Exhibit (c)(2)
AGREEMENT
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This Agreement is entered into as of February 6, 1998 by and among
Fountain View, Inc., a Delaware corporation (the "Company"), Xxxxxx Xxxxxx
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("RS"), Xxxxxx Xxxxxx ("SS", and together with RS, the "Snukals"), Xxxxxxx Xxxxx
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("Xxxxx") and Heritage Fund II, L.P. ("Heritage").
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Introduction
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This Agreement is being entered into in connection with the proposed
acquisition (the "Acquisition") of Summit Care Corporation ("Summit") by a
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newly-formed subsidiary of the Company (the "Sub"). Heritage is making a
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commitment to invest substantial additional funds in the Company in order to
effect the Acquisition, in reliance on the terms of this Agreement.
The Acquisition will be structured as (i) a tender offer by the Sub
for shares of Summit (the "Offer"), followed by (ii) a merger of Sub into Summit
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(the "Merger"), pursuant to an Agreement and Plan of Merger among Summit, the
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Company and the Sub (the "Merger Agreement").
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NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Equity Ownership and Structure. Effective immediately prior to
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the purchase of shares pursuant to the Offer (the "Tender Closing"), the stock
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ownership of the Company will be restructured in the following manner, and the
new investments specified below will be made, in a transaction under Sections
351 and 368(a)(1)(E) of the Internal Revenue Code of 1986, as amended (the
"Code"):
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(a) Investments. Each of the parties will contribute to the Company
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immediately prior to the Tender Closing the following amounts (inclusive of
amounts currently held in stock of the Company):
(i) Heritage will invest:
(A) $24,500,000 in value of Company stock already held, and
(B) $74,500,000 in new cash
(ii) The Snukals will invest:
(A) $17,500,000 in value of Company stock already held
(including Series A-3 shares previously distributed by
them), and
(B) $5,000,000 in new cash
(iii) Xxxxx will invest:
(A) All of his Summit stock and the full amount of his
after-tax option and pension proceeds received on or
about the date of the Merger (approximately $2,500,000)
(b) Classes of Stock. Effective immediately prior to the Tender
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Closing, the existing stock of the Company will be reorganized into, and the new
cash invested in the Company will purchase, shares of Series A Common Stock (the
"Series A Stock") and Series B Non-Voting Common Stock (the "Series B Stock")
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described below, which will be the only outstanding equity securities of the
Company. The Series A Stock and the Series B Stock will have the following
general characteristics:
(i) The Series A Stock will be entitled to receive return of
capital (which means, for this purpose, the amount of cash contributed and
the value of the shares exchanged for Series A Stock) plus a 22% internal
rate of return before any distributions are made on the Series B Stock.
(ii) After the Series A Stock has been paid the foregoing
amounts, each share of Series B Stock will be entitled to a distribution of
the same amount as was distributed in respect of each share of Series A
Stock.
(iii) After all of the foregoing distributions, the Series A
Stock and Series B Stock will share any remaining proceeds on a pro rata
basis.
(c) Ownership of Stock. The outstanding Common Stock will be owned
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as follows:
(i) The Series A Stock will be owned by Heritage, the Snukals
and Xxxxx as follows:
Heritage 78,240 shares
Snukals 17,780 shares
Xxxxx 3,980 shares/1/
(ii) The Series B Stock will be owned by the Snukals and Xxxxx,
or their respective designees, as follows:
Snukals 6,125 shares
Xxxxx 4,649 shares
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/1/ 2,000 of these shares may be in the form of nominally priced options
or warrants
The actual number of shares or options to be received by Xxxxx will be
adjusted to reflect the after-tax proceeds actually invested by him.
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The Series B Stock will equal 9.73% of all outstanding shares of Common
Stock of both series. The Series B Stock will be issued for nominal
consideration, and it is anticipated that the holders will file Section
83(b) Elections under the Code.
(d) Repurchase of Series B Stock. The Series B Stock will be subject
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to repurchase at cost by the Company upon a Trigger Event (which term will
generally have the meaning given to it in the existing Company Stockholders
Agreement) on a sliding scale based on achievement of the terminal value targets
for the Company's equity value (shown as Base Case, Management Case and Upside
Case on Exhibit A attached hereto) upon a Trigger Event, as follows:
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(i) If the terminal value on a Trigger Event is at or below the
Base Case, all shares of Series B Stock will be repurchased.
(ii) If the terminal value on a Trigger Event is at the
Management Case, 3,020 shares of Series B Stock will be repurchased.
(iii) If the terminal value on a Trigger Event is at or above
the Upside Case, no shares of Series B Stock will be repurchased.
(iv) The number of shares to be repurchased will be adjusted
ratably between the Base Case and the Management Case and between the
Management Case and the Upside Case, to the extent that the terminal value
is between such cases on a Trigger Event.
(v) Repurchases of Series B Stock will be pro rata among all
holders thereof.
(e) Xxxxx Investment. Xxxxx will contribute all of his interest in
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Summit into the Company, including stock, options and after-tax pension proceeds
received on or about the date of the Merger. In the case of options held by
Xxxxx, (i) these options will be cashed out in the Merger, (ii) Xxxxx will
receive a bonus from the Company to pay tax due on the options (to the extent
that it is tax neutral to the Company, using corresponding tax benefit) and (ii)
all net after tax option proceeds (after taking into account the foregoing bonus
payment) will be invested in the Company. A portion of Xxxxx'x investment may
be delayed until he receives proceeds at the Merger closing.
(f) Warrants, etc. If the financing obtained to consummate the Offer
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or the Merger, or to refinance existing indebtedness or liabilities of the
Company or Summit, includes warrants or other equity interests in the Company
for the lenders or other third parties involved in such financing, or if Sutro
invests in the Company, the resulting dilution will be shared ratably by all
parties hereto and other stockholders of the Company.
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(g) Option Pool. The parties intend that after the Merger the
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Company will put into effect a management option program to provide incentive to
employees (other than RS and Xxxxx), and which will dilute all stockholders
ratably.
2. Stockholders Agreement. Immediately prior to the Tender Closing, the
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parties will enter into a new Stockholders Agreement, replacing the existing
Fountain View Stockholders Agreement, the material terms of which will be as
follows:
(a) Board of Directors. RS will be entitled to designate two
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directors (but not less than 25% of the directors) and Xxxxx will be entitled to
designate one director of the Company for such time as they hold stock of the
Company. All other directors of the Company will be designated by Heritage.
(b) Stock transfers. The following provisions will govern stock
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transfers:
(i) No transfers of stock by non-Heritage stockholders will be
permitted for four years after the Tender Closing, except for estate
planning transfers (including transfers of Series B shares) or as described
below; provided that any party whose employment is terminated without cause
by the Company (other than for death or disability) will no longer be
subject to such restriction, but will be subject to the restrictions in
paragraph (ii) below.
(ii) The Company and the other stockholders will have a right of
first refusal on transfers by non-Heritage stockholders, except for estate
planning transfers (including transfers of Series B shares) or as described
below.
(iii) Non-Heritage stockholders have tag along rights on sales
by Heritage in a transaction constituting a Trigger Event, whether
structured as a stock sale, merger or otherwise.
(iv) Heritage has drag along rights on stock of non-Heritage
stockholders in a transaction constituting a Trigger Event, whether
structured as a stock sale, merger or otherwise.
(c) Repurchase of Series B Shares. The following provisions will
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govern repurchase of Series B shares:
(i) The repurchase of shares of Series B shares upon a Trigger
Event, based on the Terminal Value targets, as described above, will be
provided for in the Stockholders Agreement.
(ii) Terminal Value targets for forfeiture of Series B shares
may be changed by approval of the Company's Board of Directors to reflect
acquisitions and other transactions not in the ordinary course, provided
that in selecting the new targets the members of the Board approving such
changes believe in good faith that the new targets are
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broadly consistent with the valuation methodology being applied in
determining the initial Terminal Value targets attached to this Agreement.
(d) Recapitalization. Immediately prior to consummation of a
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registered initial public offering of the Company's common stock (an "IPO"),
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there will be a required recapitalization of all shares into a single class of
common stock, based on their value at that time.
(e) Termination. The Stockholders Agreement will terminate on an
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IPO.
3. Registration Rights Agreement. Immediately prior to the Tender
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Closing, the parties will enter into a new Registration Rights Agreement,
replacing the existing Fountain View Registration Rights Agreement, the material
terms of which will be as follows:
(a) Demand registrations.
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(i) Heritage will be entitled to cause the Company to effect an
IPO at any time.
(ii) Heritage will have the right to effect two demand
registrations.
(iii) The Snukals will have the right to effect one demand
registration, in which Xxxxx will have the right, at his election, to share
on a pro rata basis.
(b) Piggyback and S-3 Registrations. The parties will be entitled to
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unlimited piggyback and S-3 registrations.
(c) Cutbacks. All registrations will be subject to customary
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cutbacks. In each cutback, other than in the demand registration of the Snukals
and Xxxxx described above, shares to be included by non-Heritage stockholders
will be reduced before shares of Heritage are reduced.
(d) Additional Registration Rights. If a majority of the Company's
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Board believes in good faith that additional registration rights should be
granted to new investors in the Company who are acquiring, in the aggregate, at
least 15% of the Company's stock, the Board may grant such rights even though
such additional rights may impair or limit the rights of the parties to this
Agreement.
4. Employment Agreements for Key Management. Immediately prior to the
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Tender Closing (or, in the case of Xxxxx, the effective time of the Merger), the
Company will enter into new Employment Agreements with each of RS, SS and Xxxxx,
replacing their existing employment agreements with the Company and Summit
(although, in the case of Xxxxx, not in manner that triggers severance or other
similar payments from Summit), respectively. These agreements will have
substantially the following terms:
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(a) Term. Each agreement will be for a scheduled term of five years
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commencing on the Tender Closing.
(b) Titles; Duties. RS will have the title "Chief Executive
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Officer", SS will have the title "Executive Vice President" and Xxxxx will
initially have the title "Chairman", and each will have duties consistent with
such titles as specified by the Company's Board.
(c) Compensation and Benefits.
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(i) RS will be entitled to a base salary at an annual rate of
$500,000, and will be eligible for (A) an annual bonus of $250,000 if the
Company achieves base case EBITDA and (B) up to an additional bonus of
$250,000, determined ratably based on the Company's EBITDA being between
the base case and the upside case.
(ii) SS will be entitled to a base salary at an annual rate of
$225,000, and will be eligible for an annual bonus of up to $125,000,
determined ratably based on the Company's EBITDA being between the base
case and the upside case.
(iii) Xxxxx will be entitled to a base salary at an annual rate
of $450,000, and will be eligible for (A) an annual bonus of $200,000 if
the Company achieves base case EBITDA and (B) up to an additional bonus of
$150,000, determined ratably based on the Company's EBITDA being between
the base case and the upside case.
(iv) Salary levels will be subject to annual consumer price
adjustments.
(v) Base case, management case and upside case EBITDA for
purposes of determining bonuses will be as set forth on Exhibit B hereto,
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and may be changed by approval of the Company's Board of Directors to
reflect acquisitions and other transactions not in the ordinary course,
provided that in selecting the new EBITDA targets the members of the Board
approving such changes believe in good faith that the new targets are
broadly consistent with the valuation methodology being applied in
determining the initial EBITDA targets attached to this Agreement.
(vi) Benefits will be not less than greater of current Company
or Summit benefits generally available to executives.
(d) Termination. RS, SS and Xxxxx may be terminated with or without
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cause. In the case of termination without cause (other than on death or
disability), the Company will continue to pay their base salary (plus an
additional $25,000 in the aggregate, in the case of such termination of both RS
and SS) for the duration of their scheduled term of employment. If RS is
terminated without cause, SS may, at her option, deem her employment to have
been terminated without cause and receive the severance referred to in
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the preceding sentence. In the case of Xxxxx, his xxxxxxxxx will be reduced by
the amount, if any, he is then due under the Summit Special Severance Plan.
(e) Other Provisions. The confidentiality, noncompetition and cause
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definitions will be substantially similar to those in RS's existing Company
employment agreement.
5. Snukal Leases. Immediately prior to the Tender Closing, the Snukals
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and the Company will amend the existing leases between the Company and them to
provide as follows:
(a) Approval. They will approve change of control of the Company
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effected by the transactions described in this Agreement.
(b) Future Transactions. A subsequent IPO, change of control or
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other future disposition or change of ownership of the Company will not require
approval of the Snukals.
(c) Security Deposits. The security deposits under the leases will
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increase to six months rent (from one month) on first to occur of (i) the
Snukals no longer holding equity in Fountain View, (ii) the Snukals no longer
being in active management of the Company (unless they voluntarily resign, other
than upon death or disability), (iii) a Trigger Event (other than an IPO) or
(iv) two months after an IPO.
(d) Leasehold Mortgages. The Snukals will agree to grant leasehold
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mortgages to lenders to the Company and/or its direct or indirect subsidiaries,
until the earlier of (i) a Trigger Event (other than an IPO) or (ii) six months
after an IPO.
6. Heritage Right to Act for the Company. Upon signing the Merger
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Agreement, and until it is terminated in accordance with its terms (if at all),
Heritage will have the immediate and sole right to act for the Company and the
Sub in all respects with respect to the Merger Agreement, the Offer, the Merger
and all other matters in any way ancillary or related thereto. If requested by
Heritage, the Snukals agree immediately to elect such additional members to the
Company's Board as Heritage requests, as long as RS and SS represent not less
than 25% of the Board. This Agreement constitutes an irrevocable proxy and
power of attorney from the Company and the Snukals to effect all of the purposes
of this Agreement, including without limitation as set forth in this Section.
7. Definitive Documents. Although this Agreement is binding on the
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parties, the parties intend to replace this Agreement with final definitive
agreements and instruments evidencing the provisions hereof. The parties agree
that such definitive agreements will be prepared in good faith and delivered by
Heritage and its counsel promptly after the date hereof. Such agreements shall
be negotiated in good faith by the parties and shall be executed no later than
five days thereafter. The parties agree that it is central to the parties'
agreements contained in this Agreement that such definitive documents be fully
executed
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substantially in advance of the Tender Closing, and the parties agree to execute
such definitive agreements and instruments even if there are matters contained
in such agreements as to which the parties disagree, as long as such agreements
are broadly consistent with the terms outlined in this Agreement.
8. Equitable Remedies. The parties understand and acknowledge that any
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breach of this Agreement would cause irreparable injury to Heritage for which
there would be no adequate remedy at law, and that, in the event of such a
breach or threat thereof, Heritage shall be entitled to obtain a temporary
restraining order and/or a preliminary injunction and a permanent injunction
restraining the other parties to this Agreement from violating any provision
hereof.
9. Obligations of Snukals with respect to other Company Stockholders.
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Prior to the Tender Closing, the Snukals will cause all current stockholders of
the Company, other than Heritage, to comply with the terms of this Agreement and
to execute all agreements required hereby.
10. Miscellaneous. This agreement supersedes and overrides all other
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agreements among some or all of the parties with respect to the matters covered
hereby. This Agreement shall be effective only upon the signing of the Merger
Agreement, and shall have no force or effect if the Merger Agreement is not
fully executed. If the Merger Agreement is terminated before the Tender
Closing, this Agreement will terminate, and be of no further force or effect.
This Agreement is governed by and construed in accordance with the internal laws
of the Commonwealth of Massachusetts (excluding its conflicts of laws
principals) and with the General Corporation Law of the State of Delaware.
Jurisdiction of any litigation arising under this Agreement shall be in
California.
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IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed
instrument as of the date set forth above.
/s/ Xxxxxx Xxxxxx
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Xxxxxx Xxxxxx
/s/ Xxxxxx Xxxxxx
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Xxxxxx Xxxxxx
/s/ Xxxxxxx X. Xxxxx
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Xxxxxxx Xxxxx
HERITAGE FUND II, L.P.
By HF Partners II, L.L.C.,
its general partner
By /s/ T. Xxxxx Xxxxxx
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The undersigned, Xxxxx X. Xxxxxx, spouse of Xxxxxxx Xxxxx, hereby consents
to the foregoing agreement.
/s/ Xxxxx X. Xxxxxx
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Xxxxx X. Xxxxxx
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EXHIBIT A
Terminal Values (000)
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Year Base Mmgt Upside
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June 1998 $ 126,534 $ 136,345 $ 140,167
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Sept. 1998 133,101 157,055 171,750
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Dec. 1998 139,667 177,765 203,333
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March 1999 146,234 198,476 234,916
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June 1999 152,801 219,186 266,499
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Sept. 1999 173,526 243,074 298,999
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Dec. 1999 194,252 266,962 331,498
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March 2000 214,977 290,850 363,998
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June 2000 235,702 314,738 396,497
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Sept. 2000 245,053 340,397 430,655
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Dec. 2000 254,403 366,056 464,812
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March 2001 263,754 391,714 498,970
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June 2001 273,104 417,373 533,127
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Sept. 2001 287,174 450,009 577,406
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Dec. 2001 301,244 482,645 621,685
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March 2002 315,314 515,281 665,964
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June 2002 329,384 547,917 710,243
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Sept. 2002 345,976 576,531 746,058
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Dec. 2002 362,568 605,145 781,874
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March 2003 379,159 633,759 817,689
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June 2003 395,751 662,373 853,504
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Sept. 2003 420,485 716,191 938,845
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Dec. 2003 445,220 770,009 1,024,205
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March 2004 469,954 823,826 1,109,555
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June 2004 494,689 877,644 1,194,906
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Sept. 2004 525,607 948,953 1,314,396
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Dec. 2004 556,525 1,020,261 1,433,887
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March 2005 587,443 1,091,570 1,553,377
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June 2005 618,361 1,162,879 1,672,868
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Year Base Mmgt Upside
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Sept. 2005 657,008 1,257,362 1,840,155
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Dec. 2005 695,656 1,351,846 2,007,441
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March 2005 734,304 1,446,330 2,174,728
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June 2005 772,951 1,540,814 2,342,015
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Sept. 2005 821,261 1,666,005 2,576,216
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Dec. 2005 869,570 1,791,196 2,810,418
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March 2006 917,880 1,916,388 3,044,619
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June 2006 966,189 2,041,579 3,278,821
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Sept. 2006 1,026,576 2,207,457 3,606,703
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Dec. 2006 1,086,963 2,373,335 3,934,585
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March 2007 1,147,349 2,539,214 4,262,467
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June 2007 1,207,736 2,705,092 4,590,349
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Sept. 2008 1,283,220 2,924,881 5,049,384
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Dec. 2008 1,358,703 3,144,669 5,508,419
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March 2008 1,434,187 3,364,458 5,967,454
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June 2008 1,509,670 3,584,247 6,426,489
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EXHIBIT B
EBITDA Targets (000)
Base Mgmt Upside
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30-JUN-99 $45,188 $47,314 $47,314
30-JUN-00 53,581 57,101 59,320
30-JUN-01 56,499 67,030 71,287
30-JUN-02 60,395 78,196 85,390
30-JUN-03 65,080 87,063 95,621
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