the Company's debts and obligations, or distribute the Company Assets to the Members in kind. ARTICLE 9 MISCELLANEOUS 9.1 AMENDMENTS. 9.1.1 Each Additional Member and Substitute Member shall become a signatory hereto by signing such number of counterpart signature pages to this Agreement, and such other instruments, in such manner, as the Members shall determine. By so signing, each Additional Member and Substitute Member, as the case may be, shall be deemed to have adopted and to have agreed to be bound by all of the provisions of this Agreement. 28 34 9.1.2 Amendments to this Agreement may be made only as set forth in Paragraph 6.1.15. 9.1.3 In making any amendments, there shall be prepared and filed by, or for, the Members such documents and certificates as may be required under the Act and under the laws of any other jurisdiction applicable to the Company. 9.2 ACCOUNTING AND FISCAL YEAR. Subject to Code Section 448, the books of the Company shall be kept on such method of accounting for tax and financial reporting purposes as may be determined by a Majority in Interest. The fiscal year of the Company shall end on September 30 of each year, or on such other date permitted under the Code as a Majority in Interest shall determine. 9.3 MEETINGS. At any time, and from time to time, a Majority in Interest may, but shall not be required to, call meetings of the Members. Written notice of any such meeting shall be given to all Members not less than five (5) nor more than forty-five (45) days prior to the date of such meeting. Each Member may authorize any other Person (whether or not such other Person is a Member) to act as a proxy for it or on its behalf on all matters in which the Member is entitled to participate. Each proxy must be signed by the Member or such Member's attorney-in-fact. All other provisions governing, or otherwise relating to, the holding of meetings of the Members, shall from time to time be established by a Majority in Interest. 9.4 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof and fully supersedes any and all prior or contemporaneous agreements or understandings between the parties hereto pertaining to the subject matter hereof. 9.5 FURTHER ASSURANCES. Each of the parties hereto does hereby covenant and agree on behalf of itself, its successors, and its assigns, without further consideration, to prepare, execute, acknowledge, file, record, publish, and deliver such other instruments, documents and statements, and to take such other action as may be required by law or reasonably necessary to effectively carry out the purposes of this Agreement. 9.6 NOTICES. Any notice, consent, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be (a) delivered personally to the Person or to an officer of the Person to whom the same is directed, or (b) sent by facsimile or registered or certified mail, return receipt requested, postage prepaid, addressed as follows: if to the Company, to the Company at the address set forth in Paragraph 1.3 hereof, or to such other address as the Company may from time to time specify by notice to the Members; if to a Member, to such Member at the address set forth in Exhibit A, or to such other address as such Member may from time to time specify by notice to the Company. Any such notice shall be deemed to be delivered, given and received for all purposes as of: (i) the date so delivered, if delivered personally, (ii) upon receipt, if sent by facsimile, or (iii) on the date of receipt or refusal indicated on the return receipt, if sent by registered or certified mail, return receipt requested, postage and charges prepaid and properly addressed. 9.7 TAX MATTERS. 9.7.1 APS shall be designated and shall operate as the "Tax Matters Partner" (as defined in Code Section 6231). 29 35 9.7.2 The Member designated as "Tax Matters Partner" may make all elections for federal income and all other tax purposes (including, without limitation, pursuant to Section 754 of the Code) except as expressly provided otherwise in this Agreement; provided, however, that upon the reasonable request of any Member transferring its Membership Interest as permitted hereunder, the Tax Matters Partner, on behalf of the Company, shall make the election pursuant to Section 754 of the Code requested by such Member, as permitted by the Code. 9.7.3 Income tax returns of the Company shall be prepared by the accountant selected by a Majority in Interest. Such income tax returns shall be prepared at the Company's expense. 9.8 GOVERNING LAW. This Agreement, including its existence, validity, construction, and operating effect, and the rights of each of the parties hereto, shall be governed by and construed in accordance with the laws of the State of Delaware without regard to otherwise governing principles of conflicts of law. 9.9 ARBITRATION. The parties hereto agree to submit to arbitration any and all matters in dispute and in controversy among them concerning the terms and provisions of this Agreement. All such disputes and controversies shall be resolved, determined and adjudged by the arbitrators, all pursuant to the rules of the American Arbitration Association. The selection of arbitrators and the arbitration procedure shall be according to the Rules of the American Arbitration Association; however, the arbitrators shall have no authority to grant any relief which is inconsistent with this Paragraph 9.9 or any other provision of this Agreement. 9.10 CONSTRUCTION. This Agreement shall be construed as if all parties prepared this Agreement. 9.11 CAPTIONS - PRONOUNS. Any titles or captions contained in this Agreement are for convenience only and shall not be deemed part of the text of this Agreement. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, neuter, singular or plural as appropriate. 9.12 BINDING EFFECT. Except as otherwise expressly provided herein, this Agreement shall be binding on and inure to the benefit of the Members, their heirs, executors, administrators, successors and all other Persons hereafter holding, having or receiving an interest in the Company, whether as Assignees, Substitute Members or otherwise. 9.13 SEVERABILITY. In the event that any provision of this Agreement as applied to any party or to any circumstance, shall be adjudged by a court of competent jurisdiction to be void, unenforceable or inoperative as a matter of law, then the same shall in no way affect any other provision in this Agreement, the application of such provision in any other circumstance or with respect to any other party, or the validity or enforceability of this Agreement as a whole. 9.14 CONFIDENTIALITY. Each Party hereto agrees that the provisions of this Agreement, all understandings, agreements and other arrangements between and among the parties, and all other nonpublic information received from or otherwise relating to, the Company shall be confidential, and shall not be disclosed or otherwise released to any other Person (other than another party hereto), without the written consent of a Majority in Interest. The obligations of the parties hereunder shall not apply to the extent that the disclosure of information otherwise determined to be confidential is required by applicable law, provided that, prior to disclosing such confidential information, a party shall notify the Company 30 36 thereof, which notice shall include the basis upon which such party believes the information is required to be disclosed. 9.15 COUNTERPARTS. This Agreement may be executed in any number of multiple counterparts, each of which shall be deemed to be an original copy and all of which shall constitute one agreement, binding on all parties hereto. 9.16 NO REFERRALS. There exists no agreement or understanding between the Company and any Member, or among any Members, or any affiliates of any Member, that any Member shall order, refer or purchase goods or services from the Company, or arrange for the ordering, referring or purchasing of such goods or services from the Company. Likewise, there exists no agreement or understanding between the Company and any Member, or among any Members, or any affiliates of any Member, that the Company shall order, refer or purchase goods or services from any Member, or arrange for the ordering referring or purchasing of such goods or services from any Member. [SIGNATURE PAGE FOLLOWS) 31 37 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. AMERICAN PHARMACEUTICAL SERVICES, INC. By: /s/ WILLIAM R. KORSLIN ------------------------------------- William R. Korslin SUMMIT CARE PHARMACY, INC. By: ------------------------------------- -------------------- Its: ------------------------------------ ACKNOWLEDGED AND AGREED THIS ___ DAY OF __________, 1996 FOR THE PURPOSES OF PARAGRAPH 6.6 HEREOF. SUMMIT CARE CORPORATION By: ---------------- ------------------ Its: --------------------------- S-1 38 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. AMERICAN PHARMACEUTICAL SERVICES, INC. By: ------------------------------------- William R. Korslin SUMMIT CARE PHARMACY, INC. By: /s/ DERWIN L. WILLIAMS ------------------------------------- Derwin L. Williams Its: Sr. Vice President, Finance ------------------------------------ ACKNOWLEDGED AND AGREED THIS 30th DAY OF NOVEMBER, 1996 FOR THE PURPOSES OF PARAGRAPH 6.6 HEREOF. SUMMIT CARE CORPORATION By: /s/ DERWIN L. WILLIAMS ---------------------------- Derwin L. Williams ---------------------------- Its: Sr. Vice President, Finance --------------------------- S-1 39 EXHIBIT A MEMBERS, CAPITAL CONTRIBUTIONS, AND PERCENTAGE INTERESTS
Purchase Price for each Membership Initial Capital Interest (Pursuant Percentage Member Contribution to Paragraph 7.11) Interest ------ --------------- ------------------ ---------- American Pharmaceutical Services, Inc. Those assets that American 50% 1771 W. Diehl Road, Suite 210 Pharmaceutical Services, Inc. Naperville, Illinois 60563 uses in the conduct of its business of providing drugs, pharmaceutical supplies and pharmacy consulting to long term care facilities in the Austin, Texas area from the pharmacy located at 2324 Ridgepoint Drive, Suite G-1, Austin, Texas 78754 (Gross Asset Value = $3,000,000 (1) Summit Care Pharmacy, Inc. $1,500,000 50% 22607 Old Canal Road Yorba Linda, California 92887
- ---------- (1) APS's Capital Account will be adjusted in accordance with Paragraph 2.10 hereof to reflect the distribution provided for in Paragraph 4.1.3 hereof. 40 SCHEDULE I STATE OF DELAWARE CERTIFICATE OF FORMATION OF APS-SUMMIT CARE PHARMACY, L.L.C. FIRST: The name of the limited liability company is: APS-SUMMIT CARE PHARMACY, L.L.C. SECOND: Its registered office in the State of Delaware is to be located at: 1209 Orange Street Wilmington, DE 19801 The county of New Castle and its registered agent at such address is: The Corporation Trust Company In Witness Whereof, the undersigned has executed this Certificate of Formation of APS-SUMMIT CARE PHARMACY, L.L.C. this 27th day of November, 1996. AMERICAN PHARMACEUTICAL SERVICES, INC., a Delaware corporation By:___________________________ Name:_________________________ Title:________________________ SUMMIT CARE PHARMACY, INC., a California corporation By:___________________________ Name:_________________________ Title:________________________ 41 =============================================== ASSET CONTRIBUTION AGREEMENT BY AND BETWEEN AMERICAN PHARMACEUTICAL SERVICES, INC., a Delaware Corporation AND APS - SUMMIT CARE PHARMACY, L.L.C., a Delaware Limited Liability Company =============================================== 42 TABLE OF CONTENTS Page ASSET CONTRIBUTION AGREEMENT................................................1 RECITALS....................................................................1 AGREEMENT...................................................................1 ARTICLE I - CONTRIBUTION OF ASSETS..........................................1 1.1 Contributed Assets.........................................1 (a) Leasehold Interests..................................2 (b) Purchased Contracts..................................2 (c) Inventories..........................................2 (d) Personal Property, Fixtures and Equipment............2 (e) Governmental Licenses and Permits....................3 (f) Intangible Assets....................................3 (g) Names................................................3 (h) Goodwill.............................................3 (i) Facility Records.....................................3 (j) Customer Lists.......................................3 (k) Noncompetition Covenant..............................3 1.2 Excluded Assets............................................3 1.3 Nonassumption of Agreements................................4 ARTICLE II - ASSUMED LIABILITIES............................................4 2.1 Assumed Liabilities........................................4 2.2 Unassumed - Liabilities....................................4 ARTICLE III - FINANCIAL ARRANGEMENTS AND CLOSING............................4 3.1 Asset Value................................................4 3.2 Capital Account Balance....................................5 3.3 Payment to APS.............................................5 3.4 Allocation.................................................5 3.5 Closing....................................................5 3.6 Closing Deliveries.........................................5 i 43 ARTICLE IV - CLOSING CONDITIONS AND DOCUMENTS...............................6 4.1 Conditions to Obligations of LLC...............................6 4.2 Conditions to Obligations of APS...............................8 ARTICLE V - NONCOMPETITION COVENANT.........................................9 5.1 Covenant...................................................9 5.2 Modification...............................................9 5.3 Remedies...................................................9 ARTICLE VI - REPRESENTATIONS AND WARRANTIES OF APS.........................10 6.1 Title to Contributed Assets...............................10 6.2 Compliance With Licensing Requirements....................10 6.3 Compliance With Laws......................................10 6.4 Condition of Personal Property............................11 6.5 Books and Records.........................................11 6.6 Leases and Other Material Agreements......................11 6.7 Taxes.....................................................11 6.8 Governmental Investigations and Proceedings...............11 6.9 No Conflict or Violation..................................11 6.10 Material Misstatements....................................11 6.11 No Condemnation...........................................12 6.12 No Assessments............................................12 6.13 Financial Statements......................................12 6.14 Hazardous Material........................................12 6.15 Insurance.................................................13 6.16 Zoning....................................................13 6.17 Litigation................................................13 6.18 Authorization.............................................13 6.19 Corporate Existence and Qualification.....................13 6.20 Access to Records.........................................13 ARTICLE VII - REPRESENTATIONS AND WARRANTIES OF LLC........................14 7.1 No Conflict or Violation..................................14 7.2 Litigation................................................14 7.3 Authorization.............................................14 7.4 Corporate Existence and Qualification.....................14 ii 44 ARTICLE VIII - POSTCLOSING AGREEMENTS......................................14 8.1 Books and Records and Financial Information...............14 8.2 Sales and Use Taxes.......................................15 ARTICLE IX - INDEMNIFICATION...............................................15 9.1 Indemnification by APS....................................15 9.2 Indemnification by LLC....................................16 ARTICLE X - MISCELLANEOUS..................................................17 10.1 Notices...................................................17 10.2 Referrals.................................................18 10.3 Counterparts..............................................18 10.4 Construction..............................................18 10.5 Gender and Number.........................................18 10.6 Waiver....................................................18 10.7 Further Assurances........................................18 10.8 Confidentiality...........................................18 10.9 Time of Essence...........................................19 10.10 Survival..................................................19 10.11 Supersedes Agreement......................................19 10.12 Commissions...............................................19 10.13 Attorneys' Fees and Costs.................................19 10.14 Arbitration...............................................19 10.15 Interpretation............................................20 10.16 Severability..............................................20 10.17 Binding...................................................20 10.18 Facsimile Copies..........................................20 10.19 Force Majeure.............................................20 10.20 No Obligations To Third Parties...........................21 iii 45 ASSET CONTRIBUTION AGREEMENT This Asset Contribution Agreement (the "Agreement") is entered into as of November 27, 1996 (the "Execution Date"), by and between American Pharmaceutical Services, Inc., a Delaware corporation ("APS"), and APS - Summit Care Pharmacy, L.L.C., a Delaware limited liability company ("LLC"). APS and LLC are sometimes hereinafter referred to collectively as "Parties" and individually as "Party". RECITALS A. APS is the owner and operator of a pharmacy (the "Facility") located at 2324 Ridgepoint Drive, Suite G-1, Austin, Texas 78754 (the "Premises"). B. APS owns certain "Contributed Assets" (as defined in Section 1. 1 of this Agreement) which are used or usable in connection with the operation of the Facility. C. APS and Summit Care Pharmacy, Inc., a California corporation ("Summit Care") (a) have formed LLC for the purpose of engaging in the business of operating a pharmacy to provide pharmacy and IV therapy services and (b) have entered into that certain Limited Liability Company Agreement, of even date herewith (the "LLC Agreement"), to govern the ownership and operations of LLC. D. Pursuant to the LLC Agreement, APS will contribute to LLC, as its initial capital contribution, the Contributed Assets, on the terms and conditions set forth in this Agreement. E. APS desires to contribute the Contributed Assets to LLC, and LLC desires to receive the Contributed Assets from APS, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the terms and conditions set forth herein, the Parties agree as follows: AGREEMENT ARTICLE I CONTRIBUTION OF ASSETS 1.1 Contributed Assets. At the Closing (as defined in Section 3.5 hereof) of the transactions contemplated by this Agreement, in reliance upon the representations and warranties and agreements of APS herein, APS shall contribute to LLC, and LLC shall accept from APS, all right, title and interest 1 46 of APS in the following assets, rights and interests of APS relating to the Facility, all of which are to be contributed by APS at Closing in accordance with the provisions of Section 3.5 hereof, excluding only the "Excluded Assets" defined in Section 1.2 hereof. (All of the assets, rights and interests to be contributed and delivered by APS to LLC pursuant to Section 3.6 are hereinafter collectively referred to as the "Contributed Assets"): (a) Leasehold Interests. All of APS's leasehold interest (including all security deposits, and any options to extend such leasehold, to expand the leased premises, to purchase such premises or otherwise) as lessee of the Facility pursuant to the lease (the "Lease") under which APS, as lessee, has been granted the leasehold interest by the owner of the Premises as lessor, and all improvements owned by APS on the Closing Date, if any, to real property and the buildings leased by APS with respect to the Facility (collectively, the "Leasehold Interests"). To effectuate the transfer of the Leasehold Interests hereunder, APS agrees to execute and deliver at Closing (i) an Assignment of Lease executed by APS in substantially the form attached as Exhibit A hereto; and (ii) a "Consent to Assignment of Lease" executed by the lessor of the Premises in substantially the form attached as Exhibit B hereto. (b) Purchased Contracts. All right, title and interest of APS in, to and under the contracts relating exclusively to the operations of the Facility (collectively, the "Purchased Contracts"), including but not limited to (i) all assignable agreements between APS and third-party payors (collectively, the "Payor Contracts"), (ii) all assignable agreements with suppliers to which APS is a party (collectively, the "Supplier Contracts"), (iii) all assignable agreements with nursing homes (collectively, the "Facility Contracts") and (iv) the contracts (including the Payor Contracts, the Supplier Contracts, and the Facility Contracts) listed on Schedule 1.1(b) hereto. (c) Inventories. All of APS's inventories held for use in connection with the Facility on the Closing Date and maintained in the ordinary course of the business of the Facility, including, without limitation, all medical supplies, equipment and drugs (all such items, collectively, the "Inventory"). (d) Personal Property, Fixtures and Equipment. All right, title and interest of APS in and to all furniture, fixtures, furnishings, tools, machinery, equipment including, without limitation, all computer hardware, computer software, supplies, billing and office support equipment, telecommunications equipment and records necessary to operate, prepare and collect bills and maintain the Facility, appliances and all other tangible personal property of every kind and description 2 47 and any interest therein necessary to the operations of the Facility and owned or leased by APS and exclusively used in or related to the operation of the Facility on the Closing Date, whether or not located at the Facility, and whether or not reflected as capital assets on the accounting records of APS (all such items, collectively, the "Personal Property"), including, but not limited to, those items listed on Schedule 1.1(d) hereto. (e) Governmental Licenses and Permits. All right, title and interest of APS in, to and under all agreements, licenses, permits, consents, authorizations, certificates and other rights of every kind and character relating exclusively to the Facility of any regulatory, administrative or other governmental agency or body issued to or held by APS necessary or incidental to the operations of the Facility as of the Closing Date, to the extent the same are transferable (all such items, collectively the "Governmental Licenses and Permits"). A listing of the Facility's license and permit numbers is set forth on Schedule 1.1(e) hereto. (f) Intangible Assets. All right, title and interest of APS in, to and under the technology, data, symbols, copyrights and registrations thereof, trade names, trademarks, trademark registrations, trademark applications, service marks, service mark registrations, service mark applications, telephone numbers, licenses, and other intangible rights and privileges used by APS exclusively in connection with the operation of the Facility on the Closing Date. (g) Names. A license to use the name set forth on Schedule 1.1(g). (h) Goodwill. The goodwill and going concern value of APS's interest in the Facility. (i) Facility Records. Copies of all books and records, computer tapes, disks and data relating exclusively to the Facility and the Contributed Assets, (collectively, the "Facility Records"), as listed on Schedule 1.1(i) hereto. (j) Customer Lists. All right, title and interest of APS in all customer lists relating to the operation of the Facility. (k) Noncompetition Covenant. The Noncompetition Covenant described in Article V of this Agreement. 1.2 Excluded Assets. Notwithstanding any other provision of this Agreement, the Contributed Assets shall include only the assets, rights and interests of APS specifically described in this Agreement and expressly shall not include (and APS does not hereby contribute to LLC) any other assets, rights or interests 3 48 of APS, including, without limitation: (i) any cash, securities, bank accounts or safe deposit boxes; or (ii) any accounts receivable arising with respect to goods sold or services rendered by APS prior to the Closing Date. 1.3 Nonassumption of Agreements. Except for the obligations under the Purchased Contracts accruing on and after the Closing Date, LLC shall not assume any agreements or obligations, whether express or implied, that exist between APS and any of APS's current or former employees, or any third party, and nothing in this Agreement is intended to be or shall be construed as an assumption by LLC of any rights, obligations or liabilities of any kind under any such agreements. ARTICLE II ASSUMED LIABILITIES 2.1 Assumed Liabilities. Except as specified in Section 2.2 hereof, as of the Closing Date, LLC hereby agrees to assume, satisfy or perform when due all sums owed to trade vendors and service providers for goods and services purchased in the ordinary course of operations of the Facility (the "Accounts Payable") for goods delivered to LLC or services performed for LLC after the Closing Date (the "Assumed Liabilities"). 2.2 Unassumed Liabilities. Other than the Assumed Liabilities, LLC shall not assume, nor shall LLC or any of its affiliates be deemed to have assumed or guaranteed, any other liability or obligation of any nature of APS, or claims of such liability or obligation, whether accrued, matured or unmatured, liquidated or unliquidated, fixed or contingent, known or unknown arising out of (i) acts or occurrences prior to the Closing, (ii) liabilities or obligations relating to the Contributed Assets prior to the Closing, or (iii) any other liability or obligation of APS (all such items (i) through (iii) of this Section 2.2, collectively, the "Unassumed Liabilities"). The Unassumed Liabilities specifically include, without limitation, all Accounts Payable for goods delivered to APS or services performed for APS prior to the Closing Date and also include any liabilities or obligations of APS with respect to APS's employees earned prior to the Closing Date, whether or not any of APS's employees become employees of LLC. ARTICLE III FINANCIAL ARRANGEMENTS AND CLOSING 3.1 Asset Value. The Parties agree that the fair market value of the Contributed Assets is Three Million Dollars ($3,000,000.00). In exchange for APS's contribution of the Contributed Assets to LLC pursuant to the terms and 4 49 conditions of this Agreement, APS will receive from LLC the consideration described in Sections 3.2 and 3.3 of this Article. 3.2 Capital Account Balance. In exchange for the Contributed Assets contributed by APS to LLC in accordance with this Agreement, in addition to the consideration described in Section 3.3 below, APS will receive on the Closing Date described below in accordance with the LLC Agreement, (a) an initial capital account credit in LLC equal to One Million Five Hundred Thousand Dollars ($1,500,000.00) and (b) a membership interest in LLC that represents a fifty percent (50%) ownership interest in LLC. 3.3 Payment to APS. In exchange for the Contributed Assets contributed by APS to LLC in accordance with this Agreement, in addition to the consideration described in Section 3.2 above, APS will receive payment from LLC in the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00), to be paid in immediately available funds on the Closing Date described below. 3.4 Allocation. The Three Million Dollar ($3,000,000.00) value of the Contributed Assets agreed upon by the Parties shall be applied and allocated as set forth on Schedule 3.4 hereto. As an inducement for APS and LLC to enter into this Agreement, the Parties agree that the values assigned to the items included in this Agreement and set forth on Schedule 3.4 are fair and equitable and have been bargained for separately. In addition, the Parties agree to cooperate in filing reports relating to such allocation, as and when required by law, including IRS Form 8594. Furthermore, the Parties acknowledge and agree that APS and LLC shall report to federal and state tax authorities any additionally required information relating to the noncompetition covenant described herein or other agreements between APS and LLC. APS and LLC agree to cooperate with each other in the preparation of any such additional reports. 3.5 Closing. The closing of the transactions contemplated under this Agreement (the "Closing") shall take place by mail on or prior to November 30, 1996 (the "Closing Date"). The Closing Date may be extended upon the mutual agreement of the Parties hereto. The transfer of the Contributed Assets by APS to LLC shall be deemed to be effective as of 11:59 p.m., Texas time, on the Closing Date. 3.6 Closing Deliveries. At the Closing, APS shall execute and deliver to LLC all instruments, documents and records set forth in Section 4.1 hereof required by that Section to be delivered by APS as a condition to LLC's obligation to accept the Contributed Assets; and LLC shall execute and deliver to APS all instruments, documents and records set forth in Section 4.2 hereof required by that Section to be delivered by LLC as a condition to APS's obligation to accept the Contributed Assets. For purposes of this Agreement, the term "Transaction Documents" shall refer to this Agreement and to the Assignment 5 50 of Lease and Consent to Assignment of Lease, the General Conveyance and Assignment of Interests described below and such other instruments of transfer necessary to vest title and possession in and to the Contributed Assets in LLC as of the Closing Date. ARTICLE IV CLOSING CONDITIONS AND DOCUMENTS 4.1 Conditions to Obligations of LLC. LLC's obligation to accept the Contributed Assets shall be expressly conditioned upon satisfaction, or, in the alternative, waiver by LLC of the following conditions: (a) All of the terms, covenants and conditions of this Agreement to be complied with and performed by APS on or before the Closing Date shall have been duly complied with and performed by APS in all material respects. (b) The representations and warranties made by APS herein shall be correct in all material respects as of the Closing Date, with the same force and effect as though such representations and warranties had been made as of the Closing Date. (c) On or before the Closing Date, the Board of Directors of APS shall have voted to authorize the Transaction Documents, and the transactions described therein, and the Secretary or Assistant Secretary of APS shall have delivered to LLC a certified copy of the resolutions of its Board of Directors to such effect; APS shall have executed the Assignment of Lease and obtained the executed Consent to Assignment of Lease, in substantially the forms attached hereto as Exhibits A and B, respectively, on or before the Closing Date. (d) On or before the Closing Date, APS shall have executed an Employee Services Agreement in substantially the form attached as Exhibit D hereto. (e) The Facility shall not have been adversely affected in any material way as the result of any fire, accident or other casualty (whether or not insured) or by any act of God. (f) There shall not have been material adverse change in the operations, financial condition, or regulatory or licensing status of APS since the Execution Date of this Agreement nor shall APS have received any reports, surveys, citations or correspondence from licensing authorities (collectively, "Reports") affecting the Facility for the period prior to the 6 51 Closing Date, except such Reports as to which LLC has had a reasonable opportunity to review and not disapprove. (g) APS shall have delivered to LLC a certificate to the effect that, as of the Closing Date, the conditions set forth in subsections (a) and (b) of this Section 4.1 have been satisfied. (h) On or before the Closing Date, APS shall have executed and delivered to LLC the General Conveyance and Acceptance and Assignment of Interests and Assumption of Liabilities in substantially the form attached hereto as Exhibit C and incorporated herein by this reference (the "General Conveyance"), which General Conveyance shall be effective to transfer to LLC the Contributed Assets free and clear of all liens and encumbrances, other than the Permitted Encumbrances set forth on Schedule 6.1. (i) On or before the Closing Date, APS and Summit Care shall have executed and delivered to LLC that certain LLC Agreement by and between APS and Summit Care. Additionally, on or before the Closing Date, Summit Care shall have contributed cash in the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00) to LLC in accordance with the LLC Agreement. (j) APS shall have made available for delivery at the Facility the Purchased Contracts. (k) APS shall have made available for delivery at the Facility the Facility Records. (l) No action, suit, or proceeding before any court or any governmental body or authority pertaining to the transactions described in this Agreement or to the consummation thereof as provided herein, shall have been instituted or threatened on or before the Closing Date. (m) APS shall have delivered to LLC any additional instruments, signed and properly acknowledged by APS, if appropriate, as may be necessary for APS to comply with this Agreement. (n) To the extent required herein, APS shall have obtained all necessary consents or approvals of all third parties (except parties to nursing home contracts) whose consent or approval is required in order for APS to consummate the transactions contemplated by the Transaction Documents. (o) On or before the Closing Date, APS shall assign or cause to be assigned to LLC all of APS's existing warranties of any contractors and 7 52 suppliers who have provided either labor, services, equipment and/or materials to the Facility to the extent assignable. 4.2 Conditions to Obligations of APS. APS's obligation to contribute the Contributed Assets shall be expressly conditioned upon satisfaction, or in the alternative, waiver by APS, of the following conditions: (a) All of the terms, covenants and conditions of this Agreement to be complied with and performed by LLC on or before the Closing Date shall have been duly complied with and performed in all material respects. (b) The representations and warranties made by LLC herein shall be correct in all material respects as of the Closing Date, with the same force and effect as though such representations and warranties had been made as of the Closing Date. (c) LLC shall have executed and delivered all documents and agreements which it is obligated hereby to execute. (d) On or before the Closing Date, LLC shall have executed an Employee Services Agreement in substantially the form attached as Exhibit D hereto. (e) The Facility shall not have been adversely affected in any material way as the result of any fire, accident or other casualty (whether or not insured) or by any act of God. (f) LLC shall have delivered to APS a certificate to the effect that, as of the Closing Date, the conditions set forth in subsections (a) and (b) of this Section 4.2 have been satisfied. (g) On or before the Closing Date, LLC shall have executed and delivered to APS the General Conveyance. (h) On or before the Closing Date, APS and Summit Care shall have executed and delivered to LLC that certain LLC Agreement by and between APS and Summit Care. Additionally, on or before the Closing Date, Summit Care shall have contributed cash in the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00) to LLC in accordance with the LLC Agreement. (i) No action, suit, or proceeding before any court or any governmental body or authority pertaining to the transactions described in this Agreement or to the consummation thereof as provided herein, shall have been instituted or threatened on or before the Closing Date. 8 53 LLC shall have delivered to APS any additional instruments, signed and properly acknowledged by LLC, if appropriate, as may be necessary for LLC to comply with this Agreement. ARTICLE V NONCOMPETITION COVENANT 5.1 Covenant. APS shall not directly or indirectly carry on or engage in the business of providing pharmacy services or otherwise compete with LLC at or in connection with any location in the County of Travis, State of Texas, whether on its own account, or solely or jointly with others as an agent, consultant, stockholder, member, investor, or general or limited partner of any corporation, general partnership, limited partnership, limited liability company or any other entity, or in any other relationship or capacity. Except as set forth below, the provisions of this Article V shall survive for so long as LLC is in existence and no longer. Notwithstanding the preceding sentence, the provisions of this Article V shall terminate and cease to apply (i) immediately upon the withdrawal of either APS or Summit Care as a "Member" of LLC (as "Member" is defined in the LLC Agreement) with the consent of the other, as contemplated by the second sentence of Paragraph 7.4 of the LLC Agreement and (ii) on November 30, 1998 in the event that either APS or Summit Care withdraws from LLC (A) prior to November 30, 1998 and (B) without the consent of the other party; provided, however, that in the event either APS or Summit Care exercises its buy/sell right under Paragraph 7. 10 of the LLC Agreement, the provisions of this Article V shall apply to the selling party only (as though the buying party were LLC) and shall terminate on the date that is the second (2nd) anniversary of the closing of the sale contemplated by Paragraph 7.10 of the LLC Agreement. 5.2 Modification. Although APS and LLC consider the restrictions contained herein to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or geographical territory or any other restriction contained in this Article is an unreasonable or otherwise unenforceable restriction, the above provisions shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such other extent as such court may determine or indicate to be reasonable. 5.3 Remedies. The Parties to this Agreement further acknowledge and agree that LLC's remedy at law for a breach or threatened breach of any of the provisions of the above covenant not to compete would be inadequate and, in recognition of that fact, in the event of a breach or threatened breach by APS of the provisions of this Article, LLC shall be entitled to, without posting any bond, and APS agrees not to oppose any request for, equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy which may be 9 54 available. Nothing contained herein shall be construed as prohibiting LLC from pursuing any other remedies available to LLC for such breach or threatened breach until any such injunction is granted. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF APS APS hereby makes the following representations and warranties to LLC as of the Execution Date and the Closing Date: 6.1 Title to Contributed Assets. Except as disclosed on Schedule 6.1 (collectively, the "Permitted Encumbrances"), no claims, liens, imperfections of title, security interests or other encumbrances have attached to any of the Contributed Assets, nor has any action or event occurred which will impair APS's ability to deliver valid and marketable title to the Contributed Assets. APS has taken all reasonably necessary action to maintain and protect any trademarks or trade names used in connection with the Facility. Set forth on Schedule 6. 1A hereto are lien search results showing certain UCC Financing Statements listing APS as debtor which APS believes were filed against it in error, but for which APS specifically indemnifies and holds harmless LLC pursuant to the provisions of Section 9.1 hereof. 6.2 Compliance With Licensing Requirements. Except as specified in Schedule 6.2 hereof, the Facility has been operated in substantial compliance with the applicable laws, rules, requirements, and regulations of the State of Texas and of the federal government for licensing and certification of the Facility. Except as set forth on Schedule 6.2 hereof, all requirements or recommendations of all applicable licensing or certification authorities regarding the Facility have been or at the Closing shall have been fully complied with. As of the Closing, all material State licenses, permits and Medicare and Medicaid billing agreements and certification necessary to operate the Facility and to obtain payment shall have been obtained by APS, shall be in full force and effect, and shall not be the subject of any revocation or termination action by the issuing agencies. 6.3 Compliance With Laws. To the knowledge of APS, no action or event has occurred which would cause the Facility to be out of substantial compliance with any applicable federal, state or local laws, rules and regulations, including without limitation, all federal, state or local health, fire and safety, seismic safety, zoning, or labor laws, ordinances, rules or regulations applicable to the Facility, all requirements of the Occupational Safety and Health Act and its Texas equivalent and regulations promulgated under such legislation and all orders, judgments and decrees of any tribunal under such legislation that apply to the Facility, the consequences of violation of which could have a material adverse effect on the operations of the Facility. 10 55 6.4 Condition of Personal Property. AU Personal Property has been maintained and repaired by APS in the ordinary course of APS's business operations. 6.5 Books and Records. APS's Financial Statements and other financial books and records for the Facility have been maintained in accordance with APS's usual and customary accounting practices applied on a consistent basis and are true and correct in all material aspects. 6.6 Leases and Other Material Agreements. Except as disclosed on Schedule 6.6 hereto, APS has not entered into any leases, subleases, management agreements or management contracts affecting the Facility, other than the Lease. To the knowledge of APS, nothing has occurred which would cause any of the Purchased Contracts listed on Schedule 1.1(b) not to be legal, valid, binding, enforceable and in full force and effect. APS has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the Lease other than to LLC. 6.7 Taxes. All federal, state and local taxes (other than real and personal property taxes and any transfer taxes arising out of the transfer contemplated herein), fees and assessments of whatever nature upon the Contributed Assets being sold to LLC hereunder which are due and payable by reason of the transactions contemplated by this Agreement have been or shall be paid by APS. 6.8 Governmental Investigations and Proceedings. Except as disclosed on Schedule 6.8 hereto, there is no current or pending litigation, proceeding, vendor hold or similar lien on state or federal payments to APS, or arbitration or governmental investigation with respect to APS and relating to the Facility, which, if decided adversely to APS, could have a material and adverse impact on the operations of the Facility. 6.9 No Conflict or Violation. The execution, delivery and performance of the Transaction Documents by APS will not result in any breach or violation or constitute a default under any material agreement or other instrument to which APS is a party or result in the termination of, or accelerate the performance required by, or cause the acceleration of the maturity of any such material agreement or other instrument. 6.10 Material Misstatements. No representation or warranty by APS contained in this Agreement and no records, writing, certificate, list or other instrument furnished or to be furnished to LLC pursuant hereto or in connection with the transactions contemplated hereby contains or will contain any untrue statement of a material fact. 11 56 6.11 No Condemnation. No condemnation action has been taken or to APS's knowledge has been threatened with respect to the Facility or any part thereof. 6.12 No Assessments. The Facility has not been the subject of any assessments for work or improvements either completed or to be completed, and APS has no knowledge or belief that there is any pending or contemplated assessment or other specified tax or assessment relating to the Facility. 6.13 Financial Statements. Schedule 6.13 attached hereto sets forth the profit and loss statements of APS for APS's two (2) most recent fiscal years for the Facility (the "Financial Statements"). The Financial Statements have been prepared in accordance with APS's usual and customary accounting practices consistently followed by APS throughout the periods indicated, and fairly present the financial position and results of operations of APS for the respective periods indicated. In addition, on or before the Closing, APS shall promptly provide LLC with all such additional monthly profit and loss statements for the Facility through September 1996 as are prepared by APS in APS's normal course of business in accordance with APS' usual and customary accounting practices consistently followed by APS throughout the periods indicated. 6.14 Hazardous Material. APS has not placed any underground storage tanks on the real property upon which the Facility is located in which any Hazardous Material (as defined below) has been or is being stored, nor has APS spilled, disposed of, discharged, or released any Hazardous Material into, upon, from, or over such real property or into or upon ground or surface water on such real property. APS has not incorporated any asbestos-containing materials into the buildings or interior improvements that are part of such real property, nor has it located any electrical transformer, fluorescent light fixture with ballasts, or other equipment containing PCBs on such real property. As used in this paragraph, "Hazardous Material" means any hazardous or toxic substance, material, or waste that is regulated by any federal authority or by any state or local governmental authority where the substance, materials, or waste is located. Except as set forth on Schedule 6.14 hereto, APS has operated the Facility in material compliance with all federal, state and local environmental protection laws and regulations and has not received any notice of nor has been cited for any violation of any such law or regulation and is aware of no such pending or threatened citation. There is no pending audit with respect to the Facility known to APS by any federal, state, or local governmental authority with respect to groundwater, soil, or air monitoring; the storage, burial, release, transportation, or disposal of Hazardous Materials; or the use of underground storage tanks by APS, related to the Facility. APS has no agreement with any third party or federal, state, or local governmental authority relating to any such environmental matter or any environmental cleanup. 12 57 6.15 Insurance. APS has maintained and now maintains (1) insurance on all of the assets of the Facility of a type customarily insured, covering property damage and loss of income by fire and other casualty, and (2) adequate insurance protection against all liabilities, claims, and risks against which it is customary to insure. APS is not in default with respect to payment of premiums on any such policy. No claim is pending under any such policy which if decided adversely to APS would materially and adversely effect the business, condition, operations (financially or otherwise), or results of operations of the Facility. 6.16 Zoning. APS has not commenced, nor received notice of the commencement of, any proceeding that would affect the present zoning or other land use classification of the property where the Facility is located. 6.17 Litigation. Except as set forth on Schedule 6.17 attached hereto, APS (a) is not subject to any outstanding injunction, judgment, order, decree, ruling or charge or (b) is not a party nor to APS's knowledge is threatened to be made a party to any action, suit, proceeding, hearing, audit or investigation relating to the Facility or the Purchased Assets of, in or before any court or quasijudicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator that is reasonably likely to result in a material adverse change with respect to the business, condition, operations (financial or otherwise) or results of operation of the Facility or the Contributed Assets. 6.18 Authorization. APS has full power and authority to execute and deliver the Transaction Documents and to perform its obligations thereunder. The Transaction Documents constitute the valid and legally binding obligation of APS, enforceable against APS in accordance with their respective terms, except as may be limited by bankruptcy, insolvency, or similar laws relating to creditors' rights and to principles of equity generally. 6.19 Corporate Existence and Qualification. APS is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware, and has all necessary corporate powers to own its properties and to carry on its business as now owned and operated by it. 6.20 Access to Records. APS shall have provided LLC, its agents, counsel, and accountants, through APS's counsel, reasonable access to all records maintained by APS at the Facility applicable to the Contributed Assets and the Facility and necessary to enable LLC to consummate the transactions described herein. 13 58 ARTICLE VII REPRESENTATIONS AND WARRANTIES OF LLC LLC hereby represents and warrants to APS as follows: 7.1 No Conflict or Violation. To the actual knowledge of LLC, there is no impediment or reason, including threatened or pending litigation, which would preclude LLC from executing and delivering the Transaction Documents, from performing its obligations thereunder or from consummating the transactions contemplated hereunder. 7.2 Litigation. LLC (a) is not subject to any outstanding injunction, judgment, order, decree, ruling or charge or (b) is not a party nor to LLC's knowledge is threatened to be made a party to any action, suit, proceeding, hearing, audit or investigation in or before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator that is reasonably likely to result in a material adverse change with respect to the business, condition, operations (financial or otherwise) or results of operation of the Facility or the Contributed Assets. 7.3 Authorization. LLC has all necessary power and authority and has taken all action necessary to enter into this Agreement and to consummate the transactions contemplated hereby and to perform its obligations hereunder. The Transaction Documents have been duly executed and delivered by LLC and are the legal, valid and binding obligations of LLC enforceable against LLC in accordance with their terms, except as may be limited by bankruptcy, insolvency, or similar laws relating to creditors' rights and to principles of equity generally. 7.4 Corporate Existence and Qualification. LLC is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of Delaware, and has all necessary corporate power to own its properties and to carry on its business as now owned and operated by it. ARTICLE VIII POSTCLOSING AGREEMENTS 8.1 Books and Records and Financial Information. Following the Closing Date, APS agrees to provide, promptly upon reasonable request by LLC, access to any books, records, computer tapes, disks and data related to the Contributed Assets and the Facility, which were not purchased by LLC as Facility Records, and such financial information of APS related to the Contributed Assets and the Facility with respect to any period prior to the Closing Date as LLC or its auditors shall request in connection with any filings or reports LLC and its 14 59 affiliates are required to file, or any tax inquiry or audit, as a result of the transactions contemplated hereby. 8.2 Sales and Use Taxes. All sales and use taxes arising out of the transfer of the Contributed Assets imposed by any local, state or federal agency shall be paid by the party required to collect them under the statute imposing such taxes. ARTICLE IX INDEMNIFICATION 9.1 Indemnification by APS. (a) APS shall indemnify and hold LLC (including, for purposes of this Article IX, any members, officers, affiliates, agents and employees of LLC, and its or their successors and assigns) harmless against any claims, demands, damages, losses, expenses and liabilities, including without limitation, reasonable attorneys' fees (collectively, the "Liabilities") suffered by LLC, arising out of or resulting from (i) any breach by APS (including, for purposes of this Article IX, any officers, directors, affiliates, agents and employees of APS, and its or their successors and assigns) of this Agreement, (ii) any inaccuracy or misrepresentation in or breach of any of the representations, warranties, covenants or agreements made by APS herein, (iii) any inaccuracy or misrepresentation in any certificate or document delivered by APS in accordance with the provisions of this Agreement, (iv) any Unassumed Liabilities, or (v) any citation violations issued by the State of Texas which relate to surveys of the Facility, if any, conducted prior to the Closing. APS shall indemnify and hold LLC harmless from and against any and all liabilities arising out of the acts or omissions of APS in connection with the operation of the Facility prior to the Closing. For purposes of this Section 9.1(a), the indemnification by APS provided herein shall be in force and effect for a period of two (2) years from the Closing Date, or until the expiration of the statute of limitations applicable to the specific matter indemnified against, whichever is greater. The obligation of APS to indemnify LLC shall be limited to the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00). (b) Upon obtaining knowledge thereof, LLC shall promptly notify APS of any claim or demand which such party has determined has given or could give rise to a right of indemnification under this Agreement. If such claim or demand relates to a claim or demand asserted by a third party against such party and if APS acknowledges APS's obligations to indemnify and hold harmless hereunder, APS shall have the right to employ such counsel as is reasonably acceptable to LLC to defend any 15 60 such claim or demand asserted against such party. LLC shall have the right at its own expense to participate in the defense of any such claim or demand. So long as APS is defending in good faith any such claim or demand, LLC shall not settle such claim or demand, without the consent of APS, which shall not be unreasonably withheld. LLC shall make available to APS all records and other materials required by APS for its use in contesting any claim or demand asserted by a third party against LLC. Whether or not APS so elects to defend any such claim or demand, LLC shall not have any obligation to do so and LLC shall not waive any right that LLC may have against APS hereunder with respect to any such claim or demand by electing or failing to elect to defend any such claim or demand. 9.2 Indemnification by LLC. (a) LLC shall indemnify and hold APS harmless from and against any and all Liabilities arising out of or resulting from (i) any breach by LLC of this Agreement; (ii) the acts or omissions of LLC after the Closing; (iii) the failure by LLC to pay or otherwise discharge any Assumed Liabilities or any obligation incurred or accrued subsequent to the Closing relating to the Facility or the Purchased Assets; (iv) any inaccuracy or misrepresentation in or breach of any of the representations, warranties, covenants or agreements made by LLC herein; or (v) any inaccuracy or misrepresentation in any certificate or document delivered by LLC in accordance with the provisions of this Agreement. For purposes of this Section 9.2(a), the indemnification by LLC provided herein shall be in force and effect for a period of two (2) years from the Closing Date, or until expiration of the statute of limitations applicable to the specific matter indemnified against, whichever is greater. The obligation of LLC to indemnify APS shall be limited to the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00). (b) Upon obtaining knowledge thereof, APS shall promptly notify LLC of any claim or demand which such party has determined has given or could give rise to a right of indemnification under this Agreement. If such claim or demand relates to a claim or demand asserted by a third party against such party and if LLC acknowledges LLC's obligations to indemnify and hold harmless hereunder, LLC shall have the right to employ such counsel as is reasonably acceptable to APS to defend any such claim or demand asserted against such party. APS shall have the right at its own expense to participate in the defense of any such claim or demand. So long as LLC is defending in good faith any such claim or demand, APS shall not settle such claim or demand, without the consent of LLC, which shall not be unreasonably withheld. APS shall make available to LLC all records and other materials required by 16 61 LLC for its use in contesting any claim or demand asserted by a third party against APS. Whether or not LLC so elects to defend any such claim or demand, APS shall not have any obligation to do so and APS shall not waive any right that APS may have against LLC hereunder with respect to any such claim or demand by electing or failing to elect to defend any such claim or demand. ARTICLE X MISCELLANEOUS 10.1 Notices. All notices required or permitted to be given hereunder shall be personally delivered or sent by registered or certified mail, return receipt requested, or sent by overnight courier, or sent by both facsimile and mail, addressed to the Parties as follows: If to LLC: APS - Summit Care Pharmacy, L.L.C. 2324 Ridgepoint Drive, Suite G-1 Austin, Texas 78754 Attention: President With a copy to: Hooper, Lundy & Bookman, Inc. 1875 Century Park East, Suite 1600 Los Angeles, CA 90067-2799 Telephone: (310) 551-8111 Telecopier: (310) 551-8181 If to APS: American Pharmaceutical Services, Inc. 1771 W. Diehl Road, Suite 210 Naperville, Illinois 60563 Attn: William Korslin, President Telephone: (630) 305-8000 Telecopier: (630) 305-8190 With a copy to: American Pharmaceutical Services, Inc. 1771 W. Diehl Road, Suite 210 Naperville, Illinois 60563 Attn: Chris Mollet, Vice President and General Counsel Telephone: (630) 305-8000 Telecopier: (630) 305-8190 17 62 With a copy to: Latham & Watkins 233 So. Wacker Drive, Suite 5800 Chicago, Illinois 60606 Telephone: (312) 876-7700 Telecopier: (312) 993-9767 If mailed, notices shall be deemed received as of the date of receipt indicated by the postal service, or, if the addressee refuses to accept delivery, as of the date of such refusal of attempted delivery. If personally delivered, notices shall be deemed received as of the date of delivery. Either Party may change its address for purposes of this Agreement by giving notice thereof in accordance with this Section 10.1. 10.2 Referrals. Neither Party shall have any obligation to make referrals to the other Party. The potential for referrals between the Parties has played no role in determining the consideration described in Sections 3.2 and 3.3 of this Agreement or in the decision to enter into this Agreement. 10.3 Counterparts. This Agreement may be executed simultaneously or in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 10.4 Construction. APS and LLC acknowledge that each Party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement. 10.5 Gender and Number. The masculine, feminine and neuter gender and the singular or plural number shall each be deemed to include the other whether the context so indicates. 10.6 Waiver. Waiver by a Party of the performance of any covenant, condition or promise of any Party shall not invalidate this Agreement, nor shall it be considered to be a waiver by such Party of any other covenant, condition or promise contained herein. The waiver of either or both Parties of the time for performing any act shall not be construed as a waiver of any other act required to be performed at a later date. 10.7 Further Assurances. APS and LLC agree to execute such further documents and instruments as shall be necessary to fully carry out the terms of this Agreement or to vest, perfect or confirm in LLC the title to the Contributed Assets as of the Closing Date. 10.8 Confidentiality. The Parties agree to keep all information contained in this Agreement confidential. Additionally, the Parties agree to keep confidential all nonpublic information provided by one Party to the other Party including, 18 63 but not limited to, information of both a technical and financial nature relating to the business operations of the Parties and subsidiary or other affiliated entities. Provided, however, that the information to be kept confidential shall not include (i) information which has come within the public domain through no fault or action of either Party; (ii) information which rightfully becomes available to a Party on a nonconfidential basis prior to its disclosure in relation to this Agreement and the transactions contemplated hereunder; or (iii) information which rightfully becomes available to a Party on a nonconfidential basis from any third party, the disclosure of which to that Party did not violate any contractual or legal obligation the third party has to the other Party, its members, subsidiaries or other affiliated entities with respect to such information. For purposes of this Section only, the term "Party" shall include Summit Care. Notwithstanding the above, nothing in this Section shall prohibit a Party from providing information when legally required to do so by a law enforcement, licensing, or other governmental agency or entity. 10.9 Time of Essence. Time is of the essence of each and every provision of this Agreement. 10.10 Survival. The representations and warranties in this Agreement shall survive the Closing for a period of two (2) years. 10.11 Supersedes Agreement. This Agreement and the Schedules and Exhibits attached hereto express the complete agreement of the Parties and supersede all prior written or oral agreements between APS and LLC regarding the Facility and the Contributed Assets, except that the Agreement shall be entered into and construed in compliance with the LLC Agreement. 10.12 Commissions. No fees or commissions are due or payable to any brokers, finders or other agents of the Parties hereto. 10.13 Attorneys' Fees and Costs. In the event either Party commences legal action or arbitration to interpret or enforce this Agreement, or for damages for any alleged breach hereof, the prevailing party in such action shall be entitled to recover from the nonprevailing party reasonable attorney's fees and costs as awarded by the court. 10.14 Arbitration. Any controversy or claim arising out of or relating to this Agreement, or the breach hereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, at its Austin, Texas office, or at its office nearest to Austin. Notwithstanding the foregoing, LLC and APS shall endeavor to agree on an arbitrator within ten (10) business days (the "Arbitrator Selection Period") after the initiation of the arbitration proceeding (the "Proceeding"), the cost and expenses of which shall be shared fifty percent (50%) by APS and fifty percent (50%) by the other members of LLC, collectively. If APS and LLC are unable to agree on an arbitrator, then 19 64 within ten (10) business days after the expiration of the Arbitrator Selection Period, each of APS and LLC shall select an arbitrator (together, the "Chosen Arbitrators"), the costs and expenses of each of which shall be paid solely by the Party that selected such Chosen Arbitrator. Within 5 business days after the Chosen Arbitrators have been selected, they shall together choose a third arbitrator (together with the Chosen Arbitrators, the "Panel"), the costs and expenses of which shall be shared fifty percent (50%) by APS and fifty percent (50%) by the other members of LLC, collectively. Each Party shall submit its case in writing, setting forth the facts and its arguments with respect to the matter or matters that are the subject of the Proceeding, to the Arbitrator or the Panel, as the case may be, within thirty (30) days after the initiation of the Proceeding. Hearings in the Proceeding shall commence within thirty (30) days after the last such submission. The Arbitrator or the Panel, as the case may be, shall deliver its opinion within thirty (30) days after the completion of the arbitration hearings. Judgment upon the award rendered by the Arbitrator or the Panel, as the case may be, may be entered in any court having jurisdiction thereof. 10.15 Interpretation. This agreement shall be governed by and construed in accordance with the laws of the State of Texas. 10.16 Severability. If any provision of this Agreement or any application thereof to any person or circumstances shall to any extent be invalid, the remainder of this Agreement (including the application of such provision to persons or circumstances other than those to which it is held invalid) shall not be affected thereby, and each provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. 10.17 Binding. This Agreement shall be binding upon, and inure to the benefit of the Parties hereto and their respective heirs, executors, administrators, successors in interest and permitted assigns. 10.18 Facsimile Copies. Signed, faxed documents shall constitute originals. 10.19 Force Majeure. In the event that either Party is unable to consummate the transactions contemplated herein by the Closing Date or within any extension of the Closing Date granted hereunder due to (i) losses to the Facility by reason of strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Facility regardless of whether or not such loss shall have been insured, (ii) the outbreak or escalation of hostilities between the United States and any foreign power or of any other insurrection or armed conflict involving the United States or the declaration by the United States of a national emergency which makes it impracticable or inadvisable to consummate the transactions contemplated hereby, then either Party may extend the Closing Date until such condition no longer makes it impracticable 20 65 or inadvisable to consummate the transactions contemplated hereby but in any event, the Closing Date shall not be extended pursuant to this section for a period longer than 30 days. 10.20 No Obligations To Third Parties. The execution and delivery of this Agreement shall not be deemed to confer any rights or benefits upon any person or entity other than as specified herein. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the Execution Date first written above. APS: AMERICAN PHARMACEUTICAL SERVICES, INC., a Delaware corporation By: [SIG] ------------------------------------- Its: President ------------------------------------ LLC: APS-SUMMIT CARE PHARMACY, L.L.C., a Delaware limited liability company By: American Pharmaceutical Services, Inc., a Delaware corporation, its member By: [SIG] --------------------------------- Its: President -------------------------------- By: Summit Care Pharmacy, Inc., a California corporation, its member By: --------------------------------- Its: -------------------------------- Acknowledged and Agreed this ___ day of _____________, 1996, for the purposes of Sections 5.1 and 10.8 hereof only. SUMMIT CARE PHARMACY, INC., a California corporation By: -------------------------- Its: ------------------------- 21 66 or inadvisable to consummate the transactions contemplated hereby but in any event, the Closing Date shall not be extended pursuant to this section for a period longer than 30 days. 10.20 No Obligations To Third Parties. The execution and delivery of this Agreement shall not be deemed to confer any rights or benefits upon any person or entity other than as specified herein. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the Execution Date first written above. APS: AMERICAN PHARMACEUTICAL SERVICES, INC., a Delaware corporation By: ------------------------------------- Its: ------------------------------------ LLC: APS-SUMMIT CARE PHARMACY, L.L.C., a Delaware limited liability company By: American Pharmaceutical Services, Inc., a Delaware corporation, its member By: --------------------------------- Its: -------------------------------- By: Summit Care Pharmacy, Inc., a California corporation, its member By: DERWIN L. WILLIAMS --------------------------------- Its: Sr. Vice President, Finance -------------------------------- Acknowledged and Agreed this 30th day of November 1996, for the purposes of Sections 5.1 and 10.8 hereof only. SUMMIT CARE PHARMACY, INC., a California corporation By: DERWIN L. WILLIAMS ---------------------------- Its: Sr. Vice President, Finance --------------------------- 21 67 EXHIBIT A ASSIGNMENT OF LEASE [SEE ATTACHED] 68 ASSIGNMENT AND ASSUMPTION OF LEASE This ASSIGNMENT AND ASSUMPTION OF LEASE (the "Assignment") is made as of November 30,1996 by AMERICAN PHARMACEUTICAL SERVICES, INC., a Delaware corporation ("Assignor"), APS-SKILLED CARE PHARMACY, L.L.C., a Delaware limited liability company ("Assignee"), and PROMONTORY INVESTORS, LTD., a Texas limited partnership ("Landlord"), as successor in interest to Pension Realty Income Trust A. RECITALS A. Lease. Pursuant to that certain Lease, dated as of April 11, 1994 (the "Lease"), by and between Landlord, as lessor, and Assignor, as successor in interest to Abbey Pharmaceutical Services, Inc., as lessee, Landlord leased to Assignor certain real property located at 2324 Ridgepoint Drive, Suite G-1, Austin, Texas, 78754 (the "Property"). The entire right, title and interest of Assignor under the Lease is referred to herein as the "Leasehold Estate." B. Purpose. Pursuant to (i) that certain Limited Liability Company Agreement of APS-Summit Care Pharmacy, L.L.C., dated as of the date hereof, by and between Assignor and Summit Care Pharmacy, Inc. a California corporation ("SCPI"), and (ii) that certain Asset Contribution Agreement, dated as of the date hereof, by and between Assignor and Assignee, Assignor and SCPI have formed Assignee and provided for the contribution of all of the assets of Assignor's pharmacy business that is conducted at the Property to Assignee, and Assignee wishes to assume the obligations of the Lease and have all of Assignor's rights under the Lease assigned to Assignee. AGREEMENT NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor, Assignee and Landlord mutually agree as follows: 1. Assignment. Assignor hereby sets over, transfers and assigns unto Assignee, effective as of the date hereof, all of Assignor's right, title and interest in and to the Leasehold Estate, for the balance of the term thereof, with the full benefit of all the powers and of all the covenants and provisions contained therein. This assignment includes an assignment of all right, title and interest of Assignor in and to the improvements at the Property. The execution of this Assignment shall not release Assignor from Assignor's obligations as lessee under the Lease. 2. Assumption. In consideration of the foregoing assignment, Assignee hereby accepts the foregoing assignment and agrees to make all of the payments and to otherwise observe, keep and perform all the terms, covenants and conditions to be made, observed, kept and performed by Assignor, as lessee under the Lease, as fully as though Assignee were originally named in the Lease as the lessee. 69 3. Consent. Landlord hereby consents to the terms of this Assignment and acknowledges that Assignee shall forthwith be the lessee under the Lease. 4. Assignor's Warranties. Assignor hereby represents and warrants to Assignee that: (a) At the time of this Assignment, Assignor is the lawful owner of that interest in and to the Leasehold Estate assigned hereby and Assignor has the right, power and authority to assign the same to Assignee. (b) Assignor has not previously assigned, transferred or conveyed any of its right, title or interest in or to the Leasehold Estate. (c) The Lease is free and clear of any and all liens, charges, encumbrances and claims whatsoever. 5. Landlord's Warranties. Landlord hereby represents and warrants to Assignee that: (a) The term of the Lease began June 1, 1994 and will expire May 31, 1999. (b) The current minimum rent in the amount of $5,156.02 per month and all other sums due thereunder, have been paid in accordance with the terms of the Lease through the date hereof, and Landlord holds no security deposit with respect to the Lease. (c) To the best of Landlord's knowledge, as of the date hereof, Landlord is entitled to no penalties, interest or offset under the Lease. (d) As of the date hereof, the Lease is in full force and effect and, to the best of Landlord's knowledge, no default exists thereunder. (e) Landlord has not assigned, hypothecated, pledged or otherwise transferred all or any portion of its interest under the Lease except to Equitable of Iowa or its affiliate under a first mortgage loan. (f) The copy of the Lease attached hereto as Exhibit A is a true and correct copy of the Lease. The Lease has not been modified or amended except as indicated on Exhibit A. The Lease constitutes the only agreement relating to the lease of the Leasehold Estate from Landlord to Assignor. 6. Tenant's Sign. Assignee agrees that it will remove its sign from the exterior facade of the Property within thirty (30) days after the date hereof. If Assignee replaces such sign, the new sign will comply with Landlord's sign specifications, a copy of which has been delivered to Assignee prior to the execution of this document. 2 70 7. Miscellaneous. Each party agrees that it will execute and deliver such additional documents as are necessary or reasonable to give effect to this Assignment or any provisions hereof If any party refers this Assignment to an attorney to assist in its enforcement, the prevailing party in any action on the dispute shall be entitled to an award of its costs and attorneys' fees incurred in connection therewith. This Assignment shall be governed by the law of the State of Texas. This Assignment shall be binding upon, and shall inure to the benefit of, the heirs, successors, assigns and personal representatives of the parties. This Assignment may be executed in one or more counterparts, each of which is an original and all of which constitute one agreement. [SIGNATURE PAGE FOLLOWS] 3 71 IN WITNESS WHEREOF, the parties hereto have executed this Assignment as of the date first above written. "Assignor" AMERICAN PHARMACEUTICAL SERVICES, INC., a Delaware corporation By:__________________________________ Name:________________________________ Title:_______________________________ "Assignee" APS-SKILLED CARE PHARMACY, L.L.C., a Delaware limited liability company By: American Pharmaceutical Services, Inc., a Delaware corporation, Member By:_____________________________ Name:___________________________ Title:__________________________ By: Summit Care Pharmacy, Inc., a California corporation, Member By:_____________________________ Name:___________________________ Title:__________________________ "Landlord" PROMONTORY INVESTORS, LTD., a Texas limited partnership By: Cameron Road Investors, Ltd., a Texas limited liability company By:_____________________________ Name: Mark S. Scher Title: Director S-1 72 EXHIBIT A THE LEASE Attached. A-1 73 EXHIBIT B CONSENT TO ASSIGNMENT OF LEASE [SEE EXHIBIT A] 74 EXHIBIT C GENERAL CONVEYANCE AND ACCEPTANCE AND ASSIGNMENT OF INTERESTS AND ASSUMPTION OF LIABILITIES [SEE ATTACHED] 75 GENERAL CONVEYANCE AND ACCEPTANCE AND ASSIGNMENT OF INTERESTS AND ASSUMPTION OF LIABILITIES This General Conveyance and Acceptance and Assignment of Interests and Assumption of Liabilities (the "General Conveyance") is hereby entered into and delivered by and between American Pharmaceutical Services, Inc., a Delaware corporation ("APS"), and APS-Summit Care Pharmacy, L.L.C., a Delaware limited liability company ("LLC"), effective as of November 30, 1996, in connection with that certain Asset Contribution Agreement of even date herewith (the "Asset Contribution Agreement"). The terms of the Asset Contribution Agreement are hereby incorporated herein by this reference. For valuable consideration, the receipt and adequacy of which are hereby acknowledged, APS hereby contributes, transfers and assigns to LLC, in accordance with the terms of the Asset Contribution Agreement, all of APS's rights, title and interest in and to the Contributed Assets (as defined in Article I of the Asset Contribution Agreement). In accordance with the terms of the Asset Contribution Agreement, LLC hereby accepts the Contributed Assets and assumes the Assumed Liabilities (as defined in Article II of the Asset Contribution Agreement). APS hereby covenants and agrees to take all steps reasonably necessary to establish the record of LLC's title to the Contributed Assets contributed, transferred and assigned in accordance with this General Conveyance. This General Conveyance is executed in, and shall be governed by, the laws of the State of Texas. IN WITNESS WHEREOF, the parties have executed this General Conveyance effective as of the date first written above. AMERICAN PHARMACEUTICAL APS-SUMMIT CARE PHARMACY, L.L.C., SERVICES, INC., a a Delaware limited liability company Delaware corporation By: American Pharmaceutical Services, Inc. a Delaware corporation, its member By:_____________________________ Its:____________________________ By:_________________________________ Its:________________________________ By: Summit Care Pharmacy, Inc., a California corporation, its member By:_________________________________ Its:________________________________ 76 EXHIBIT D EMPLOYEE SERVICES AGREEMENT [SEE ATTACHED] 77 EMPLOYEE SERVICES AGREEMENT This Employee Services Agreement (the "Agreement") is made as of this 30th day of November, 1996 by and between APS-Summit Care Pharmacy, L.L.C., a Delaware limited liability company ("Joint Venture"), and American Pharmaceutical Services, Inc., a Delaware corporation ("APS"). RECITALS A. Joint Venture was formed pursuant to that certain Limited Liability Agreement, dated as of the date hereof (the "LLC Agreement"), by and between APS and Summit Care Pharmacy, Inc., a California corporation. B. Joint Venture owns and operates a pharmacy located at 2324 Ridgepoint Drive, Suite G-1, Austin, Texas (the "Pharmacy") providing pharmaceutical supplies and services to long-term care facilities that are located in the Austin, Texas area (the "Business"). C. Joint Venture desires that APS provide, and APS desires to provide, employee services to operate the Business in the ordinary course of business according to the terms and provisions of this Agreement. AGREEMENT 1. Provision of Employee Services. APS shall make commercially reasonable efforts to provide to Joint Venture, at the request of Joint Venture, the services of APS employees that are reasonably necessary to operate the Business in a manner consistent with its past operation and with its reasonable business needs (the "Employee Services"). The employees providing the Employee Services (the "Leased Employees") shall work on-site at the Pharmacy during its regular business hours and shall also be available during non-business hours, consistent with APS personnel policies, with the past operation of the Business and with its reasonable business needs. The Leased Employees shall hold all such licenses or other professional qualifications as are reasonably necessary for the operation of the Business in the ordinary course of business. 2. Compensation for Employee Services. APS shall be solely responsible for paying the costs of providing the Employee Services (the "Employee Costs"), including, without limitation, (i) the salaries or wages, as applicable, of the Leased Employees, including, without limitation, vacation pay, sick pay, payroll taxes and severance costs, (ii) the cost of employee benefits programs for the Leased Employees, to the extent such benefits are customarily provided to APS employees, including, without limitation, health insurance, life insurance, disability insurance, worker's compensation insurance, malpractice insurance, other customary insurance, retirement programs and profit sharing plans, and (iii) a reasonable allocation for the overhead costs of APS in employing the Leased Employees. Joint Venture shall reimburse to APS the amount of all Employee Costs during the term of this Agreement. As soon as practicable after the end of each calendar month, APS shall deliver to Joint Venture a statement setting forth the Employee Costs that are attributable to such month. Joint Venture shall pay the Employee Costs reflected on such statement on or before the fifth (5th) day after receipt of such statement. 1 78 3. Employee Management. Subject to the provisions of Section I hereof and except as otherwise required by applicable law, Joint Venture shall supervise and manage the day-to-day duties of the Leased Employees and be liable for their actions in such capacity. Joint Venture hereby agrees to comply with all applicable laws and regulations and to follow APS personnel policies with respect to the Leased Employees. APS, in its sole discretion, shall make all hiring and termination decisions, establish and pay all wages, salaries and compensation, determine staffing levels, individual work hours, personnel policies and employee benefit programs for all of the Leased Employees, all consistent with APS's personnel policies. APS shall consult with Joint Venture on such matters, but all final decisions shall be those of APS, in its sole discretion. 4. Ownership of Employee Records. All records and information relating to the Leased Employees shall remain the property of APS. 5. Term. This Agreement shall commence on the date hereof and shall terminate on the date that APS ceases to hold at least fifty percent (50%) of the membership interests in Joint Venture. 6. Indemnity by Joint Venture. Joint Venture hereby indemnifies, saves and holds harmless APS, its affiliates and subsidiaries, and its and its affiliates' and subsidiaries' respective officers, directors, principals, attorneys, agents or other representatives (collectively, "APS Indemnified Parties") from and against all costs, losses, liabilities, damages, lawsuits, deficiencies, claims and expenses (whether or not arising out of third party claims), including, without limitation, interest, penalties, reasonable attorneys' fees and all amounts paid in investigation, defense or settlement of any of the foregoing incurred in connection with or arising out of the actions of the Leased Employees while leased to Joint Venture pursuant hereto or the Leased Employees' employment on-site at the Clinic, including, without limitation, claims for discrimination, harassment and workplace injury. Nothing contained herein is intended to relieve any APS Indemnified Party of its respective obligations arising as a result of APS's status as a member in Joint Venture. 7. Indemnity by APS. APS hereby indemnifies, saves and holds harmless Joint Venture, its affiliates and subsidiaries, and its and its affiliates' and subsidiaries' respective officers, directors, principals, attorneys, agents or other representatives (collectively, "Joint Venture Indemnified Parties") from and against all costs, losses, liabilities, damages, lawsuits, deficiencies, claims and expenses (whether or not arising out of third party claims), including, without limitation, interest, penalties, reasonable attorneys' fees and all amounts paid in investigation, defense or settlement of any of the foregoing incurred in connection with or arising out of the failure by APS to timely pay any Employee Costs as contemplated by the first sentence of Section 2 hereof or any decisions by APS to fire or otherwise discipline Leased Employees to the extent that a Majority in Interest (as defined in the "LLC Agreement") did not agree with such decision to fire or discipline. 8. No Liability. In no event shall APS, or its successors and assigns, representatives, agents, advisors, partners, consultants, affiliates, contractors, counsel, shareholders, directors, officers and employees, be liable to Joint Venture under or in connection 2 79 with this Agreement under any theory of tort, contract, strict liability or other legal or equitable theory for any damages, direct or indirect, consequential or otherwise except for such damages that result from the recklessness or willful misconduct of APS and except for the intentional repudiation by APS of its obligations hereunder when such intentional repudiation is not reasonable under the existing circumstances. Nothing contained herein is intended to relieve any APS Indemnified Party of its respective obligations arising as a result of APS's status as a member in Joint Venture. 9. Assignment and No Third Party Beneficiaries. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by any party without the prior written consent of the other party. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and no other person shall have any right, benefit or obligation under this Agreement as a third party beneficiary or otherwise. 10. Choice of Law. This Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Texas (without reference to the choice of law provisions of Texas law). 11. Entire Agreement; Amendments and Waivers. This Agreement together with all exhibits to be attached hereto constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes or will supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. To the extent that the provisions of the exhibits to be attached hereto conflict with the provisions of this Agreement, the provisions of this Agreement shall control. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 12. Notices. All notices, requests, and other communications which may be given under this Agreement (other than orders hereunder, which shall be placed as provided herein) shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy; the day after being sent, if sent for next day delivery by recognized overnight delivery service (e.g., FedEx); and upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be given as follows: If to Joint Venture, addressed to: APS-Summit Care Pharmacy, L.L.C. 2324 Ridgepoint Drive, Suite G-1 Austin, TX 78754 Telecopy Number:__________________ 3 80 Attention: Terry Davis with a copy to the same address: Attention: Jesse Martinez If to APS, addressed to: American Pharmaceutical Services, Inc. Diehl Road, Suite 210 Naperville, IL 60563 Telecopy Number: (708) 305-0824 Attention: President with a copy to the same address: Attention: General Counsel 13. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14. Relationship. Nothing herein shall be deemed to create a partnership, joint venture or other similar relationship. Joint Venture and APS shall not be construed as partners of each other by reason of this Agreement, and neither shall have the power to bind or obligate the other except as specifically set forth herein. [SIGNATURE PAGE FOLLOWS] 4 81 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. AMERICAN PHARMACEUTICAL SERVICES, INC., a Delaware corporation By:_____________________________ Name:___________________________ Title:__________________________ APS-SKILLED CARE PHARMACY, L.L.C., a Delaware limited liability company By: American Pharmaceutical Services, Inc., a Delaware corporation, Member By:_____________________________ Name:___________________________ Title:__________________________ By: Summit Care Pharmacy, Inc., a California corporation, Member By:_____________________________ Name:___________________________ Title:__________________________ S-1 82 SCHEDULE 1.1(b) PURCHASED CONTRACTS [SEE ATTACHED] 83 CUSTOMER/SERVICE SEGMENTS 9/30/96
SERVICE SEGMENT -------------------------------------------- Area/Reg. Territ. Facility Name City SL AFFIL. C RX IV RT E U WC PHAR. - --------- ------- ------------------- ---------------- -- ------ --- ---- ---- -------- --- --- ---- ----- C/MS P-CONS Aldwyche Group Austin TX LCA X X AU C/MS CTX Alexander CC Austin TX LCA X X X X X X AU C/MS P-PHRM Arbor Austin TX PCA X AU C/MS CTX Arboretum S. Marcos TX X X X X X AU C/MS P-PHRM Austin Manor Austin TX 3927 X X X AU C/MS CTX Austin NC Austin TX X X X X AU C/MS CTX B. Gardens Austin TX Mart X X X X X X AU C/STX P-PHRM Barton House Austin TX X AU C/MS CTX Bastrop Nursing Bastrop TX LCA X X X X X X AU C/MS CTX Brazos Valley Geri College Station TX LCA X X X X X X AU C/MS P-PHRM Canon Oaks Austin TX PCA X AU C/MS P-PHRM Capital City Austin TX PCA X AU C/MS P-PHRM Cent Tx Treatment Austin TX X AU C/MS CTX CI-Lagrange Lagrange TX LCA X X X X X X AU C/MS CTX CI-Liano Liano TX LCA X X X X X X AU C/MS P-PHRM Clairmont Austin TX X AU C/MS P-PHRM Concept Six Austin TX X X AU C/MS Crestview Methodist Brian TX X X X AU C/MS CTX Crestview Manor Belton TX LCA X X X X X X AU C/STX SAN Deer Creek Nursing Wimberly TX LCA X X X X X X AU C/STX P-PHRM Four Seasons Austin TX X AU C/MS CTX Gracy Woods Austin TX X X X X X AU C/MS Gracy Woods II Austin TX LCA X X X X AU C/STX P-PHRM Heartland Austin YX HCR X X X AU C/MS CTX Heritage Park Austin TX HCCI X X X X X AU C/MS Home Patients Austin TX X X X AU C/MS P-PHRM Indian Wells Austin TX X X AU C/MS P-PHRM Lalla Austin TX X AU C/MS P-PHRM M. Johnson N C Austin TX X X AU C/MS P-CONS M.L. Southpointe Austin TX X X AU C/MS CTX Marbridge Manchaca TX X X X AU C/MS P-PHRM Mary Lee Res Ctr Austin TX X X AU C/MS P-CONS Marywood Group Austin TX LCA X AU C/MS P-PHRM Mason CC Mason TX 3927 X X AU C/MS P-PHRM Monte Siesta Austin TX X AU C/MS CTX Oak Manor NC Flatonia TX Summit X AU C/MS CTX Oakland Manor Giddings TX Summit X AU C/MS P-CONS Parkfield Group Austin TX LCA X X AU C/MS CTX Pecan Grove Austin TX X X X X X AU C/MS P-CONS Pendleton Group Austin TX LCA X X AU C/MS CTX Pflugerville HC Pflugerville TX X X X AU C/MS P-PHRM Regency Village Austin TX X X X X X X AU C/MS P-PHRM Renaissance Georgetown TX X AU C/MS CTX Retirement & NC Austin TX X X X AU C/MS P-PHRM River Gardens New Brauniels TX X X AU C/MS CTX River Haven Georgetown TX X X X X AU C/MS P-PHRM Scissortail Austin TX X X AU C/MS P-PHRM Settlement Home Austin TX X AU C/MS CTX Sierra Health Austin TX Sierra X X X X X AU C/MS P-CONS Silverway Group Austin TX LCA X X AU C/MS P-PHRM Skyview Austin TX X X AU C/MS CTX Southwood Austin TX Summit X X X AU C/MS P-PHRM Stratford House Austin TX X AU C/MS P-PHRM Summit HCC Austin TX X X AU C/MS CTX Sweetbriar Taylor Taylor TX LCA X X X X X X AU C/MS CTX The Hearthstone Roundrock TX LCA X X X X X X AU ??? CT ???????? TX X X X AU C/MS P-CONS Wagon Crossing Austin TX LCA X X AU C/STX P-PHRM Walnut Hills Austin TX X X AU C/MS CTX Westminster HC Austin TX X X X X X X AU
84 SCHEDULE 1.1(d) PERSONAL PROPERTY, FIXTURES AND EQUIPMENT [SEE ATTACHED] 85 November 19, 1996 Page 1 9:23 AM American Pharmamceutical Services DEPRECIATION EXPENSE REPORT as of 09/30/1996
- ----------------------------------------------------------------------------------------------------------------------------------- In Svc Acquired Dep P Est Salvage/ Depreciable Thru Prior Accum Depreciation Current Year Curr Accum SYS No Ext Date Value Meth T Life Sect 179 Basis Date Depreciation This Run To Date Depreciation Key - ----------------------------------------------------------------------------------------------------------------------------------- Book: Book 6 FY: September 000085 000 10/01/94 4206.02 SLMM P 04 07 0.00 4206.02 08/96 917.68 76.48 917.68 1835.36 000086 000 10/01/94 3923.73 SLMM P 04 08 0.00 3923.73 08/96 840.80 70.07 840.84 1681.64 000087 000 10/01/94 2376.87 SLMM P 04 10 0.00 2376.87 08/96 491.77 40.98 491.76 983.53 000088 000 10/01/94 4632.48 SLMM P 04 11 0.00 4632.48 08/96 942.20 78.52 942.24 1884.44 000089 000 07/01/94 69600.00 SLMM P 04 10 0.00 69600.00 08/96 14400.00 1200.00 18000.00 32400.00 000090 000 10/01/94 18191.29 SLMM P 04 09 0.00 18191.29 08/96 3829.75 319.14 3829.79 7659.54 000091 000 10/01/94 3062.40 SLMM P 04 10 0.00 3062.40 08/96 633.60 52.80 633.60 1267.20 000092 000 10/01/94 905.91 SLMM P 04 11 0.00 905.91 08/96 184.25 15.36 184.25 368.50 000093 000 10/01/94 7440.00 SLMM P 02 03 0.00 7440.00 08/96 3288.89 275.55 3324.44 6613.33 000094 000 10/01/94 16137.00 SLMM P 02 09 0.00 16137.00 08/96 5868.00 489.00 5868.00 11736.00 000095 000 10/01/94 1095.56 SLMM P 02 10 0.00 1095.56 08/96 386.67 32.22 386.66 773.33 000370 000 10/01/94 276.98 SLMM P 04 06 0.00 276.98 08/96 61.55 5.13 61.56 123.11 000371 000 10/01/94 34.88 SLMM P 04 06 0.00 34.88 08/96 7.75 0.64 7.79 15.54 000372 000 10/01/94 2.78 SLMM P 04 08 0.00 2.78 08/96 0.62 0.05 0.60 1.22 000373 000 10/01/94 133.90 SLMM P 04 06 0.00 133.90 08/96 29.76 2.48 29.76 59.52 000374 000 10/01/94 56.84 SLMM P 04 07 0.00 56.84 08/96 12.63 1.04 12.57 25.20 000375 000 10/01/94 226.24 SLMM P 04 06 0.00 226.24 08/96 50.28 4.19 50.28 100.56 000376 000 10/01/94 138.22 SLMM P 04 06 0.00 138.22 08/96 30.72 2.56 30.72 61.44 000377 000 10/01/94 988.20 SLMM P 04 06 0.00 988.20 08/96 219.60 18.30 219.60 439.20 000378 000 10/01/94 1312.20 SLMM P 04 06 0.00 1312.20 08/96 291.60 24.30 291.60 583.20 000379 000 10/01/94 2102.26 SLMM P 04 06 0.00 2102.26 08/96 467.17 38.93 467.16 934.33 000380 000 10/01/94 1341.19 SLMM P 04 06 0.00 1341.19 08/96 298.04 24.84 298.08 596.12 000381 000 10/01/94 6268.75 SLMM P 04 03 0.00 6268.75 08/96 1475.00 122.92 1475.04 2950.04 000663 000 10/01/94 97.90 SLMM P 04 06 0.00 97.90 08/96 21.76 1.82 21.76 43.52 000664 000 10/01/94 144.96 SLMM P 04 06 0.00 144.96 08/96 32.21 2.69 32.21 64.42 000666 000 10/01/94 4291.50 SLMM P 02 03 0.00 4291.50 08/96 1907.33 158.95 1907.39 3814.72 000667 000 10/01/94 5922.50 SLMM A 01 02 0.00 5922.50 11/95 2369.00 0.00 987.10 3356.10 d 000668 000 10/01/94 3742.99 SLMM A 02 06 0.00 3742.99 08/96 1497.20 124.77 1497.24 2994.44 000669 000 10/01/94 6742.35 SLMM A 02 06 0.00 6742.35 08/96 2696.94 224.74 2696.99 5393.93 000670 000 10/01/94 3240.00 SLMM A 02 03 0.00 3240.00 07/96 1440.00 0.00 1200.00 2640.00 d 000671 000 10/01/94 5359.50 SLMM A 02 03 0.00 5359.50 07/96 2382.00 0.00 1985.00 4367.00 d 001103 000 03/01/95 1495.30 SLMM P 05 00 0.00 1495.30 08/96 174.45 24.92 299.05 473.50 001104 000 05/01/95 1674.00 SLMM P 05 00 0.00 1674.00 08/96 139.50 27.90 334.80 474.30 001105 000 12/01/94 3122.00 SLMM P 05 00 0.00 3122.00 08/96 520.33 52.04 624.40 1144.73 001106 000 10/01/94 17426.80 SLMM P 04 00 0.00 17426.80 08/96 0.00 363.06 8713.40 8713.40 001107 000 10/01/94 1561.00 SLMM P 04 00 0.00 1561.00 08/96 0.00 32.52 780.49 780.49 001108 000 10/01/94 5855.00 SLMM P 04 00 0.00 5855.00 08/96 0.00 121.98 2927.50 2927.50 001109 000 10/01/94 3155.34 SLMM P 05 00 0.00 3155.34 08/96 105.18 52.59 1156.96 1262.14 001110 000 10/01/94 43.38 SLMM P 05 00 0.00 43.38 08/96 1.45 0.73 15.91 17.36 001111 000 08/01/95 2550.00 SLMM P 05 00 0.00 2550.00 08/96 85.00 42.50 510.00 595.00 001112 000 10/01/94 4152.80 SLMM P 05 00 0.00 4152.80 08/96 622.92 69.22 1038.20 1661.12 001113 000 01/01/95 3141.61 SLMM P 05 00 0.00 3141.60 08/96 471.27 52.36 628.32 1099.59 001114 000 05/01/95 1475.74 SLMM P 05 00 0.00 1475.74 08/96 122.98 24.59 295.19 418.17 001115 000 07/01/95 3190.32 SLMM P 05 00 0.00 3190.32 08/96 159.52 53.17 638.05 797.57 001116 000 10/01/94 1595.16 SLMM P 05 00 0.00 1595.16 08/96 26.59 26.58 611.46 638.05 001117 000 10/01/94 187.89 SLMM P 02 00 0.00 187.89 08/96 0.00 7.82 187.89 187.89 002811 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 0.00 0.00 002812 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 0.00 0.00
86 November 19, 1996 9:23 A.M. Page 2 American Pharmaceutical Services DEPRECIATION EXPENSE REPORT as of 09/30/1996 - --------------------------------------------------------------------------------------------------------------------------- In Svc Acquired Dep P Est Salvage/ Depreciable Thru Prior Accum Depreciation SYS No. Ext Date Value Meth T Life Sect 179 Basis Date Depreciation This Run - --------------------------------------------------- ---------------------------------------------------------------------- 002814 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002815 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002816 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002817 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002818 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002819 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002820 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002821 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002822 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002823 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002824 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002825 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002826 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002837 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002842 000 10/01/94 0.00 SLMM P 01 00 0.00 0.00 08/96 0.00 0.00 002843 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002844 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002845 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002846 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002847 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002848 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002849 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002850 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002854 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002855 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 002856 000 10/01/94 0.00 SLMM P 10 00 0.00 0.00 08/96 0.00 0.00 003042 000 10/01/94 16308.48 SLMM A 03 02 0.00 16308.48 08/96 5150.05 429.17 003091 000 10/01/94 17190.22 SLMM A 03 04 0.00 17190.22 08/96 5157.07 429.75 003338 000 10/01/94 15859.49 SLMM R 04 10 0.00 15859.49 08/96 3281.27 273.44 003339 000 10/01/94 1497.37 SLMM P 04 10 0.00 1497.37 08/96 309.80 25.82 003340 000 10/01/94 7947.31 SLMM P 04 10 0.00 7947.31 08/96 1644.27 137.02 003341 000 10/01/94 8475.38 SLMM P 04 10 0.00 8475.38 08/96 1753.53 146.13 003342 000 10/01/94 1489.63 SLMM P 05 00 0.00 1489.63 08/96 308.20 24.83 003343 000 10/01/94 4632.48 SLMM P 04 11 0.00 4632.48 08/96 942.20 78.52 003344 000 02/01/95 444.18 SLMM A 02 00 0.00 444.18 08/96 148.06 18.51 003345 000 04/01/95 17466.81 SLMM A 04 00 0.00 17466.81 08/96 2138.98 363.89 003346 000 09/09/95 17722.38 SLMM A 03 04 0.00 17722.38 08/96 0.00 443.06 003347 000 12/01/95 15885.61 SLMM A 03 04 0.00 15885.61 08/96 0.00 397.14 003348 000 10/01/94 6850.25 SLMM P 02 09 0.00 6850.25 08/96 2491.00 207.59 003349 000 10/01/94 4067.91 SLMM P 02 09 0.00 4067.91 08/96 1479.24 123.27 003350 000 10/01/94 252.96 SLMM P 02 10 0.00 252.96 08/96 89.28 7.44 003351 000 10/01/94 760.77 SLMM P 02 10 0.00 760.77 08/96 268.51 22.37 003358 000 02/01/96 584.00 SLMM P 05 00 0.00 584.00 08/96 0.00 9.74 003359 000 10/01/95 2954.00 SLMM P 05 00 0.00 2954.00 08/96 0.00 49.24 003360 000 12/01/95 5866.00 SLMM P 05 00 0.00 5866.00 08/96 0.00 97.77 003361 000 01/01/96 722.86 SLMM P 05 00 0.00 722.86 08/96 0.00 12.05 003662 000 10/01/94 2395.88 SLMM P 01 02 0.00 2395.88 12/95 958.35 0.00 003664 000 10/01/94 19.51 SLMM P 01 01 0.00 19.51 10/95 4.34 0.00 003665 000 10/01/94 68.23 SLMM P 01 01 0.00 68.23 10/95 15.16 0.00 - ------------------------------------------------- Current Year Curr Accum to Date Depreciation Key - ------------------------------------------------- 002814 0.00 0.00 002815 0.00 0.00 002816 0.00 0.00 002817 0.00 0.00 002818 0.00 0.00 002819 0.00 0.00 002820 0.00 0.00 002821 0.00 0.00 002822 0.00 0.00 002823 0.00 0.00 002824 0.00 0.00 002825 0.00 0.00 002826 0.00 0.00 002837 0.00 0.00 002842 0.00 0.00 002843 0.00 0.00 002844 0.00 0.00 002845 0.00 0.00 002846 0.00 0.00 002847 0.00 0.00 002848 0.00 0.00 002849 0.00 0.00 002850 0.00 0.00 002854 0.00 0.00 002855 0.00 0.00 002856 0.00 0.00 003042 5150.04 10300.09 003091 5157.11 10314.18 003338 3281.28 6562.55 003339 309.84 619.64 003340 1644.26 3288.53 003341 1753.56 3507.09 003342 306.46 614.66 003343 942.24 1884.44 003344 222.12 370.18 003345 4411.06 6550.04 003346 5759.77 5759.77 003347 3971.40 3971.40 003348 2491.00 4982.00 003349 1479.24 2958.48 003350 89.28 178.56 003351 268.55 537.06 003358 77.87 77.87 003359 590.80 590.80 003360 977.70 977.70 003361 108.45 108.45 003662 319.44 1277.79 d 003664 1.44 5.78 d 003665 5.04 20.20 d
87 November 19, 1996 Page 3 9:23 AM American Pharmaceutical Services DEPRECIATION EXPENSE REPORT as of 09/30/1996
- ------------------------------------------------------------------------------------------------------------------- Depre- Depre- Current Curr Accum In Svc Acquired Dep P Est Salvage/ ciable Thru Prior Accum ciation Year Deprecia- SYS No Ext Date Value Meth T Life Sec 179 Basis Date Depreciation This Run to Date tion Key - ------------------------------------------------------------------------------------------------------------------- 003666 000 10/01/94 61.71 SLMM P 01 01 0.00 61.71 10/95 13.71 0.00 4.56 16.27 d 003667 000 10/01/94 784.80 SLMM P 01 01 0.00 784.80 10/95 174.40 0.00 58.12 232.52 d 003668 000 10/01/94 162.34 SLMM P 01 01 0.00 162.34 10/95 36.08 0.00 12.04 48.12 d 003671 000 06/01/96 1821.08 SLMM P 10 00 0.00 1821.08 08/96 0.00 15.17 91.05 91.05 003687 000 09/30/96 16900.65 SLMM A 03 04 0.00 16900.65 00/00 0.00 0.00 0.00 0.00 003807 000 09/30/96 1431.41 SLMM P 05 00 0.00 1431.41 00/00 0.00 0.00 0.00 0.00 003808 000 09/30/96 1554.00 SLMM P 05 00 0.00 1554.00 00/00 0.00 0.00 0.00 0.00 Count= 104 --------- ---- --------- -------- -------- --------- --------- Grand Total 396799.44 0.00 396799.44 75867.46 7672.37 106937.05 182804.51 Less disposals and transfers 18014.47 0.00 18014.47 7393.04 11965.78 --------- ---- --------- -------- -------- --------- --------- Net 378784.97 0.00 378784.97 68474.42 7672.37 106937.05 170838.73 ========= ==== ========= ======== ======== ========= =========
- ----------------------------Calculation Assumptions---------------------------------------------------------------- Book Short Years Midquarter Convention Adjustment Convention ------ ----------- --------------------- --------------------- Book 6 [N] [N] Immediate
- -----------------------------Asset Grouping/Sorting---------------------------- Group: Location 125 Include Assets that meet the following conditions: Location is 125 Sort Assets by: - --------------------------------------Key-------------------------------------- d: Asset has been disposed of. 88 SCHEDULE 1.1 (e) LICENSES AND PERMITS 1. Texas Pharmacy License No.: 15974, expires 05/31/97 2. Medicaid No.: 350045 3. DEA No.: BA-4304109, expires 06/30/97 4. NABP No.: 4591637 5. NHIC No.: VP3500457 6. Texas Controlled Substances Registration Certificate No.: X0088579, expires 08/31/97 89 SCHEDULE 1.1(g) LICENSED NAME AMERICAN PHARMACEUTICAL SERVICES 90 SCHEDULE 1.1 (i) FACILITY RECORDS Copies of all books and records, computer tapes, disks and data located at the Facility that relate exclusively to the Facility and the Contributed Assets. 91 SCHEDULE 3.4 ALLOCATION
DESCRIPTION AMOUNT - ----------- ------ Inventories $ 388,403 Fixed Assets 198,214 Capital Leases (46,036) ---------- Total Net Assets $540,581 ========== Goodwill $2,459,419 ---------- Total Value of Contributed Assets $3,000,000 ==========
92 SCHEDULE 6.1 PERMITTED ENCUMBRANCES NONE. 93 EXHIBIT 6.1A FINANCING STATEMENT FILINGS
Debtor Name Records Searched Type of Secured Party Search ============================================================================ American Secretary of State UCC Cash Flow Pharmaceutical State of Texas Management, Services, Inc. Inc. American Secretary of State Federal Internal Pharmaceutical State of Texas Tax Revenue Services, Inc., a Lien Service, Corporation Dallas, Texas American Secretary of State Federal Pharmaceutical State of Texas Tax Internal Services, Inc., a Lien Revenue Corporation Service, Dallas, Texas
Debtor Name Scope of Lien Date Continuations Document Filed Assignments Number ============================================================================================================ American All accounts, instruments, 4/3/92 N/A 92-065309 Pharmaceutical documents, inventory, equipment, Services, Inc. intangibles, all goods and inventory, books, records, etc. N/A 93-019604 American Taxes due for periods ending 1/29/93 Pharmaceutical 6/30/92 and 9/30/92 in the total Services, Inc., a amount of $109,239.48 plus interest Corporation and penalties American Pharmaceutical Taxes due for periods ending 5/26/93 N/A 93-103981 Services, Inc., a 6/30/92,9/30/92 and 12/31/92 in the Corporation total amount of $161,528.71 plus interest and penalties
94 SCHEDULE 6.2 NONCOMPLIANCE WITH LICENSING REQUIREMENTS NONE. 95 SCHEDULE 6.6 LEASES AND OTHER MATERIAL AGREEMENTS [SEE ATTACHED] 96 American Pharmaceutical Services Vehicle Lease Schedule As of September 30, 1996
ACCUM PURCH TRM ORIGINAL GE Capital DEPRN UNIT# BR YR MAKE MODEL SERIAL NUMBER DATE MOS COST Increase (S/L) - ------ -- -- ---- ----- ------------- ---- --- ---- -------- ----- 9409 #025 1994 FORD VAN IFTDA14U9RZB34046 08/10/94 40 17,166.84 524.71 10,542.75 9411 #025 1995 FORD VAN IFTDA14U8SZA00733 09/13/94 40 17,190.22 566.75 9,574.03 9516 #025 1995 FORD VAN IFTDA14UXSZA91066 07/24/95 40 17,722.39 847.82 5,200.91 9506 #025 1995 FORD VAN IFTDA14U4SZA35043 03/20/95 40 17,466.81 740.95 7,008.95 9528 #025 1995 FORD VAN IFTDA14U7SZC21093 12/25/95 36 15,885.61 901.48 2,929.94 96018 #025 1996 FORD ESCORT IFASP1536TW148995 06/30/96 13,318.91 0.00 -------------------------------- AUSTIN TOTAL 98,750.78 3,581.71 35,256.58 ------------ NET ORGNL MNTHLY REMN PRIN LEASE BOOK INT PRN PYMT MOS ON OBLGTN CUR LT UNIT# VALUE RATE (DEPR) LEASE 12/31/94 PRTN PRTN ------ ----- ---- ------ ----- -------- ---- ---- 9409 6,624.09 414.01 16 6,624.16 4,968.12 1,656.04 9411 7,616.91 400.85 19 7,616.15 4,810.20 2,805.95 9516 12,521.48 417.38 30 12,521.40 5,008.56 7,512.84 9506 10,457.86 418.31 25 10,457.75 5,019.72 5,438.03 9528 12,955.67 417.92 31 12,955.52 5,015.04 7,940.48 96018 13,318.91 0.00 1 0.00 0.00 0.00 --------- -------- --------- --------- --------- AUSTIN TOTAL 63,494.20 2,068.47 50,174.98 24,821.64 25,353.34 - ------------
97 DUPLICATE [ARI LOGO] MOTOR VEHICLE LEASE AGREEMENT AUTOMOTIVE RENTALS, INC. (ARI) hereby leases to AMERICAN PHARMACEUTICAL SERVICES, INC. (Lessee), the vehicle referred to herein for the rental set forth herein. This Lease Agreement and any assignment hereof is subject to all the terms and conditions of the Agreement dated 10/13/94 between ARI and Lessee covering the leasing of vehicles to Lessee all of which are incorporated herein by reference. ARI hereby assigns to CORESTATES BANK NA AGENT (Assignee) all right, title and interest of ARI in and to all moneys due and to become due under this Lease Agreement and ARI hereby authorizes Assignee to collect all such moneys when due, either in the name of Assignee or ARI. Lessee hereby agrees to this assignment. To induce Assignee to accept on assignment of ARI's rights hereunder, Lessee agrees that upon such assignment all rights and remedies of ARI hereunder shall vest in and be exercisable by Assignee that Lessee will render performance of Lessee's obligation hereunder to Assignee rather than ARI and that the rights of Assignee to rentals and other sums due hereunder shall not be subject to any defense (except payment), off-set, counter-claim or recoupment of Lessee whatsoever arising from the breach of warranty or representation relating to the motor vehicle whether made by the manufacturer thereof, ARI or any other person, or arising from the breach or failure of ARI to observe or perform the provisions of this Lease Agreement or any other agreement between ARI and Lessee or arising from any course whatsoever. Lessee also agrees that nothing (including termination of this Lease Agreement) except full payment to Assignee of the Capitalized Value set forth below, with interest to date of such payment as specified below, shall be sufficient to terminate liability of Lessee to make payment to Assignee under this Lease Agreement. Lessee also agrees to continue to make prompt payment to Assignee of the rentals due hereunder even if bankruptcy, reorganization, arrangement, insolvency, liquidation or dissolution proceedings are instituted by or against ARI and regardless whether a trustee or receiver in any such proceedings shall assume or reject this Lease Agreement or other agreement between ARI and Lessee. Lessee also agrees that Assignee does not assume any obligations arising hereunder and Lessee will look solely to ARI for the performance of any such obligations. - ---------------------------------------------------------------------------------------------------------- VEHICLE INFORMATION - ---------------------------------------------------------------------------------------------------------- YR & MAKE - 1995 FORD MODEL - A14 C VAN VEHICLE # - 0025-09528 ENGINE - 6 CYL. 3.0 LITER EXT COLOR - OXFORD WHITE LESSEE # - 0647-00 SERIAL # - 1FTDA14U7SZC21093 DELIVERY DATE - 12/25/95 REVISION DATE:02/13/96 REVISION NO: 02 - ---------------------------------------------------------------------------------------------------------- S = SIDEBILLED D = DEALER INSTALLED EQUIPMENT - ---------------------------------------------------------------------------------------------------------- VINYL INT DUAL BUCKETS P215/75R14 BSW FXD SD DOOR GLS SWING LOCK MIRR MANUAL AIR COND RADIO AM/FM CAS D 000000 - ---------------------------------------------------------------------------------------------------------- COST - ---------------------------------------------------------------------------------------------------------- CAPPED CAPPED CAPPED DESCRIPTION AMOUNT DESCRIPTION AMOUNT DESCRIPTION AMOUNT - ---------------------------------------------------------------------------------------------------------- BASE COST 14,783.35 P&H 150.00 SIDEBILL 225.00- MODAGRAFICS BODY CST1 14.24 DLR INSTL ITEMS 225.00 SALES TAX 938.02 TOTAL COST 15,885.61 - ---------------------------------------------------------------------------------------------------------- LEASE INFORMATION - ---------------------------------------------------------------------------------------------------------- OPEN END LEASE - PERIOD BEGINS: 01/96 TOTAL CAPITALIZATION: 15,885.61 * * * * * * RATES BELOW REFLECT DEPRECIATION AND ADMINISTRATIVE FEE ONLY * * * * * * RATE AMT 1ST-12TH MONTH .02868 $455.60 PER MONTH DEPRECIATION PERIOD 36 MONTHS @ $441.30 13TH-24TH MONTH .02868 $455.60 PER MONTH 25TH-36TH MONTH .02868 $455.60 PER MONTH FINANCIAL INFO INT-TYPE: FLOAT INDEX: COMM PAPER FACTOR-SCHEDULE: 107 - ---------------------------------------------------------------------------------------------------------- CENTMARTINEZ 320
MAILING AMERICAN PHARMACEUTICAL DRIVER NAME: TERRY DAVIS ADDRESS: ATTN: LISA DILLON ADDRESS: AMERICAN PHARMACEUTICALS 1771 W DIEHL ROAD 2524 RIDGEPOINT DR. SUITE 210 SUITE R1 NAPERVILLE IL 60563 AUSTIN TX 78754 Date 02/05/96 By [SIG] ------------ -------------------------- Authorized Signature 98 DUPLICATE [ARI LOGO] MOTOR VEHICLE LEASE AGREEMENT AUTOMOTIVE RENTALS, INC. (ARI) hereby leases to AMERICAN PHARMACEUTICAL SERVICES, INC. (Lessee), the vehicle referred to herein for the rental set forth herein. This Lease Agreement and any assignment hereof is subject to all the terms and conditions of the Agreement dated 10/13/94 between ARI and Lessee covering the leasing of vehicles to Lessee all of which are incorporated herein by reference. ARI hereby assigns to CORESTATES BANK NA AGENT (Assignee) all right, title and interest of ARI in and to all moneys due and to become due under this Lease Agreement and ARI hereby authorizes Assignee to collect all such moneys when due, either in the name of Assignee or ARI. Lessee hereby agrees to this assignment. To induce Assignee to accept on assignment of ARI's rights hereunder, Lessee agrees that upon such assignment all rights and remedies of ARI hereunder shall vest in and be exercisable by Assignee that Lessee will render performance of Lessee's obligation hereunder to Assignee rather than ARI and that the rights of Assignee to rentals and other sums due hereunder shall not be subject to any defense (except payment), off-set, counter-claim or recoupment of Lessee whatsoever arising from the breach of warranty or representation relating to the motor vehicle whether made by the manufacturer thereof, ARI or any other person, or arising from the breach or failure of ARI to observe or perform the provisions of this Lease Agreement or any other agreement between ARI and Lessee or arising from any course whatsoever. Lessee also agrees that nothing (including termination of this Lease Agreement) except full payment to Assignee of the Capitalized Value set forth below, with interest to date of such payment as specified below, shall be sufficient to terminate liability of Lessee to make payment to Assignee under this Lease Agreement. Lessee also agrees to continue to make prompt payment to Assignee of the rentals due hereunder even if bankruptcy, reorganization, arrangement, insolvency, liquidation or dissolution proceedings are instituted by or against ARI and regardless whether a trustee or receiver in any such proceedings shall assume or reject this Lease Agreement or other agreement between ARI and Lessee. Lessee also agrees that Assignee does not assume any obligations arising hereunder and Lessee will look solely to ARI for the performance of any such obligations. - ---------------------------------------------------------------------------------------------------------- VEHICLE INFORMATION - ---------------------------------------------------------------------------------------------------------- YR & MAKE - 1995 FORD MODEL - AEROSTAR VEHICLE # - 0043-09601 ENGINE - 6 CYL. 3.3 LITER EXT COLOR - WHITE LESSEE # - 0647-00 SERIAL # - 1FTDA14U2SZC22734 DELIVERY DATE - 01/27/96 REVISION DATE:04/17/96 REVISION NO: 02 - ---------------------------------------------------------------------------------------------------------- S = SIDEBILLED D = DEALER INSTALLED EQUIPMENT - ---------------------------------------------------------------------------------------------------------- CLOTH INT 004200 STD AIR COND TINT GLASS ALL AM-FM STEREO PWR STEERING PWR DISC BRAKES CRUISE/TILT DUAL BUCKETS FRT LIC PLATE FXD SD DOOR GLS - ---------------------------------------------------------------------------------------------------------- COST - ---------------------------------------------------------------------------------------------------------- CAPPED CAPPED CAPPED DESCRIPTION AMOUNT DESCRIPTION AMOUNT DESCRIPTION AMOUNT - ---------------------------------------------------------------------------------------------------------- BASE COST 16,940.35 P&H 150.00 MODAGRAFICS BODY CST1 14.15 FLEET INCENTIVE 1,000.00- TOTAL COST 16,104.50 - ---------------------------------------------------------------------------------------------------------- LEASE INFORMATION - ---------------------------------------------------------------------------------------------------------- OPEN END LEASE - PERIOD BEGINS: 02/96 TOTAL CAPITALIZATION: 16,104.50 * * * * * * RATES BELOW REFLECT DEPRECIATION AND ADMINISTRATIVE FEE ONLY * * * * * * RATE AMT 1ST-12TH MONTH .02868 $461.88 PER MONTH DEPRECIATION PERIOD 36 MONTHS @ $447.38 13TH-24TH MONTH .02868 $461.88 PER MONTH 25TH-36TH MONTH .02868 $461.88 PER MONTH FINANCIAL INFO INT-TYPE: FLOAT INDEX: COMM PAPER FACTOR-SCHEDULE: 107 - ---------------------------------------------------------------------------------------------------------- CENTMARTINEZ 320
MAILING AMERICAN PHARMACEUTICAL DRIVER NAME: JOHN KEELING ADDRESS: ATTN: LISA DILLON ADDRESS: 34921 US HWY 19 NORTH 1771 W DIEHL ROAD PALM HARBOR FL 34684 SUITE 210 NAPERVILLE IL 60563 Date 02/02/96 By [SIG] ------------ -------------------------- Authorized Signature 99 DUPLICATE [ARI LOGO] MOTOR VEHICLE LEASE AGREEMENT AUTOMOTIVE RENTALS, INC. (ARI) hereby leases to AMERICAN PHARMACEUTICAL SERVICES, INC. (Lessee), the vehicle referred to herein for the rental set forth herein. This Lease Agreement and any assignment hereof is subject to all the terms and conditions of the Agreement dated 10/13/94 between ARI and Lessee covering the leasing of vehicles to Lessee all of which are incorporated herein by reference. ARI hereby assigns to CORESTATES BANK NA AGENT (Assignee) all right, title and interest of ARI in and to all moneys due and to become due under this Lease Agreement and ARI hereby authorizes Assignee to collect all such moneys when due, either in the name of Assignee or ARI. Lessee hereby agrees to this assignment. To induce Assignee to accept on assignment of ARI's rights hereunder, Lessee agrees that upon such assignment all rights and remedies of ARI hereunder shall vest in and be exercisable by Assignee that Lessee will render performance of Lessee's obligation hereunder to Assignee rather than ARI and that the rights of Assignee to rentals and other sums due hereunder shall not be subject to any defense (except payment), off-set, counter-claim or recoupment of Lessee whatsoever arising from the breach of warranty or representation relating to the motor vehicle whether made by the manufacturer thereof, ARI or any other person, or arising from the breach or failure of ARI to observe or perform the provisions of this Lease Agreement or any other agreement between ARI and Lessee or arising from any course whatsoever. Lessee also agrees that nothing (including termination of this Lease Agreement) except full payment to Assignee of the Capitalized Value set forth below, with interest to date of such payment as specified below, shall be sufficient to terminate liability of Lessee to make payment to Assignee under this Lease Agreement. Lessee also agrees to continue to make prompt payment to Assignee of the rentals due hereunder even if bankruptcy, reorganization, arrangement, insolvency, liquidation or dissolution proceedings are instituted by or against ARI and regardless whether a trustee or receiver in any such proceedings shall assume or reject this Lease Agreement or other agreement between ARI and Lessee. Lessee also agrees that Assignee does not assume any obligations arising hereunder and Lessee will look solely to ARI for the performance of any such obligations. - ---------------------------------------------------------------------------------------------------------- VEHICLE INFORMATION - ---------------------------------------------------------------------------------------------------------- YR & MAKE - 1995 FORD MODEL - A14 C VAN VEHICLE # - 0025-09516 ENGINE - 6 CYL. 3.0 LITER EXT COLOR - OXFORD WHITE LESSEE # - 0647-00 SERIAL # - 1FTDA14UXSZA91066 DELIVERY DATE - 07/24/95 REVISION DATE:00/00/00 REVISION NO: 00 - ---------------------------------------------------------------------------------------------------------- S = SIDEBILLED D = DEALER INSTALLED EQUIPMENT - ---------------------------------------------------------------------------------------------------------- VINYL INT DUAL BUCKETS P215/75R14 BSW FXD SD DOOR GLS MANUAL AIR COND AM/FM STEREO 0053000 - ---------------------------------------------------------------------------------------------------------- COST - ---------------------------------------------------------------------------------------------------------- CAPPED CAPPED CAPPED DESCRIPTION AMOUNT DESCRIPTION AMOUNT DESCRIPTION AMOUNT - ---------------------------------------------------------------------------------------------------------- BASE COST 16,191.35 P&H 150.00 MODAGRAFICS BODY CST1 14.08 DLR INSTL ITEMS 355.00 SALES TAX 1,011.95 TOTAL COST 17,722.38 - ---------------------------------------------------------------------------------------------------------- LEASE INFORMATION - ---------------------------------------------------------------------------------------------------------- OPEN END LEASE - PERIOD BEGINS: 08/95 TOTAL CAPITALIZATION: 17,722.38 * * * * * * RATES BELOW REFLECT DEPRECIATION AND ADMINISTRATIVE FEE ONLY * * * * * * RATE AMT 1ST-12TH MONTH .02590 $459.01 PER MONTH DEPRECIATION PERIOD 40 MONTHS @ $443.06 13TH-24TH MONTH .02590 $459.01 PER MONTH 25TH-36TH MONTH .02590 $459.01 PER MONTH FINANCIAL INFO INT-TYPE: FLOAT INDEX: COMM PAPER FACTOR-SCHEDULE: 107 - ---------------------------------------------------------------------------------------------------------- CENTMARTINEZ 320
MAILING AMERICAN PHARMACEUTICAL DRIVER NAME: TERRY DAVIS ADDRESS: ATTN: LISA DILLON ADDRESS: 2324 RIDGEPOINT DR. 1771 W DIEHL ROAD SUITE 41 SUITE 210 AUSTIN TX 78754 NAPERVILLE IL 60563 Date 09/21/95 By [SIG] ------------ -------------------------- Authorized Signature 100 DUPLICATE [ARI LOGO] MOTOR VEHICLE LEASE AGREEMENT AUTOMOTIVE RENTALS, INC. (ARI) hereby leases to AMERICAN PHARMACEUTICAL SERVICES, INC. (Lessee), the vehicle referred to herein for the rental set forth herein. This Lease Agreement and any assignment hereof is subject to all the terms and conditions of the Agreement dated 10/13/94 between ARI and Lessee covering the leasing of vehicles to Lessee all of which are incorporated herein by reference. ARI hereby assigns to CORESTATES BANK NA AGENT (Assignee) all right, title and interest of ARI in and to all moneys due and to become due under this Lease Agreement and ARI hereby authorizes Assignee to collect all such moneys when due, either in the name of Assignee or ARI. Lessee hereby agrees to this assignment. To induce Assignee to accept on assignment of ARI's rights hereunder, Lessee agrees that upon such assignment all rights and remedies of ARI hereunder shall vest in and be exercisable by Assignee that Lessee will render performance of Lessee's obligation hereunder to Assignee rather than ARI and that the rights of Assignee to rentals and other sums due hereunder shall not be subject to any defense (except payment), off-set, counter-claim or recoupment of Lessee whatsoever arising from the breach of warranty or representation relating to the motor vehicle whether made by the manufacturer thereof, ARI or any other person, or arising from the breach or failure of ARI to observe or perform the provisions of this Lease Agreement or any other agreement between ARI and Lessee or arising from any course whatsoever. Lessee also agrees that nothing (including termination of this Lease Agreement) except full payment to Assignee of the Capitalized Value set forth below, with interest to date of such payment as specified below, shall be sufficient to terminate liability of Lessee to make payment to Assignee under this Lease Agreement. Lessee also agrees to continue to make prompt payment to Assignee of the rentals due hereunder even if bankruptcy, reorganization, arrangement, insolvency, liquidation or dissolution proceedings are instituted by or against ARI and regardless whether a trustee or receiver in any such proceedings shall assume or reject this Lease Agreement or other agreement between ARI and Lessee. Lessee also agrees that Assignee does not assume any obligations arising hereunder and Lessee will look solely to ARI for the performance of any such obligations. - ---------------------------------------------------------------------------------------------------------- VEHICLE INFORMATION - ---------------------------------------------------------------------------------------------------------- YR & MAKE - 1995 FORD MODEL - A14 C VAN VEHICLE # - 0025-09506 ENGINE - 6 CYL. 3.0 LITER EXT COLOR - OXFORD WHITE LESSEE # - 0647-00 SERIAL # - 1FTDA14U4SZA35043 DELIVERY DATE - 03/20/95 REVISION DATE:08/16/95 REVISION NO: 02 - ---------------------------------------------------------------------------------------------------------- S = SIDEBILLED D = DEALER INSTALLED EQUIPMENT - ---------------------------------------------------------------------------------------------------------- VINYL INT 000000 SWING LOCK MIRR MANUAL AIR COND CRUISE/TILT AM/FM STEREO DUAL BUCKETS P215/75R14 BSW FRONT LICENSE 3.73 AXLE RATIO FXD SD DOOR GLS - ---------------------------------------------------------------------------------------------------------- COST - ---------------------------------------------------------------------------------------------------------- CAPPED CAPPED CAPPED DESCRIPTION AMOUNT DESCRIPTION AMOUNT DESCRIPTION AMOUNT - ---------------------------------------------------------------------------------------------------------- BASE COST 15,955.35 P&H 150.00 MODAGRAFICS BODY CST1 9.25 DLR INSTL ITEMS 355.00 SALES TAX 977.21 TOTAL COST 17,466.81 - ---------------------------------------------------------------------------------------------------------- LEASE INFORMATION - ---------------------------------------------------------------------------------------------------------- OPEN END LEASE - PERIOD BEGINS: 04/95 TOTAL CAPITALIZATION: 17,466.81 * * * * * * RATES BELOW REFLECT DEPRECIATION AND ADMINISTRATIVE FEE ONLY * * * * * * RATE AMT 1ST-12TH MONTH .02590 $452.39 PER MONTH DEPRECIATION PERIOD 40 MONTHS @ $436.67 13TH-24TH MONTH .02590 $452.39 PER MONTH 25TH-36TH MONTH .02590 $452.39 PER MONTH 37TH-40TH MONTH .02590 $452.39 PER MONTH FINANCIAL INFO INT-TYPE: FLOAT INDEX: COMM PAPER FACTOR-SCHEDULE: 107 - ---------------------------------------------------------------------------------------------------------- CENTMARTINEZ 320
MAILING AMERICAN PHARMACEUTICAL DRIVER NAME: TERRY DAVIS ADDRESS: ATTN: LISA GREENE ADDRESS: 2324 RIDGEPOINT DR. 1771 W DIEHL ROAD SUITE E1 SUITE 210 AUSTIN TX 78754 NAPERVILLE IL 60563 Date 04/24/95 By [SIG] ------------ -------------------------- Authorized Signature 101 DUPLICATE [ARI LOGO] MOTOR VEHICLE LEASE AGREEMENT AUTOMOTIVE RENTALS, INC. (ARI) hereby leases to ABBEY PHARMACEUTICAL SERVICES (Lessee), the vehicle referred to herein for the rental set forth herein. This Lease Agreement and any assignment hereof is subject to all the terms and conditions of the Agreement dated 05/28/92 between ARI and Lessee covering the leasing of vehicles to Lessee all of which are incorporated herein by reference. ARI hereby assigns to CORESTATES BANK NA AGENT (Assignee) all right, title and interest of ARI in and to all moneys due and to become due under this Lease Agreement and ARI hereby authorizes Assignee to collect all such moneys when due, either in the name of Assignee or ARI. Lessee hereby agrees to this assignment. To induce Assignee to accept on assignment of ARI's rights hereunder, Lessee agrees that upon such assignment all rights and remedies of ARI hereunder shall vest in and be exercisable by Assignee that Lessee will render performance of Lessee's obligation hereunder to Assignee rather than ARI and that the rights of Assignee to rentals and other sums due hereunder shall not be subject to any defense (except payment), off-set, counter-claim or recoupment of Lessee whatsoever arising from the breach of warranty or representation relating to the motor vehicle whether made by the manufacturer thereof, ARI or any other person, or arising from the breach or failure of ARI to observe or perform the provisions of this Lease Agreement or any other agreement between ARI and Lessee or arising from any course whatsoever. Lessee also agrees that nothing (including termination of this Lease Agreement) except full payment to Assignee of the Capitalized Value set forth below, with interest to date of such payment as specified below, shall be sufficient to terminate liability of Lessee to make payment to Assignee under this Lease Agreement. Lessee also agrees to continue to make prompt payment to Assignee of the rentals due hereunder even if bankruptcy, reorganization, arrangement, insolvency, liquidation or dissolution proceedings are instituted by or against ARI and regardless whether a trustee or receiver in any such proceedings shall assume or reject this Lease Agreement or other agreement between ARI and Lessee. Lessee also agrees that Assignee does not assume any obligations arising hereunder and Lessee will look solely to ARI for the performance of any such obligations. - ---------------------------------------------------------------------------------------------------------- VEHICLE INFORMATION - ---------------------------------------------------------------------------------------------------------- YR & MAKE - 1995 FORD MODEL - A14 C VAN VEHICLE # - 0025-09411 ENGINE - 6 CYL. 3.0 LITER EXT COLOR - OXFORD WHITE LESSEE # - 0647-01 SERIAL # - 1FTDA14U8SZA00733 DELIVERY DATE - 10/13/94 REVISION DATE:00/00/00 REVISION NO: 00 - ---------------------------------------------------------------------------------------------------------- S = SIDEBILLED D = DEALER INSTALLED EQUIPMENT - ---------------------------------------------------------------------------------------------------------- VINYL INT S/DR FIXED GLS STD AIR COND 1860#PAYLOAD TINT GLASS ALL S/LK PLR MIRROR RADIO AM/FM STE D 004200 PWR STEERING PWR DISC BRAKES STD TRIM DUAL BUCKETS P215/TIRES 3.73 AXLE RATIO - ---------------------------------------------------------------------------------------------------------- COST - ---------------------------------------------------------------------------------------------------------- CAPPED CAPPED CAPPED DESCRIPTION AMOUNT DESCRIPTION AMOUNT DESCRIPTION AMOUNT - ---------------------------------------------------------------------------------------------------------- BASE COST 16,347.85 P&H 150.00 DLR INSTL ITEMS 290.00 FLEET INCENTIVE 400.00- INCENTIVE 2 200.00- SALES TAX 1,002.37 TOTAL COST 17,190.22 - ---------------------------------------------------------------------------------------------------------- LEASE INFORMATION - ---------------------------------------------------------------------------------------------------------- OPEN END LEASE - PERIOD BEGINS: 10/94 TOTAL CAPITALIZATION: 17,190.22 * * * * * * RATES BELOW REFLECT DEPRECIATION AND ADMINISTRATIVE FEE ONLY * * * * * * RATE AMT 1ST-12TH MONTH .02570 $441.79 PER MONTH DEPRECIATION PERIOD 40 MONTHS @ $429.76 13TH-24TH MONTH .02570 $441.79 PER MONTH 25TH-36TH MONTH .02570 $441.79 PER MONTH 37TH-40TH MONTH .02570 $441.79 PER MONTH FINANCIAL INFO INT-TYPE: FLOAT INDEX: COMM PAPER FACTOR-SCHEDULE: 108A - ---------------------------------------------------------------------------------------------------------- CENTMARTINEZ 320
MAILING AMERICAN PHARMACEUTICAL DRIVER NAME: TERRY DAVIS ADDRESS: ATTN: LISA GREENE ADDRESS: 2324 RIDGEPOINT DR. 1771 W DIEHL ROAD SUITE E1 SUITE 210 AUSTIN TX 78754 NAPERVILLE IL 60563 Date 10/14/94 By [SIG] ------------ -------------------------- Authorized Signature 102 DUPLICATE [ARI LOGO] MOTOR VEHICLE LEASE AGREEMENT AUTOMOTIVE RENTALS, INC. (ARI) hereby leases to ABBEY PHARMACEUTICAL SERVICES (Lessee), the vehicle referred to herein for the rental set forth herein. This Lease Agreement and any assignment hereof is subject to all the terms and conditions of the Agreement dated 05/28/92 between ARI and Lessee covering the leasing of vehicles to Lessee all of which are incorporated herein by reference. ARI hereby assigns to CORESTATES BANK NA AGENT (Assignee) all right, title and interest of ARI in and to all moneys due and to become due under this Lease Agreement and ARI hereby authorizes Assignee to collect all such moneys when due, either in the name of Assignee or ARI. Lessee hereby agrees to this assignment. To induce Assignee to accept on assignment of ARI's rights hereunder, Lessee agrees that upon such assignment all rights and remedies of ARI hereunder shall vest in and be exercisable by Assignee that Lessee will render performance of Lessee's obligation hereunder to Assignee rather than ARI and that the rights of Assignee to rentals and other sums due hereunder shall not be subject to any defense (except payment), off-set, counter-claim or recoupment of Lessee whatsoever arising from the breach of warranty or representation relating to the motor vehicle whether made by the manufacturer thereof, ARI or any other person, or arising from the breach or failure of ARI to observe or perform the provisions of this Lease Agreement or any other agreement between ARI and Lessee or arising from any course whatsoever. Lessee also agrees that nothing (including termination of this Lease Agreement) except full payment to Assignee of the Capitalized Value set forth below, with interest to date of such payment as specified below, shall be sufficient to terminate liability of Lessee to make payment to Assignee under this Lease Agreement. Lessee also agrees to continue to make prompt payment to Assignee of the rentals due hereunder even if bankruptcy, reorganization, arrangement, insolvency, liquidation or dissolution proceedings are instituted by or against ARI and regardless whether a trustee or receiver in any such proceedings shall assume or reject this Lease Agreement or other agreement between ARI and Lessee. Lessee also agrees that Assignee does not assume any obligations arising hereunder and Lessee will look solely to ARI for the performance of any such obligations. - ---------------------------------------------------------------------------------------------------------- VEHICLE INFORMATION - ---------------------------------------------------------------------------------------------------------- YR & MAKE - 1994 FORD MODEL - A14 C VAN VEHICLE # - -09409 ENGINE - 6 CYL. 3.0 LITER EXT COLOR - WHITE LESSEE # - 0847-01 SERIAL # - 1FTDA14U9RZB34046 DELIVERY DATE - 08/10/94 REVISION DATE:00/00/00 REVISION NO: 00 - ---------------------------------------------------------------------------------------------------------- S = SIDEBILLED D = DEALER INSTALLED EQUIPMENT - ---------------------------------------------------------------------------------------------------------- VINYL INT 004200 TD AIR COND INT GLASS ALL AM-FM STEREO PWR STEERING PWR DISC BRAKES STD TRIM DUAL BUCKETS FIXED GLS S/D STLD WHEEL CVRS - ---------------------------------------------------------------------------------------------------------- COST - ---------------------------------------------------------------------------------------------------------- CAPPED CAPPED CAPPED DESCRIPTION AMOUNT DESCRIPTION AMOUNT DESCRIPTION AMOUNT - ---------------------------------------------------------------------------------------------------------- BASE COST 16,415.85 P&H 150.00 FLEET INCENTIVE 400.00- SALES TAX 1,000.99 TOTAL COST 17,166.84 - ---------------------------------------------------------------------------------------------------------- LEASE INFORMATION - ---------------------------------------------------------------------------------------------------------- OPEN END LEASE - PERIOD BEGINS: 08/94 TOTAL CAPITALIZATION: 17,166.84 * * * * * * RATES BELOW REFLECT DEPRECIATION AND ADMINISTRATIVE FEE ONLY * * * * * * RATE AMT 1ST-12TH MONTH .02570 $441.19 PER MONTH DEPRECIATION PERIOD 40 MONTHS @ $429.17 13TH-24TH MONTH .02570 $441.19 PER MONTH 25TH-36TH MONTH .02570 $441.19 PER MONTH 37TH-40TH MONTH .02570 $441.19 PER MONTH FINANCIAL INFO INT-TYPE: FLOAT INDEX: COMM PAPER FACTOR-SCHEDULE: 108A - ---------------------------------------------------------------------------------------------------------- CENTMARTINEZ 320
MAILING AMERICAN PHARMACEUTICAL DRIVER NAME: TERRY DAVIS ADDRESS: ATTN: LISA GREENE ADDRESS: 2324 RIDGEPOINT DR. 1771 W DIEHL ROAD SUITE G1 SUITE 210 AUSTIN TX 78754 NAPERVILLE IL 60563 Date 08/11/94 By [SIG] ------------ -------------------------- Authorized Signature 103 SCHEDULE 6.8 PENDING GOVERNMENT INVESTIGATIONS NONE. 104 SCHEDULE 6.13 FINANCIAL STATEMENTS [SEE ATTACHED] 105 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1995
Desc October November December January February March April May June July - ------------------------------------------------------------------------------------------------------------------------------------ Revenue Enteral 56,691 56,261 50,513 40,722 40,381 43,913 54,765 49,889 53,384 56,409 Wholesale 6,574 11,202 9,729 11,585 11,890 10,456 10,616 13,512 10,265 14,748 Billing Service Fee 1,000 1,100 1,000 520 890 450 770 810 1,790 660 Option 10,231 7,074 8,968 8,125 10,282 11,779 9,240 13,187 14,619 13,153 ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ Enteral Total 74,496 75,637 70,210 60,952 63,443 66,598 75,391 77,398 80,058 84,970 Urological 17,150 18,886 20,417 18,130 17,805 8,879 16,996 15,583 20,641 23,689 Wholesale 0 0 0 0 0 0 0 0 0 0 ------- ------- ------ ------ ------ ------ ------ ------ ------ ------ Urological Total 17,150 18,886 20,417 18,130 17,805 8,879 16,996 15,583 20,641 23,689 Orthotics 9,514 8,244 5,616 4,017 5,003 0 0 0 3,006 3,409 Wholesale 0 0 0 0 0 0 0 0 0 0 ------ ------ ------ ------ ------ ------ ------- ------ ------ ------ Orthotics Total 9,514 8,244 5,616 4,017 5,003 0 0 0 3,006 3,409 Wound Care Part B 3,930 253 3,184 (493) 3,682 5,484 2,757 9,893 2,003 41,375 Wound Care Non B/Whse 0 0 0 0 0 56 258 450 (256) 371 ------- ------ ------ ------ ------ ------ ------ ------ ------- ------ Wound Care Total 3,930 253 3,184 (493) 3,682 5,540 3,015 10,343 1,747 41,746 I.V. 3,420 5,376 10,281 7,610 11,726 26,079 5,791 7,964 14,379 17,159 Pharmacy 146,380 150,807 149,769 151,196 123,581 155,678 159,676 179,227 185,874 158,415 Medicaid 99,573 107,073 129,104 126,595 119,478 150,463 117,363 135,263 128,952 181,335 Contractual Allowance (6,876) (11,571) (16,346) (16,347) (16,347) (30,093) (23,473) (27,053) (25,791) (36,267) Consulting 6,907 5,640 5,061 5,157 5,474 15,340 9,660 16,177 13,673 16,012 Correctional 0 0 0 0 0 0 0 0 0 0 Corr. Billing Serv. Fee 0 0 0 0 0 0 0 0 0 0 Oxygen 0 0 0 0 0 0 0 0 0 0 Oxygen Medicaid 0 0 0 0 0 0 0 0 0 0 Retail 21,906 13,231 11,506 12,288 21,541 20,450 9,358 32,078 5,074 (4,940) Other (92) 0 0 0 0 0 0 0 0 0 --------- ------- -------- -------- ------- ------- ------- -------- ------- ------- Pharmacy Total 267,798 265,180 279,094 278,889 253,727 311,838 272,594 335,692 307,982 314,555 -------- ------- -------- -------- ------- ------- ------- -------- ------- ------- Total Revenue 376,308 373,576 388,802 369,105 355,386 418,934 373,787 446,980 427,813 485,528 Contractual Allowance % (6.9%) (10.6%) (12.7%) (12.9%) (13.7%) (20.0%) (20.0%) (20.0%) (20.0%) (20.0%) Desc August September YTD Actuals - --------------------------------------------------------------------- Revenue Enteral 61,139 74,608 638,675 Wholesale 13,434 10,961 134,972 Billing Service Fee 770 470 10,230 Option 4,975 7,284 118,917 ------- ------ ------- Enteral Total 80,318 93,323 902,794 Urological 15,944 16,973 211,093 Wholesale 0 0 0 ------ ------ ------- Urological Total 15,944 16,973 211,093 Orthotics 0 0 38,809 Wholesale 0 0 0 ------ ------ ------- Orthotics Total 0 0 38,809 Wound Care Part B 21,099 33,076 126,243 Wound Care Non B/Whse 690 1,092 2,661 ------ ------- ------- Wound Care Total 21,789 34,168 128,904 I.V. 9,022 13,841 132,648 Pharmacy 206,236 188,738 1,957,667 Medicaid 149,080 149,448 1,593,727 Contractual Allowance (29,816) (29,890) (269,870) Consulting 16,639 15,671 131,611 Correctional 0 0 0 Corr. Billing Serv. Fee 0 0 0 Oxygen 0 0 0 Oxygen Medicaid 0 0 0 Retail 8,063 (258) 150,307 Other 0 0 (92) Pharmacy Total 352,292 323,909 3,563,550 ------- ------- --------- Total Revenue 479,365 482,214 4,977,796 Contractual Allowance % (20.0%) (20.0%) (16.9%)
Page 1 106 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1995
Desc October November December January February March April May June July - ---------------------------------------------------------------------------------------------------------------------------------- COGS Enteral 29,242 34,793 23,236 18,732 18,575 20,200 25,192 22,949 24,556 25,948 Wholesale 3,391 0 4,475 5,329 5,469 4,810 4,883 6,216 4,722 6,784 Option 5,278 0 4,585 3,977 5,139 7,783 4,604 6,438 7,548 6,354 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Enteral Total 37,911 34,793 32,296 28,038 29,183 32,793 34,679 35,603 36,826 39,086 Urological 12,540 8,688 9,392 8,340 8,190 4,084 7,818 7,168 9,495 10,897 Wholesale 0 0 0 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Urological Total 12,540 8,688 9,392 8,340 8,190 4,084 7,818 7,168 9,495 10,897 Orthotics 0 3,792 2,584 1,848 2,301 0 0 0 1,383 1,568 Wound Care 0 116 1,465 (227) 1,694 2,546 1,658 5,689 961 22,960 I.V. 0 1,882 3,598 2,663 4,104 9,127 2,027 2,787 5,033 6,005 Pharmacy 170,221 169,221 178,669 178,473 161,861 193,317 226,693 146,588 188,680 194,650 Contractual Allowance 0 0 0 0 0 0 0 0 0 0 Correctional 0 0 0 0 0 0 0 0 0 0 Oxygen 0 0 0 127 0 0 0 174 0 0 Retail 0 0 0 0 0 0 0 0 0 0 Other 17,293 3,303 4,861 2,270 2,046 (6,592) 877 (206) 1,617 921 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Pharmacy Total 187,514 172,524 183,530 180,870 163,907 186,725 227,570 146,556 190,297 195,571 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total COGS 237,965 221,795 232,865 221,532 209,379 235,277 273,752 197,803 243,995 276,067
Desc August September YTD Actuals - ---------------------------------------------------------------- COGS Enteral 26,124 4,152 275,699 Wholesale 6,180 5,042 57,301 Option 2,643 3,567 57,916 ------- ------- --------- Enteral Total 36,947 12,761 390,916 Urological 7,334 7,808 101,754 Wholesale 0 0 0 ------- ------- --------- Urological Total 7,334 7,808 101,754 Orthotics 0 0 13,476 Wound Care 11,984 21,408 70,256 I.V. 3,158 4,845 45,229 Pharmacy 218,845 200,841 2,228,059 Contractual Allowance 0 0 0 Correctional 0 0 0 Oxygen 0 0 301 Retail 0 0 0 Other 1,805 2,504 30,699 ------- ------- --------- Pharmacy Total 220,650 203,345 2,259,059 ------- ------- --------- Total COGS 280,073 150,167 2,680,690
Page 2 107 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1995
Desc October November December January February March April - ------------------------------------------------------------------------------------------------------------ Gross Profit Enteral 27,449 21,468 27,277 21,990 21,806 23,713 29,573 Wholesale 3,183 11,202 5,254 6,256 6,421 5,646 5,733 Billing Service Fee 1,000 1,100 1,000 520 890 450 770 Option 4,953 7,074 4,383 4,148 5,143 3,996 4,636 ------- ------- ------- ------- ------- ------- ------- Total Enteral 36,585 40,844 37,914 32,914 34,260 33,805 40,712 Urological 4,610 10,198 11,025 9,790 9,615 4,795 9,178 Wholesale 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- Total Urological 4,610 10,198 11,025 9,790 9,615 4,795 9,178 Total Orthotics 9,514 4,452 3,032 2,169 2,702 0 0 Total Wound Care 3,930 137 1,719 (266) 1,988 2,992 1,357 Total I.V. 3,420 3,494 6,683 4,947 7,622 16,952 3,764 Pharmacy 75,732 88,659 100,204 99,318 81,198 112,824 50,346 Contractual Allowance (6,876) (11,571) (16,346) (16,347) (16,347) (30,093) (23,473) Consulting 6,907 5,640 5,061 5,157 5,474 15,340 9,660 Correctional 0 0 0 0 0 0 0 Oxygen 0 0 0 (127) 0 0 0 Retail 21,906 13,231 11,506 12,288 21,541 20,450 9,368 Other (17,385) (3,303) (4,861) (2,270) (2,046) 6,592 (877) ------- ------- ------- ------- ------- ------- ------- Total Pharmacy 80,284 92,656 95,564 98,019 89,820 125,113 45,024 ------- ------- ------- ------- ------- ------- ------- Total Gross Profit 138,343 151,781 155,937 147,573 146,007 183,657 100,035 Enteral % 49.1% 54.0% 54.0% 54.0% 54.0% 50.8% 54.0% Urological % 26.9% 54.0% 54.0% 54.0% 54.0% 54.0% 54.0% Orthotics % 100.0% 54.0% 54.0% 54.0% 54.0% 0.0% 0.0% Wound Care % 100.0% 54.2% 54.0% 54.0% 54.0% 54.0% 45.0% I.V. % 100.0% 65.0% 65.0% 65.0% 65.0% 65.0% 65.0% Pharmacy % 30.0% 34.9% 34.2% 35.1% 35.4% 40.1% 16.5% Total Gross Profit % 36.8% 40.6% 40.1% 40.0% 41.1% 43.8% 26.8% Desc May June July August September YTD Actuals - ----------------------------------------------------------------------------------------------------- Gross Profit Enteral 26,940 28,828 30,461 33,015 70,456 362,976 Wholesale 7,296 5,543 7,964 7,254 5,919 77,671 Billing Service Fee 810 1,790 660 770 470 10,230 Option 6,749 7,071 6,799 2,332 3,717 61,001 ------- ------- ------- ------- ------- --------- Total Enteral 41,795 43,232 45,884 43,371 80,562 511,878 Urological 8,415 11,146 12,792 8,610 9,165 109,339 Wholesale 0 0 0 0 0 0 ------- ------- ------- ------- ------- --------- Total Urological 8,415 11,146 12,792 8,610 9,165 109,339 Total Orthotics 0 1,623 1,841 0 0 25,333 Total Wound Care 4,654 786 18,786 9,805 12,760 58,648 Total I.V. 5,177 9,346 11,154 5,864 8,996 87,419 Pharmacy 167,902 126,146 145,100 138,561 137,345 1,323,335 Contractual Allowance (27,053) (25,791) (36,267) (29,816) (29,890) (269,870) Consulting 16,177 13,873 16,012 16,639 15,871 131,811 Correctional 0 0 0 0 0 0 Oxygen (174) 0 0 0 0 (301) Retail 32,078 5,074 (4,940) 8,063 (258) 150,307 Other 206 (1,617) (921) (1,805) (2,504) (30,791) ------- ------- ------- ------- ------- --------- Total Pharmacy 189,136 117,685 118,984 131,642 120,564 1,304,491 ------- ------- ------- ------- ------- --------- Total Gross Profit 249,177 183,818 209,441 199,292 232,047 2,097,108 Enteral % 54.0% 54.0% 54.0% 54.0% 56.3% 56.7% Urological % 54.0% 54.0% 54.0% 54.0% 54.0% 51.8% Orthotics % 0.0% 54.0% 54.0% 0.0% 0.0% 65.3% Wound Care % 45.0% 45.0% 45.0% 45.0% 37.3% 45.5% I.V. % 65.0% 65.0% 65.0% 65.0% 65.0% 65.9% Pharmacy % 56.3% 38.2% 37.8% 37.4% 37.2% 36.6% Total Gross Profit % 55.7% 43.0% 43.1% 41.6% 48.1% 42.1%
Page 3 108 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1995
Desc October November December January February March April May - -------------------------------------------------------------------------------------------------------------------------------- Salaries 72,497 91,062 79,699 81,379 76,071 91,354 83,801 90,038 Mtb Bonus 1,668 1,668 1,688 1,668 1,668 1,668 1,668 5,833 A/R Bonus (706) 0 0 0 7 2,174 1,171 428 Commissions 4,591 2,078 4,120 694 1,253 (8,802) 1,220 961 FICA Taxes 5,724 5,630 6,163 6,297 5,902 13,688 6,084 6,537 Unemployment Taxes 156 153 577 1,110 714 552 364 298 Workmen's Comp Insurance 4,328 4,204 6,403 4,995 (2,407) 8,603 3,692 2,709 General Insurance 1,510 1,510 5,896 390 8,171 4,271 3,197 5,108 Denver City Tax 0 0 0 0 0 0 0 0 Group Health Insurance 1,577 8,805 5,582 6,245 6,535 6,749 6,590 6,290 401K 0 98 163 110 105 298 267 279 ------- ------- ------- ------- ------- ------- ------- ------- Salaries 91,343 115,206 110,269 102,886 98,019 20,553 111,052 118,479 Vehicle GE Capital 83 0 63 68 64 1,149 1,097 1,249 Vehicle Repairs 0 0 0 0 0 2,577 123 1,104 Vehicle Gasoline 697 0 0 1,462 0 0 1,614 1,385 Vehicle Misc. 0 1,428 155 629 924 0 0 202 ------- -------- ------- ------- ------- ------- ------- ------- Vehicle 780 1,428 218 2,159 988 3,726 2,834 3,850 Travel & Lodging 883 3,465 1,781 2,683 3,228 4,864 (790) 2,152 Meats 535 219 161 334 527 489 266 332 Entertainment 255 333 497 62 122 50 77 (8) Mileage 541 0 0 0 0 0 0 0 Car Allowance 1,200 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Shows & Conventions 4,907 381 0 0 0 0 81 191 ------- ------- -------- ------- ------- ------- ------- ------- Travel Expense 8,321 5,898 3,939 4,579 5,375 6,903 1,134 4,167 Consulting Services 5000 1,600 610 575 575 350 350 0 Audit Fees 0 0 0 0 0 0 0 0 Legal Fees 0 0 0 0 0 846 138 (1,089) Misc Professional Services 1,436 1,476 3,799 1,184 2,480 414 (486) 1,951 ------- ------- ------- ------- ------- ------- ------- ------- Professional Services 1,936 3,078 4,409 1,759 3,055 1,610 2 862 Office Space 7,584 0 6,695 6,695 8,559 8,516 8,734 2,339 Other Space Rental 91 0 91 202 196 0 0 348 ------- ------- ------- ------- ------ ------- ------- ------- Space Rental 7,675 0 6,766 6,897 8,755 8,516 8,734 2,687 Desc. June July August September YTD Actuals - ----------------------------------------------------------------------------------------------- Salaries 79,797 78,929 84,148 79,287 988,060 Mtb Bonus 4,833 3,633 4,933 5,833 36,727 A/R Bonus 184 0 0 (334) 5,924 Commissions 292 1,798 2,165 1,794 12,166 FICA Taxes 5,885 7,664 6,118 6,703 81,395 Unemployment Taxes 194 186 181 119 4,604 Workmen's Comp Insurance 6,499 3,448 (1,207) 1,028 42,293 General Insurance (1,845) 2,539 3,375 2,183 36,305 Denver City Tax 0 0 0 0 0 Group Health Insurance 5,486 5,904 5,528 4,832 70,123 401K 245 174 174 14 1,927 ------- ------- ------- ------- --------- Salaries 101,570 104,275 105,415 100,457 1,279,524 Vehicle GE Capital 1,126 1,117 1,117 1,110 8,243 Vehicle Repairs 213 1,056 1,528 1,969 8,480 Vehicle Gasoline 0 1,702 0 3,671 10,531 Vehicle Misc. 0 0 0 0 3,338 ------- ------- ------- ------- --------- Vehicle 1,339 3,875 2,645 6,750 30,592 Travel & Lodging 4,245 2,175 1,528 1,624 27,836 Meats 320 388 278 372 4,221 Entertainment 0 144 0 338 1,870 Mileage 0 0 0 0 541 Car Allowance 1,500 1,500 1,500 1,500 17,700 Shows & Conventions 403 0 0 0 5,963 ------- ------- ------- ------- --------- Travel Expense 6,468 4,207 3,306 3,834 58,131 Consulting Services 0 0 0 0 4,560 Audit Fees 0 0 0 0 0 Legal Fees 1,069 (138) (1,089) 75 (188) Misc Professional Services 530 0 865 210 13,859 ------- ------- ------- ----- --------- Professional Services 1,619 (138) (224) 285 18,251 Office Space 7,203 7,627 6,127 6,127 76,206 Other Space Rental 168 256 394 230 1,976 ------- ------- ------- ------- --------- Space Rental 7,371 7,883 6,521 6,357 78,182
Page 4 109 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1995
Desc October November December January February March April ------ ------ ------ ------ ------ ------ ------ Machine & Equipment 1,022 1,337 1,412 (73) 925 925 925 Furn & Fixtures 412 412 392 (926) 687 550 550 Vehicles 818 2,154 1,724 6,228 2,201 2,201 (2,384 Leasehold Improvements 1,473 1,473 1,473 1,473 1,473 1,468 1,473 Building Improvements 0 0 0 0 0 0 0 Durable Medical Equip 0 0 0 0 0 0 0 Computer Hardware 1,358 1,358 1,321 2,900 1,395 1,395 1,395 Computer Software 0 0 0 0 0 0 0 ------ ------ ------ ------ ------ ------ ------ Depreciation Expenses 5,083 6,734 6,322 9,602 6,681 6,539 1,959 Employee Relations 375 107 202 827 342 273 119 Temporary Services 124 0 0 0 0 0 0 Employee Education 1,592 63 63 63 75 119 66 Recruiting 1,200 1,200 1,054 1,000 0 0 0 Office Supplies 1,728 2,063 3,691 2,708 1,428 2,000 843 Independent Business 0 0 776 200 875 75 781 Small Equipment 0 0 0 0 0 0 0 Furniture & Equip Rentals 513 395 1,517 539 342 1,001 22 Repairs & Maintenance 52 3,159 2,162 1,135 373 495 326 Telephone 4,114 3,286 1,384 6,422 2,901 2,182 1,132 Cellular Phone 178 239 262 258 370 534 306 Advertising 583 421 307 618 935 (112) 400 Postage 483 581 527 103 811 343 1,781 Freight 94 54 0 1,149 488 89 144 Janitorial 351 351 351 351 351 351 351 Dues/Subscription 12 0 44 0 0 40 395 Professional Licenses 0 0 420 0 85 0 0 Uniforms 0 0 0 0 0 0 0 Computer 0 11 0 864 2,065 907 504 Utilities 1,189 0 827 2,622 2,404 602 661 General Taxes 0 0 0 (1,580) 0 294 152 Tax Penalty 0 147 0 0 0 0 0 Donations & Contributions 0 0 0 0 0 0 0 Property Taxes 1,325 1,325 1,325 9,453 1,325 1,325 1,325 LTC Link 0 0 0 0 0 0 0 Other Misc Income 0 0 (1,706) 0 0 (500) 0 Other Misc Expenses 0 (61) 0 17,050 0 0 0 ------ ------ ------ ------ ------ ------ ------ Other Misc. Expenses 13,911 13,361 13,204 43,862 15,170 10,018 9,308 ------ ------ ------ ------ ------ ------ ------ Total Other Expenses 37,706 30,497 34,878 68,858 40,024 37,312 23,971
YTD Desc May June July August September Actuals ------ ------ ------ ------ --------- ------- Machine & Equipment 925 1,398 1,017 1,089 5,982 16,884 Furn & Fixtures 580 580 454 758 734 5,183 Vehicles 2,028 2,099 1,711 2,099 2,099 22,978 Leasehold Improvements 1,473 1,473 1,473 1,473 1,473 17,671 Building Improvements 0 0 0 0 0 0 Durable Medical Equip 0 0 0 0 0 0 Computer Hardware 1,395 1,395 1,395 1,395 1,395 18,097 Computer Software 0 0 0 0 0 0 ------ ------ ------ ------ ------ ------- Depreciation Expenses 6,401 6,945 6,050 6,814 11,683 80,813 Employee Relations 182 197 125 75 45 2,869 Temporary Services 0 0 65 100 0 289 Employee Education 66 74 72 101 66 2,420 Recruiting 0 0 0 0 0 4,454 Office Supplies 2,924 (340) 1,780 2,878 2,893 24,616 Independent Business 622 898 2,381 563 1,478 8,729 Small Equipment 9 0 0 0 0 9 Furniture & Equip Rentals 469 972 678 2,142 1,315 9,905 Repairs & Maintenance 1,870 (2,159) 587 678 619 9,297 Telephone 2,461 2,575 3,018 2,725 1,673 33,873 Cellular Phone 319 864 47 1,285 687 5,347 Advertising 1,705 677 736 689 850 7,809 Postage 734 199 428 625 287 6,902 Freight 210 972 103 16 249 3,568 Janitorial 392 351 351 0 351 3,902 Dues/Subscription 0 6 0 80 0 577 Professional Licenses 0 0 0 0 0 505 Uniforms 0 0 0 843 136 979 Computer 1,560 2,039 2,387 1,329 1,347 13,013 Utilities 2,282 1,144 1,261 1,329 1,247 15,568 General Taxes 22 0 61 13 127 (911) Tax Penalty 94 0 0 0 0 241 Donations & Contributions 0 0 0 0 0 0 Property Taxes 1,325 1,325 1,325 1,325 1,325 24,028 LTC Link 0 0 0 (594) (108) (702) Other Misc Income 0 0 0 (247) (13) (2,468) Other Misc Expenses 0 128 (582) 0 0 16,535 ------ ------ ------ ------ ------ ------- Other Misc. Expenses 17,246 9,922 14,823 15,955 14,574 191,354 ------ ------ ------ ------ ------ ------- Total Other Expenses 35,213 33,684 36,700 35,017 43,483 457,323
Page 5 110 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1995
Desc October November December January February March April May June July - ---------------------------------------------------------------------------------------------------------------------------------- Partner Service Charges 0 0 0 0 0 0 0 0 0 0 Bad Debt Facility 1,663 671 1,920 2,068 2,068 2,004 2,030 2,153 1,968 2,449 Bad Debt Medicare 5,404 1,171 4,097 3,472 4,261 3,463 4,992 5,475 5,903 7,947 Bad Debt Medicaid 2,781 2,865 3,383 3,308 3,094 3,611 2,816 3,247 3,095 4,352 Bad Debt Private 5,259 3,286 4,990 5,060 4,518 5,808 5,361 6,824 6,145 5,085 Bad Debt Other 0 215 411 305 569 1,043 231 318 575 687 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Bad Debt 15,127 8,208 14,801 14,211 14,408 15,929 15,430 18,017 17,686 20,520 Total Operating Expense 144,178 153,911 159,948 185,955 152,451 173,794 150,453 171,709 152,920 161,495 Amortization Nondeductible 0 0 0 0 0 0 0 0 0 0 Amortization Deductible 0 0 0 0 0 0 0 0 0 0 Earnings From Operations (5,833) 2,130 (4,011) (38,382) (6,444) 9,663 (50,418) 77,468 30,898 47,946 Interest/Income/Dividend 0 0 0 0 0 0 0 0 0 0 Interest Expense 338 22 182 187 164 179 1,880 11,522 251 3,289 Minority Interest 0 0 0 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Earnings Before Allocations (6,171) (2,152) (4,193) (38,569) (6,608) 9,684 (52,298) 65,946 30,647 44,657 Corporate Allocations 0 0 0 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Earnings Before Taxes (6,171) (2,152) (4,193) (38,569) (6,608) 9,684 (52,298) 65,946 30,647 44,657 State Income Tax 0 0 0 0 0 0 0 0 0 0 Federal Income Tax 0 0 0 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Income Tax 0 0 0 0 0 0 0 0 0 0 Net Income (6,171) (2,152) (4,193) (38,569) (6,608) 9,684 (52,298) 65,946 30,647 44,657 ======= ======= ====== ======= ====== ====== ======= ====== ====== ======= Percent to Sales ---------------- Salaries % 24.3% 30.8% 28.4% 27.9% 27.6% 28.8% 29.7% 26.5% 23.7% 21.5% Vehicle % 0.2% 0.4% 0.1% 0.6% 0.3% 0.9% 0.8% 0.9% 0.3% 0.8% Professional Services % 0.5% 0.6% 1.1% 0.5% 0.9% 0.4% 0.0% 0.2% 0.4% (0.0%) Space Rental % 2.0% 0.0% 1.7% 1.9% 2.5% 2.0% 2.3% 0.6% 1.7% 1.6% Depreciation % 1.4% 1.8% 1.6% 2.6% 1.9% 1.6% 0.5% 1.4% 1.6% 1.2% Other Misc. Expense % 3.7% 3.6% 3.4% 11.9% 4.3% 2.4% 2.5% 3.9% 2.3% 3.1% Total Other Expenses % 10.0% 8.2% 9.0% 18.7% 11.3% 8.9% 6.4% 7.9% 7.9% 7.6% Bad Debt % 4.0% 2.2% 3.8% 3.9% 4.1% 3.8% 4.1% 4.0% 4.1% 4.2% Total Op. Expense % 38.3% 41.2% 41.1% 50.4% 42.9% 41.5% 40.3% 38.4% 35.7% 33.3% Earnings From Operations % (1.6%) (0.6%) (1.0%) (10.4%) (1.8%) 2.4% (13.5%) 17.3% 7.2% 9.9% Net Income % (1.6%) (0.6%) (1.1%) (10.4%) (1.9%) 2.3% (14.0%) 14.8% 7.2% 9.2%
Desc August September YTD Actuals - ---------------------------------------------------------------- Partner Service Charges 0 0 0 Bad Debt Facility 2,071 1,823 22,904 Bad Debt Medicare 4,663 8,701 59,749 Bad Debt Medicaid 3,578 3,587 39,717 Bad Debt Private 4,991 6,131 63,458 Bad Debt Other 361 554 5,169 ------- ------- ------- Bad Debt 15,864 20,796 190,997 Total Operating Expense 156,296 164,736 1,927,844 Amortization Nondeductible 0 0 0 Amortization Deductible 0 0 0 Earnings From Operations 42,996 67,311 169,264 Interest/Income/Dividend 0 0 0 Interest Expense (12,568) 1,617 7,063 Minority Interest 0 0 0 ------- ------- ------- Earnings Before Allocations 55,564 65,694 162,201 Corporate Allocations 0 0 0 ------- ------- ------- Earnings Before Taxes 55,564 65,694 162,201 State Income Tax 0 0 0 Federal Income Tax 0 0 0 ------- ------- ------- Income Tax 0 0 0 Net Income 55,564 65,694 162,201 ======= ====== ======= Percent to Sales ---------------- Salaries % 22.0% 20.8% 25.7% Vehicle % 0.6% 1.4% 0.6% Professional Services % (0.0%) 0.1% 0.4% Space Rental % 1.4% 1.3% 1.6% Depreciation % 1.4% 2.4% 1.6% Other Misc. Expense % 3.3% 3.0% 3.8% Total Other Expenses % 7.3% 9.0% 9.2% Bad Debt % 3.3% 4.3% 3.8% Total Op. Expense % 32.6% 34.2% 38.7% Earnings From Operations % 9.0% 14.0% 3.4% Net Income % 11.6% 13.6% 3.3%
111 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1996
Desc October November December January February March April May June July - ------------------------------------------------------------------------------------------------------------------------------------ Revenue Enteral 54,452 46,134 51,198 43,299 84,699 7,033 49,189 54,634 115,690 (16,489) Wholesale 12,580 12,357 11,514 11,008 9,883 10,341 9,067 13,157 4,458 6,450 Billing Service Fee 600 720 540 300 330 480 70 170 (300) 300 Option 5,214 6,453 2,508 1,590 2,596 2,827 0 0 0 0 ------- ------- ------ ------ ------ ------ ------ ------ ------- ------- Enteral Total 72,846 85,664 65,760 56,197 97,508 20,681 58,326 67,961 119,848 (9,739) Urological 12,527 13,658 13,522 16,062 14,967 12,837 10,736 10,848 3,829 8,514 Wholesale 0 0 0 0 0 0 0 0 0 0 ------- ------- ------ ------ ------ ------ ------ ------ ------- ------- Urological Total 12,527 13,658 13,522 16,062 14,967 12,837 10,736 10,848 3,829 8,514 Orthotics 867 0 0 0 0 0 1,209 (312) (285) 6,106 Wholesale 0 0 0 0 0 0 0 0 0 0 ------ ------ ------ ------ ------ ------ ------- ------ ------- ------- Orthotics Total 867 0 0 0 0 0 1,209 (312) (285) 6,106 Wound Care Part B 32,328 40,130 (6,999) 21,377 19,380 15,588 11,588 17,501 14,102 20,744 Wound Care Non B/Whlse 879 510 1,130 2,052 (121) 53 291 1,036 18 104 ------- ------ ------ ------ ------ ------ ------ ------- -------- ------- Wound Car Total 33,207 40,640 (5,869) 23,429 19,259 15,641 11,879 18,537 14,120 20,848 Vencor/Vencare 0 0 0 0 1,581 1,801 1,960 902 2,258 (485) Resp Supplies 0 0 0 0 0 0 0 0 0 0 Concent Rentals 0 0 0 0 0 0 0 0 0 0 ------- ------ ----- ----- ----- ------ ------ ------ ------- ------ Respiratory Total 0 0 0 0 1,581 1,801 1,960 902 2,258 (485) I.V. 9,183 16,909 5,900 16,261 18,879 18,746 26,700 12,570 7,533 12,194 Pharmacy 209,510 164,770 192,077 214,848 200,433 195,235 184,017 213,930 170,710 220,500 Medicaid 158,068 146,975 150,098 158,402 122,383 173,868 235,650 230,258 219,281 251,311 Contractual Allowance (31,614) (29,395) (30,020) (31,680) (24,477) (34,774) (47,130) (46,052) (43,856) (50,262) Consulting 18,697 16,049 10,286 8,947 13,579 13,586 13,855 13,925 13,819 13,793 Correctional 0 0 0 0 0 0 0 0 0 0 Corr. Billing Serv. Fee 0 0 0 0 0 0 0 0 0 0 Oxygen 0 0 0 0 0 0 0 0 0 0 Oxygen Medicaid 0 0 0 0 0 0 0 0 0 0 Retail 4,176 1,744 3,041 3,742 1,993 2,133 3,022 8,783 2,466 2,333 Other 0 0 0 0 0 0 0 0 0 0 --------- ------- -------- -------- ------- ------- ------- -------- ------- ------- Pharmacy Total 358,837 300,143 325,482 354,259 313,911 350,048 389,414 420,910 362,420 437,585 -------- ------- -------- -------- ------- ------- ------- -------- ------- ------- Total Revenue 487,467 437,014 404,795 466,206 466,105 419,756 500,224 531,416 509,723 475,023 Contractual Allowance % (20.0%) (20.0%) (20.0%) (20.0%) (20.0%) (20.0%) (20.0%) (20.0%) (20.0%) (20.0%) Desc August September YTD Actuals - --------------------------------------------------------------------- Revenue Enteral 15,208 49,457 654,504 Wholesale 3,020 8,259 112,094 Billing Service Fee (450) 0 2,760 Option 0 0 21,168 ------- ------ ------- Enteral Total 17,778 57,716 690,546 Urological 7,014 7,335 131,849 Wholesale 0 0 0 ------ ------ ------- Urological Total 7,014 7,335 131,849 Orthotics (2,052) 0 5,553 Wholesale 0 0 0 ------ ------ ------- Orthotics Total (2,052) 0 5,533 Wound Care Part B 2,823 21,756 210,318 Wound Care Non B/Whlse (10) 338 6,280 ------ ------- ------- Wound Car Total 2,813 22,094 216,598 Vencor/Vencare 1,631 1,539 11,187 Resp Supplies 0 0 0 Concent Rentals 0 0 0 ------ ------ ------- Respiratory Total 1,631 1,539 11,187 I.V. 20,569 11,759 177,205 Pharmacy 196,643 195,336 2,360,009 Medicaid 261,053 239,651 2,346,996 Contractual Allowance (52,211) (47,930) (469,401) Consulting 13,739 13,795 163,960 Correctional 0 0 0 Corr. Billing Serv. Fee 0 0 0 Oxygen 0 0 0 Oxygen Medicaid 0 0 0 Retail 2,442 1,983 37,858 Other 408 2,361 2,835 ------- ------- --------- Pharmacy Total 424,074 405,196 4,442,279 ------- ------- --------- Total Revenue 471,827 505,639 5,675,197 Contractual Allowance % (20.0%) (20.0%) (20.0%)
112 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1996
Desc October November December January February March April - --------------------------------------------------------------------------------------------------- COGS Enteral 24,367 20,645 22,911 19,376 37,903 3,147 22,012 Wholesale 5,629 5,530 5,152 4,926 4,423 4,627 4,057 Option 2,602 3,210 1,365 1,113 1,617 1,979 0 ------- ------- ------- ------- ------- ------- ------- Enteral Total 32,598 29,385 29,428 25,415 44,143 9,753 26,069 Urological 7,720 8,417 8,333 9,899 9,224 7,911 6,617 Wholesale 534 (534) 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- Urological Total 8,254 7,883 8,333 9,899 9,224 7,911 6,617 Orthotics 399 0 0 0 0 0 556 Wound Care 15,986 19,565 (2,825) 11,278 9,271 7,529 5,719 Vencor/Vencare 0 0 0 0 1,423 1,549 1,764 Resp Supplies 0 0 0 0 0 0 0 Concent Rentals 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- Respiratory total 0 0 0 0 1,423 1,549 1,764 I.V. 3,306 6,087 2,124 5,854 6,796 6,749 9,612 Pharmacy 207,928 173,667 189,557 211,089 183,593 205,679 229,579 Contractual Allowance 0 0 0 0 0 0 0 Correctional 0 0 0 0 0 0 0 Oxygen 0 0 0 0 0 0 0 Retail 0 2,570 (2,570) 0 0 0 0 Other 676 3,335 3,128 1,289 3,243 1,619 3,909 ------- ------- ------- ------- ------- ------- ------- Pharmacy Total 208,604 179,572 190,115 212,378 186,836 207,298 233,488 ------- ------- ------- ------- ------- ------- ------- Total COGS 269,147 242,492 227,175 264,824 257,693 240,789 283,825
Desc May June July August September YTD Actuals - ------------------------------------------------------------------------------------------------ COGS Enteral 24,448 43,962 (6,431) 5,931 19,288 237,559 Wholesale 5,888 4,059 5,937 7,780 7,601 60,609 Option 0 0 0 0 0 12,066 ------- ------- ------- ------- ------- --------- Enteral Total 30,336 48,021 (494) 8,711 26,889 310,254 Urological 6,686 2,642 5,960 4,910 5,134 83,453 Wholesale 0 0 0 0 0 0 ------- ------- ------- ------- ------- --------- Urological Total 6,686 2,642 5,960 4,910 5,134 83,453 Orthotics (143) (128) 2,809 (944) 0 2,549 Wound Care 8,924 6,919 10,424 1,407 11,047 105,244 Vencor/Vencare 785 1,959 (363) 1,468 1,320 9,905 Resp Supplies 0 0 0 0 0 0 Concent Rentals 0 0 0 0 0 0 ------- ------- ------- ------- ------- --------- Respiratory total 785 1,959 (363) 1,468 1,320 9,905 I.V. 4,525 4,608 9,705 12,788 7,311 79,465 Pharmacy 248,789 220,210 266,053 263,312 243,381 2,642,837 Contractual Allowance 0 0 0 0 0 0 Correctional 0 0 0 0 0 0 Oxygen 0 0 0 0 0 0 Retail 0 0 0 0 0 0 Other 740 4,565 4 2,076 1,861 26,445 ------- ------- ------- ------- ------- --------- Pharmacy Total 249,529 224,775 266,057 265,388 245,242 2,669,282 ------- ------- ------- ------- ------- --------- Total COGS 300,642 288,796 294,098 293,728 296,943 3,260,152
113 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1996
Desc October November December January February March April - ------------------------------------------------------------------------------------------------------------ Gross profit Enteral 30,085 25,489 28,287 23,923 46,796 3,886 27,177 Wholesale 6,951 6,827 6,362 6,082 5,460 5,714 5,010 Billing Service Fee 600 720 540 300 330 480 70 Option 2,612 3,243 1,143 477 779 848 0 ------- ------- ------- ------- ------- ------- ------- Total Enteral 40,248 36,279 36,332 30,782 53,365 10,928 32,257 Urological 4,807 5,241 5,189 6,163 5,743 4,926 4,119 Wholesale (534) 534 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- Total Urological 4,273 5,775 5,189 6,163 5,743 4,926 4,119 Total Orthotics 468 0 0 0 0 0 653 Total Wound Care 17,221 21,075 (3,044) 12,151 9,988 8,112 6,160 Vencor/Vencare 0 0 0 0 158 252 196 Resp Supplies 0 0 0 0 0 0 0 Concent Rentals 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- Respiratory Total 0 0 0 0 158 252 196 Total I.V. 5,877 10,822 3,776 10,407 12,083 11,999 17,088 Pharmacy 159,650 138,078 152,618 162,161 139,223 163,424 190,088 Contractual Allowance (31,614) (29,395) (30,020) (31,680) (24,477) (34,774) (47,130) Consulting 18,697 16,049 10,286 8,947 13,579 13,586 13,855 Correctional 0 0 0 0 0 0 0 Oxygen 0 0 0 0 0 0 0 Retail 4,176 (826) 5,611 3,742 1,993 2,133 3,022 Other (676) (3,335) (3,128) (1,289) (3,243) (1,619) (3,909) ------- ------- ------- ------- ------- ------- ------- Total Pharmacy 150,233 120,571 135,367 141,881 127,075 142,750 155,926 ------- ------- ------- ------- ------- ------- ------- Total Gross Profit 218,320 194,522 177,620 201,384 208,412 178,967 216,399 Enteral % 55.3% 55.2% 55.2% 54.8% 54.7% 52.8% 55.3% Urological % 34.1% 42.3% 38.4% 38.4% 38.4% 38.4% 38.4% Orthotics % 54.0% 0.0% 0.0% 0.0% 0.0% 0.0% 54.0% Wound Care % 51.9% 51.9% 51.9% 51.9% 51.9% 51.9% 51.9% Respiratory % 0.0% 0.0% 0.0% 0.0% 10.0% 14.0% 0 I.V. % 64.0% 64.0% 64.0% 64.0% 64.0% 64.0% 64.0% Pharmacy % 41.9% 40.2% 41.6% 40.1% 40.5% 40.8% 40.0% Total Gross Profit % 44.8% 44.5% 43.9% 43.2% 44.7% 42.6% 43.3% Desc May June July August September YTD Actuals - ----------------------------------------------------------------------------------------------------- Gross profit Enteral 30,186 71,728 (10,058) 9,277 30,169 316,945 Wholesale 7,269 399 513 240 658 51,485 Billing Service Fee 170 (300) 300 (450) 0 2,760 Option 0 0 0 0 0 9,102 ------- ------- ------- ------- ------- --------- Total Enteral 37,625 71,827 (9,245) 9,067 30,827 380,292 Urological 4,162 1,187 2,554 2,104 2,201 48,396 Wholesale 0 0 0 0 0 0 ------- ------- ------- ------- ------- --------- Total Urological 4,162 1,187 2,554 2,104 2,201 48,396 Total Orthotics (169) (157) 3,297 (1,108) 0 2,964 Total Wound Care 9,613 7,201 10,424 1,406 11,047 111,354 Vencor/Vencare 117 299 (122) 163 219 1,282 Resp Supplies 0 0 0 0 0 0 Concent Rentals 0 0 0 0 0 0 ------- ------- ------- ------- ------- --------- Respiratory Total 117 299 (122) 163 219 1,282 Total I.V. 8,045 2,925 2,489 7,781 4,448 97,740 Pharmacy 195,399 169,781 205,758 196,384 191,606 2,064,170 Contractual Allowance (46,052) (43,856) (50,262) (52,211) (47,930) (469,401) Consulting 13,925 13,819 13,703 13,739 13,795 163,960 Correctional 0 0 0 0 0 0 Oxygen 0 0 0 0 0 0 Retail 8,783 2,466 2,333 2,442 1,983 37,858 Other (674) (4,565) (4) (1,665) 500 (23,610) ------- ------- ------- ------- ------- --------- Total Pharmacy 171,381 137,645 171,528 158,686 159,954 1,772,997 ------- ------- ------- ------- ------- --------- Total Gross Profit 230,774 220,927 180,925 178,099 206,696 2,415,045 Enteral % 55.4% 59.9% 94.9% 51.0% 53.4% 55.1% Urological % 38.4% 31.0% 30.0% 30.0% 30.0% 36.7% Orthotics % 54.2% 55.1% 54.0% 54.0% 0.0% 53.9% Wound Care % 51.9% 51.0% 50.0% 50.0% 50.0% 51.4% Respiratory % 13.0% 13.2% 25.2% 10.0% 14.2% 11.5% I.V. % 64.0% 38.8% 20.4% 37.8% 37.8% 55.2% Pharmacy % 40.7% 38.0% 39.2% 37.4% 39.5% 39.9% Total Gross Profit % 43.4% 43.3% 38.1% 37.7% 41.3% 42.6%
Page 15 114 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1996
Desc October November December January February March April May - -------------------------------------------------------------------------------------------------------------------------------- Salaries 79,945 76,423 79,141 78,665 72,718 72,842 81,405 79,025 MtB Bonus 1,668 1,666 1,666 (211) 1,197 1,197 (7,181) 0 A/R Bonus 4,509 4,489 (7,873) 573 248 (231) 186 73 Commissions 1,101 3,395 3,422 1,674 2,377 2,389 1,014 1,906 FICA Taxes 5,723 5,234 5,002 6,426 5,705 5,706 5,490 5,830 Unemployment Taxes 37 87 53 1,893 855 494 243 182 Workmen's Comp Insurance 3,407 3,212 3,662 3,129 3,023 3,087 3,489 3,349 General Insurance 2,069 1,975 2,228 1,925 1,857 1,862 2,080 2,041 Denver City Tax 0 0 0 0 0 0 0 0 Group Health Insurance 5,885 4,752 5,083 5,235 5,361 (2,098) 2,992 4,669 401K 0 0 0 287 153 241 183 308 ------- ------- ------- ------- ------- ------- ------- ------- Salaries 104,342 101,233 92,384 99,596 93,494 85,489 89,901 97,383 Vehicle GE Capital 132 89 98 89 83 160 0 124 Vehicle Repairs 146 214 1,830 921 1,158 1,536 709 722 Vehicle Gasoline 0 3,785 53 4,056 1,863 10 2,372 3,377 Vehicle Misc. 0 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- ------- Vehicle 278 4,088 1,981 5,068 3,104 1,706 3,081 4,223 Travel & Lodging 1,529 1,162 249 406 (158) 172 0 173 Meals 95 288 222 292 146 141 22 103 Entertainment 0 0 742 75 45 98 84 61 Mileage 0 679 1,216 1,543 1,487 1,270 1,612 1,523 Car Allowance 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Shows & Conventions 0 8 0 0 0 0 0 0 ------- ------- -------- ------- ------- ------- ------- ------- Travel Expense 3,124 3,637 3,929 3,816 3,020 3,181 3,218 3,360 Consulting Services 0 0 2,198 1,060 0 0 0 0 Audit Fees 0 0 0 0 0 0 0 0 Legal Fees 0 0 0 216 221 325 125 549 Misc Professional Services 0 0 0 0 1,757 1,504 0 0 ------- ------- ------- ------- ------- ------- ------- ------- Professional Services 0 0 2,198 1,276 1,978 1,829 125 549 Office Space 6,127 6,127 6,127 6,127 9,321 8,430 4,530 6,480 Other Space Rental 230 301 230 230 230 230 230 230 ------- ------- ------- ------- ------ ------- ------- ------- Space Rental 6,357 6,428 6,357 6,357 9,551 8,660 4,760 6,710 Desc. June July August September YTD Actuals - ---------------------------------------------------------------------------------------------------- Salaries 77,443 87,884 70,295 76,721 932,507 Mtb Bonus 0 0 2,394 1,197 3,591 A/R Bonus 0 0 54 269 2,297 Commissions 3,028 3,482 (771) 2,618 25,635 FICA Taxes 6,377 6,478 4,384 4,889 67,244 Unemployment Taxes 92 1,388 (1,088) 174 4,410 Workmen's Comp Insurance 3,113 713 (2,769) 2,808 30,221 General Insurance 1,818 2,240 (839) 1,640 20,896 Denver City Tax 0 0 0 0 0 Group Health Insurance 4,453 4,627 4,468 5,035 50,460 401K 262 1,666 (1,721) 0 1,379 ------- ------- ------- ------- --------- Salaries 96,586 108,478 74,405 95,349 1,138,640 Vehicle GE Capital 95 87 99 161 1,217 Vehicle Repairs 2,190 338 426 1,539 11,729 Vehicle Gasoline 1,460 2,878 2,888 2,133 24,875 Vehicle Misc. 0 0 0 0 0 ------- ------- ------- ------- --------- Vehicle 3,745 3,303 3,413 3,833 37,821 Travel & Lodging 140 0 101 (605) 3,169 Meals 146 83 54 114 1,706 Entertainment 86 0 0 0 1,191 Mileage 1,077 1,396 1,072 1,476 14,351 Car Allowance 1,500 1,875 1,685 1,419 18,479 Shows & Conventions 0 0 0 0 8 ------- ------- ------- ------- --------- Travel Expense 2,949 3,354 2,912 2,404 38,904 Consulting Services 505 1,050 1,110 0 5,923 Audit Fees 0 0 0 0 0 Legal Fees 329 (1,220) 0 1,382 1,927 Misc Professional Services 1,391 0 750 0 5,402 ------- ------- ------- ----- --------- Professional Services 2,225 (170) 1,860 1,382 13,252 Office Space 6,863 7,246 6,863 6,863 81,104 Other Space Rental 135 368 0 674 3,066 ------- ------- ------- ------- --------- Space Rental 6,998 7,612 6,863 7,537 84,190
Page 16 115 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1996
Desc October November December January February March April - ---------------------------------------------------------------------------------------------------- Machine & Equipment 534 1,854 2,582 1,547 1,547 1,547 1,547 Furn & Fixtures 734 490 734 893 714 1,498 882 Vehicles 2,099 3,003 3,463 2,588 2,582 2,365 2,365 Leasehold Improvements 1,473 1,473 1,473 1,473 1,473 1,473 1,473 Building Improvements 0 0 0 0 0 0 0 Durable Medical Equip 0 0 0 0 0 0 0 Computer Hardware 1,395 528 1,418 1,413 1,325 1,325 1,325 Computer Software 0 0 0 0 0 0 0 ------ ------ ------ ------ ------ ------ ------ Depreciation Expense 6,235 7,348 9,670 7,914 7,621 8,168 7,592 Employee Relations 23 16 658 163 15 194 202 Temporary Services 0 160 0 225 0 0 220 Employee Education 70 80 1,064 996 298 (904) 21 Recruiting 0 202 0 0 0 0 0 Office Supplies 184 4,072 3,192 3,390 3,358 2,002 2,050 Independent Business 95 745 900 733 1,084 54 1,100 Small Equipment 0 0 0 0 0 0 0 Furniture & Equip Rentals 1,459 443 1,266 634 1,218 517 1,007 Repairs & Maintenance 768 2,186 447 936 752 198 348 Telephone 2,738 2,307 1,680 3,167 3,312 (189) 2,619 Cellular Phone 953 342 568 1,069 305 539 1,025 Advertising 746 550 726 640 552 482 524 Postage 755 211 697 647 734 310 882 Freight 101 23 52 96 (171) 241 39 Janitorial 703 352 352 352 274 484 349 Dues/Subscription 0 15 0 100 0 342 0 Professional Licenses 0 0 0 0 0 0 0 Uniforms 0 44 0 0 0 0 0 Computer 619 744 791 677 558 1,307 1,091 Utilities 1,024 883 822 715 780 1,039 790 General Taxes 0 0 0 0 0 0 242 Tax Penalty 0 0 0 0 0 0 0 Donations & Contributions 0 0 0 0 0 0 0 Property Taxes 600 725 725 2,145 2,145 2,145 2,145 LTC Link 0 0 0 0 0 0 0 Other Misc Income (672) (63) (117) 2,860 0 0 0 Other Misc Expense 0 468 0 (24) 250 (477) 0 ------ ------ ------ ------ ------ ------ ------ Other Misc. Expenses 10,164 14,535 13,858 19,527 15,464 8,284 14,654 ------ ------ ------ ------ ------ ------ ------ Total Other Expenses 26,158 36,036 37,993 43,958 40,738 31,826 33,430
Desc May June July August September YTD Actuals - -------------------------------------------------------------------------------------------------- Machine & Equipment 1,547 1,548 1,547 1,547 1,548 18,893 Furn & Fixtures 882 913 913 913 913 10,437 Vehicles 4,748 2,762 3,095 3,095 2,750 34,895 Leasehold Improvements 1,473 1,473 1,473 1,473 1,473 17,678 Building Improvements 0 0 0 0 0 0 Durable Medical Equip 0 0 0 0 0 0 Computer Hardware 1,325 1,325 1,325 1,325 1,543 15,572 Computer Software 0 0 0 0 0 0 ------ ------ ------ ------ ------ ------- Depreciation Expense 9,975 8,021 8,353 8,353 8,225 97,473 Employee Relations 273 78 113 106 245 2,066 Temporary Services 3,095 930 560 80 1,696 6,966 Employee Education 0 83 0 14 48 1,770 Recruiting 0 167 0 0 42 411 Office Supplies 1,679 2,118 588 2,183 1,826 26,612 Independent Business 945 548 1,850 148 1,404 9,602 Small Equipment 0 0 0 0 0 0 Furniture & Equip Rentals 1,293 634 1,269 363 1,238 11,361 Repairs & Maintenance 447 707 311 896 825 8,819 Telephone 2,311 1,011 1,416 1,243 2,891 24,506 Cellular Phone 534 968 494 516 869 8,182 Advertising 335 568 455 716 559 6,853 Postage 635 42 1,055 698 759 7,425 Freight 15 34 60 13 73 576 Janitorial 0 349 698 487 352 4,752 Dues/Subscriptions 75 240 0 0 0 772 Professional Licenses 0 0 0 0 0 0 Uniforms 0 0 0 0 0 44 Computer 941 1,357 497 1,008 1,505 11,123 Utilities 1,028 1,226 13 2,720 1,150 12,190 General Taxes 54 0 0 2,597 16,338 19,252 Tax Penalty 0 0 0 0 0 0 Donations & Contributions 30 0 0 0 0 30 Property Taxes 2,135 2,135 2,135 2,135 1,118 20,288 LTC Link 0 0 0 0 0 0 Other Misc Income 445 (145) 66 (46) (3) 2,292 Other Misc Expense 128 0 21 192 (210) 348 ------ ------ ------ ------ ------ ------- Other Misc Expenses 16,398 13,045 11,571 16,065 32,695 186,260 ------ ------ ------ ------ ------ ------- Total Other Expenses 41,215 36,983 34,023 39,468 56,076 457,900
Page 17 116 AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1996 Desc October November December January February March April - ----------------------------------------------------------------------------------------------------------- Partner Service Charges Bad Debt Facility 2,104 2,033 1,785 1,754 1,642 1,503 1,070 Bad Debt Medicare 7,236 8,809 4,388 5,170 8,738 1,954 5,154 Bad Debt Medicaid 3,794 3,527 3,602 3,802 2,937 4,172 5,656 Bad Debt Private 6,972 5,477 6,162 6,828 8,840 6,329 6,027 Bad Debt Other 837 676 237 650 755 750 1,068 ------- ------- ------- ------- ------- ------- ------- Bad Debt 20,473 20,522 16,174 18,202 20,552 14,708 18,975 Total Operating Expense 150,973 157,791 146,551 161,754 154,784 132,023 142,306 Amortization Nondeductible 0 0 0 0 0 0 0 Amortization Deductible 0 0 0 0 0 0 0 Earnings From Operations 67,347 36,731 31,069 39,630 53,628 46,944 74,093 Interest Income/Dividend 0 0 0 0 0 0 0 Interest Expense 1,692 1,465 1,381 1,371 1,334 1,510 1,000 Minority Interest 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- Earnings Before Allocation 65,655 35,266 29,688 38,259 52,294 45,434 73,093 Corporate Allocations 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- Earnings Before Taxes 65,655 35,266 29,688 38,259 52,294 45,434 73,093 State Income Tax 0 0 0 0 0 0 0 Federal Income Tax 0 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- ------- Income Tax 0 0 0 0 0 0 0 Net Income 65,655 35,266 29,688 38,259 52,294 45,434 73,093 ======= ======= ======= ======= ======= ======= ======= Percent to Sales - ----------------- Salaries % 21.4% 23.2% 22.8% 21.4% 20.1% 20.4% 18.0% Vehicle % 0.1% 0.9% 0.5% 1.1% 0.7% 0.4% 0.6% Professional Services % 0.0% 0.0% 0.5% 0.3% 0.4% 0.0% 0.0% Space Rental % 1.3% 1.5% 1.6% 1.4% 2.0% 2.1% 1.0% Depreciation % 1.3% 1.7% 2.4% 1.7% 1.6% 1.9% 1.5% Other Misc. Expense % 2.1% 3.3% 3.4% 4.2% 3.3% 2.0% 2.9% Total Other Expenses % 5.4% 8.2% 9.4% 9.4% 8.7% 7.6% 6.7% Bad Debt % 4.2% 4.7% 4.0% 3.9% 4.4% 3.5% 3.8% Total Op. Expense % 31.0% 36.1% 36.2% 34.7% 33.2% 31.5% 28.4% Earnings From Operations % 13.5% 8.1% 7.3% 8.2% 11.2% 10.8% 14.6% Net Income % 13.5% 8.1% 7.3% 8.2% 11.2% 10.8% 14.6
AMERICAN PHARMACEUTICAL SERVICES, INC. Austin September 30, 1996 Desc May June July August September YTD Actuals - -------------------------------------------------------------------------------------- ------------ Partner Service Charges Bad Debt Facility 1,970 503 996 690 971 17,021 Bad Debt Medicare 5,391 10,331 98 1,832 5,014 64,115 Bad Debt Medicaid 5,526 5,263 6,031 6,268 5,752 56,328 Bad Debt Private 7,101 5,610 6,606 8,457 (78,596) (8,549) Bad Debt Other 503 301 488 823 471 7,089 ------- ------- ------- ------- ------- ------- Bad Debt 20,491 22,008 14,219 16,068 (66,388) 138,004 Total Operating Expense 159,089 155,577 156,720 129,039 85,037 1,732,544 Amortization Nondeductible 0 0 0 0 0 0 Amortization Deductible 0 0 0 0 0 0 Earnings From Operations 71,685 65,350 24,205 48,160 123,659 682,501 Interest Income/Dividend 0 0 0 0 0 0 Interest Expense 1,627 1,214 1,206 1,193 1,100 16,093 Minority Interest 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- Earnings Before Allocation 70,058 64,136 22,999 46,967 122,559 666,408 Corporate Allocations 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- Earnings Before Taxes 70,058 64,136 22,999 46,967 122,559 666,408 State Income Tax 0 0 0 0 0 0 Federal Income Tax 0 0 0 0 0 0 ------- ------- ------- ------- ------- ------- Income Tax 0 0 0 0 0 0 Net Income 70,058 64,136 22,999 46,967 122,559 666,408 ======= ======= ======= ======= ======= ======= Percent to Series - ----------------- Salaries % 18.3% 18.9% 22.8% 15.8% 18.9% 20.1% Vehicle % 0.8% 0.7% 0.7% 0.7% 0.8% 0.7% Professional Services % 0.1% 0.4% (0.0%) 0.4% 0.3% 0.2% Space Rental % 1.3% 1.4% 1.6% 1.5% 1.5% 1.5% Depreciation % 1.9% 1.6% 1.8% 1.6% 1.6% 1.7% Other Misc. Expense % 3.1% 2.6% 2.4% 3.4% 6.5% 3.3% Total Other Expenses % 7.8% 7.3% 7.2% 8.4% 11.1% 8.1% Bad Debt % 3.9% 4.3% 3.0% 3.4% (13.1%) 2.4% Total Op. Expense % 29.9% 30.5% 33.0% 27.6% 18.8% 30.5% Earnings From Operations % 13.2% 12.6% 4.6% 10.0% 24.2% 11.7% Net Income % 13.2% 12.6% 4.6% 10.0% 24.2% 11.7%
Page 18 117 SCHEDULE 6.14 NONCOMPLIANCE WITH ENVIRONMENTAL LAWS NONE. 118 SCHEDULE 6.17 OUTSTANDING LITIGATION NONE. EX-10.46 3 EXHIBIT 10.46 1 EXHIBIT 10.46 AGREEMENT OF PURCHASE AND SALE OF ASSETS INTRODUCTION AND RECITALS This Agreement of Purchase and Sale of Assets (the "Agreement") is made and entered into this 24th day of November, 1997, by and between Robert Crone-South Texas Health Care, Inc., a Texas corporation ("Seller") and Summit Care Texas, LP, a Texas limited partnership or its affiliated nominee, ("Buyer" or "Summit Care"). RECITALS WHEREAS, Seller is: (i) The lessee of a certain One Hundred and Ninety Four (194)-bed nursing facility, commonly known as Briarcliff Nursing and Rehabilitation Center, located at 3201 North Ware Road, McAllen, Texas 78501, more particularly described on Exhibit 1.01(a)(i) hereto and hereby incorporated herein by reference (the "Facility"), pursuant to a lease, dated July 1, 1993, by and between Seller, as "Lessee" and Lloyd Hobbs, as "Lessor," as amended by that certain First Amendment to Lease, dated April 9, 1996, (collectively the "Lease"), between Seller and Hobbs & Curry Family Limited Partnership, a Texas partnership and successor-in-interest to Lloyd Hobbs, as "Lessor," copies of which are also attached as part Exhibit 1.01(a)(i) hereto and hereby incorporated herein by reference (hereinafter, the term "Owner" shall be used to refer to both Lloyd Hobbs and to Hobbs & Curry Family Limited Partnership during their respective ownership of the Facility); and (ii) A party to that certain "Option Agreement," dated August 2, 1992, as amended by that certain Amendment to Option Agreement, dated April 9, 1996 (collectively the "Option Agreement"), copies of which are attached as Exhibit 1.01(a)(ii) hereto and hereby incorporated herein by reference, whereby Owner has granted Seller an option to purchase fee title to the Facility, exercisable on the terms therein set forth; and (iii) The fee owner of a certain parcel of vacant land comprising approximately 1.8 acres, situated adjacent to the Facility (the "Adjacent Land"), more particularly described on Exhibit 1.01(a)(iii) hereto and hereby incorporated herein by reference, subject to that certain deed of trust dated October 26, 1995 ("Trust Deed"), to Allen Shields, as "Trustee," a copy of which is also attached as part of Schedule 1.01(a) (iii) hereto and hereby incorporated by reference; and 2 (iv) The owner or lessee of all supplies, machinery, equipment, fixtures, inventory and all other items of personal property utilized in the operation of all of the foregoing, as hereinafter defined; and WHEREAS, the Seller desires to sell and assign Buyer desires to purchase and assume the Seller's interest in the Facility, and the Assets of Seller, as more fully defined herein, on the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual promises of the parties and for other good and valuable consideration, the parties agree as follows: ARTICLE I PURCHASE AND SALE OF ASSETS 1.01 Description of Assets. Subject to the terms and conditions of this Agreement, as of the Closing Date, as defined in Article IX herein, Seller shall convey, assign and transfer to Buyer and Buyer shall accept good and indefeasible title to the following assets as the same may exist on the Closing Date (collectively referred to as the "Assets"). (a) All of Seller's right, title and interest in and to the Facility, including without limitation, the real property, structures, fixtures, paving, surfacing and improvements therein (collectively referred to as the "Premises"), which real property is more particularly described on Exhibit 1.01(a)(i) attached hereto, and which shall be conveyed to Buyer pursuant to an assignment of Seller's interest in the Lease and Option Agreement, with the written consent of the Owner thereto; (b) All personal property, except supplies, as defined below, such as furniture, fixtures, vehicles, and equipment located in and upon the Premises as of the Closing or used in the operation of the Premises as a nursing facility (the "Personal Property"), more particularly described on Exhibit 1.01(b) attached hereto; (c) Seller's interest in any and all leases, contracts, service contracts and other agreements used in the operation of the Facility which Buyer has expressly agreed to assume in addition to the Lease and Option Agreement, copies of which are attached hereto as set forth in Exhibit 1.01(c) ("the Contracts"); (d) Seller's interest in any and all patient records and agreements, personnel records, provider agreements, records of inspection of the Facility by local, state and federal agencies, records of construction, architectural plans of the improvements on the Premises, including as built plans and surveys, construction 2 3 contracts and specifications, as such presently exist in and upon the Premises; (e) All of Seller's right, title and interest in and to the use of the name "Briarcliff Nursing and Rehabilitation Center"; (f) All of Seller's right, title and interest in and to any and all drugs, medicines, foods, linens or other supplies used in connection with the operation of the Facility, but in any event not less than the normal and usual operating compliment of supplies necessary to last ten (10) days in the ordinary course of Seller's business operations at the Facility (the "Supplies"); and (g) All of Seller's right, title and interest in and to any and all licenses, permits and authorizations obtained in connection with the operation of the Facility which are transferable, copies of which are attached hereto as Exhibit 1.01(g). 1.02 Liabilities and Assets Excluded. The following tangible and intangible assets and liabilities of Seller are being retained by Seller and are expressly excluded from the Assets being Purchased by or transferred to Buyer: (a) Seller's cash on hand, or in bank accounts and investments; (b) Seller's accounts receivable as of the Closing Date; (c) All of Seller's leases, contracts, service contracts or other commitments, if any, not expressly assumed by Buyer as provided on Exhibit 1.01(c) hereto; (d) Any and all property of patients held by Seller as security for or in lieu of payment for Seller's accounts receivable; (e) Any and all debts, obligations or liabilities of Seller relating to the Assets, unless expressly assumed herein by Buyer on Exhibit 1.01(c) attached hereto; (f) Any and all liabilities of Seller for injuries, damages, acts or omissions relating to the Facility or the Assets prior to the Closing Date; (g) Any and all claims of or obligations to the United States under the Medicare Program, or to the State of Texas under the Medicaid Program, or other third-party payors, arising out of the operations of the Assets prior to the Closing Date; 3 4 (h) Any and all federal and state tax liabilities including for sales tax payable with respect to periods prior to the Closing and sales, use or excise tax payable with respect to the within transaction and the assets transferred hereunder; (i) Seller's proprietary computer software, and those proprietary forms and manuals owned by or developed for Seller for use at the Facility; and (k) All other items of personal property set forth on Exhibit 1.02 hereto (collectively, the "Excluded Assets"). ARTICLE II PURCHASE PRICE The purchase price (the "Purchase Price") which Buyer agrees to pay and Seller agrees to accept for the Assets is Three Million Nine Hundred Thousand Dollars ($3,900,000.00), to be paid to Seller in accordance with the provisions of this Article II. 2.01 Earnest Money Deposit. Seller acknowledges that Buyer has deposited the sum of One Hundred Thousand Dollars ($100,000.00) as an earnest money deposit ("Deposit") with Wanda Keller, Senior Vice President and Escrow Officer, First American Title Company, Houston, Texas ("Escrow Holder"), to be held in an interest-bearing escrow account pending the Closing and subject to the terms and conditions of this Agreement, to be applied to the payment of the Purchase Price at Closing. The Deposit and all interest accrued thereon shall be refundable in full to Buyer upon written request of Buyer for any reason delivered on or before September 16, 1997, and thereafter shall be refundable to Buyer should the contemplated transaction fail to close on or before October 31, 1997, for any reason other than the default of Buyer hereunder, and as provided by Section 7.18 of this Agreement. 2.02 Cash. Buyer shall pay in immediately available funds to Seller the cash portion of the Purchase Price by wire deposit to Seller at Closing, less the Deposit and all accrued interest thereon and less the Adjustment Retention Fund (as provided in Section 2.04 below). 2.03 Adjustments. The Purchase Price shall be adjusted upward within forty-five (45) days of the Closing as of the Effective Date to the extent, if any, that Buyer derives a benefit from any prepaid items of Seller, including, but not limited to taxes, expenses and insurance and to the extent Buyer succeeds to Seller's position with respect to Seller's deposits for utilities, such as telephone, water, gas, electricity or sewer. The Purchase Price shall be adjusted downward within forty five (45) days of Closing as of the Effective Date to the extent that Seller has not fully paid and discharged all payables, charges, expenses, costs, 4 5 taxes or assessments accruing on or before the Effective Date, including employee vacation pay or for other employee benefit programs of Seller. All adjustments at or after Closing shall be in cash. 2.04 Adjustment Retention Fund. Escrow Holder shall retain, from the cash portion of the Purchase Price payable to Seller at Closing, the sum of Twenty Thousand Dollars ($20,000.00) as a retention fund (the "Adjustment Retention Fund") from which Escrow Holder shall, upon instructions from Buyer and Seller, deduct adjustments to the Purchase Price, if any, to be made following the Closing. The Adjustment Retention Fund, less any such adjustments, shall be delivered to Seller and all adjustments shall be delivered to Buyer no later than forty-five (45) days following the Closing Date. 2.05 Prorations, Credits, Costs. The following items shall be apportioned and prorated as of the Closing Date: (a) Property Taxes. General county, city and school taxes on a fiscal year basis for the Premises and for the personal property (including taxes impounded with Mortgage lenders). (b) Insurance. There shall be no proration of Seller's prepaid insurance premiums as Buyer shall provide its own insurance coverage. Seller shall be entitled to receive any refunds of any such prepaid insurance premiums. (c) Rents, Utilities and Deposits. All rents, utilities shall be paid to the Closing Date by Seller. Seller shall be entitled to a refund for any utility deposits. (d) Employee Sick, Holiday, Vacation Pay, Etc. Seller shall credit to Buyer against the Purchase Price a sum equal to the equivalent of employee wages for all employee vacation pay or other employee benefits earned or accrued prior to the Closing Date. Such credit shall reduce the cash payment required of Buyer at Closing as provided in Section 2.02 above. (e) Closing Costs. Buyer shall pay for the cost of recordation of the Assignment of Lease and the Assignment of Option Agreement. Buyer and Seller shall each pay fifty percent (50%) of the statutory cost of a leasehold title insurance policy with the survey exception removed. Buyer and Seller shall each pay fifty percent (50%) for the cost of the survey and Seller shall pay any transfer tax applicable to recordation of the Assignment of Lease or the Assignment of Option Agreement, any recordation fees for other instruments required to clear title hereunder, and any sales or use taxes, if applicable, to this transaction. Personal and real property taxes will be prorated as of the Closing Date. 5 6 (f) Employer's Taxes. Seller shall be responsible for all business, occupation, withholding, FICA, unemployment and similar taxes of any kind, including both the employer's and employee's portion of any such tax, relating to any period prior to the Closing Date, including taxes on employee sick, holiday and vacation pay. (g) Prepaid Services. Any advance payments made by residents of the Facility for services to be rendered after the Closing Date shall be paid to Buyer at Closing. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as of the Execution Date and the Closing Date (the truth and accuracy of which shall constitute a condition precedent to Buyer's obligations hereunder) as follows: 3.01 Organization. Seller is a duly organized and validly existing Texas subchapter S corporation, and is in good standing in the State of Texas. Seller has full power and authority to own and lease its properties and to carry on its business as presently conducted. Robert Crone and Kelly Baily are the sole shareholders of Seller. 3.02 Authority. The execution, delivery and performance of this Agreement has been duly authorized by the Seller in accordance with its articles of incorporation and bylaws and no further action by Seller will be required to make this Agreement valid and binding upon Seller in accordance with its terms. Except as provided on Exhibit 3.02 attached hereto, the execution, delivery and performance of this Agreement will not cause any default in or breach of any provisions of any applicable law, rules or regulations, or any indenture, mortgage, loan agreement, contract, lease or other instrument to which Seller is a party or by which it or any of its property or assets are bound. 3.03 Financial Statements. Exhibit 3.03 attached hereto sets forth the unaudited balance sheets and operating statements of Seller for the eight (8) months ended August 31, 1997 and shall be updated at Closing to include the nine (9) ending on September 30, 1997, and unaudited financial statements compiled and reviewed by Jody Turner, Seller's accountant, for the same period (collectively, the "Financial Statements"). The Financial Statements attached hereto as Exhibit 3.03 have been prepared in accordance with generally accepted accounting principles consistently followed and fairly present the operating position of the Facility as of the respective dates and the results of operations for the respective periods indicated. Seller agrees to cooperate with Buyer and use its best efforts in furnishing any 6 7 financial information of Seller required by Buyer for filing with the Securities and Exchange Commission after Closing. 3.04 Tax Returns. Within the times and in the manner prescribed by law, Seller has filed all federal, state and local tax returns required by law and has paid all taxes, assessments, and penalties due and payable. The provisions for taxes reflected in Seller's Financial Statements, are adequate for any and all county, school and local property taxes for the period ending on the date of the most recent balance sheet and for all prior periods, whether or not disputed. There are no present disputes as to taxes of any nature payable by Seller. 3.05 Absence of Changes. Except as provided on Exhibit 3.05, since the date of the latest Financial Statements of Seller, there has not been any material change in the financial condition or operations of Seller, except changes in the ordinary course of business. 3.06 Liabilities. Exhibit 3.06 to this Agreement contains a true and complete schedule of all known liabilities and obligations of Seller except those incurred in the ordinary course of business. Seller acknowledges that Buyer shall not be obligated for any liabilities or obligations of Seller of any kind or nature in connection with this Agreement, whether absolute, accrued, contingent, known, unknown or otherwise, except for liabilities of Seller which Buyer has expressly agreed to assume as provided on Exhibit 1.01(c) and Seller hereby indemnifies and holds Buyer harmless from any such liabilities not so assumed. 3.07 Title to Property. Seller is the lessee of the Property subject only to the Permitted Exceptions provided for in paragraph 5.01, Seller will deliver to Buyer at Closing good and marketable leasehold title to the Property. Seller is in possession of all Property leased from others. 3.08 Condition of Property. To the best of Seller's knowledge and except as provided on Exhibit 3.08 attached hereto, as of the Closing Date, the Premises and personal property of Seller being conveyed or assigned herein will be in good operating condition and repair, subject only to ordinary wear and tear. Seller shall disclose to Buyer on Exhibit 3.08 any known material defect or deficiency with regard to the structure, soil, fixtures or equipment of the Premises which would materially impair the use or value of the Premises, and any known material defect or deficiency with regard to the plumbing, electrical, mechanical or other system of the Premises which would materially impair the use or value of the Premises. 3.09 Real Property Description and Zoning. Exhibit 1.01(a) to this Agreement is a legal description of the Premises leased by Seller and included in this transaction. To the best of Seller's 7 8 knowledge, the zoning of each parcel of property described on, Exhibit 1.01(a) permits the existing improvements as constituted and the continuation of the business presently being conducted on each such parcel. 3.10 Encroachments. To the best of Seller's knowledge, there are no encroachments onto the Property except as may be revealed by the Survey, and all improvements constituting part of such real properties located thereon are entirely located on the real properties being conveyed or transferred to Buyer pursuant to this Agreement without encroachment on any other property whatsoever, and none of such improvements encroach upon any known easement or right of way affecting such real property. As a condition to Closing, Buyer and Seller shall each pay fifty percent (50%) of the cost of a real property survey of the Property, by a registered land surveyor in the State of Texas, in a form reasonably satisfactory to Buyer, certifying such facts which shall be attached hereto as Exhibit 3.10. 3.11 Personal Property Description. Exhibit 1.01(b) to this Agreement is a schedule of machinery, equipment, furniture, supplies, vehicles, tools, and other tangible personal property owned by, in the possession of, or used by Seller in connection with the business now being conducted at the Facility (except fixtures and inventories of Supplies and items excluded pursuant to this Agreement). Except as provided on Exhibit 3.11 or on the list of Contracts attached as Exhibit 1.01(c), no personal property used by Seller in connection with the Facility or the business conducted thereon is held under a security agreement, conditional sales contract, lease, or other title retention or security arrangement or is located other than in the possession of Seller at the Facility. Exhibit 1.02 lists personal property on the premises of the Facility which is excluded from sale and which may be removed from the Facility by Seller at any time prior to or after the Closing Date, except that all such items shall be removed within five (5) business days of request by Buyer after the Closing Date. 3.12 Contracts, Leases, Commitments. Except as provided on Exhibit 1.01 (c) as of the date of Closing, there will be no contracts, agreements, or commitments of any kind relating to the business at the Facility which will affect Buyer on the Premises subsequent to the Closing Date, other than those that can be terminated on thirty (30) days, notice, without penalty or further payment. Seller is not a party to, nor is the Premises bound by any agreement that is materially adverse to the business as presently conducted at the Facility or those that have been excluded from sale by mutual written agreement of the parties and for which Seller shall remain liable. 3.13 Defaults. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in any of the following: (1) any violation or breach of 8 9 any term or provision of this Agreement; (2) a default or an event that with notice or lapse of time or both, would result in a default, breach, adverse modification or violation of any lease, license, franchise, promissory note, conditional sales contract, commitment, indenture, deed of trust, or any other agreement, instrument or arrangement to which Seller is a party or by which Seller or the Premises is or may be bound; (3) an event that would permit any party to terminate any agreement or to accelerate the maturity of any indebtedness or other obligation of Seller or the Facility, or; (4) the creation or imposition of any lien, charge or encumbrance on any of the Property. 3.14 Adverse Claims, Litigation and Proceedings. Except as shown on Exhibit 3.14, Seller knows of no material claims by creditors or other parties against Seller, actual or contingent, direct or indirect, liquidated or unliquidated, or otherwise affecting Seller, at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or before any arbitrator of any kind, which involve the possibility of any judgment or liability not fully covered by casualty or liability insurance or for which provision for payment has not been made or which would impose any liability on Buyer or the Facility. Seller is not in default with respect to any judgment, order, writ, injunction, decree, award, rule or regulation of any court, arbitration or governmental department, commission, board, bureau, agency or instrumentality. Seller is not aware of any pending or potential condemnation action with respect to the property to be transferred hereby. Seller acknowledges that Buyer shall not be obligated for any liabilities or obligations of Seller of any kind or nature in connection with this Agreement, whether absolute, accrued, contingent, known, unknown or otherwise, except for liabilities of Seller which Buyer has expressly agreed to assume as provided herein and Seller hereby indemnifies and holds Buyer harmless from any such liabilities not so assumed. 3.15 Labor Relations, Employment Policies and Benefits. Seller is not a party to nor is it bound by any employment contracts, collective bargaining agreements, pension, bonus, profit sharing, stock option or other agreements or arrangements for the benefit of or relating to its employees. Seller agrees to save, indemnify and hold Buyer harmless of and from any and all liability, responsibility, loss, cost or expense of any nature whatsoever, arising out of or relating to any of Seller's employment policies for all periods prior to the Closing Date. Seller acknowledges that, except to the extent required by law, or to the extent disclosed by Seller and assumed by Buyer, Buyer is not assuming any of Seller's obligations to its employees. Attached as a part of Exhibit 3.15 hereto are copies of Seller's vacation and holiday policies and all other employment policies and practices not set out in those policies, to which Seller is a party or by which Seller may be bound, and Seller is not in default under 9 10 any of them. There have been no claims of default, and, to the best knowledge of Seller, there are no facts or conditions which, by their existence or on notice, will result in a default under these policies. Except as set forth in Exhibit 3.15 hereto, there has been no union election or material organizational activity affecting the employees of Seller. Except as described in Exhibit 3.15, there is not, to Seller's knowledge, any pending or threatened labor dispute or work stoppage affecting Seller's business. Exhibit 3.15 attached hereto sets forth a list of all employees of Seller at the Facility and a schedule of their rates of pay, length of employment, and earned (and accrued, if any) vacation and sick leave benefits, as of the Closing Date. Such earned and accrued vacation and sick leave benefits shall be calculated for each employee on a true accrual basis (to include both earned and unearned benefits). 3.16 Compliance with Laws, Regulations and Licensure. (a) Seller has complied with and is not in violation of applicable federal, state or local statutes, laws or regulations (including, without limitation, any applicable building, zoning, or other law, ordinance or regulation affecting the Premises) in the operation of the Facility as now conducted. To Seller's knowledge, except as set forth in the most recent survey and certification inspection reports and plan of correction on the Facility, dated which are attached hereto as Exhibit 3.16, there have been no notices of violation of any applicable law, order, ordinance, rule, regulation or requirement, or of any covenant, condition or restriction affecting or relating to the use of occupancy of the Premises issued by any governmental agency having jurisdiction over the Premises or by any other person entitled to enforce the same. To the best of Seller's knowledge, Seller shall have fully complied at its sole expense prior to Closing with the requirements of any outstanding plan of correction formulated in response to any inspection survey, with the exception of those items listed on the latest survey and plan of correction, attached as Exhibit 3.16 hereto, which Buyer agrees to review and, unless Buyer notifies Seller to the contrary on or before September 16, 1997, which Buyer agrees to correct at Buyer's expense. (b) Seller has obtained and is not currently in violation under all permits, licenses, provider agreements and other authorizations required by Seller for the operation of the Facility as now conducted, all of which are in full force and effect. There is no suit, action, administrative, or other proceeding, or governmental investigation pending or threatened to withdraw or revoke such permits, licenses, provider agreements or other authorizations. 10 11 (c) The Facility is currently licensed as follows: 194 beds, of which 120 are licensed Medicaid, 36 are licensed Medicare/Medicaid, and 38 are Private. 3.17 Cost Reports. Seller shall deliver to Buyer prior to Closing copies of Seller's last three (3) fiscal year cost reports, as filed with and audited by desk audit by the appropriate Medicare and Medicaid agencies. To the extent either or both of the Medicare or Medicaid reimbursement Programs have not audited the last three (3) fiscal year cost reports filed with the respective agency, Seller shall, in addition, deliver to Buyer a copy of the most recently audited cost report for each reimbursement program, such copy to include a copy of the audit report and all adjustments made pursuant to or subsequent to the said audit. Seller shall prepare and file with the appropriate Medicare and Medicaid agencies its final cost reports in respect to its operation of the Facility as soon as practicable after the Closing Date. In the event the federal or state agencies making payments to Seller for services performed prior to the Closing Date make any claim for reimbursement of overpayment occurring for any such period, then Seller agrees to save, indemnify and hold Buyer harmless from and against any and all loss, damage, injury or expense incurred by Buyer because of any such claim, or in the event that a claim is made against Buyer in respect to the right to reimbursement for periods prior to the Closing Date. It is specifically contemplated by the parties that indemnification shall include, without limitation, any liability under Section 1128A of the Social Security Act, as amended. If, following the transfer of licensure, Buyer receives payment from any federal or state agency which represents reimbursement in respect to underpayments made to Seller for services rendered prior to the Closing Date, then Buyer shall promptly remit such payments to Seller. 3.18 Insurance. Exhibit 3.18 contains a description of all insurance policies held by Seller concerning the Premises and the business as now conducted. All the insurance policies are in the respective principal amounts as set forth on Exhibit 3.18 and Seller has maintained continuously, without gaps in coverage for the five (5) years preceding the Closing Date insurance as described Exhibit 3.18. Seller shall obtain, if necessary, tail coverage for any gap in coverage for occurrences up to the Closing Date. 3.19 Patient Trust Accounts. Exhibit 3.19 contains a true, correct, and complete accounting, properly reconciled as of the Closing Date, of all patient trust funds held by Seller in respect to the Facility. 3.20 Average Patient Census. Attached hereto as Exhibit 3.20 are true and correct summaries of the current patient census ("Census") of the Facility showing the sources of payments (i.e. 11 12 Medicare, Medicaid, private or other) for each of the last two (2) years of Seller. 3.21 Full Disclosure. Seller has disclosed all facts, information, events and transactions relating to the Facility and the assets transferred herein, to the best of its knowledge and ability. Seller has made no representation which it knows to be false or inaccurate or which it knows contains or will contain any untrue statement of a material fact or omit any material fact necessary to make the statements contained herein misleading. Seller shall make such additions, corrections and supplements to the Exhibits as are necessary up to the Closing Date to make disclosures complete in all respects. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as of the Execution Date and the Closing Date (the truth and accuracy of which shall constitute a condition precedent to Seller's obligations hereunder) as follows: 4.01 Organization. Buyer is a limited partnership duly organized, validly existing and in good standing under the laws of the State of Texas, having full power and authority to enter into this Agreement and to perform its obligations hereunder. Buyer is in good standing or authorized to do business in the State of Texas. 4.02 Authority. The execution, performance and delivery of this Agreement by Buyer has been duly authorized by Buyer and no further action of Buyer will be required in order to make this Agreement valid and binding upon Buyer in accordance with its terms and conditions. This Agreement will not violate or breach Buyer's constituting instruments, any contract to which Buyer is a party or by which Buyer may be bound, or any judgment, ruling or court order purporting to bind Buyer. 4.03 Third Party Consults. Except for licensure and other normal approvals for a transaction of this type, this purchase and sale is not subject to approval or consent of any governmental or regulatory authority and no such consent or approval is required as a condition to the validity or enforceability of the obligations of Buyer hereunder. 4.04 Litigation. Buyer is not aware of any litigation pending, threatened or anticipated involving Buyer which would or might materially, adversely, directly or indirectly affect the enforceability of this Agreement or the ability of Buyer to perform its obligations hereunder. 12 13 ARTICLE V CONDUCT OF SELLER PRIOR TO CLOSING Seller hereby covenants and agrees as follows (the fulfillment of which constitutes a condition precedent to Buyer's performance hereunder): 5.01 Title Insurance Commitment. Not later than thirty (30) days prior to Closing, Buyer shall obtain a title insurance commitment with respect to the Premises (Texas Department of Insurance promulgated form) attached hereto as Exhibit 5.01, issued by such title insurer as is agreed upon by the parties. Buyer shall have twenty (20) days from the date of receipt of title commitment to examine the condition of Seller's title. If Buyer determines title to be defective, Buyer shall notify Seller, in writing, within said twenty (20) day period of its objections to title. Seller shall have fifteen (15) days from receipt of such notice to remove the defects of title at Seller's expense. If Seller is unable to remove them within the aforesaid period, Buyer shall have the option of (a) accepting title in its defective condition or, (b) terminating this Agreement, whereupon Buyer and Seller shall be released of all further obligations hereunder and the Deposit, with all accrued interest, shall be returned to Buyer. Seller shall use its best efforts to correct any defects of title within the applicable time period, including applying Purchase Price proceeds reasonably required to remove the disapproved items and, if necessary, by filing law suits. Any exceptions to or conditions upon or defects of title as reflected in said Title insurance commitment which (a) are not specifically and timely objected to by Buyer; or (b) which after objection are waived by Buyer, shall be deemed to be Permitted Exceptions and Buyer agrees to accept title at Closing with all Permitted Exceptions. 5.02 Survey: Environmental Report Study. Not later than twenty (20) days prior to Closing, Buyer shall receive a survey of the Premises identified on Exhibit 1.01 certified by a registered surveyor, sufficient to remove the survey exception from the aforementioned title insurance policy. The survey shall indicate all setbacks, structures, easements, encroachments, routes of access and dimensions. If the survey indicates an encroachment or violates the terms of this Agreement, the encroachment or violation shall be resolved or accepted in the manner specified in paragraph 5.01 above for removing defects of title. Concurrently with obtaining the survey, Buyer shall obtain at Buyer's expense, a Phase I Environmental Study ("Environmental Study") with respect to the Premises. If the Environmental Study indicates a problem it shall be resolved or accepted in the manner set forth in Paragraph 5.01 above. 5.03 UCC Clearance. Within fifteen (15) days after the date hereof, Seller shall deliver to Buyer an appropriate certificate from the Uniform Commercial Code filing officer of the State of 13 14 Texas with respect to the Personal Property to be transferred herein, showing all existing creditors of Seller having a security interest in any of such Personal Property. 5.04 Conduct of Business. Prior to the Closing Date, Seller shall carry on its business substantially in the manner as previously carried out at the Facility in its ordinary course, including doing the following: (a) Seller shall, to the best of its ability, maintain the goodwill of suppliers, distributors, residents, employees, and others having a business relationship with Seller; (b) Seller shall, to the best of its ability, perform all maintenance and repairs necessary to keep the Facility in good operating condition and repair, including maintaining supplies and inventory at levels consistent with Seller's operations in the ordinary course of business; (c) Except with the prior approval of Buyer, Seller shall not enter into or terminate any agreements, leases, or commitments, except in the ordinary course of business; (d) Seller shall maintain an average occupancy rate and patient mix at the Facility consistent with the representations made by Seller in Section 3.20 above; (e) Except in the ordinary course of business, Seller shall not increase the rate of compensation payable to become payable to Seller's employees; (f) Seller shall not execute any union agreement with any collective bargaining unit or union representatives without Buyer's prior consent; (g) Seller shall maintain all permits, licenses and other authorizations required for the lawful operation of the Facility; (h) Seller shall not sell or remove any of the Property on the Premises without Buyer's prior approval except in the ordinary course of business or those items listed on Exhibit 1.02; (i) Seller shall not implement any new employment agreements, bonus plans, employee benefit plans, etc. without Buyer's prior written approval; and (j) Seller shall not change its personnel policies without Buyer's prior written approval. 14 15 5.05 Feasibility Inspection of Premises. The exhibits were not available for the Buyer's review and approval prior to execution of this Agreement. Therefore, Buyer and Seller agree that the following dates shall govern with respect to the Buyer's review and approval of exhibits and Facility. On or before September 1, 1997 shall be the date for all of Seller's preliminary exhibits. Buyer shall have until September 16, 1997, at 5:00 p.m., Central Standard Time, (the "Feasibility Period") to review, approve and inspect the Facility, Assets, exhibits and all of the books and records maintained at the Facility relevant to the operation of the Facility. Buyer shall maintain strict confidentiality of all information obtained during its inspection. Buyer shall have the right to terminate this Agreement if it is not satisfied with any material aspect of the condition of the Assets, including but not limited to, the Property, Premises, Personal Property and operations of the Facility at the end of the Feasibility Period. Buyer's failure to terminate this Agreement on or before the expiration of the Feasibility Period shall be deemed as Buyer's agreement to proceed to Closing. Exhibits that state information as of the Closing Date will be amended three (3) days before the Closing Date and substituted on the Closing Date. 5.06 Insurance. Seller shall maintain until Closing all existing insurance policies covering the Facility and the Premises, including those policies listed on Exhibit 3.18 attached hereto. 5.07 Accounts Payable. Seller shall pay all accounts payable at the Facility for goods received prior to the Closing Date, the liability for which has been incurred by Seller. ARTICLE VI BUYER'S CONDUCT PRIOR TO CLOSING 6.01 Licensure. Buyer shall use its best efforts and due diligence to obtain a license from the Department of Human Services of the State of Texas authorizing Buyer to operate the Facility as presently represented to be licensed and to obtain Medicare and Medicaid certification and provider agreements thereunder. ARTICLE VII CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER The obligations of Buyer under this Agreement are subject to the satisfaction, at or before Closing, of all of the conditions set forth in this Article VII. Buyer may waive any or all of these conditions in whole or in part without prior notice; provided that no such waiver shall constitute a waiver by Buyer of any of its other rights or remedies at law or in equity if Seller shall be in default of any of its representations, warranties or covenants under this Agreement. 15 16 7.01 Certificate Regarding the Accuracy of Representations. Except as provided otherwise on an exhibit attached hereto, all representations of Seller in this Agreement or in any written statement delivered to Buyer under this Agreement shall be true at Closing as though made again at that time. A certificate of Seller dated the Closing Date executed by an officer of Seller shall be provided to Buyer at Closing to certify the same. 7.02 Good Standing Certificate. Seller shall deliver to Buyer a certificate of good standing issued by the Secretary of State of Texas. 7.03 UCC Clearance. Seller shall deliver an appropriate certificate from the Uniform Commercial Code filing officer of the State of Texas with respect to the Personal Property to be transferred herein, showing all existing creditors of Seller having a security interest in any of such Personal Property. All such security interests shall be released prior to Closing or through escrow at Closing. 7.04 Opinion of Seller's Counsel. Seller shall deliver a favorable opinion of counsel to Seller, dated the Closing Date, in form and substance satisfactory to Buyer, stating that (i) the instruments of conveyance, assignment and transfer of the Property delivered by Seller to Buyer hereunder have been duly authorized, executed and delivered, and are legal, valid and effective for the purpose of conveying to Buyer Seller's, good and marketable title to the Property; (ii) except as may be specified by such counsel, counsel does not know of any litigation, proceeding or governmental investigation pending or threatened against or relating to the Facility, Seller or the Property, nor of any basis for any such litigation, proceeding or governmental investigations; (iii) all proceedings required by law or by this Agreement to be taken by Seller in connection with the transactions contemplated hereunder have been duly and validly taken; (iv) Seller has complete and unrestricted corporate power to convey, assign and deliver to Buyer all of the Property, and the conveyance and transfer of the Property has been duly authorized by Seller's Board of Directors and are not Contrary to Seller's articles of incorporation or bylaws; (v) such Counsel has no knowledge of any defects in the title to any of the Property, or of any claims asserted by others of rights or interests in such Property, and there are no restrictions upon the vesting of title to the Property in Buyer; (vi) no consent or approval of any third party not obtained and in effect on the Closing Date is required to vest good and indefeasible title to the Property in Buyer or to consummate the transactions contemplated hereunder; (vii) such counsel has no knowledge or belief that would lead such counsel to doubt the veracity of any of the covenants, representations or warranties of Seller in this Agreement; and (viii) as to such other matters as Buyer may reasonably request. In rendering the opinion, such counsel may rely as to factual matters on certificates of Seller's 16 17 officers and upon such other evidence as such counsel may deem necessary or appropriate. 7.05 Consents. All third parties whose consents or authorizations are required in order to convey and transfer to Buyer unencumbered, good and marketable title to the Property shall have given such consents or authorizations in writing. 7.06 Seller's Compliance. Seller shall have performed satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by Seller. 7.07 Actions, Suits, Proceedings. No action, suit or proceeding before any court or any governmental body or authority, pertaining to the transaction contemplated by this Agreement or to its consummation, shall have been instituted on or before the Closing Date. 7.08 Title Insurance. At the Closing, there shall be delivered to Buyer, as the insured, a standard Texas Department of Insurance promulgated form extended coverage policy of title insurance, with endorsements sufficient to remove the survey exception and other standard exceptions, in the amount of the Purchase Price, issued by a qualified title insurance company, as provided in Section 5.01 above, insuring Buyer as the fee owner of the Premises, showing as exceptions only the permitted exceptions. 7.09 Survey; Environmental Study. Buyer and Seller shall each pay fifty percent (50%) of the cost of a boundary line survey of the Premises acceptable to Buyer and sufficient to remove the survey exception from the aforementioned policy of title insurance showing the location of all structures, improvements, rights of way, easements, setbacks, encroachments, access, dimensions, and other matters affecting the Premises; prepared by a registered land surveyor and a, at Buyer's expense, a Phase I Environmental Study, both of which shall comply with the requirements of Section 5.02 hereof. 7.10 Licenses, Permits. Seller and Buyer agree that Buyer shall have obtained in its name all permits, licenses and other governmental approvals required for the operation of the Facility before the Effective Date, including, but not limited to, the following: written approval or a waiver of the need for such approval pursuant to Certificate of Need or Capital Expenditure Review (Section 1122 of the Social Security Act, as amended), or any federal or state Successor legislation, and a license issued by the State Department of Health to operate the Facility with the same licensed bed capacity of the Facility as set forth herein. 17 18 7.11 Provider Agreements, Approvals, Certification. Buyer shall be satisfied that, if applied for, signed provider agreements, new provider numbers, and all appropriate Medicaid and Medicare approvals and certification, if any, shall be obtainable. 7.12 Correction, Improvements. All corrections or improvements required to be made to the improvements, to the Property by any federal, state or local governmental agency or by any third party payor to effect transfer of licensure, the Premises and all provider agreements to Buyer at Closing shall be made or performed in accordance with Section 3.16 hereof prior to Closing. If such corrections or improvements are due to deficiencies cited prior to the Closing Date, they shall be made at Seller's expense. If Seller elects not to make the required corrections or improvements, Buyer may terminate this Agreement and receive a refund of Deposit, or accept the Facility without such corrections or improvements and proceed to Closing. If such corrections or improvements are due to deficiencies cited after the Closing Date, they shall be made at the expense of Buyer. 7.13 List of Seller's Creditors. The Seller shall furnish to the Buyer, in accordance with the requirements of the Uniform Commercial Code, a list of Seller's existing creditors, signed and sworn to by an officer of the Seller containing the names and business addresses of all existing creditors of the Seller, with the amounts due to each creditor, and also the names of all persons who are known to the Seller to assert claims against it even though such claims are disputed. The Seller understands that, in accordance with the provisions of the Uniform Commercial Code, the Buyer intends to deliver or send appropriate notice to all the persons shown on the list of creditors furnished by the Seller and to other persons, if any, who are known to the Buyer to hold or assert claims against the Seller. The Seller will cooperate with the Buyer in all matters relating to such notice and will furnish any additional information that may be required by the Buyer to satisfy the statutory provisions in this regard. 7.14 Tax and Assessment Clearance Certificate. Seller shall provide to Buyer a certificate from the applicable taxing and assessing authorities as Buyer may reasonably request as evidence that all property tax liabilities and assessments of Seller accruing for all tax years prior to the current tax year, have been fully satisfied or provision for such satisfaction has been made. 7.15 Exterminator's Report. Seller shall have delivered to Buyer an exterminator's certification attached hereto as Exhibit 7.15, to the effect that there is no evidence of infestation or infection of structurally damaging pests or organisms nor damage to the Facility caused by same. If such exists, repair and treatment shall be done prior to the Closing Date at the sole expense of Seller. 18 19 7.16 Seller's Noncompete Agreement. Robert Crone and any members of his immediate family who are presently involved in the operation of the Facility, shall have executed and delivered their Non-Competition Agreements, the form of which is attached as Exhibit 9.01(c) whereby they agree that they will not directly or indirectly compete with Buyer in the County of Hidalgo, Texas for a term of seven (7) ears following the Closing Date. 7.17 Extraordinary Events. There shall not have been (i) any suspension of trading in or limitation on prices for securities generally on any national securities exchange, or (ii) the declaration or a bank moratorium or any suspension of payment of banks, or (iii) the commencement of armed hostilities or other national or international calamity directly involving the United States which directly and materially affects the business or Property of the Seller. 7.18 Concurrent Sale of Adjacent Land To Buyer. Prior to the Closing, Buyer and Seller shall have entered into a binding and definitive mutual written agreement whereby Seller agrees to sell its fee interest in the Adjacent Land to Buyer and Buyer agrees to purchase Seller's interest in the Adjacent Land. Buyer shall further have satisfied itself that the Adjacent Land may be purchased by Buyer on such terms and conditions as therein contained. Buyer's purchase of the Adjacent Land shall take place concurrently with the Closing. Notwithstanding anything to the contrary contained in this Agreement, if this condition is not satisfied at Closing, at Closing Buyer may, at its sole discretion and upon written notice to Seller and Escrow Holder, elect not to purchase the Facility and Buyer shall thereupon be entitled to receive a return of its Deposit, plus all accrued interest thereon. ARTICLE VIII CONDITIONS PRECEDENT TO SELLER'S PERFORMANCE The obligations of Seller under this Agreement are subject to the satisfaction, at or before the Closing, of all the conditions set out below in this Article VIII. Seller may waive any or all of these conditions in whole or in part without prior notice, provided, however, that no such waiver of a condition shall constitute a waiver by Seller of any of its other rights or remedies, at law or in equity, if Buyer shall be in default of any its representations, warranties or covenants under this Agreement. 8.01 Accuracy of Representations and Warranties. Except as otherwise permitted by this Agreement, all representations and warranties by Buyer in this Agreement or in any written statement delivered by Buyer under this Agreement shall be true on and as of the Closing as though made at that time. 19 20 8.02 Good Standing Certificate. Buyer shall deliver a good standing certificate issued by the Secretary of State of the State of Texas and of each other state in which Buyer transacts business. 8.03 Opinion of Buyer's Counsel. Buyer shall deliver an opinion of counsel to Buyer, dated the Closing Date, and in form and substance satisfactory to Seller, stating that (i) Buyer is a corporation duly incorporated in the state of its incorporation or a partnership validly existing and authorized to do business in the State of Texas, (ii) that Buyer has complete and unrestricted power to transact the purchase of the Property hereunder and that the purchase of said Property has been duly authorized by Buyer's Board of Directors and is not contrary to Buyer's articles of incorporation, bylaws or partnership agreement, if applicable; (iii) such counsel has no knowledge or belief that would lead such counsel to doubt the veracity of any of the covenants, warranties or representations of Buyer in this Agreement; and (iv) as to such other matters as Seller may reasonably request. In rendering the opinion, such counsel may rely as to factual matters on certificates of Buyer's officers and upon such other evidence as such counsel may deem necessary or appropriate. 8.04 Buyer's Compliance. Buyer shall have performed, satisfied and complied with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by Buyer. 8.05 Actions, Suits, Proceedings. No action, suit or proceeding before any court or governmental body or authority, pertaining to the transaction contemplated by this Agreement or to its consummation shall have been instituted on or before the Closing Date. ARTICLE IX CLOSING The Closing of this Agreement shall take place at the offices of Hidalgo County Abstract and Title, at 4900 N. Tenth Street, Suite E-2, McAllen, Texas, 78504 at 10:00 a.m. local time, on or before Monday, November 24, 1997, to be effective as of 12:00 a.m., local time, December 1, 1997 (the "Closing Date" or "Closing"). The parties hereto may by mutual consent expressed in writing fix another time to be the Closing Date or another location for the Closing. In the event the conditions precedent to the closing of this transaction listed in Articles VII and VIII hereof have not occurred in time to allow the Closing to take place on the Closing Date, the transaction shall close as soon thereafter as possible and such Closing shall be effective as of that date and time. The Parties hereto agree to use their best efforts to ensure that the transaction closes on the Closing Date as specified herein or as soon thereafter as possible. If the Closing has not occurred on or 20 21 prior to December 1, 1997, either party may, by written notice to the other, terminate this transaction without liability to the other providing the party giving notice is not then in default. 9.01 Se11er's Obligations at Closing. At the Closing, in addition to having satisfied the conditions precedent provided in Article VII, Seller shall deliver or cause to be delivered to Buyer: (a) For all real property and interests in real property, an Assignment of Lease, sufficient to convey to Buyer all of Seller's right to any options to purchase the Facility, as contained in the Lease, with the written consent of the Owner, properly executed and acknowledged, conforming to and conveying the agreed state of the title, in recordable form as shall be reasonably acceptable to Buyer; (b) For all Personal Property, a general warranty bill of sale with full covenants of warranty, in the form set forth on Exhibit 9.01(b) hereto, properly executed and acknowledged, conforming to the terms of this Agreement; for all supplies, a general warranty bill of sale in the form set forth on Exhibit 9.01(b) hereto, properly executed and acknowledged, and conforming to the terms of this Agreement (the "Bills of Sale") ; (c) A Non-Competition Agreement, the form of which is attached as Exhibit 9.01(c), executed by Seller; (d) For all leases, maintenance contracts, service contracts and other agreements which are transferable, an assignment of Seller's interest (the "Assignment", in the form set forth on Exhibit 9.01(d) hereto, properly executed and acknowledged, and conforming to the terms of this Agreement; (e) A Schedule of Seller's Accounts Receivable as of the Closing Date; (f) A list of all present employees, their rates of pay, length of employment, and vacation, holiday and sick leave accruals as of the Effective Date; (g) All other Exhibits to this Agreement which are required to be updated by Seller to the Closing Date; and (h) Seller, at any time before or after the Closing Date, will execute, acknowledge, and deliver any further assignments, conveyances, and other assurances, documents, and instruments of transfer, reasonably requested by Buyer, and will take any other action consistent with the terms of this Agreement that may reasonably be requested by Buyer for the purpose of assigning, transferring, granting, conveying, and confirming to Buyer, or reducing to possession, any or all of the Property to be 21 22 conveyed or transferred by this Agreement. If requested by Buyer, Seller further agrees to prosecute or otherwise enforce in their name for the benefit of Buyer any claims, rights or benefits that are transferred to Buyer by this Agreement and that require, in Buyer's opinion, prosecution or enforcement of claims, rights or benefits, and such prosecution or enforcement under this paragraph shall be solely at Buyer's expense, unless the prosecution or enforcement is made necessary by a breach of this Agreement by Seller. On the Closing Date, Seller shall put Buyer into full possession and enjoyment of the Property. 9.02 Buyer's Obligations at Closing. At the Closing, in addition to having satisfied the conditions precedent provided in Article VIII, Buyer shall deliver or cause to be delivered to Sellers: (a) The Purchase Price specified in Article II hereof and all costs and expenses payable by or under the terms of this Agreement (see (b) and (e) attached); (b) All documents, required of Buyer by the Title Company for issuance of the Owner's title policy to be issued at the Closing; and (c) The certificates and opinion of Counsel set forth in Article VIII hereof. ARTICLE X POST-CLOSING OBLIGATIONS OF PARTIES 10.01 Post-Closing Obligations of Seller. Subsequent to the Closing Date, in addition to that provided above, Seller covenants and agrees as follows: (a) Accounts Payable. Seller is responsible for payment of all accounts payable that have accrued from or in connection with the operation of the Facility for any period prior to the Closing Date. Seller, therefore, agrees to save, indemnify and hold Buyer harmless from any and all loss, damage, injury or expense incurred by Buyer as a result of Seller's non-payment of such accounts payable. (b) Survival of Representations. All statements contained in any certificate or other instrument delivered by or on behalf of Seller pursuant hereto, or in connection with the transactions contemplated hereby, shall be deemed representations of Seller. All representations of Seller shall survive for one (1) year following the Closing. 22 23 (c) Records. Seller agrees to make available to Buyer all current patient accounts and current patient financial records which may reasonably be required by Buyer. 10.02 Post-Closing Obligations of Buyer. Subsequent to the Closing Date, in addition to that provided above, Buyer covenants and agrees as follows: (a) Assumption of Leases, Contracts and Commitments. Buyer agrees to assume and be bound by all of the terms and provisions of the Contracts referred to in Exhibit 1.01(c) hereof. Buyer shall indemnify and hold Seller harmless from any matter or loss, damage, injury or expense related to the performance of, services rendered, or goods sold under or pursuant to such Contracts after the Closing Date; (b) Accounts Receivable. Buyer agrees that the Accounts Receivable of Seller as of the Closing Date are not being transferred or sold hereunder (the "Accounts Receivable") . At Closing, Seller will deliver a Schedule of the Accounts Receivable, acknowledged by Buyer, which will list said Accounts Receivable by Patient. Those receipts from patients designated on such schedule of Accounts Receivable will be paid by Buyer to Seller up to the total account for each such patient so listed that are attributable to the period of Seller's operation of the Facility prior to the Closing Date. Buyer acknowledges that whereas room and board charges are billed in advance, miscellaneous services are billed in arrears. Buyer, therefore, agrees to cooperate with Seller in billing and collecting miscellaneous services provided by Seller prior to the Closing Date. Buyer and Seller agree that, for patients continuing as patients in the Facility after the Closing Date, payments made shall be first applied to past due charges unless otherwise agreed for specified accounts or indicated on the payment itself. It is understood that Buyer is agreeing merely to receive payments on Seller's Accounts Receivable and not to actively collect same. As to Seller's Accounts Receivable that have not been collected at the end of the ninety (90) day collection period, Seller thereafter shall collect such Accounts Receivable for its own account and Buyer shall have no further responsibility therefor, except that Buyer agrees to promptly forward any payments received by Buyer on Seller's account, to Seller; (c) Patient Trust Accounts. Buyer acknowledges that Seller will transfer all of its patient trust accounts to Buyer as of the Closing Date, which patient trust accounts are attached as Exhibit 3.19 hereto. With respect to such patient trust accounts, Buyer agrees to assume custody of such accounts and deal with them in a fiduciary capacity required by law; 23 24 (d) Maintenance of Patient Records. Buyer understands that all the Seller's current patient records are being transferred hereunder to Buyer, as required by law, and with respect to all current patient records, Buyer agrees to diligently maintain such records as prescribed by law and to allow Seller or its agents or representatives to reasonably examine such records relating to the period of Seller's operation of the Facility from time to time and to make copies thereof at Seller's expense; and (e) Survival of Representations. All statements contained in any certificate or other instrument delivered by or on behalf of Buyer pursuant hereto, or in connection with the transaction contemplated hereby, shall be deemed representations of Buyer. All representations, warranties and covenants made by Buyer shall survive the Closing. ARTICLE. XI INDEMNIFICATION 11.01 Indemnity by Seller. Seller hereby agrees to indemnify, defend and hold Buyer harmless from and against any and all claims, demands, obligations, losses, liabilities, damages, recoveries and deficiencies, including interest, penalties and reasonable attorneys' fees, costs and expenses, which Buyer may suffer as a result of the untruth of any of the representations made herein, or any default by Seller in the performance of any of its commitments, covenants or conditions under this Agreement, or for any liabilities which may arise from operation or ownership of the Property by Seller prior to the Effective Date. For the purposes hereof, any representation shall be deemed to be inaccurate if it omits to state any fact which is necessary in order to make the statements contained therein not false or misleading. The rights of Buyer under this Section 11.01 are without prejudice to any other remedies not inconsistent herewith which Buyer may have against Seller. Seller hereby indemnities and agrees to defend and hold Buyer harmless from any and all claims, demands, obligations, losses, liabilities, damages, recoveries and deficiencies except as stated in Section 3.16(a) (including interest, penalties, reasonable attorneys' fees, costs and expenses) which Buyer may suffer as a result of Seller's failure to file cost reimbursement reports with all written proposed audit adjustments to such cost reports for the period of its operation of the Facility, or its failure to correct any deficiencies with respect to such reports, or its failure to accurately compute and bill charges for reimbursement which results in liability for any overcharge, or as a result of any liability arising pursuant to Section 1128A of the Social Security Act for the period of its operation of the Facility. This indemnification shall survive for a term of one (1) year from the Closing date. 24 25 11.02 Indemnity by Buyer. Buyer hereby agrees to indemnify, defend and hold Seller harmless from and against any and all claims, demands, obligations, losses, liabilities including interest, penalties and reasonable attorneys' fees, costs and expenses, which Seller may suffer as a result of the untruth of any of the representations or warranties of Buyer herein or given pursuant hereto, or any default by Buyer in the performance of any of its commitments, covenants or conditions under this Agreement, or for any liabilities which may arise from operation or ownership of the Property by Buyer from and after the Closing Date. For the purposes hereof, any representation shall be deemed to be inaccurate if it omits to state any fact which is necessary in order to make the statements contained therein not false or misleading. The rights of Seller under this Section 11.02 are without prejudice to any other remedies not inconsistent herewith which Seller may have against Buyer. 11.03 Contested Claims. Upon receiving notice of a claim for indemnification, the receiving party shall be entitled to defend, compromise, or otherwise contest such claim at its own cost and expenses. In the event the notifying party determines that it may, in light of such claim, be subject to any loss, damage or expense, the notifying party shall have the right, but not the obligation, to participate at its own expense in the defense, compromise or contest of such claim; provided, however, the receiving party shall be entitled to control such defense unless the notifying party assumes all liability thereof. ARTICLE XII MISCELLANEOUS 12.01 Legal Expenses. If any legal action or other proceeding is brought for the enforcement of this Agreement, or because of an alleged or actual dispute, breach, default or misrepresentation in connection with any of the provisions of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys, fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled. 12.02 Expenses. Each of the parties shall pay all costs and expenses incurred or to be incurred by it in negotiating and preparing this Agreement and in carrying out the transactions contemplated herein, except as otherwise provided herein. 12.03 Assignment. Neither this Agreement nor the rights, duties or obligations arising hereunder shall be assignable or delegable by either party without the express prior written consent of the other, which consent will not unreasonably be withheld; provided, however, that Buyer may assign this Agreement or its rights, duties or obligations hereunder to a wholly-owned 25 26 subsidiary of Buyer, or to a corporation which is a member of an affiliated group of companies of which Buyer is the common parent corporation (within the meaning of Section 1540 of the Internal Revenue Code, as amended) which group is permitted to file a consolidated federal income tax return. Neither shall the restriction on assignment or delegation apply to a merger or consolidation involving Buyer and any other corporation. In the event of such a permitted assignment, Buyer shall not be released from its obligations hereunder without the express written consent of Seller, nor shall a notation be deemed to have occurred without such written consent. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by Buyer and Seller and their respective permitted successors and assigns. Seller hereby further consents in advance to an assignment by Buyer to a real estate investment trust. 12.04 Parties in Interest. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any persons other than Buyer and Seller and their respective permitted successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligations or liability of any third persons to any party to this Agreement, nor shall any provisions give any third persons any right of subrogation or action over or against any party of this Agreement. 12.05 Notices. All notices, requests, demands, and other communications hereunder shall be in writing, and shall be deemed to have been duly given when personally delivered or, if mailed, seventy-two (72) hours after mailing the said notice, registered or certified mail, postage prepaid, return receipt requested, and properly addressed as follows: To Buyer (if by mail): Summit Care Corporation 2600 W. Magnolia Blvd. Burbank, California 95107-2100 Attn: President or Chairman of the Board With Copies to: Frank S. Osen, Esq. 9454 Wilshire Boulevard Suite 800 Beverly Hills, CA 90210 To Seller: Robert Crone - South Texas Health Care, Inc. 3201 North Ware Road McAllen, Texas 78501 Attn: Robert Crone, President 26 27 With Copies to: Larry W. Langley, Esq. Akin, Gump, Strauss, Hauer, Feld, LLP 816 Congress Avenue Austin, Texas 78701 or at such other address as either party may by like notice designate to the other in writing. 12.06 Applicable Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Texas. 12.07 Counterparts. This Agreement may be executed simultaneously in one or more Counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.08 Effect of Captions. The captions of section and subsections of this Agreement have been inserted solely for convenience and reference, and shall not control or effect the meaning or construction of any of the provisions of this Agreement. 12.09 Entire Agreement; Modification; Waiver. This Agreement and the exhibits hereto, constitute the entire Agreement between Seller, on the one hand, and Buyer, on the other, pertaining to the subject matter contained in it and supersedes all prior agreements, representations and all understandings of the parties. No supplement, modification or amendment of this Agreement shall be binding unless expressed as such and executed in writing by Buyer and Seller. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof, whether or not similar, nor shall any such waiver constitute a continuing waiver. No waiver shall be binding unless expressed as such in a document executed by the party making the waiver. 12.10 Publicity. Seller agrees to consult with Buyer concerning any notice to employees, patients, families, referral sources or government agencies concerning the transactions contemplated by this Agreement. All other notices to third parties and all other publicity concerning the transactions contemplated by this Agreement shall be jointly planned, mutually coordinated and released by and between Buyer and Seller. Buyer shall make no public disclosure without Seller's consent which may not be unnecessarily withheld or delayed. None of the parties shall act unilaterally in this regard without the prior written approval of the other; however, the approval shall not be unreasonably withheld. 27 28 12.11 Risk of Loss. Seller shall bear the risk of loss or damage to the Premises from fire or other casualty until the Closing Date. In the event of any material damage to or destruction of the Premises by fire or other casualty, whether or not insured, or the taking of all or any material part of the Premises by power of eminent domain or deed in lieu thereof, prior to the Closing Date, Buyer may, at its option and, as its sole and exclusive remedy, either (a) terminate this Agreement and all rights and obligations hereunder, in which event all funds and documents deposited by Buyer into the Escrow shall be returned promptly to Buyer and all documents and other items deposited by Seller into the Escrow shall be returned promptly to Seller, or (b) elect to proceed with the purchase of the Premises, in which event Seller shall deliver possession of the Premises to Buyer at the close of the Escrow together with (i) all insurance proceeds received by Seller in connection with such damage or destruction and (ii) an assignment of all rights and claims of Seller under any applicable insurance policies. Should Buyer elect to proceed with the purchase of the Premises as provided in the foregoing subclause (b), Seller agrees to fully cooperate with and assist Buyer in adjusting any loss and perfecting and pursuing any claim under any applicable insurance policy. For purposes of this Agreement, the phrase "material" damage to or destruction of the Premises shall mean any damage to or destruction of any part of the Premises, the effect of which would materially impair the current use and operation of the Premises. 12.13 Broker and Professional Fees. Tesch & Associates ("Tesch") are the only brokers in this transaction. Buyer agrees to pay any brokerage commission claimed to be due from Tesch with respect to this transaction. Tesch is acting as agent for the Buyer and does not represent the interests of any other party hereto. 12.14 Waiver of Deceptive Trade Practices - Consumer Protection Act. Buyer represents, covenants and agrees that Buyer is not in a significantly disparate bargaining position. Further, Buyer represents, warrants and agrees that Buyer is represented by legal counsel in seeking or acquiring goods or services, other than the purchase or lease of a family residence occupied or to be occupied as Buyer's residence, by a purchase or a lease for a consideration paid or to be paid that exceeds $500,000.00. Finally, Buyer represents, warrants, and agrees that it waives all of the provisions of the Deceptive Trade Practices Consumer 28 29 Protection Act, other than Section 17.555, by this express provision in this written contract signed by both Buyer and Buyer's legal counsel. [SIG] ------------------------------- Buyer [SIG] ------------------------------- Buyer's Legal Counsel IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. In the Presence of SELLER ROBERT CRONE-SOUTH TEXAS HEALTH CARE, INC., a Texas Subchapter S corporation BY: [SIG] ------------------------------- President BUYER SUMMIT CARE TEXAS, L.P., a Texas limited partnership By: Summit Care Texas Management, Inc., a Texas corporation and sole general partner By: [SIG] ------------------------------- Sr. V.P. Finance ------------------------------- [Title] 29 30 EXHIBIT LIST
Page. 1.01(a)(i) Facility Legal Description and Lease 1.01(a)(ii) Facility Option Agreement 1.01(a)(iii) Adjacent Land Legal Description and Trust Deed 1.01(b) Personal Property 1.01(c) Contracts 1.01(g) Transferable Licenses and Permits 1.02 Excluded Assets 3.02 Authority Exceptions 3.03 Financial Statements 3.05 Changes 3.06 Liabilities 3.08 Condition of Property 3.10 Survey 3.11 Personal Property Leases; Liens 3.14 Adverse Claims; Litigation 3.15 Labor; Vacation and Holiday Policies 3.15 Employee List 3.16 Current Inspection Reports 3.17 Cost Reports 3.18 Description of Insurance Policies 3.19 Schedule of Patient Trust Accounts 3.20 Current Patient Census 5.01 Title Commitment 7.01 Certificate of Seller 7.02 Seller's Good Standing Certificate 7.03 UCC Clearance 7.04 Opinion of Seller's Counsel 7.05 Consents of Third Parties(i) 7.14 Tax Clearance Certificate 7.15 Exterminator's Report 8.03 Opinion of Buyer's Counsel 9.01(a) Form of Assignment of Lease 9.01(b) Form of Bills of Sale 9.01(c) Form of Seller's Non-Compete Agreement 9.01(F) Seller's Accounts Receivable
30 31 EXHIBIT 3.08 CONDITION OF PROPERTY THIS IS TO ACKNOWLEDGE THAT TO THE BEST OF MY KNOWLEDGE AS OF DECEMBER 1, 1997 THE BRIARCLIFF NRS. & REHAB CTR. PREMISES AND PERSONAL PROPERTY ARE IN GOOD OPERATING CONDITION AND REPAIR, SUBJECT ONLY TO ORDINARY WEAR AND TEAR. /s/ ROBERT J. CRONE ------------------------------- ROBERT J. CRONE 11/24/97 ------------------------------- DATE 32 EXHIBIT 3.14 ADVERSE CLAIMS; LITIGATION AS OF NOVEMBER 19, 1997 TO MY KNOWLEDGE BRIARCLIFF NURSING AND REHABILITATION CENTER HAS NO MATERIAL CLAIMS FILED AGINST THEM. /s/ ROBERT J. CRONE ------------------------------- ROBERT J. CRONE 11/24/97 ------------------------------- DATE 33 CERTIFICATE OF OFFICER OF ROBERT CRONE-SOUTH TEXAS HEALTH CARE, INC. A TEXAS CORPORATION I, Robert Crone, the duly elected and acting President of Robert Crone-South Texas Health Care, Inc., a Texas Corporation (the "Buyer") , DO HEREBY CERTIFY in connection with Article 7. 01 of that certain Agreement of Purchase and Sale of Assets, (the "Agreement"), dated November 24, 1997, by and between Summit Care Texas, LP, a Texas Limited Partnership as Seller, the terms of which are hereby incorporated herein by reference, that the representations of Buyer set forth in the Agreement are true and correct as of December 1, 1997: IN WITNESS WHEREOF, I have hereunto set my hand and seal this twenty-fourth (24th) day of November, 1997, effective as of the first (1st) day of December, 1997, /s/ ROBERT J. CRONE ------------------------------- ROBERT J. CRONE 34 AMERICAN TITLE COMPANY SF 355545-A ------------------- CLOSER 157 W. KELLER --------------- CONSENT TO ASSIGNMENT OF LEASEHOLD ESTATE OF BRIARCLIFF NURSING & REHABILITATION CENTER, MCALLEN, TEXAS On August 12, 1992, Robert Crone/South Texas Healthcare, Inc., entered into a Lease Agreement as Lessee, with Lloyd Hobbs, as Lessor (Owner) of the Briarcliff Nursing & Rehabilitation Center, in McAllen, Texas. Legal Description attached as Exhibit "A". On January 1, 1995, Lloyd Hobbs assigned all his right, title and interest in the Lease Agreement to Hobbs & Curry Family Limited Partnership, and on April 19, 1997 this Lease was amended to add a seventy-four bed addition and increase the monthly rental payment. Now comes Summit Care Texas, L.P., whose address is 2600 West Magnolia Boulevard, Burbank, California 95107-2100 agreeing to assume and perform all of the terms, covenants and conditions, as Lessee under this Lease and further agreeing to keep the Certificate and License in full force and effect during the term of the Lease. Summit Care specifically acknowledges the escalation provision of Paragraph 2 of the Lease Agreement. The Lease will be considered in default if the Lessee (Summit Care) shall fail or neglect to pay the rentals when due, or to pay any other sums of money which they are required by this Lease to pay, and such non-payment shall continue on the tenth day after written notice of the same has been posted to Lessees. In the event of default of this Lease, Lessee will forfeit and transfer any rights, or ownership of contracts and ownership of the Certificate of Need at this location, with the State of Texas or the United States Government, to Lessor. Summit Care Texas, L.P. ("Lessee") agrees to assume all other terms, covenants and conditions of this Lease as originally written and amended. Robert Crone/South Texas Healthcare, Inc. agrees to remain liable to the Lessor on this Lease if Summit Care should default. Subject to the above terms and conditions, any other terms and conditions of the Lease, Hobbs & Curry Family Limited Partnership hereby agrees to consent to the Assignment of this Lease and Option on the Briarcliff Nursing & Rehabilitation Center, McAllen, Texas to Summit Care Texas, L.P. The next rental payment of $53,218.75 will be due December 1st, 1997 and monthly thereafter. The Option may be exercised on October 1, 2003, provided the lease payments are current and the Lease is in full force and effect. The amended option price will be Four Million Seven Hundred Thousand Dollars ($4,700,000.00). 35 WITNESS OUR HANDS this 20th day of November, 1997. SUMMIT CARE, TEXAS, L.P. By: /s/ DERWIN L. WILLIAMS ------------------------------- NAME: Derwin L. Williams ------------------------------- Title: Sr. V.P. Finance ------------------------------- Date: 11/24/97 ------------------------------- ROBERT CRONE/SOUTH TEXAS HEALTHCARE, INC. By: /s/ ROBERT CRONE ------------------------------- Robert Crone, President ------------------------------- Date: 11/24/97 ------------------------------- HOBBS AND CURRY FAMILY LIMITED PARTNERSHIP By. /s/ C. DAVID CURRY ------------------------------- Name: C. David Curry ------------------------------- Title: General Partner ------------------------------- Date: November 20, 1997 ------------------------------- 2 36 EXHIBIT "A" Lot One (1), PRIMO SUBDIVISION No. 2, an Addition to the City of McAllen, Hidalgo County, Texas; according to map or plat thereof recorded in Volume 31, Page 40B, Map Records, Hidalgo County, Texas. 37 ACKNOWLEDGEMENT STATE OF ARKANSAS COUNTY OF SEBASTIAN On this the 20th day of November, 1997, before me, the undersigned officer, personally appeared C. David Curry, known to me to be the person whose name is subscribed to the within Consent To Assignment of Leasehold Estate of Briarcliff Nursing & Rehabilitation Center, McAllen, Texas, and acknowledged that he executed the same for the purposes therein contained. In Witness Whereof I hereunto set my hand and official seal. [SIG] ------------------------------- Notary Public` My Commission expires: November 1, 2000 - ------------------------------- [SEAL] 38 THE STATE OF TEXAS ) COUNTY OF HIDALGO ) This instrument was acknowledged before me this 24th day of November, 1997, by DERWIN L. WILLIAMS, SR. V.P. FINANCE, of SUMMIT CARE TEXAS, L.P., a Texas Limited Partnership. WANDA KELLER [SEAL] MY COMMISSON EXPIRES August 19, 2000 /s/ WANDA KELLER ------------------------------- NOTARY PUBLIC, STATE OF TEXAS THE STATE OF TEXAS ) COUNTY OF HIDALGO ) This instrument was acknowledged before me on this 24th day of November, 1997, by ROBERT J. CRONE, PRESIDENT of ROBERT CRONE/SOUTH TEXAS HEALTHCARE, INC. WANDA KELLER [SEAL] MY COMMISSON EXPIRES August 19, 2000 /s/ WANDA KELLER ------------------------------- NOTARY PUBLIC, STATE OF TEXAS AFTER RECORDING RETURN TO: AMERICAN TITLE CO. OF HOUSTON SPRING OFFICE - BRANCH 25317 I-45 NORTH THE WOODLANDS, TEXAS 77380 39 FIRST AMENDMENT TO LEASE AGREEMENT This Amendment to Lease Agreement entered into this 9th day of April, 1996, amending the Lease Agreement dated August 12, 1992, on Briarcliff Nursing & Rehabilitation Center of McAllen, Texas between Lloyd G. Hobbs as Lessor and ROBERT CRONE/SOUTH TEXAS HEALTHCARE, INC., as Lessee. Lloyd G. Hobbs assigned his interest in this lease agreement to Hobbs & Curry Family Limited Partnership on January 1, 1995. Now, Lessor and Lessees have agreed to add seventy-four beds to the Briarcliff Nursing & Rehabilitation Center, making a total of 194 beds. Lessor and Lessee have also agreed to increase the monthly rent by Nineteen Thousand Nine Hundred Sixty-Seven Dollars and Fifty-Eight Cents ($19,967.58) per month beginning when construction of the addition is complete and is ready for occupancy. Lessor is presently paying $30,027.81 per month rental on the original 120 beds and the increase of $19,967.58 for the addition would make a total monthly rental payment of $49,995.39, until such time as there is an increase in the Medicaid rates. It is expressly understood by both parties that the escalation clause in Paragraph 2 of the Lease Agreement will prevail and that this escalation clause will pertain to the total of 194 beds, after completion of the addition, and that any increase in Medicaid rates will increase the monthly rental payments accordingly for the balance of the lease term. All other terms of the Lease Agreement, dated August 12, 1992, will remain the same as originally written. Witness our hands this 9th day of April, 1996. HOBBS & CURRY FAMILY LIMITED PARTNERSHIP /s/ LLOYD HOBBS ---------------------------------------- Lloyd Hobbs, General Partner Lessor ROBERT CRONE/SOUTH TEXAS HEALTHCARE, INC. /s/ ROBERT CRONE ---------------------------------------- Robert Crone, President, Lessee 40 LEASE AGREEMENT THIS LEASE AGREEMENT entered into this 12th day of August, 1992, by and between LLOYD HOBBS as LESSOR, and ROBERT CRONE/SOUTH TEXAS HEALTHCARE, INC., 213 North 40th, McAllen, TX 78501, as LESSEE, WITNESSETH: THAT for and in consideration of the covenants herein contained and the rent hereby reserved, the Lessor has hereby let and rented to Lessee and Lessee has hired and taken from the Lessor, the following described property, consisting of one, 120-bed nursing home, commonly known as Briarcliff Nursing & Rehabilitation Center of McAllen, Texas, located on the premises in Hidalgo County, Texas, more particularly described in Exhibit "A" attached hereto, including all furniture, fixtures and equipment located therein, provided and installed by Lessor, paid for by Lessor, more particularly described in Exhibit "B" attached hereto, to have and to hold the same for the period of years and upon the terms and conditions hereinafter stated: 1. The term of this Lease shall be for the period of Fifteen (15) years, commencing July 1, 1993 and ending June 30, 2008. 2. The rental shall be Twenty-Eight Thousand Four Hundred Seventy-Six Dollars ($28,476.00) per month, payable in advance on or before the first day of each month, except the rent shall be reduced to Twenty-Three Thousand Four Hundred Seventy-Six Dollars ($28,476.00) for the first three (3) months of the Lease, then back to $28,476.00 per month for the balance of the term of the Lease, plus escalation as provided below. If the Lease shall commence on a day other than the first day of the month, the rent will be pro-rated for the first month. The rental payment will be mailed to Lloyd Hobbs, P.O. Box 126, Fort Smith, Arkansas 72902, or to such other address as may be directed in writing. The escalation clause is based upon increases in the Medicaid rates of 13.7% of the Texas 207 Tile rates, times 120 beds times 30.4 average days per month and shall be adjusted on the first day of the month following the effective date of each and every rate increase. As an example, the 207 Texas Tile rate is now $56.62 per day, times 120 beds, equals $6,794.40, times 365 days, equals $2,479,958.00. $28,478 per month rent times 12 equals $341,712 annual rent. $341,712 divided by $2,479,956 equals 13.7% of any 207 Tile rate increase, times 50%. 3. Lessee agrees to pay all taxes, general or special, assessed against the land, buildings and personal property, from the time the property is deeded to Lessor forward. An escrow for taxes is required; therefore, an escrow payment of $1,500.00 1 41 forward. An escrow for taxes is required; therefore, an escrow payment of $1,500.00 per month will be deposited with the Lessor for payment of taxes. This escrow payment will be adjusted annually, to cover the taxes as levied against the real and personal property by all taxing authorities using the previous year as a guide. 4. The Lessee shall be responsible for and pay for fire and extended coverage on the building and contents in such amount as shall be reasonably requested by Lessor, being at least replacement value. The Insurance policy shall designate Lessor and Lessee as named insured and loss payee, as their interests may appear. If Lessee fails or neglects to provide this insurance as required, Lessor may obtain same and add the premium cost to the next lease payment due. 5. In the event of partial destruction of the building and contents (that is, destruction of less than half, in value of the building and contents) by fire or other casualty, then the Lessee shall be entitled to the insurance proceeds and shall be obligated to restore the premises, including furniture, furnishings, fixtures and equipment, to at least as good condition as it was, prior to the destruction. Any insurance proceeds, in the event of loss, will be escrowed with Owner of the building. Owner will pay bills incurred, as directed by Lessee, from insurance proceeds, to repair damages as presented by repair contractors. If repairs cost more than insurance proceeds Lessee will be obligated to pay the difference from Lessee's own funds. If destruction is fifty percent (50%) or more, of value, Lessor shall be entitled to the insurance proceeds and shall, at his option, restore the premises as above provided or cancel the Lease. In the event of destruction of fifty percent (50%) or more of value, Lessor shall advise Lessee, within thirty (30) days following the destruction, of his election in this regard. 6. In the event of a taking of all or of part of the land and buildings as a result of eminent domain, condemnation or other governmental taking, the consideration paid therefore shall be paid to the Lessor, and from the date of payment of such consideration, the rental amount shall abate and be reduced in proportion to the relation of the amount of the consideration to $2,400,000.00 in value. 7. Lessee shall, as long as this Lease remains in effect, procure and keep in effect, general public liability insurance against claims for bodily injury or death occurring upon, in or about the demised premises, and on, in or about the adjoining streets and passageways, with limits of not less than $3,000,000.00 any one person or incident. Lessee shall also provide for malpractice insurance. Lessor shall be a 2 42 named insured on all policies. 8. Lessee agrees that it will at all times, during the term of this Lease or any extension thereof, indemnify, protect, defend and save harmless, the Lessor, against any and all claims, costs, charges, liabilities, or expenses arising from damage or injury, actual or claimed, of whatever kind or character, to property or persons occurring in or about the demised premises, streets, sidewalks, passageways, parking lots, and alleys adjacent thereto, and agree to resist or defend such action or proceedings, and cause the same to be defended at his expense. 9. The premises shall be used as a licensed nursing home and for no other purpose without the written consent of Lessor, Lessee agrees to maintain the entire premises, including buildings, drives, parking area, furniture, fixtures, equipment, and decoration in good and tenable repair and condition. Lessee shall, at its expense, repair or replace items as may be necessary to comply with this covenant, and such that the premises shall at all times qualify for and remain, licensed as, at least an ICF II or private pay for a 120-bed nursing home under the laws and regulations of the United States and the State of Texas. A reduction in, or loss of, this or equivalent license rating, in the event license ratings are changed, will be considered a default in this Lease. 10. Lessee, with the prior written consent of the Lessor, which consent shall not be unreasonably withheld, shall have the right to make such additions, alterations, changes and improvements on the demised premises as Lessee shall deem necessary or desirable; provided that no such addition, alteration, change or improvement shall be made which will weaken the structural strength of the building, deminish its utility or value, and all additions, alterations, changes and improvements shall be made in a workmanlike manner in full compliance with all building laws and ordinances applicable thereto, and shall become part thereto upon termination of this Lease. Lessee may erect and maintain such signs upon the premises as they may desire, and as may be permitted by laws or ordinances pertaining thereto, but at its sole expense and responsibility. 11. Lessee shall keep the demised premises in a clean, safe and sanitary condition, and shall comply with all municipal, county, state and federal laws and regulations governing the conduct of the activities conducted, suffered or permitted by the Lessee on the demised premises and the Lessee shall obtain appropriate permits from all such authorities required. 3 43 shall have the right to sub-lease any or all of the leased premises, with the prior written consent of Lessor, first obtained, which consent will not be unreasonably withheld, provided that the Lessee will remain liable for the performance of the covenants and obligations of this Lease. If the property is sub-leased, the Lessor will have the right to a reasonable adjustment in the rent. 13. Lessee agrees to permit Lessor, or his authorized representative to enter the demised premises at all reasonable times during usual business hours for the purpose of inspecting the same, provided that this shall not be construed to obligate Lessor to notify Lessee of any defect observed therein. 14. Lessee shall not do or suffer anything to be done whereby the demised premises, or any part thereof, may be encumbered by a mechanic's or similar lien, and in the event such lien is filed against the demised premises, or any part thereof, purporting to be for or on account of any labor done or material or services furnished in connection with any work in or about the demised premises, Lessee shall discharge the same of record within ten days after the date of such claim, or if Lessee desires to contest the validity or amount of such claim, they may do so provided that they first post security acceptable to Lessor, fully indemnifying Lessor and the premises from any claim, charge, or demand arising from such claim or expenses incurred in connection therewith. 15. The occurrence of any one or more of the following events shall constitute an "event of default" in the performance of the covenants of the Lessee: a. The Lessee shall fail or neglect to pay the rentals when due, or to pay any other sums of money which it is required by this Lease to pay, and such non-payment shall continue on the tenth day after written notice of the same has been posted to Lessee. In the event of default of this Lease, Lessee will forfeit any rights, or ownership of contracts and ownership of Certificate of Need at this location, with the State of Texas or the United States Government, to Lessor, and will assign all its rights in the Medicaid or Medicare Contract to Lessor without any cost to Lessor. b. The Lessee shall fail, refuse or neglect to perform or observe any other covenant required of it herein, and such non-performance or non-observance shall continue on the thirtieth (30th) day (unless a later date be slated in the notice) after written notice of the same has been posted to the Lessee. c. This Lease, or the premises itself, or any property of the Lessee is levied upon the process of law, and such levy be not completely discharged or secured to the 4 44 upon by process of law, and such levy by not completely discharged, or secured to the satisfaction of the Lessor, within fifteen (15) days after service of the process. d. Lessee becomes involved in financial difficulties as evidenced by (1) an admission in writing of its inability to pay its debts generally as they become due, (2)becoming petitioner in any voluntary debtor or bankruptcy proceedings, whether asking arrangement, composition, reorganization,liquidation or other relief, suspension or modification of their obligations, (3) becoming a party respondent to any involuntary proceeding the purpose of which is to subject the assets of the Lessees to the control of a court of creditor's committee, (4) making an assignment of all or of a substantial part of their property for the benefit of their creditors, or (5) seeking, consenting to, or failing to avert the appointment of a receiver or a trustee for all or a substantial part of its property, or of the demised premises, or of its interest in this Lease. 16. If an event of default occurs, Lessor shall have the option to: a. Terminate this Lease by service of written notice of termination, and Lessees right to the possession of the premises shall cease upon the date stated in such notice, without prejudice to Lessors' right to recover all sums due as of the date possession is surrendered, plus any damage or loss suffered on or prior to such date, including any expenses such as court costs, attorney's fees and similar expenses incurred by Lessor in recovering possession, rent, and/or damages due from Lessee; or b. Re-enter and take possession of the premises without further demand or notice, and expel Lessee, or those claiming under it, and remove the effects of both, or either (forcibly if necessary) without being deemed guilty of any manner of trespass and without prejudice to Lessor's further rights under this Lease. In such event, the obligations of the Lessee under this Lease shall continue, but Lessor may from time to time upon such terms and conditions, and for such bona fide rental as it may be able reasonably to negotiate, sub-let the premises for the account of Lessee, and all sums received by Lessor shall be credited to the account of Lessee, and all sums received by Lessor shall be credited to the account of Lessee, less all reasonable expenses actually incurred by Lessor, including, but not limited to brokerage fees, advertising expense, preparation including re-decoration, of the premises for sub-letting, legal expenses, cost of performing such of Lessees obligations as Lessor finds it necessary to perform at his expense and all other items necessary and proper to procure suitable 5 45 tenants for the premises. Lessee shall remain liable to Lessor for any deficiency between the amounts properly credited to Lessee, and the amount due Lessor under this Lease. c. If Lessor, after taking possession of the premises pursuant to subparagraph (b) above, is unable to make a bona fide sub-lease with a new tenant for a term which equals or exceeds the balance of the period for which Lessee is then obligated, Lessor shall have the right forthwith to demand and recover from Lessee, the present value of the difference between the amount to be received by Lessor under the new sub-lease, and the amount which would have been payable by Lessee under this Lease for the remainder of the term hereof, plus the expenses of Lessor as defined above. d. Notwithstanding any election by Lessor to retake possession pursuant to subparagraph (b) above, Lessor may at any time thereafter, upon written notice to Lessee, terminate this Agreement in all respects, and in such event, Lessee shall have no further liability, obligation or responsibility after the date of such termination. e. In order that Lessor may be indulgent when it deems the circumstances warrant without prejudicing his right under this Lease, Lessee now expressly agrees that no indulgence or extension, waiver or forgiveness, variation by practice, nor any neglect or abstention by Lessor in strictly enforcing the covenants of Lessee on any one or more occasions shall ever be deemed a waiver of or estoppel against the right of Lessor to insist upon strict compliance with each and every covenant herein, without any further or special notice or warning, the existence of a covenant in this Lease and the provisions of this paragraph being deemed adequate notice of the rights of the Lessor. No property belonging to the Lessee shall ever be removed from the premises at any time when there exists any default in the performance of any other covenant or obligation assumed herein by Lessee. 17. Lessee agrees to execute any instrument reasonably required by Lessor reflecting attornment to its prior interest which may be required by Lessor in connection with mortgaging their interest in the demised premises, and/or refunding or refinancing in the future of any mortgage which Lessor may place upon the premises, subject to right of option of even date herewith. 18. Upon any termination of this Lease, whether by lapse of time, cancellation pursuant to an election provided for therein, forfeiture, or otherwise, Lessees shall surrender, immediately, possession of the demised premises and all buildings and 6 46 improvements then on the same, to Lessor in good and tenantable repair, reasonable wear and damage from fire or other casualty or peril excepted. If possession be not immediately surrendered, Lessor, with or without process of Law may forthwith re-enter said premises and repossess the same, all persons and property, without being deemed guilty of any unlawful act and without prejudice to any other legal remedy available to Lessor. 19. Lessor has the right to assign all or any part of this Lease. Lessor will notify Lessee in the event of an Assignment. 20. It is the intention of the parties that this is to be a net, net net Lease. 21. Lessee agrees that if a default on this Lease occurs, resulting in foreclosure or assignment, Lessees interest in the certificate of need will be assigned to Lessor immediately and forthwith, at no cost to Lessor. 22. This Lease shall be construed and interpreted in accordance with the laws of the State of Texas. 23. Any notice or demand required or permitted by law or by any of the provisions of this Lease shall be in writing. All notices or demands by Lessor to or upon Lessee shall be deemed to have been properly given when sent by certified mail, addressed to Lessee, Robert Crone/South Texas Healthcare, Inc., 213 North 40th, McAllen, TX 78501, or such other place as Lessee may from time to time, designate in a written notice to Lessor; and to Lessor by Lessee, addressed to Lloyd Hobbs, P.O. Box 126, Fort Smith, Arkansas 72902, or at such other place as Lessor may from time to time, designate in a written notice to Lessee. 24. This Lease and all provisions herein shall be binding upon and inure to the benefit of the parties hereto, their heirs, legal representatives, successors and assigns. 25. Time is of the essence in this Lease. IN WITNESS WHEREOF the parties have caused this instrument to be properly executed the day and year first above written. /s/Lloyd Hobbs --------------------------------------- Lloyd Hobbs Lessor ROBERT CRONE/SOUTH TEXAS HEALTHCARE, INC. /s/Robert Crone --------------------------------------- Robert Crone, PRESIDENT -- LESSEE 7 47 Exhibit A McAllen, Texas The East 425.0 fee of the North 375.0 feet of the South 734.55 feet of Lot 125, La Lomita Irrigation & Construction Company's Subdivision, of Porciones 61, 62 and 63, Hidalgo County, Texas, as per map or plat thereof recorded in Volume 24, Page 68, Deed Records, Hidalgo County, Texas, and described as follows: BEGINNING at a point on the East line of Lot 125, North 8 degrees 42 minutes 30 seconds East, 359.55 feet from the Southeast corner of Lot 125, for the Southeast corner of the following described tract of land, said point being in North Ware Road (F.M. #2220); THENCE, with the East line of Lot 125, in Ware Road, North 8 degrees 42 minutes 30 seconds East, 375.0 feet to a point, for the Northeast corner hereof; said point being on the projection of the South line of Gardenia Avenue; THENCE, with he South line of Gardenia Avenue and its projection, North 81 degrees 17 minutes 30 seconds West, at 40.91 feet pass an iron pin on the West line of North Road and at 425.0 feet an iron pin on the East line of North 38th Street, for the Northwest corner hereof; THENCE, with the East line of North 38th Street, and its Southerly projection, South 8 degrees 42 minutes 30 seconds West, 375.00 feet to a point, for the Southwest corner hereof; THENCE, parallel to the South line of Lot 125, South 81 degrees 17 minutes 30 seconds East, at 384.09 feet pass an iron pin on the West line of North Ware Road and at 425.0 feet the PLACE OF BEGINNING, containing 3.66 acres of land, more or less, of which the East 10.91 feet, comprising 0.35 acre, lies in North Ware Road (F.M. #2220). EDWARDS ABSTRACT AND TITLE CO. 48 FIRST AMENDMENT TO OPTION This Amendment to Option entered into this 9th day of April, 1996, amending the Option Agreement dated August 12, 1992, on Briarcliff Nursing & Rehabilitation Center of McAllen, Texas between LLOYD G. HOBBS, as Grantor, and ROBERT CRONE/SOUTH TEXAS HEALTHCARE, INC., as Grantee. Lloyd G. Hobbs assigned his Interest in this Option to Hobbs & Curry Family Limited Partnership on January 1, 1995. Now, Grantor and Grantee have agreed to add seventy-four beds to the Briarcliff Nursing & Rehabilitation Center, making a total of 194 beds. Grantor and Grantee have also agreed to increase the Option Price for this nursing home as follows: The Option is amended to state that the Option may be exercised by Grantee at any time after eighty-four (84) monthly rental payments have been paid which would include the increased rental payments for the new addition. For example, if the first monthly rental payment to include the new addition is made on October 1, 1996, then the option could be exercised on October 1, 2003, providing all 84 payments had been paid. The option price will be $4,700,000.00 All other terms of the Option Agreement, dated August 12, 1992, will remain the same as originally written. Witness our hands this 9th day of April, 1996. H0BBS & CURRY FAMILY LIMITED PARTNERSHIP /s/ Lloyd Hobbs ------------------------------- Lloyd Hobbs, General Partner Grantor ROBERT CRONE/SOUTH TEXAS HEALTHCARE, INC. /s/ Robert Crone ------------------------------- Robert Crone, President-Grantee 49 OPTION AGREEMENT For and in consideration of the sum of ten dollars cash in hand paid, receipt of which is hereby acknowledged and for other good and valuable considerations, LLOYD HOBBS, hereinafter called "Grantor", does hereby give and grant unto Robert Crone/South Texas Healthcare, Inc., 214 North 40th, McAllen, TX 78501, together with all improvements now or hereafter constructed upon the same, and including all personal property shown upon Exhibit "B" attached hereto, and in addition, any renewals, substitutions, replacements or additions thereto, which may be on the premises and belonging to Grantor at the time of the exercise of this Option, To-Wit: Legal description attached hereto as exhibit "A". 1. This Option may be exercised by Grantees at any time after one hundred Twenty (120) payments have been paid, provided all lease payments are current, conditioned upon the Grantees, their successors or assigns being in possession of the home at the time of exercise and upon the express condition and understanding that the Grantees herein have fully performed all of the terms and conditions contained in that certain Lease Agreement dated the 12th day of August, 1992, to be kept and performed by the Lessees therein and more particularly are current in the payment of all sums due under the terms of said Lease Agreement. If at any time, the above Lease shall be terminated, this Option will immediately become null and void. This Option may be exercised by means of Grantee giving written notice by certified mail, return receipt requested, of such election to Lessor, Lloyd Hobbs, Box 126, Fort Smith, AR 72902 or at such other place as may be directed in writing, accompanied by $10,000.00 earnest money deposit. The earnest money deposit will be applied on the purchase price if purchase is concluded. 2. The price for the assets to be sold shall be Two Million Four Hundred Thousand Dollars ($2,400,000.00). The purchase price is payable in cash unless a financing arrangement is worked out at the time of purchase with Seller. The purchase price herein stated shall include the personal property consisting of furniture, furnishings, fixtures and equipment located on said premises as of the date of beginning of this Lease, and such as may thereafter be placed upon the 1 50 premises by way of substitution for or addition to such furniture, furnishings, fixtures and equipment, less any furniture and equipment removed for replacement during the Lease term by Lessor or Lessee. 3. Upon receipt of notice of intent to exercise this Option, Grantor shall promptly furnish to Grantees, a Warranty Dead, subject only to recorded easements, rights-of-way, mineral interests and etc. Recorded easements and restrictions shall not be deemed to impair title. 4. Closing shall be at a time and place mutually agreeable. In the absence of agreement, Grantor may obligate Grantees to perform by giving written notice that he is ready, willing and able to execute the Deed and Bill of Sale. Grantees shall have ten (10) business days to execute the instruments required to consummate this transaction, and to pay the purchase price. If purchase price is not tendered or other arrangements made within the ten-day period, the option will be null and void and the $10,000.00 earnest money deposit will be considered liquidated damages and the Lease will continue in force, except no option will be in force and effect. Grantees shall designate some place in Fort Smith, Arkansas at which they will appear prepared to perform, and Grantor shall have ten (10) business days after receipt of such demand in which to execute and deliver the documents required by this Option. If Grantor fails, neglects or refuses to perform, Grantees shall have the right to seek specific performance of this Option. 5. This Option may not be assigned by Grantees without the written consent of the Grantor, which consent will not be unreasonably withheld. Notices required or permitted by this Option may be given to Grantor by certified mail, return receipt requested, addressed to Lloyd Hobbs, P. O. Box 126, Fort Smith, Arkansas 72902 and to Grantees by certified mail, return receipt requested, to Robert Crone/South Texas Healthcare, Inc., 213 North 40th, McAllen, TX 78601. Either party may change the person to whom or the place to which notice is to be given by written request. This Agreement shall be binding upon the heirs, legal representatives, successors and assigns of the parties hereto. 2 51 Dated this 12th day of August, 1992. /s/ Lloyd Hobbs ------------------------------- Lloyd Hobbs, Grantor ROBERT CRONE/SOUTH TEXAS HEALTHCARE, INC. /s/ Robert Crone ------------------------------- Robert Crone, President-Grantee 3 52 BILL OF SALE FOR SUPPLIES Robert Crone-South Texas Health Care, Inc., a Texas corporation ("SELLER"), as owner of certain supplies used in the operation of the facility more particularly described in Exhibit "A" hereto for Ten Dollars ($10.00) and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, does hereby grant, sell and transfer unto Summit Care Texas, LP, a Texas limited partnership or its affiliated nominee, ("BUYER" or "SUMMIT"), the Personal property more particularly set forth and described on Exhibit "B" attached hereto and incorporated herein by reference. To have and to hold the same to BUYER and its successors and assigns for their use forever. SELLER hereby covenants and warrants to the BUYER that it is the lawful owner of said goods; that said goods are free and clear from all encumbrances except as set forth; and that SELLER has the right to sell the same. IN WITNESS WHEREOF, SELLER has executed this Bill of Sale on November 24, 1997, to be effective as of the first (1st) day of December, 1997. IN THE PRESENCE OF: SELLER: ROBERT CRONE-SOUTH TEXAS HEALTH CARE, INC. [SIG] By: /s/ Robert Crone - ------------------------------- ------------------------------- Robert Crone -1- 53 NON-COMPETE AGREEMENT This Non-Compete Agreement (the "Agreement") is entered into this 24th day of November, 1997 by and among Summit Care Texas, LP, a Texas limited partnership ("Summit Care") and Robert Crone, an individual and resident of the State of Texas (hereinafter referred to as "Seller") RECITALS A. Summit Care and Seller have entered into an Agreement of Purchase and Sale of Assets (the "Purchase Agreement"), whereby Seller has agreed to sell to Summit Care that certain One Hundred and Ninety Four (194)-bed nursing facility, commonly known as Briarcliff Nursing and Rehabilitation Center, located at 3201 North Ware Road, in the City of McAllen, County of Hidalgo, State of Texas, more particularly described on Exhibit A hereto and herein incorporated by reference (the "Facility"). The terms and provisions of the Purchase Agreement are hereby incorporated herein as if set forth in full. All capitalized, undefined terms used herein shall have the meanings given to them in the Agreement. B. Seller has knowledge and expertise in the ownership and operation of nursing homes. C. Summit Care intends to operate the Facility and real property held and operated by Seller and sold to Summit Care as a nursing home. AGREEMENT NOW, THEREFORE, in consideration of the premises and of the mutual promises herein, the parties hereto agree as follows: 1. For good and valuable consideration, the receipt of which is hereby acknowledged, Seller agrees for seven (7) calendar years following the Closing Date of the Agreement not to compete with Summit Care within the County of Hidalgo, State of Texas. 2. For purposes of this Agreement, Seller shall be deemed to be in competition with Summit Care if Seller either separately or jointly, owns, operates, or has a direct or indirect interest in the operation of a Nursing Home (which, for purposes of this Agreement shall mean, a facility engaged in the provision of long -1- 54 term care, an extended care facility, assisted living facility, retirement center or any similar facility) or the provision of any service or ancillary service that is provided in the operation of the Facility during the term of this Agreement, in the County of Hidalgo; or if Seller engages in the operation of a Nursing Home or the provision of long term care in Hidalgo County as an affiliate, investor, officer, director, administrator, employee, consultant, agent, or in any other material capacity. 3. Seller also covenants that he shall not during the term hereof, solicit Summit Care's or its affiliates' patients or current employees for the purpose of providing long term care, long term care, or any other medical services, and will not hire any of said employees for the provision of services associated with a Nursing Home, long term care, or any other medical services. 4. For purposes of this Agreement a "current employee" is defined to mean any person who has been employed by Summit Care for at least four hundred (400) hours during any continuous one hundred twenty (120) day period within the past twelve (12) months preceding any particular date in question during the term of this Agreement. 5. Seller acknowledges that the restrictions in this Agreement are reasonable, as to substance, geographical area and duration, for the protection of Summit Care. Nonetheless, if a court finds this covenant not to compete to be too broad, said court shall have the ability to narrow the substance, geographical area or duration to the extent necessary for the covenant to become reasonable and enforceable. If Seller knowingly or intentionally violates this section, Summit Care may exercise any or all remedies provided by law, including but not limited to a temporary restraining order without notice and without bond, temporary injunction without bond, and a permanent injunction without bond in addition to other equitable or legal remedies, if any, Summit Care may have against Seller or others acting in concert with Seller. In addition to and without waiving other remedies available to Summit Care under law or pursuant to this Section, Summit Care may require Seller to account and remit to Summit an amount equal to one hundred and fifty percent (150%) of all gross fees earned by Seller from such customers and patients as liquidated damages for such breach. 6. This Agreement shall not be changed or canceled without the express written consent of Summit Care and shall be binding upon and shall inure to the benefit of the heirs, successors and assigns of the parties. -2- 55 7. This Agreement shall last for a term of seven (7) calendar years from the date hereof and shall be construed and interpreted in accordance with the laws of the state of Texas. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. SUMMIT CARE TEXAS, LP a Texas limited partnership By: -------------------------------- The Sr. V.P. Finance --------------------------- of its General Partner Summit Care Management, Inc. a California Corporation SELLER /s/ Robert Crone ------------------------------- Robert Crone ------------------------------- [SIG] ------------------------------- Family Member ------------------------------- -3- 56 BILL OF SALE FOR PERSONAL PROPERTY Robert Crone-South Texas Health Care, Inc., a Texas corporation ("SELLER"), in consideration of Ten Dollars ($10. 00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, does hereby grant, bargain, sell, convey and transfer to Summit Care Texas, LP, a Texas limited partnership or its affiliated nominee, ("BUYER" or "SUMMIT CARE"), all right, title and interest, as of December 1, 1997, in and to, all and singular, the following: (1) all existing personal property such as furniture, fixtures, and equipment (the "Personal Property") including, but not limited to the items listed on Exhibit "A" attached hereto which are presently located on the real property of and/or used in connection with the ownership, maintenance or operation of the facility more particularly described in Exhibit "B" attached hereto (the "Facility"), other than that Personal property specifically excluded under the terms of the Agreement of Purchase and Sale of Assets dated November 24, 1997, by and between Buyer and Seller (the "Purchase Agreement"); and (2) all licenses, occupancy agreements, certificates, permits, accreditation, registrations and authorizations of all federal, state and local governmental or regulatory authorities, or other agreements providing for the use or occupancy of, the Facility and Personal Property (to the extent each may be transferred). (3) any and all plans, drawings, specifications, surveys, engineering reports, and other technical descriptions owned or held by Seller which relate in any way to the design, construction, ownership, use, maintenance, service, or operation of the Facility or the Personal property to the extent any of the above are transferable. (4) all rights, title, and interest in and to the names and the telephone numbers for the Facility set forth on Exhibit "A" hereto. TO HAVE AND TO HOLD, all and singular, the Personal Property hereby sold, assigned, transferred and conveyed to Buyer, its successors and assigns, to and for its own use and benefit. Seller hereby represents and warrants to Buyer that Seller is the owner of said Personal Property, that Seller has full right, -1- 57 power and authority to sell said Personal Property and to make this Bill of Sale, and that said Personal Property is not encumbered. Subject to the foregoing limitations, representations and warranties, and to the representations and warranties contained in the Purchase Agreement, the Personal Property is hereby conveyed by Seller to Buyer. Seller does hereby bind itself, its successors and assigns and the heirs, executors, administrators and assigns of Seller, to forever WARRANT AND DEFEND the title to the said Personal property unto the said Buyer and its successor and assigns; against every person whosoever lawfully claiming, or declaiming the same, or any part thereof. Signed this twenty-fourth (24th) day of November, 1997, to be effective as of the first (1st) day of December, 1997. IN THE PRESENCE OF: SELLER: ROBERT CRONE-SOUTH TEXAS HEALTH CARE, INC. /s/ By: /s/ Robert Crone - ------------------------------- ------------------------------- Robert Crone -2- 58 BILL OF SALE FOR SUPPLIES Robert Crone-South Texas Health Care, Inc., a Texas corporation ("SELLER"), as owner of certain supplies used in the operation of the facility more particularly described in Exhibit "A" hereto for Ten Dollars ($10.00) and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, does hereby grant, sell and transfer unto Summit Care Texas, LP, a Texas limited partnership or its affiliated nominee, ("BUYER" or "SUMMIT") , the Personal property more particularly set forth and described on Exhibit "B" attached hereto and incorporated herein by reference. To have and to hold the same to BUYER and its successors and assigns for their use forever. SELLER hereby covenants and warrants to the BUYER that it is the lawful owner of said goods; that said goods are free and clear from all encumbrances except as set forth; and that SELLER has the right to sell the same. IN WITNESS WHEREOF, SELLER has executed this Bill of Sale on November 24, 1997, to be effective as of the first (1st) day of December, 1997. IN THE PRESENCE OF: SELLER: ROBERT CRONE-SOUTH TEXAS HEALTH CARE, INC. /s/ By: /s/ Robert Crone - ------------------------------- ------------------------------- Robert Crone -1- EX-10.47 4 EXHIBIT 10.47 1 EXHIBIT 10.47 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 2 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 3 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 4 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 5 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 6 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 7 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 8 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 9 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 10 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 11 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 12 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 13 (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 14 (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 15 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 16 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 17 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 18 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 19 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 20 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 21 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 22 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 23 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 24 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 25 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 26 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 27 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 28 (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 29 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 30 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 31 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 32 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 33 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 34 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 35 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 36 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 37 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 38 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 39 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 40 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 41 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 42 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: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ ATTEST: FOUNTAIN VIEW, INC., a Delaware corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ ATTEST: FV-SCC ACQUISITION CORP., a Delaware corporation By: By: ------------------------------ --------------------------------- Name: Name: ---------------------------- ------------------------------- Title: Title: --------------------------- ------------------------------ 37 43 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: ------------------------------ Name: ---------------------------- By: --------------------------------- Title: --------------------------- Name: ------------------------------- Title: ------------------------------ 38 44 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 45 (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 46 EXHIBIT A MERGER AGREEMENT A-1 47 EXHIBIT B COMMITMENT LETTER B-1 48 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. 49 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. 50 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, 51 SCHEDULE 3.6 CONSENTS AND APPROVALS (CONTINUED) 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 52 SCHEDULE 3.6 CONSENTS AND APPROVALS (CONTINUED) 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. 53 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. 54 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-10.48 5 EXHIBIT 10.48 1 EXHIBIT 10.48 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: 2 (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 3 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 3 4 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. 4 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 5 6 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 6 7 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 7 8 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 Related Positions See Exhibit I Vice President, Regional Vice President or See Exhibit II Pharmacy President Title Prior to Effective Date Severance Pay ----------------------------- ------------- Center Administrator, Executive Twelve months Director or Corporate Main Office Department Head (Exhibit III) Directors and Related Positions (Exhibit IV) Nine months Other exempt employee (Exhibit V) Six months (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. 8 9 Number of Years of Service Completed Prior to Termination Severance Pay -------------------- ------------- Less than one Two months At least one but less than three Three months At least three but less than five Five months 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. 9 10 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 _________________________ _________________________ _________________________ 10 11 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 11 12 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 12 13 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. 13 14 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 14 15 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 6th day of February, 1998. SUMMIT CARE CORPORATION By: ____________________________________ Chairman and Chief Executive Officer 15 EX-27 6 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM [IDENTITY SPECIFIC FINANCIAL STATEMENTS] AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. [optional] 2-MOS JUN-30-1998 OCT-01-1997 DEC-31-1997 1,702 0 38,817 2,474 3,204 56,818 224,773 30,220 267,420 45,434 0 0 0 52,020 32,701 267,420 0 53,972 0 51,029 0 957 2,311 1,986 784 0 0 0 0 1,202 0.18 0.18
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