-----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, VwqOMMqmUMPjddCgHyk3nrQDB5TOQzblnEyWn3+yg4r13Fr/lAzGjlYWtTVMWzU5 zL5D5BqamG5C2I37D6K2Sg== 0000950134-00-002748.txt : 20000331 0000950134-00-002748.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950134-00-002748 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEVERLY ENTERPRISES INC CENTRAL INDEX KEY: 0001040441 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621691861 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09550-2B FILM NUMBER: 585483 BUSINESS ADDRESS: STREET 1: 5111 ROGERS AVE STREET 2: SUITE 40-A CITY: FORT SMITH STATE: AR ZIP: 72903 BUSINESS PHONE: 5014526712 MAIL ADDRESS: STREET 1: 511 ROGERS AVE STREET 2: SUITE 40-A CITY: FORT SMITH STATE: AR ZIP: 72903 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEVERLY HOLDINGS INC DATE OF NAME CHANGE: 19970604 10-K 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NUMBER: 1-9550 BEVERLY ENTERPRISES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 62-1691861 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1000 BEVERLY WAY FORT SMITH, ARKANSAS 72919 (Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (501) 201-2000 Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.10 par value New York Stock Exchange Pacific Stock Exchange 9% Senior Notes due February 15, 2006 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: NONE INDICATE BY CHECK MARK WHETHER 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. [X] YES [ ] NO INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF REGISTRANT WAS $266,486,131 AS OF FEBRUARY 29, 2000. 102,495,556 (NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, NET OF TREASURY SHARES, AS OF FEBRUARY 29, 2000) PART III IS INCORPORATED BY REFERENCE FROM THE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 25, 2000. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K, and other information provided by the Company from time to time, contains certain "forward-looking" statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding the Company's expected future financial position, results of operations, cash flows, continued performance improvements, ability to service and refinance its debt obligations, ability to finance growth opportunities, ability to respond to changes in government regulations, and similar statements including, without limitation, those containing words such as "believes," "anticipates," "expects," "intends," "estimates," "plans," and other similar expressions are forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors: national and local economic conditions, including their effect on the availability and cost of labor and materials; the effect of government regulations and changes in regulations governing the healthcare industry, including the Company's compliance with such regulations; changes in Medicare and Medicaid payment levels; liabilities and other claims asserted against the Company, including patient care liabilities, as well as the resolution of the Class Action and Derivative Lawsuits (see "Item 3. Legal Proceedings"); the ability to attract and retain qualified personnel; the availability and terms of capital to fund acquisitions and capital improvements; the competitive environment in which the Company operates; the ability to maintain and increase census levels; and demographic changes. Given these risks and uncertainties, the Company can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, cautions investors not to place undue reliance on them. See "Item 1. Business -- Governmental Regulation and Reimbursement," "-- Competition" and "-- Employees" for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and various risk factors inherent in them. 1 3 PART I ITEM 1. BUSINESS. GENERAL References herein to the Company include Beverly Enterprises, Inc. and its wholly-owned subsidiaries. The business of the Company consists principally of providing healthcare services, including the operation of nursing facilities, assisted living centers, home care centers, outpatient therapy clinics and rehabilitation therapy services. The Company is one of the largest operators of nursing facilities in the United States. At February 29, 2000, the Company operated 559 nursing facilities with 61,896 licensed beds. The nursing facilities are located in 29 states and the District of Columbia, and range in capacity from 20 to 355 beds. At February 29, 2000, the Company also operated 37 assisted living centers containing 1,138 units, 180 outpatient therapy clinics, and 63 home care centers. The Company's nursing facilities had average occupancy of 87.2%, 88.7% and 88.9% during the years ended December 31, 1999, 1998 and 1997, respectively. See "Item 2. Properties." Healthcare service providers, such as the Company, operate in an industry that is subject to significant changes from business combinations, new strategic alliances, legislative reform, aggressive marketing practices by competitors and market pressures. In this environment, the Company is frequently contacted by, and otherwise engages in discussions with, other healthcare companies and financial advisors regarding possible strategic alliances, joint ventures, business combinations and other financial alternatives. Most recently, the significant reductions in stock prices for publicly-held long-term care companies, as well as the increasing number of providers filing for bankruptcy protections, could change the nature of the activity in this area. OPERATIONS The Company is currently organized into two operating segments, which include: (i) Beverly Healthcare, which provides long-term healthcare through the operation of nursing facilities and assisted living centers; and (ii) Beverly Care Alliance, which operates outpatient therapy clinics, home care centers and an inpatient rehabilitation therapy services business. Business in each operating segment is conducted by one or more corporations headed by a president who is also a senior officer of the Company. The corporations comprising each of the two operating segments also have separate boards of directors. See "Part II, Item 8 -- Note 11 of Notes to Consolidated Financial Statements" for segment information. Beverly Healthcare's nursing facilities provide residents with routine long-term care services, including daily dietary, social and recreational services and a full range of pharmacy services and medical supplies. Beverly Healthcare's skilled staff also offers complex and intensive medical services to patients with higher acuity disorders outside the traditional acute care hospital setting. In addition, Beverly Healthcare provides assisted living services. Approximately 91%, 90% and 80% of the Company's total net operating revenues for the years ended December 31, 1999, 1998 and 1997, respectively, were derived from services provided by Beverly Healthcare. Beverly Care Alliance provides outpatient and rehabilitative therapy services, home care services, and managed care contract services within the Company's nursing facilities and to other healthcare providers. Approximately 9%, 7% and 2% of the Company's total net operating revenues for the years ended December 31, 1999, 1998 and 1997, respectively, were derived from services provided by Beverly Care Alliance. GOVERNMENTAL REGULATION AND REIMBURSEMENT The Company's nursing facilities are subject to compliance with various federal, state and local healthcare statutes and regulations. Compliance with state licensing requirements imposed upon all healthcare facilities is a prerequisite for the operation of the facilities and for participation in government-sponsored healthcare funding programs, such as Medicaid and Medicare. Medicaid is a medical assistance program for the indigent, operated by individual states with the financial participation of the federal government. Medicare 2 4 is a health insurance program for the aged and certain other chronically disabled individuals, operated by the federal government. Changes in the reimbursement policies of such funding programs as a result of budget cuts by federal and state governments or other legislative and regulatory actions could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. The Company receives payments for services rendered to patients from (a) each of the states in which its nursing facilities are located under the Medicaid program; (b) the federal government under the Medicare program; and (c) private payors, including commercial insurers, managed care payors and Veterans Administration ("VA"). The following table sets forth: (i) patient days derived from the indicated sources of payment as a percentage of total patient days, (ii) room and board revenues derived from the indicated sources of payment as a percentage of net operating revenues, and (iii) ancillary and other revenues derived from all sources of payment as a percentage of net operating revenues, for the periods indicated:
MEDICAID MEDICARE PRIVATE AND VA ------------------ ------------------ ------------------ ROOM AND ROOM AND ROOM AND PATIENT BOARD PATIENT BOARD PATIENT BOARD ANCILLARY AND DAYS REVENUES DAYS REVENUES DAYS REVENUES OTHER REVENUES ------- -------- ------- -------- ------- -------- -------------- Year ended: December 31, 1999............ 71% 52% 9% 14% 20% 19% 15% December 31, 1998............ 69% 46% 11% 13% 20% 18% 23% December 31, 1997............ 68% 40% 12% 12% 20% 16% 32%
Consistent with the long-term care industry in general, changes in the mix of the Company's patient population among the Medicaid, Medicare and private categories can significantly affect revenues and profitability. In most states, private patients are the most profitable, and Medicaid patients are the least profitable. Ancillary revenues are derived from providing services to residents beyond room, board and custodial care and include occupational, physical, speech, respiratory and intravenous ("IV") therapy, as well as sales of pharmaceuticals and other services. Such services are currently provided primarily to Medicare and private pay patients. Medicaid programs are currently in existence in all of the states in which the Company operates nursing facilities. While these programs differ in certain respects from state to state, they are all subject to federally-imposed requirements, and at least 50% of the funds available under these programs is provided by the federal government under a matching program. The Medicaid and Medicare programs each contain specific requirements which must be adhered to by healthcare facilities in order to qualify under the programs. Currently, most state Medicaid programs utilize a cost-based reimbursement system for nursing facilities which reimburses facilities for the reasonable direct and indirect allowable costs incurred in providing routine patient care services (as defined by the programs) plus, in certain states, efficiency incentives or a return on equity, subject to certain cost ceilings. These costs normally include allowances for administrative and general costs as well as the costs of property and equipment (e.g. depreciation and interest, fair rental allowance or rental expense). State Medicaid reimbursement programs vary as to the methodology used to determine the level of allowable costs which are reimbursed to operators. In some states, cost-based reimbursement is subject to retrospective adjustment through cost report settlement. In other states, payments made to a facility on an interim basis that are subsequently determined to be less than or in excess of allowable costs may be adjusted through future payments to the affected facility and to other facilities owned by the same owner. Arizona, Arkansas and California provide for reimbursement at a flat daily rate, as determined by the responsible state agency. Several states in which the Company currently operates have enacted payment mechanisms which are based on patient acuity versus traditional cost-based methodologies. Many other states are actively developing similar payment systems based on patient acuity or which may follow a methodology similar to Medicare's prospective payment system. The Company is unable to estimate the ultimate impact of these changes in 3 5 payment mechanisms on the Company's future consolidated financial position, results of operations, or cash flows. Healthcare system reform and concerns over rising Medicare and Medicaid costs continue to be high priorities for both the federal and state governments. In August 1997, the President signed into law the Balanced Budget Act of 1997 (the "1997 Act") in which Congress included numerous program changes directed at balancing the federal budget. The legislation changed Medicare and Medicaid policy in a number of ways, including: (i) the phase in of a Medicare prospective payment system ("PPS") for skilled nursing facilities effective July 1, 1998 (see below); (ii) establishment of limitations on Part B therapy charges per beneficiary per year; (iii) a 10% reduction in Part B therapy costs for the period from January 1, 1998 through July 1, 1998, at which time reimbursement for these services became based on fee schedules established by the Health Care Financing Administration ("HCFA") of the Department of Health and Human Services ("HHS"); (iv) development of new Medicare and Medicaid health plan options; (v) creation of additional safeguards against healthcare fraud and abuse; and (vi) repeal of the Medicaid "Boren Amendment" payment standard. The legislation also included new opportunities for providers to focus further on patient outcomes by creating alternative patient delivery structures. PPS, which became effective for the Company on January 1, 1999, significantly changed the manner in which its skilled nursing facilities are paid for inpatient services provided to Medicare beneficiaries. In year one (1999 for the Company), Medicare PPS rates were based 75% on 1995 facility-specific Medicare costs (as adjusted for inflation) and 25% was federally-determined based upon the acuity level (as measured by which one of 44 Resource Utilization Grouping ("RUG") categories a particular patient is classified) of Medicare patients served in the Company's skilled nursing facilities. The direct impact of PPS and other provisions of the 1997 Act was a decrease in the Company's 1999 net operating revenues of approximately $114,000,000 as compared to 1998. Unless a nursing facility provider chooses to be reimbursed at 100% of the federally-determined acuity-adjusted rate as allowed under BBRA 1999 (as discussed below): (i) in year two, Medicare PPS rates will be based 50% on 1995 facility-specific costs (as adjusted for inflation) and 50% on the federally-determined acuity-adjusted rate; (ii) in year three, Medicare PPS rates will be based 25% on 1995 facility-specific costs (as adjusted for inflation) and 75% on the federally-determined acuity-adjusted rate; and (iii) in year four and thereafter, Medicare PPS rates will be based entirely on the federally-determined acuity-adjusted rate. In November 1999, the President signed into law the Balanced Budget Refinement Act of 1999 ("BBRA 1999") which refines the 1997 Act and will restore approximately $2.7 billion in Medicare funding for skilled nursing providers over the next three years. The provisions of BBRA 1999 include: (i) the option for a skilled nursing provider to choose between the higher of current law, as described above, or 100% of the federally-determined acuity-adjusted rate effective for cost reporting periods starting on or after January 1, 2000; (ii) a temporary increase of 20% in the federal adjusted per diem rates for 15 RUG categories covering extensive services, special care, clinically complex, and high and medium rehabilitation, for the period from April 1, 2000 through September 30, 2000; at which time, if HCFA has not recalculated the necessary refinements to the overall RUG-III system, the 20% increase will be extended until such time as the calculations are completed; (iii) a 4% increase in the federal adjusted per diem rates for all 44 RUG categories for each of the periods October 1, 2000 through September 30, 2001 and October 1, 2001 through September 30, 2002; (iv) a two-year moratorium on implementing the two Part B $1,500 therapy limitations contained in the 1997 Act, effective January 1, 2000 through January 1, 2002; (v) a retroactive provision that corrects a technical error in the 1997 Act denying payment of Part B services to skilled nursing facilities participating in PPS demonstration projects; and (vi) exclusion from the Medicare PPS rates of ambulance services to and from dialysis, prosthetic devices, radioisotopes and chemotherapy furnished on or after April 1, 2000. The Company has elected to move to a 100% federally-determined acuity-adjusted rate on approximately 300 of its nursing facilities effective January 1, 2000. The Company currently estimates an increase in its 2000 net operating revenues of approximately $20,000,000 related to the impact of BBRA 1999. However, no assurances can be given as to what the actual impact of BBRA 1999 will be on the Company's consolidated financial position or results of operations. In addition, future federal budget legislation and federal and state regulatory changes, 4 6 including refinements to the RUG-III system expected from HCFA by October 1, 2000, may negatively impact the Company. In addition to the requirements to be met by the Company's facilities for annual licensure renewal, the Company's healthcare facilities are subject to annual surveys and inspections in order to be certified for participation in the Medicare and Medicaid programs. In order to maintain their operator's licenses and their certification for participation in Medicare and Medicaid programs, the nursing facilities must meet certain statutory and administrative requirements. These requirements relate to the condition of the facilities and the adequacy and condition of the equipment used therein, the quality and adequacy of personnel, and the quality of medical care. Such requirements are subject to change. There can be no assurance that, in the future, the Company will be able to maintain such licenses for its facilities or that the Company will not be required to expend significant capital in order to do so. HCFA published new survey, certification and enforcement guidelines in July 1999 and December 1999 to implement the Medicare and Medicaid provisions of the Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987"). The OBRA 1987 statute authorized HCFA to develop regulations governing survey, certification and enforcement of the requirements for contract participation by skilled nursing facilities under Medicare and nursing facilities under Medicaid. Among the provisions that HCFA has adopted are requirements that (i) surveys focus on residents' outcomes; (ii) all deviations from the participation requirements will be considered deficiencies, but all deficiencies will not constitute noncompliance; and (iii) certain types of deficiencies must result in the imposition of a sanction. The regulations also identify alternative remedies and specify the categories of deficiencies for which they will be applied. These remedies include: temporary management; denial of payment for new admissions; denial of payment for all residents; civil monetary penalties of $50 to $10,000; closure of facility and/or transfer of residents in emergencies; directed plans of correction; and directed in service training. HCFA's most recent enforcement guidelines established criteria that mandates the immediate application of remedies before the provider has an opportunity to correct the deficiency; that impose a "per instance" civil monetary penalty up to $10,000 per day; and that allow imposition of termination in as few as two days. The Company has undertaken an analysis of the procedures with respect to its programs and facilities covered by the revised HCFA regulations. While it is unable to predict at this time the degree to which its programs and facilities will be determined to be in compliance with regulations, compliance data for the past year is available. Results of HCFA surveys for the past year determined that over 96% of the Company's nursing facilities surveyed have been determined to be in compliance with the HCFA criteria. HCFA has reported that of all non-Company facilities in the states in which the Company operates, 95% of such facilities were determined to be similarly in compliance. Furthermore, the average number of deficiencies cited in the Company's facilities was less than the rest of the industry, and the Company had more deficiency-free facilities than the rest of the industry. Although the Company could be adversely affected if a substantial portion of its programs or facilities were eventually determined not to be in compliance with the HCFA regulations, the Company believes its programs and facilities are generally in compliance. The Company has a Quality Management ("QM") program to help ensure that high quality care is provided in each of its nursing and outpatient facilities. The Company's nationwide QM network of healthcare professionals includes physician medical directors, registered nurses, dieticians, social workers and other specialists who work in conjunction with regional and facility based QM professionals. Facility based QM is structured through the Company's Quality Assessment and Assurance Committee. With a philosophy of quality improvement, Company-wide clinical indicators are utilized as a database to set goals and monitor thresholds in critical areas directly related to the delivery of healthcare related services. These internal evaluations are used by local quality improvement teams, which include QM advisors, to identify and correct possible problems. The Social Security Act and regulations of HHS provide for exclusion of providers and related persons from participation in the Medicare and Medicaid programs if they have been convicted of a criminal offense related to the delivery of an item or service under either of these programs or if they have been convicted, under state or federal law, of a criminal offense relating to neglect or abuse of residents in connection with the delivery of a healthcare item or service. Furthermore, individuals or entities and their affiliates may be 5 7 excluded from the Medicare and Medicaid programs under certain circumstances including conviction relating to fraud, license revocation or suspension, or failure to furnish services of adequate quality. On February 3, 2000, the Company entered into a series of agreements with the U.S. Department of Justice and the Office of Inspector General (the "OIG") of the Department of Health and Human Services, which settled the federal government investigations of the Company relating to the allocation to the Medicare Program of certain nursing labor costs in its skilled nursing facilities from 1990 to 1998 (the "Allocation Investigations"). These agreements finalized the terms of the settlements, which were tentatively announced in July 1999. The agreements consist of: (i) a Plea Agreement; (ii) a Civil Settlement Agreement; (iii) a Corporate Integrity Agreement; and (iv) an agreement concerning the disposition of 10 nursing facilities. Under the Plea Agreement, a subsidiary of the Company pled guilty to one count of mail fraud and 10 counts of making false statements to Medicare relating to the submission of certain Medicare cost reports for 10 separate nursing facilities. The subsidiary paid a criminal fine of $5,000,000 and, under a separate agreement, is obligated to dispose of the 10 nursing facilities. The subsidiary will continue to operate and staff the nursing facilities until new operators are found. Under the separate Civil Settlement Agreement, the Company will reimburse the federal government $170,000,000 as follows: (i) $25,000,000, which was paid during the first quarter of 2000, and (ii) $145,000,000 to be withheld from the Company's biweekly Medicare periodic interim payments in equal installments over eight years. Such installments began during the first quarter of 2000. In addition, the Company agreed to resubmit certain Medicare filings to reflect reduced labor costs. The Company also entered into a Corporate Integrity Agreement with the OIG relating to the monitoring of compliance with requirements of federal healthcare programs on an ongoing basis. Such agreement addresses the Company's obligations to ensure that it is in compliance with the requirements for participation in the federal healthcare programs, and includes the Company's functional and training obligations, audit and review requirements, recordkeeping and reporting requirements, as well as penalties for breach/noncompliance of the agreement. Except as noted above, the Company believes that its facilities are in substantial compliance with currently applicable Medicaid and Medicare conditions of participation. In the ordinary course of its business, however, the Company receives notices of deficiencies for failure to comply with various regulatory requirements. The Company reviews such notices and takes appropriate corrective action. In most cases, the Company and the reviewing agency will agree upon the steps to be taken to bring the facility into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take a number of adverse actions against a facility. These adverse actions can include the imposition of fines, temporary suspension of admission of new patients to the facility, decertification from participation in the Medicaid or Medicare programs and, in extreme circumstances, revocation of a facility's license. The "fraud and abuse" anti-kickback provisions of the Social Security Act (presently codified in Section 1128B(b) of the Social Security Act, hereinafter the "Antifraud Amendments") make it a criminal felony offense to knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business for which reimbursement is provided under government health programs, including Medicare and Medicaid. The Antifraud Amendments have been broadly interpreted to make remuneration of any kind, including many types of business and financial arrangements among providers, potentially illegal if any purpose of the remuneration or financial arrangement is to induce a referral. Accordingly, joint ventures, space and equipment rentals, management and personal services contracts, and certain investment arrangements among providers may be suspect. In 1991 and again in 1999, HHS promulgated regulations which describe, or clarify, certain arrangements that would not be subject to enforcement action under the Social Security Act (the "Safe Harbors"). The Safe Harbors described in the regulations are narrow, leaving unprotected a wide range of economic relationships that many hospitals, physicians and other healthcare providers consider to be legitimate business arrangements not prohibited by the Antifraud Amendments. The regulations do not purport to describe 6 8 comprehensively all lawful relationships between healthcare providers and referral sources, and clearly provide that arrangements that do not qualify for Safe Harbor protection are not automatically deemed to violate the Antifraud Amendments. Thus, skilled nursing facilities and other healthcare providers having arrangements or relationships that do not fall within a Safe Harbor may not be required to alter them in order to ensure compliance with the Social Security Act provisions. Although failure to qualify for a Safe Harbor may subject a particular arrangement or relationship to increased regulatory scrutiny, the fact that a particular relationship or arrangement does not fall within one of the Safe Harbors does not, in and of itself, mean the relationship or arrangement is unlawful. In addition to the Antifraud Amendments, Section 1877 of the Social Security Act (known as the "Stark Law") imposes restrictions on financial relationships between physicians and certain entities. The Stark Law provides that if a physician (or an immediate family member of a physician) has a financial relationship with an entity that furnishes certain designated health services, the physician may not refer a Medicare or Medicaid patient to the entity, and the entity may not bill for services provided unless an exception to the financial relationship exists. Designated health services include certain services furnished by the Company, such as physical therapy, occupational therapy, prescription drugs and home health. The types of financial relationships that can trigger the referral and billing prohibitions are broad and include ownership or investment interests, as well as compensation arrangements. Penalties for violating the law are severe, including denial of payment for services furnished pursuant to prohibited referrals, civil monetary penalties of $15,000 for each item claimed, assessments equal to 200% of the dollar value of each such service provided, and exclusion from the Medicare and Medicaid programs. On August 14, 1995, final regulations were published interpreting the original provisions of the Stark Law that became effective January 1, 1992. These provisions relate to entities that furnish clinical laboratory services, commonly referred to as "Stark I." Expanded restrictions as applied to the additional designated health services (referred to as "Stark II") became effective as of January 1, 1995. Proposed regulations implementing Stark II were published on January 9, 1998. The Company cannot predict the final form that such regulations will take or the effect that Stark II or the regulations promulgated thereunder will have on the Company. Many states in which the Company operates also have laws that prohibit payments to physicians for patient referrals with statutory language similar to the Antifraud Amendments, but with broader effect since they apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties, as well as loss of licensure. Many states also have passed legislation similar to the Stark Law, but with broader effect, since the legislation applies regardless of the source of payment for care. The scope of these state laws is broad and little precedent exists for their interpretation or enforcement. On August 21, 1996, President Clinton signed significant new federal health reform legislation known as the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). The new law includes comprehensive and far-reaching revisions or supplements to the Antifraud Amendments. Under HIPAA, healthcare fraud, now defined as knowingly and willfully executing or attempting to execute a "scheme or device" to defraud any healthcare benefit program, is made a federal criminal offense. In addition, for the first time, federal enforcement officials will have the ability to exclude from the Medicare and Medicaid programs any investors, officers and managing employees associated with business entities that have committed healthcare fraud, even if the investor, officer or employee had no actual knowledge of the fraud. HIPAA also establishes a new violation for the payment of inducements to Medicare or Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner. Most of the provisions of HIPAA became effective January 1, 1997. HIPAA was followed by the 1997 Act. The 1997 Act also contained a significant number of new fraud and abuse provisions. For example, civil monetary penalties may now be imposed for violations of the anti-kickback provisions of the Medicare and Medicaid statute (previously, exclusion or criminal prosecution were the only actions under the anti-kickback statute), as well as contracting with an individual or entity that the provider knows or should know is excluded from a federal healthcare program. The 1997 Act provides for civil monetary penalties of $50,000 and damages of not more than three times the amount of remuneration in the prohibited activity. 7 9 In October 1999, under the mandates of HIPAA, HHS released proposed regulations aimed at protecting the privacy of electronically transmitted health data. Such regulations are expected to be finalized during the second quarter of 2000. The proposed regulations are designed to set boundaries on the use and release of health records and establish accountability for inappropriate use and release of protected health information. Protected health information is individually identifiable health information that is or has been electronically transmitted or electronically maintained by a covered entity and includes such information in any other form. Under the proposed regulations, all health plans and many healthcare providers, including the Company, as well as healthcare clearinghouses, fall within the scope of the regulations. The proposed regulations would: (i) allow health information to be used and shared for treatment and payment for health care; (ii) allow information to be disclosed without an individual's authorization for certain national priority purposes, such as research, public health and oversight, but only under defined circumstances; (iii) require written authorization for use and disclosure of health information for other purposes; and (iv) create standards for informing individuals how their information is used and disclosed, ensure individuals that they have access to information about themselves, and require health plans and providers to maintain administrative and physical safeguards to protect the confidentiality of health information and protect against unauthorized access. HHS estimates that implementation of the proposed regulations will cost the healthcare industry approximately $1.8 billion to $6.3 billion over the next five years. The Company will be required to be in compliance with the proposed regulations within two years of final issuance of the regulations. The Company is currently evaluating the impact of compliance with the proposed regulations but has not completed its analysis or finalized its estimated costs to comply. There can be no assurances that the final regulations will not have an adverse affect on the Company's consolidated financial position, results of operations or cash flows. In 1976, Congress established the OIG at HHS to identify and eliminate fraud, abuse and waste in HHS programs and to promote efficiency and economy in HHS departmental operations. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to healthcare providers on ways to engage in legitimate business practices and avoid scrutiny under the fraud and abuse statutes, the OIG has from time to time issued "fraud alerts" identifying segments of the healthcare industry and particular practices that are vulnerable to abuse. The OIG has issued three fraud alerts targeting the skilled nursing industry: an August 1995 alert relating to the provision of medical supplies to nursing facilities, the fraudulent billing for medical supplies and equipment and fraudulent supplier transactions; a May 1996 alert focusing on the provision of fraudulent professional services to nursing facility residents; and a March 1998 alert addressing the interrelationship between hospice services and the nursing home industry, and potentially illegal practices and arrangements. The fraud alerts encourage persons having information about potentially abusive practices or transactions to report such information to the OIG. In addition to laws addressing referral relationships, several federal laws impose criminal and civil sanctions for fraudulent and abusive billing practices. The federal False Claims Act imposes sanctions, consisting of monetary penalties of up to $10,000 for each claim and treble damages, on entities and persons who knowingly present or cause to be presented a false or fraudulent claim for payment to the federal government. Section 1128B(a) of the Social Security Act prohibits the knowing and willful making of a false statement or misrepresentation of a material fact in relation to the submission of a claim for payment under government health programs (including the Medicare and Medicaid programs). Violations of this provision constitute felony offenses punishable by fines and imprisonment. The new HIPAA provisions establish criminal penalties for fraud, theft, embezzlement, and the making of false statements in relation to healthcare benefits programs (which includes private, as well as government programs). Government prosecutors are increasing their use of the federal False Claims Act to prosecute quality of care deficiencies in nursing facilities and other healthcare facilities under the theory that the submission of reimbursement claims for services provided in a manner which falls short of quality of care standards can constitute the submission of a false claim in violation of the federal False Claims Act. A joint federal/state initiative, Operation Restore Trust, was created in 1995 to apply to nursing homes, home health agencies, and suppliers of medical equipment in five states: New York, Florida, California, Illinois and Texas. The program was subsequently expanded to hospices in these states as well. The program is designed to focus audit and law enforcement efforts on geographic areas and provider types receiving large 8 10 concentrations of Medicare and Medicaid funds. According to HHS statistics, the targeted states account for nearly 40% of all Medicare and Medicaid beneficiaries. Under Operation Restore Trust, the OIG and HCFA have undertaken a variety of activities to address fraud and abuse by nursing homes, home health providers and medical equipment suppliers. These activities include financial audits, creation of a Fraud and Waste Report Hotline, and increased investigations and enforcement activity. On May 20, 1997, HHS announced that Operation Restore Trust would be expanded during the next two years to include twelve additional states (Arizona, Colorado, Georgia, Louisiana, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia and Washington), as well as several other types of healthcare services. Over the longer term, it is anticipated that Operation Restore Trust investigative techniques will be used in all 50 states, and will be applied throughout the Medicare and Medicaid programs. In addition to increasing the resources devoted to investigating allegations of fraud and abuse in the Medicare and Medicaid programs, federal and state regulatory and law enforcement authorities are taking an increasingly strict view of the requirements imposed on healthcare providers by the Social Security Act and Medicare and Medicaid regulations. The Nursing Home Resident Protection Amendments of 1999, which were signed into law on March 25, 1999 and amend Section 1919(c)(2) of the Social Security Act, are designed to protect Medicaid patients living in nursing facilities that decide to withdraw from the Medicaid program. Under the amended version of Section 1919(c)(2), a nursing facility is required to continue providing care to residents currently qualifying for assistance under the Medicaid program, as well as residents who may qualify under Medicaid in the future, even if the facility decides to withdraw from the Medicaid program. While federal regulations do not provide states with grounds to curtail funding of their Medicaid cost reimbursement programs due to state budget deficiencies, states have nevertheless curtailed funding in such circumstances in the past. No assurance can be given that states will not do so in the future or that the future funding of Medicaid programs will remain at levels comparable to the present levels. The United States Supreme Court ruled in 1990 that healthcare providers could use the Boren Amendment to require states to comply with their legal obligation to adequately fund Medicaid programs. The 1997 Act repeals the Boren Amendment and authorizes states to develop their own standards for setting payment rates. It requires each state to use a public process for establishing proposed rates whereby the methodologies and justifications used for setting such rates are available for public review and comment. This requires facilities to become more involved in the rate setting process since failure to do so may interfere with a facility's ability to challenge rates later. PATIENT CARE LIABILITIES General liability and professional liability costs for the long-term care industry, especially in the state of Florida, have become increasingly expensive and unpredictable. The Company and most of its competitors have experienced increases in both the number of claims and the size of the typical claim. This phenomenon is most evident in the state of Florida, where well-intended patient rights' statutes tend to be exploited by plaintiffs' attorneys, since the statutes allow for actual damages, punitive damages and plaintiff attorney fees to be included in any proven violation. Statistics show that Florida long-term care providers: (i) incur three times the number of general liability claims as compared to the rest of the country; (ii) have general liability claims that are approximately 250% higher in cost than the rest of the country; and (iii) incur 40% of the cost for general liability claims for the country, but only represent approximately 10% of the total nursing facility beds. Insurance companies are exiting the state of Florida, or severely restricting their capacity to write long-term care general liability insurance, since they cannot provide coverage when faced with the magnitude of losses and the explosive growth of claims. Although the Company's overall general liability costs per bed in Florida are lower than the industry average in Florida, these costs are still severely out of line with the rest of the country and continue to escalate. The Company's provision for insurance and related items decreased approximately $65,900,000 for the year ended December 31, 1999, as compared to the same period in 1998, primarily due to a loss portfolio transfer transaction that significantly increased insurance costs during the fourth quarter of 1998. Despite such decrease year over year, the Company, as well as other nursing home 9 11 providers with significant operations in Florida, are experiencing substantial increases in patient care and other claims, evidencing the negative trend surrounding patient care liabilities. The Company is taking an active role in lobbying efforts to reform tort laws in the state of Florida. In addition, community outreach programs are being used to communicate care levels and caregiver dedication in each of its facilities. There is significant media and legislative attention currently being placed on these issues, and the Company is hopeful that there will be certain reforms made in the current statutes. However, there can be no assurances made that legislative changes will be made, or that any such changes will have a positive impact on the current trend. COMPETITION The long-term care industry is highly competitive. The Company's competitive position varies from facility to facility, from community to community and from state to state. Some of the significant competitive factors for the placing of patients in a nursing facility include quality of care, reputation, physical appearance of facilities, services offered, family preferences, location, physician services and price. The Company's operations compete with services provided by nursing facilities, acute care hospitals, subacute facilities, transitional hospitals, rehabilitation facilities, hospices and home healthcare centers. The Company also competes with a number of tax-exempt nonprofit organizations which can finance acquisitions and capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to the Company. Recently, the long-term care industry has experienced significant changes in its competitive environment. Several large long-term care providers have filed for protection under the federal bankruptcy laws. There is no way to predict how this may impact competition for the Company in the long-term, and there can be no assurance that the Company will not encounter increased competition which could adversely affect its business, results of operations or financial condition. EMPLOYEES At December 31, 1999, the Company had approximately 67,000 employees. The Company is subject to both federal minimum wage and applicable federal and state wage and hour laws. The Company maintains various employee benefit plans. In recent years, the Company has experienced increases in its labor costs primarily due to higher wages and greater benefits required to attract and retain qualified personnel, increased staffing levels in its nursing facilities due to greater patient acuity and the hiring of therapists on staff. The Company's ability to control costs, including its wages and related expenses which continue to rise and represent the largest component of the Company's operating and administrative expenses, will significantly impact its future operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Operating Results." Due to nationwide low unemployment rates, the Company is currently experiencing difficulty attracting and retaining certain nursing home personnel, such as certified nursing assistants, nurses' aides and other important personnel, for whom the Company competes with other service industries. Although the Company's wages and related expenses decreased for the year ended December 31, 1999, as compared to the same period in 1998, the Company's weighted average wage rate and use of registry personnel increased, both of which underscore the increased difficulties many of the Company's nursing facilities are having attracting personnel. The Company is addressing this through several ongoing programs and training initiatives. No assurance can be given that these programs and training initiatives will in fact improve the Company's ability to attract these nursing personnel. Approximately 100 of the Company's nursing facilities, or 7% of the Company's employees, are represented by various labor unions. Certain labor unions have publicly stated that they are concentrating their organizing efforts within the long-term healthcare industry. The Company, being one of the largest employers within the long-term healthcare industry, has been the target of a "corporate campaign" by two AFL-CIO affiliated unions attempting to organize certain of the Company's facilities. Although the Company has never experienced any material work stoppages and believes that its relations with its employees are generally good, 10 12 the Company cannot predict the effect continued union representation or organizational activities will have on the Company's future activities. There can be no assurance that continued union representation and organizational activities will not result in material work stoppages, which could have a material adverse effect on the Company's operations. Excessive litigation is a tactic common to "corporate campaigns" and one that is being employed against the Company. There are several proceedings against facilities operated by the Company before the National Labor Relations Board ("NLRB"). These proceedings consolidate individual cases from separate facilities, and certain of these proceedings are currently pending before the NLRB. The Company is vigorously defending these proceedings. The Company believes, based on advice from its Deputy General Counsel, that many of these cases are without merit, and further, it is the Company's belief that the NLRB-related proceedings, individually and in the aggregate, are not material to the Company's consolidated financial position, results of operations, or cash flows. ITEM 2. PROPERTIES. At February 29, 2000, the Company operated 559 nursing facilities, 37 assisted living centers, 180 outpatient therapy clinics and 63 home care centers in 34 states and the District of Columbia. Most of the Company's 192 leased nursing facilities are subject to "net" leases which require the Company to pay all taxes, insurance and maintenance costs. Most of these leases have original terms from ten to fifteen years and contain at least one renewal option, which could extend the original term of the leases by five to fifteen years. Many of these leases also contain purchase options. The Company considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. Certain of the nursing facilities and assisted living centers owned by the Company are included in the collateral securing the obligations under its various debt agreements. See "Part II, Item 8 -- Note 6 of Notes to Consolidated Financial Statements." 11 13 The following is a summary of the Company's nursing facilities, assisted living centers, outpatient therapy clinics and home care centers at February 29, 2000:
NURSING FACILITIES ASSISTED LIVING ------------------- CENTERS OUTPATIENT HOME ---------------- THERAPY CARE TOTAL CLINICS CENTERS LICENSED TOTAL ---------- ------- LOCATION NUMBER BEDS NUMBER UNITS NUMBER NUMBER - -------- ------- --------- ------- ------ ---------- ------- Alabama.......................... 21 2,743 -- -- -- -- Arizona.......................... 3 480 -- -- -- -- Arkansas......................... 37 4,376 4 80 4 2 California....................... 72 7,744 3 185 37 19 Colorado......................... -- -- -- -- 15 -- Delaware......................... -- -- -- -- 4 -- District of Columbia............. 1 355 -- -- -- -- Florida.......................... 51 6,325 5 311 -- -- Georgia.......................... 17 2,137 4 109 23 3 Hawaii........................... 2 396 -- -- -- -- Illinois......................... 3 275 -- -- -- -- Indiana.......................... 26 3,817 1 16 -- 1 Kansas........................... 31 1,783 2 29 -- -- Kentucky......................... 8 1,039 -- -- -- -- Louisiana........................ -- -- -- -- 1 -- Maryland......................... 4 585 1 16 8 -- Massachusetts.................... 24 2,402 -- -- -- -- Michigan......................... 2 206 -- -- -- -- Minnesota........................ 35 3,032 3 33 -- -- Mississippi...................... 21 2,496 -- -- -- -- Missouri......................... 28 2,908 3 101 -- 1 Nebraska......................... 24 2,146 1 16 -- 4 Nevada........................... -- -- -- -- -- 1 New Jersey....................... 1 120 -- -- -- -- North Carolina................... 11 1,398 1 16 10 24 Ohio............................. 12 1,433 -- -- 4 -- Pennsylvania..................... 42 4,780 3 53 12 5 South Carolina................... 3 302 -- -- 15 -- South Dakota..................... 17 1,228 1 36 -- -- Tennessee........................ 7 948 2 57 -- -- Texas............................ -- -- -- -- 36 2 Virginia......................... 15 1,937 3 80 -- -- Washington....................... 9 904 -- -- 11 -- West Virginia.................... 3 310 -- -- -- -- Wisconsin........................ 29 3,291 -- -- -- 1 --- ------ -- ----- --- -- 559 61,896 37 1,138 180 63 === ====== == ===== === == CLASSIFICATION Owned............................ 365 39,842 32 852 -- -- Leased........................... 192 21,919 5 286 180 63 Managed.......................... 2 135 -- -- -- -- --- ------ -- ----- --- -- 559 61,896 37 1,138 180 63 === ====== == ===== === ==
12 14 ITEM 3. LEGAL PROCEEDINGS. On February 3, 2000, the Company entered into a series of agreements with the U.S. Department of Justice and the Office of Inspector General (the "OIG") of the Department of Health and Human Services which settled the federal government investigations of the Company relating to the allocation to the Medicare Program of certain nursing labor costs in its skilled nursing facilities from 1990 to 1998 (the "Allocation Investigations"). These agreements finalized the terms of the settlements, which were tentatively announced in July 1999. The agreements consist of: (i) a Plea Agreement; (ii) a Civil Settlement Agreement; (iii) a Corporate Integrity Agreement; and (iv) an agreement concerning the disposition of 10 nursing facilities. Under the Plea Agreement, a subsidiary of the Company pled guilty to one count of mail fraud and 10 counts of making false statements to Medicare relating to the submission of certain Medicare cost reports for 10 separate nursing facilities. The subsidiary paid a criminal fine of $5,000,000 and, under a separate agreement, is obligated to dispose of the 10 nursing facilities. The subsidiary will continue to operate and staff the nursing facilities until new operators are found. Under the separate Civil Settlement Agreement, the Company will reimburse the federal government $170,000,000 as follows: (i) $25,000,000, which was paid during the first quarter of 2000, and (ii) $145,000,000 to be withheld from the Company's biweekly Medicare periodic interim payments in equal installments over eight years. Such installments began during the first quarter of 2000. In addition, the Company agreed to resubmit certain Medicare filings to reflect reduced labor costs. The Company also entered into a Corporate Integrity Agreement with the OIG relating to the monitoring of compliance with requirements of federal healthcare programs on an ongoing basis. Such agreement addresses the Company's obligations to ensure that it is in compliance with the requirements for participation in the federal healthcare programs, and includes the Company's functional and training obligations, audit and review requirements, recordkeeping and reporting requirements, as well as penalties for breach/noncompliance of the agreement. On July 6, 1999, an amended complaint was filed by the plaintiffs in a previously disclosed purported class action lawsuit pending against the Company and certain of its officers in the United States District Court for the Eastern District of Arkansas (the "Class Action"). Plaintiffs filed a second amended complaint on September 9, 1999 which asserted claims under Section 10(b) (including Rule 10b-5 promulgated thereunder) and under Section 20 of the Securities Exchange Act of 1934 arising from practices that were the subject of the Allocation Investigations. The defendants filed a motion to dismiss that complaint on October 8, 1999. Due to the preliminary state of the Class Action and the fact the second amended complaint does not allege damages with any specificity, the Company is unable at this time to assess the probable outcome of the Class Action or the materiality of the risk of loss. However, the Company believes that it acted lawfully with respect to plaintiff investors and will vigorously defend the Class Action. However, there can be no assurances that the Company will not experience an adverse effect on its consolidated financial position, results of operations or cash flows as a result of these proceedings. In addition, since July 29, 1999, eight derivative lawsuits have been filed in the state courts of Arkansas, California and Delaware (collectively, the "Derivative Actions"). Norman M. Lyons v. David R. Banks, et al., Case No. OT99-4041, was filed in the Chancery Court of Pulaski County, Arkansas (4th Division) on or about July 29, 1999, and the parties filed an Agreed Motion to Stay the proceedings on January 17, 2000; Alfred Badger, Jr. v. David R. Banks, et al., Case No. OT99-4353, was filed in the Chancery Court of Pulaski County, Arkansas (1st Division) on or about August 17, 1999 and voluntarily dismissed on November 30, 1999. On November 1, 1999, the defendants filed a motion to dismiss the Lyons and Badger actions. James L. Laurita v. David R. Banks, et al., Case No. 17348NC, was filed in the Delaware Chancery Court on or about August 2, 1999; Kenneth Abbey v. David R. Banks, et al., Case No. 17352NC, was filed in the Delaware Chancery Court on or about August 4, 1999; Alan Friedman v. David R. Banks, et al., Case No. 17355NC, was filed in the Delaware Chancery Court on or about August 9, 1999. The Laurita, Abbey and Friedman actions were subsequently consolidated by order of the Delaware Chancery Court. On or about October 1, 1999, the defendants moved to dismiss the Laurita, Abbey and Friedman actions. Elles Trading Company v. 13 15 David R. Banks, et al., was filed in the Superior Court for San Francisco County, California on or about August 4, 1999, and the plaintiffs filed a notice of voluntary dismissal on February 3, 2000. Kushner v. David R. Banks, et al., Case No. LR-C-98-646, was filed in the United States District Court for the Eastern District of Arkansas (Western Division) on September 30, 1999. Richardson v. David R. Banks, et al., Case No. LR-C-99-826, was filed in the United States District Court for the Eastern District of Arkansas (Western Division) on November 4, 1999. The Kushner and Richardson actions were ordered to be consolidated and by agreed motion, plaintiffs have until April 15, 2000 to file an amended, consolidated complaint. The Derivative Actions each name the Company's directors as defendants, as well as the Company as a nominal defendant. The Badger and Lyons actions also name as defendants certain of the Company's officers. The Derivative Actions each allege breach of fiduciary duties to the Company and its stockholders arising primarily out of the Company's alleged exposure to loss due to the Class Action and the Allocation Investigations. The Lyons, Badger and Richardson actions also assert claims for abuse of control and constructive fraud arising from the same allegations, and the Richardson action also claims unjust enrichment. Due to the preliminary state of the Derivative Actions and the fact the complaints do not allege damages with any specificity, the Company is unable at this time to assess the probable outcome of the Derivative Actions or the materiality of the risk of loss. However, the Company believes that it acted lawfully with respect to the allegations of the Derivative Actions and will vigorously defend the Derivative Actions. However, there can be no assurances that the Company will not experience an adverse effect on its consolidated financial position, results of operations or cash flows as a result of these proceedings. There are various other lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages that are generally not covered by insurance. The Company does not believe that the ultimate resolution of such other matters will have a material adverse effect on the Company's consolidated financial position or results of operations. 14 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended December 31, 1999. EXECUTIVE OFFICERS AND DIRECTORS The table below sets forth, as to each executive officer and director of the Company, such person's name, positions with the Company and age. Each executive officer and director of the Company holds office until a successor is elected, or until the earliest of death, resignation or removal. Each executive officer is elected or appointed by the Board of Directors. The information below is given as of February 29, 2000.
NAME POSITION AGE ---- -------- --- David R. Banks(1)............................... Chairman of the Board, Chief Executive Officer and Director 63 William A. Mathies.............................. Executive Vice President and President -- Beverly Healthcare 40 T. Jerald Moore................................. Executive Vice President 59 Bobby W. Stephens............................... Executive Vice President -- Asset Management 55 Scott M. Tabakin................................ Executive Vice President and Chief Financial Officer 41 Mark D. Wortley................................. Executive Vice President and President -- Beverly Care Alliance 44 Philip W. Small................................. Executive Vice President -- Strategic Planning and Operations Support 43 Pamela H. Daniels............................... Senior Vice President, Controller and Chief Accounting Officer 36 Schuyler Hollingsworth, Jr. .................... Senior Vice President and Treasurer 53 Beryl F. Anthony, Jr.(1)(3)(5).................. Director 62 Carolyne K. Davis, R.N., Ph.D.(1)(4)............ Director 68 James R. Greene(2)(3)(4)........................ Director 78 Edith E. Holiday(2)(4)(5)....................... Director 48 Jon E.M. Jacoby(1)(2)........................... Director 61 Risa J. Lavizzo-Mourey, M.D.(3)(4).............. Director 45 Marilyn R. Seymann(2)(4)(5)..................... Director 57
- --------------- (1) Member of the Executive Committee. (2) Member of the Audit and Compliance Committee. (3) Member of the Compensation Committee. (4) Member of the Quality Management Committee. (5) Member of the Nominating Committee. Mr. Banks has been a director of the Company since 1979 and has served as Chief Executive Officer since May 1989 and Chairman of the Board since March 1990. Mr. Banks was President of the Company from 1979 to September 1995. Mr. Banks is a director of Nationwide Health Properties, Inc., Ralston Purina Company and Agribrands International, Inc. Mr. Mathies joined the Company in 1981 as an Administrator in training. He was an Administrator until 1986 at which time he became a Regional Manager. In 1988, Mr. Mathies was elected Vice President of Operations for the California region and was elected Executive Vice President of the Company and President of the corporations within Beverly Healthcare in September 1995. Mr. Moore joined the Company as Executive Vice President in December 1992 and served as President of the corporations within Beverly Specialty Hospitals from June 1996 to June 1998. Mr. Moore was employed at Aetna Life and Casualty from 1963 to 1992 and was elected Senior Vice President in 1990. 15 17 Mr. Stephens joined the Company as a staff accountant in 1969. He was elected Assistant Vice President in 1978, Vice President of the Company and President of the Company's Central Division in 1980, and Executive Vice President in February 1990. Mr. Stephens is a director of Sparks Regional Medical Center, City National Bank in Fort Smith, Arkansas, Beverly Japan Corporation, and Harbortown Properties, Inc. Mr. Tabakin joined the Company in October 1992 as Vice President, Controller and Chief Accounting Officer. He was elected Senior Vice President in May 1995, Acting Chief Financial Officer in September 1995 and Executive Vice President and Chief Financial Officer in October 1996. From 1980 to 1992, Mr. Tabakin was with Ernst & Young LLP. Mr. Tabakin is a director of St. Edward Mercy Medical Center. Mr. Wortley joined the Company as Senior Vice President and President of the corporations within Beverly Care Alliance in September 1994 and was elected Executive Vice President in February 1996. From 1988 to 1994, Mr. Wortley was an officer of Therapy Management Innovations. Mr. Small joined the Company in January 1986 as Reimbursement Manager, was promoted to Division Controller in September 1986 and Director of Finance for the California Region in 1989. He was elected Vice President -- Reimbursement in September 1990, Senior Vice President -- Finance in 1995 and Executive Vice President -- Strategic Planning and Operations Support in August 1998. Ms. Daniels joined the Company in May 1988 as Audit Coordinator. She was promoted to Financial Reporting Senior Manager in 1991 and Director of Financial Reporting in 1992. She was elected Vice President, Controller and Chief Accounting Officer in October 1996 and Senior Vice President in December 1999. From 1985 to 1988, Ms. Daniels was with Price Waterhouse LLP. Mr. Hollingsworth joined the Company in June 1985 as Assistant Treasurer. He was elected Treasurer in 1988, Vice President in 1990 and Senior Vice President in March 1992. Mr. Anthony served as a member of the United States Congress and was Chairman of the Democratic Congressional Campaign Committee from 1987 through 1990. In 1993, he became a partner in the Winston & Strawn law firm. He has been a director of the Company since January 1993. Dr. Davis has been an international health care consultant since 1985. She is a director of Beckman Coulter, Inc., The Prudential Insurance Company of America, Inc., MiniMed, Inc. and Merck & Co., Inc. She has been a director of the Company since December 1997. Mr. Greene's principal occupation has been that of a director and consultant to various U.S. and international businesses since 1986. He is a director of Buck Engineering Company and Bank Leumi. He has been a director of the Company since January 1991. Ms. Holiday is an attorney. She served as White House Liaison for the Cabinet and all federal agencies during the Bush administration. Prior to that, Ms. Holiday served as General Counsel of the U.S. Treasury Department, as well as its Assistant Secretary of Treasury for Public Affairs and Public Liaison. She is a director of Amerada Hess Corporation, Hercules Incorporated, H.J. Heinz Company and RTI International Metals, Inc. and a director or trustee of various investment companies in the Franklin Templeton Group of Funds. She has been a director of the Company since March 1995. Mr. Jacoby is Executive Vice President, Chief Financial Officer and a director of Stephens Group, Inc. Mr. Jacoby has held the indicated positions with Stephens Group, Inc. since 1986, and prior to that time, served as Manager of the Corporate Finance Department and Assistant to the President of Stephens Inc. Mr. Jacoby is a director of Power-One, Inc. and Delta and Pine Land Company, Inc. He has been a director of the Company since February 1987. Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the Division of Geriatric Medicine, Associate Executive Vice President for health policy and Professor of Medicine at the University of Pennsylvania, Ralston-Penn Center. She is a director of Lifemark, Inc. and Hanger Orthopedic Group, Inc. She has been a director of the Company since March 1995. Ms. Seymann is President and Chief Executive Officer of M One, Inc., a management and information systems consulting firm specializing in the financial services industry. She is a director of Community First 16 18 Bankshares, Inc., True North Communications, Inc. and NorthWestern Corporation. She has been a director of the Company since March 1995. During 1999, there were 17 meetings of the Board of Directors. Each director attended 75% or more of the meetings of the Board and committees on which he or she served. In 1999, directors, other than Mr. Banks, received a retainer fee of $25,000 for serving on the Board and an additional fee of $1,000 for each Board or committee meeting attended. The chairperson of each committee received an additional $1,000 for each committee meeting attended. Such fees can be deferred, at the option of the director, as provided for under the Non-Employee Director Deferred Compensation Plan (discussed below). Mr. Banks, the Company's current Chairman of the Board and Chief Executive Officer received no additional cash compensation for serving on the Board or its committees. During 1997, the Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan was approved. Such plan provides each nonemployee director the opportunity to receive awards equivalent to shares of Common Stock ("deferred share units") and to defer receipt of compensation for services rendered to the Company. There are three types of contributions available under the plan. First, nonemployee directors can defer all or part of retainer and meeting fees to a pre-tax deferred compensation account with two investment options. The first investment option is a cash account which is credited with interest, and the second investment option is a deferred share unit account, with each unit having a value equivalent to one share of Common Stock. The second type of contribution is a Company matching contribution whereby the Company matches 25% of the amount of fees deferred, to the extent the deferral is in the deferred share unit account. Third, as a replacement for the prior benefits under the retirement plan for outside directors, each nonemployee director receives a grant of 675 deferred share units each year which is automatically credited to the deferred share unit account. Distributions under the plan will commence upon retirement, termination, death or disability and will be made in shares of Common Stock unless the Board of Directors approves payment in cash. During 1997, the New Beverly Non-Employee Directors Stock Option Plan (the "Non-Employee Directors Stock Option Plan") was approved. Such plan became effective December 3, 1997 and will remain in effect until December 31, 2007, subject to early termination by the Board of Directors. Such plan replaced the Nonemployee Directors' Plan entered into in 1994. There are 300,000 shares of the Company's $.10 par value common stock ("Common Stock") authorized for issuance, subject to certain adjustments, under the Non-Employee Directors Stock Option Plan. The Non-Employee Directors Stock Option Plan was amended by the Board of Directors on December 11, 1997 to provide that 3,375 stock options be granted to each nonemployee director on June 1 of each year until the plan is terminated, subject to the availability of shares. Stock option grants have been made since 1994 to each of the nonemployee directors. Such stock options are granted at a purchase price equal to fair market value on the date of grant, become exercisable one year after date of grant and expire ten years after date of grant. 17 19 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed on the New York and Pacific Stock Exchanges. The table below sets forth, for the periods indicated, the range of high and low sales prices of the Common Stock as reported on the New York Stock Exchange composite tape.
PRICES -------------------------- HIGH LOW ----------- ----------- 1998 First Quarter............................................. $15 9/16 $12 1/4 Second Quarter............................................ 16 1/4 13 1/2 Third Quarter............................................. 14 13/16 7 3/8 Fourth Quarter............................................ 8 1/8 5 1/4 1999 First Quarter............................................. $ 6 15/16 $ 4 1/2 Second Quarter............................................ 8 3/16 4 5/16 Third Quarter............................................. 8 3 7/8 Fourth Quarter............................................ 5 3/16 3 1/2 2000 First Quarter (through February 29)....................... $ 4 9/16 $ 2 1/2
The Company is subject to certain restrictions under its long-term debt agreements related to the payment of cash dividends on its Common Stock. During 1999 and 1998, no cash dividends were paid on the Company's Common Stock and no future dividends are currently planned. At February 29, 2000, there were 5,341 record holders of the Common Stock. EMPLOYEE STOCK PURCHASE PLAN The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and restated) enables all full-time employees having completed one year of continuous service to purchase shares of Common Stock at the current market price through payroll deductions. The Company makes contributions in the amount of 30% of the participant's contribution. Each participant specifies the amount to be withheld from earnings per two-week pay period, subject to certain limitations. The total charge to the Company's statement of operations for the year ended December 31, 1999 related to this plan was approximately $1,723,000. At December 31, 1999, there were approximately 3,400 participants in the plan. Merrill Lynch & Co., Merrill Lynch World Headquarters, North Tower, World Financial Center, New York, New York 10281, was appointed broker to open and maintain an account in each participant's name and to purchase shares of Common Stock on the New York Stock Exchange for each participant. 18 20 ITEM 6. SELECTED FINANCIAL DATA. The following table of selected financial data should be read in conjunction with the Company's consolidated financial statements and related notes thereto for 1999, 1998 and 1997 included elsewhere in this Annual Report on Form 10-K.
AT OR FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------- 1999 1998(1) 1997(2) 1996 1995 ------------ ------------ ------------ ------------ ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net operating revenues........................ $ 2,546,672 $ 2,812,232 $ 3,217,099 $ 3,267,189 $ 3,228,553 Interest income............................... 4,335 10,708 13,201 13,839 14,228 ------------ ------------ ------------ ------------ ----------- Total revenues........................ 2,551,007 2,822,940 3,230,300 3,281,028 3,242,781 Costs and expenses: Operating and administrative................ 2,354,328 2,633,135 2,888,021 2,958,942 2,960,832 Interest.................................... 72,578 65,938 82,713 91,111 84,245 Depreciation and amortization............... 99,160 93,722 107,060 105,468 103,581 Special charges related to settlements of federal government investigations......... 202,447 1,865 -- -- -- Asset impairments, workforce reductions and other unusual items....................... 23,818 69,443 44,000 -- 100,277 Year 2000 remediation....................... 12,402 9,719 -- -- -- ------------ ------------ ------------ ------------ ----------- Total costs and expenses.............. 2,764,733 2,873,822 3,121,794 3,155,521 3,248,935 ------------ ------------ ------------ ------------ ----------- Income (loss) before provision for (benefit from) income taxes, extraordinary charge and cumulative effect of change in accounting for start-up costs.......................... (213,726) (50,882) 108,506 125,507 (6,154) Provision for (benefit from) income taxes..... (79,079) (25,936) 49,913 73,481 1,969 Extraordinary charge, net of income tax benefit of $1,057 in 1998 and $1,099 in 1996........................................ -- (1,660) -- (1,726) -- Cumulative effect of change in accounting for start-up costs, net of income tax benefit of $2,811...................................... -- (4,415) -- -- -- ------------ ------------ ------------ ------------ ----------- Net income (loss)............................. $ (134,647) $ (31,021) $ 58,593 $ 50,300 $ (8,123) ============ ============ ============ ============ =========== Net income (loss) applicable to common shares...................................... $ (134,647) $ (31,021) $ 58,593 $ 50,300 $ (14,998) ============ ============ ============ ============ =========== Diluted income (loss) per share of common stock: Before extraordinary charge and cumulative effect of change in accounting for start-up costs............................ $ (1.31) $ (.24) $ .57 $ .50 $ (.16) Extraordinary charge........................ -- (.02) -- (.01) -- Cumulative effect of change in accounting for start-up costs........................ -- (.04) -- -- -- ------------ ------------ ------------ ------------ ----------- Net income (loss)........................... $ (1.31) $ (.30) $ .57 $ .49 $ (.16) ============ ============ ============ ============ =========== Shares used to compute per share amounts.... 102,491,000 103,762,000 103,422,000 110,726,000 92,233,000 CONSOLIDATED BALANCE SHEET DATA: Total assets.................................. $ 1,982,880 $ 2,160,511 $ 2,073,469 $ 2,525,082 $ 2,506,461 Current portion of long-term debt............. $ 34,052 $ 27,773 $ 31,551 $ 38,826 $ 84,639 Long-term debt, excluding current portion..... $ 746,164 $ 878,270 $ 686,941 $ 1,106,256 $ 1,066,909 Stockholders' equity.......................... $ 641,124 $ 776,206 $ 862,505 $ 861,095 $ 820,333 OTHER DATA: Average occupancy percentage(3)............... 87.2% 88.7% 88.9% 87.4% 88.1% Number of nursing home beds................... 62,217 62,293 63,552 71,204 75,669
- --------------- (1) Amounts for 1998 include the operations of American Transitional Hospitals, Inc. through June 30, 1998. (2) Amounts for 1997 include the operations of Pharmacy Corporation of America up until the effective date of the Merger (as discussed herein). (3) Average occupancy percentage for 1999, 1998 and 1997 was based on operational beds, and for all periods prior to 1997, such percentage was based on licensed beds. Average occupancy percentage for 1999, 1998 and 1997 based on licensed beds was 85.3%, 86.9% and 87.1%, respectively. 19 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL GOVERNMENTAL REGULATION AND REIMBURSEMENT Healthcare system reform and concerns over rising Medicare and Medicaid costs continue to be high priorities for both the federal and state governments. In August 1997, the President signed into law the Balanced Budget Act of 1997 (the "1997 Act") in which Congress included numerous program changes directed at balancing the federal budget. The legislation changed Medicare and Medicaid policy in a number of ways, including: (i) the phase in of a Medicare prospective payment system ("PPS") for skilled nursing facilities effective July 1, 1998 (see below); (ii) establishment of limitations on Part B therapy charges per beneficiary per year; (iii) a 10% reduction in Part B therapy costs for the period from January 1, 1998 through July 1, 1998, at which time reimbursement for these services became based on fee schedules established by the Health Care Financing Administration ("HCFA") of the Department of Health and Human Services ("HHS"); (iv) development of new Medicare and Medicaid health plan options; (v) creation of additional safeguards against healthcare fraud and abuse; and (vi) repeal of the Medicaid "Boren Amendment" payment standard. The legislation also included new opportunities for providers to focus further on patient outcomes by creating alternative patient delivery structures. PPS, which became effective for the Company on January 1, 1999, significantly changed the manner in which its skilled nursing facilities are paid for inpatient services provided to Medicare beneficiaries. In year one (1999 for the Company), Medicare PPS rates were based 75% on 1995 facility-specific Medicare costs (as adjusted for inflation) and 25% was federally-determined based upon the acuity level (as measured by which one of 44 Resource Utilization Grouping ("RUG") categories a particular patient is classified) of Medicare patients served in the Company's skilled nursing facilities. The direct impact of PPS and other provisions of the 1997 Act was a decrease in the Company's 1999 net operating revenues of approximately $114,000,000 as compared to 1998. Unless a nursing facility provider chooses to be reimbursed at 100% of the federally-determined acuity-adjusted rate as allowed under BBRA 1999 (as discussed below): (i) in year two, Medicare PPS rates will be based 50% on 1995 facility-specific costs (as adjusted for inflation) and 50% on the federally-determined acuity-adjusted rate; (ii) in year three, Medicare PPS rates will be based 25% on 1995 facility-specific costs (as adjusted for inflation) and 75% on the federally-determined acuity-adjusted rate; and (iii) in year four and thereafter, Medicare PPS rates will be based entirely on the federally-determined acuity-adjusted rate. In November 1999, the President signed into law the Balanced Budget Refinement Act of 1999 ("BBRA 1999") which refines the 1997 Act and will restore approximately $2.7 billion in Medicare funding for skilled nursing providers over the next three years. The provisions of BBRA 1999 include: (i) the option for a skilled nursing provider to choose between the higher of current law, as described above, or 100% of the federally-determined acuity-adjusted rate effective for cost reporting periods starting on or after January 1, 2000; (ii) a temporary increase of 20% in the federal adjusted per diem rates for 15 RUG categories covering extensive services, special care, clinically complex, and high and medium rehabilitation, for the period from April 1, 2000 through September 30, 2000; at which time, if HCFA has not recalculated the necessary refinements to the overall RUG-III system, the 20% increase will be extended until such time as the calculations are completed; (iii) a 4% increase in the federal adjusted per diem rates for all 44 RUG categories for each of the periods October 1, 2000 through September 30, 2001 and October 1, 2001 through September 30, 2002; (iv) a two-year moratorium on implementing the two Part B $1,500 therapy limitations contained in the 1997 Act, effective January 1, 2000 through January 1, 2002; (v) a retroactive provision that corrects a technical error in the 1997 Act denying payment of Part B services to skilled nursing facilities participating in PPS demonstration projects; and (vi) exclusion from the Medicare PPS rates of ambulance services to and from dialysis, prosthetic devices, radioisotopes and chemotherapy furnished on or after April 1, 2000. The Company has elected to move to a 100% federally-determined acuity-adjusted rate on approximately 300 of its nursing facilities effective January 1, 2000. The Company currently estimates an increase in its 2000 net operating revenues of approximately $20,000,000 related to the impact of BBRA 1999. However, no assurances can be given as to what the actual impact of BBRA 1999 will be on the Company's consolidated financial position or 20 22 results of operations. In addition, future federal budget legislation and federal and state regulatory changes, including refinements to the RUG-III system expected from HCFA by October 1, 2000, may negatively impact the Company. The Company's future operating performance will continue to be affected by the issues facing the long-term healthcare industry as a whole, including the maintenance of occupancy, its ability to continue to expand higher margin businesses, the availability of nursing, therapy and other personnel, the adequacy of funding of governmental reimbursement programs, the rising cost of patient care liabilities, the demand for nursing home care and the nature of any additional healthcare reform measures that may be taken by the federal government, as well as by any state governments. The Company's ability to control costs, including its wages and related expenses which continue to rise and represent the largest component of the Company's operating and administrative expenses, will also significantly impact its future operating results. PATIENT CARE LIABILITIES General liability and professional liability costs for the long-term care industry, especially in the state of Florida, have become increasingly expensive and unpredictable. The Company and most of its competitors have experienced increases in both the number of claims and the size of the typical claim. This phenomenon is most evident in the state of Florida, where well-intended patient rights' statutes tend to be exploited by plaintiffs' attorneys, since the statutes allow for actual damages, punitive damages and plaintiff attorney fees to be included in any proven violation. Statistics show that Florida long-term care providers: (i) incur three times the number of general liability claims as compared to the rest of the country; (ii) have general liability claims that are approximately 250% higher in cost than the rest of the country; and (iii) incur 40% of the cost for general liability claims for the country, but only represent approximately 10% of the total nursing facility beds. Insurance companies are exiting the state of Florida, or severely restricting their capacity to write long-term care general liability insurance, since they cannot provide coverage when faced with the magnitude of losses and the explosive growth of claims. Although the Company's overall general liability costs per bed in Florida are lower than the industry average in Florida, these costs are still severely out of line with the rest of the country and continue to escalate. The Company's provision for insurance and related items decreased approximately $65,900,000 for the year ended December 31, 1999, as compared to the same period in 1998, primarily due to a loss portfolio transfer transaction that significantly increased insurance costs during the fourth quarter of 1998. Despite such decrease year over year, the Company, as well as other nursing home providers with significant operations in Florida, are experiencing substantial increases in patient care and other claims, evidencing the negative trend surrounding patient care liabilities. The Company is taking an active role in lobbying efforts to reform tort laws in the state of Florida. In addition, community outreach programs are being used to communicate care levels and caregiver dedication in each of its facilities. There is significant media and legislative attention currently being placed on these issues, and the Company is hopeful that there will be certain reforms made in the current statutes. However, there can be no assurances made that legislative changes will be made, or that any such changes will have a positive impact on the current trend. YEAR 2000 REMEDIATION In 1996, the Company began a major systems initiative to upgrade or replace all of its integrated financial application software to facilitate the adoption of a new standard chart of accounts. As part of that major initiative, the Company took the necessary steps to upgrade or replace the applications with year 2000 compliant releases of the software whenever possible. For those purchased software applications where the year 2000 release was not available, the upgrades to the compliant releases were addressed as part of the year 2000 project (the "Y2K Project"). The Company utilized both internal and external resources to reprogram or replace, test, and implement the software and operating equipment for year 2000 modifications. The total amount expended on the Y2K Project was approximately $24,700,000 ($22,100,000 expensed and $2,600,000 capitalized for new systems and equipment). The Company does not expect to incur material expenditures in the future related to the year 2000 issue. 21 23 The Company did not experience any disruptions in, or failures of, normal business activities attributable to the year 2000 issue and does not anticipate any such disruptions in the future. OPERATING RESULTS 1999 COMPARED TO 1998 RESULTS OF OPERATIONS Net loss was $134,647,000 for the year ended December 31, 1999, as compared to a net loss of $31,021,000 for the year ended December 31, 1998. Net loss for 1999 included a special pre-tax charge of approximately $202,400,000 related to the separate criminal and civil settlements of the Allocation Investigations (as discussed below). In addition, net loss for 1999 included a pre-tax charge of approximately $23,800,000 for impaired long-lived assets, workforce reductions and other unusual items (as discussed below). Net loss for 1998 included a pre-tax charge of approximately $69,400,000 for workforce reductions, impaired long-lived assets and other unusual items (as discussed below). In addition, net loss for 1998 included a $1,660,000 extraordinary charge, net of income taxes, related to the write-off of unamortized deferred financing costs associated with the repayment of certain debt instruments, as well as certain bond refundings, and a cumulative effect adjustment of $4,415,000, net of income taxes, related to the adoption of SOP 98-5 (as defined below). In late July 1999, the Company reached a tentative understanding with the U.S. Department of Justice to settle the separate civil and criminal aspects of all investigations by the federal government and its fiscal intermediary into the allocation of nursing labor hours to the Medicare program from 1990 to 1998 (the "Allocation Investigations"). On February 3, 2000, the Company announced that it had signed agreements with the Office of Inspector General of the Department of Health and Human Services and the U.S. Department of Justice finalizing the tentative settlements. (See "Part I, Item 3. Legal Proceedings"). As a result, during the year ended December 31, 1999, the Company recorded a special pre-tax charge of approximately $202,400,000 ($127,500,000, net of income taxes, or $1.24 per share diluted) which includes: (i) provisions totaling approximately $128,800,000 representing the net present value of the separate civil and criminal settlements; (ii) impairment losses of approximately $17,000,000 on 10 nursing facilities that pled guilty of submitting erroneous cost reports to the Medicare program in conjunction with the criminal settlement; (iii) approximately $39,000,000 for certain prior year cost report related items affected by the settlements; (iv) approximately $3,100,000 of debt issuance and refinancing costs related to various bank debt modifications as a result of the settlements; and (v) approximately $14,500,000 for other investigation and settlement related costs. The final written agreements resolved both civil and criminal matters, and included a corporate integrity agreement, providing for a reporting and compliance program to be overseen by the Company and the Office of Inspector General. The provisions of the settlements were consistent with the Company's expectations as previously reported and included the planned disposition of 10 nursing facilities operated by a single subsidiary of the Company, which will continue to operate and staff the nursing facilities until new operators are found. Under the Civil Settlement Agreement, the Company will reimburse the federal government $170,000,000 as follows: (i) $25,000,000, which was paid during the first quarter of 2000; and (ii) $145,000,000 to be withheld from the Company's biweekly Medicare periodic interim payments in equal installments over eight years. Because this obligation does not bear interest, the Company is required to impute interest over the eight-year period. This imputed interest expense, along with an increase in interest and rent expense resulting from the Amendments (as defined below), will adversely impact the Company's future operating results. Under the Plea Agreement, the subsidiary operating the 10 nursing facilities that pled guilty of submitting erroneous cost reports to the Medicare program paid a fine of $5,000,000 during the first quarter of 2000. 22 24 If, prior to January 1, 1999, the settlement obligations and related items had been finalized and recorded, the Company's bank debt had been refinanced and the Company had closed or sold the facilities that are impacted by the criminal settlement, the Company's results of operations, on an unaudited pro forma basis, would have been reduced by approximately $13,200,000, or $.13 per share diluted, for the year ended December 31, 1999. During the fourth quarter of 1999, the Company recorded a pre-tax charge of approximately $23,800,000 related to restructuring of agreements on certain leased facilities; severance and other workforce reduction expenses; asset impairments; and other unusual items. The Company negotiated the terminations of lease agreements on 19 nursing facilities (2,047 beds), which resulted in a charge of approximately $17,300,000. In addition, the Company accrued approximately $5,900,000 primarily related to severance agreements associated with three executives of the Company. Substantially all of the $5,900,000 was paid during the first quarter of 2000. INCOME TAXES The Company had an annual effective tax rate of 37% for the year ended December 31, 1999, compared to an annual effective tax rate of 51% for the year ended December 31, 1998. The annual effective tax rate in 1999 was different than the federal statutory rate primarily due to the impact of state income taxes. The annual effective tax rate in 1998 was different than the federal statutory rate primarily due to the impact of the sale of American Transitional Hospitals, Inc. ("ATH"), which operated as Beverly Specialty Hospitals, the benefit of certain tax credits and the pre-tax charge of $69,400,000 (as discussed below) which reduced the Company's pre-tax income to a level where the impact of permanent tax differences and state income taxes had a more significant impact on the effective tax rate. At December 31, 1999, the Company had federal net operating loss carryforwards of $84,259,000 for income tax purposes which expire in years 2018 through 2019. At December 31, 1999, the Company had general business tax credit carryforwards of $8,850,000 for income tax purposes which expire in years 2008 through 2015. For financial reporting purposes, the federal net operating loss carryforwards and the general business tax credit carryforwards have been utilized to offset existing net taxable temporary differences reversing during the carryforward periods. The Company's net deferred tax assets at December 31, 1999 will be realized primarily through the reversal of temporary taxable differences and future taxable income. Accordingly, the Company does not believe that a deferred tax valuation allowance is necessary at December 31, 1999. NET OPERATING REVENUES The Company reported net operating revenues of $2,546,672,000 during the year ended December 31, 1999 compared to $2,812,232,000 for the same period in 1998. Approximately 91% and 90% of the Company's total net operating revenues for the years ended December 31, 1999 and 1998, respectively, were derived from services provided by the Company's Beverly Healthcare segment. The decrease in net operating revenues of approximately $265,600,000 for the year ended December 31, 1999, as compared to the same period in 1998, consists of the following: a decrease of approximately $204,000,000 due to the disposition of, or lease terminations on, 12 nursing facilities, one assisted living center and 17 home care centers in 1999 and 26 nursing facilities and ATH in 1998; a decrease of approximately $180,100,000 due to facilities which the Company operated during each of the years ended December 31, 1999 and 1998 ("same facility operations"); partially offset by an increase of approximately $118,500,000 due to acquisitions of nursing facilities and outpatient and home care businesses during 1999 and 1998. The decrease in net operating revenues of approximately $204,000,000 for 1999, as compared to the same period in 1998, resulting from dispositions and lease terminations that occurred during the years ended December 31, 1999 and 1998 are as follows. During 1999, the Company sold or terminated the leases on 12 nursing facilities (1,291 beds), one assisted living center (10 units), 17 home care centers and certain other assets. The Company did not operate two of these nursing facilities (166 beds) which were leased to other nursing home operators in prior year transactions. The Company recognized net pre-tax losses, which were included in net operating revenues during the year ended December 31, 1999, of approximately $4,000,000 as a result of these dispositions. During 1998, the Company sold or terminated the leases on 26 nursing facilities 23 25 (3,203 beds) and certain other assets. The Company did not operate seven of these nursing facilities (893 beds) which were leased to other nursing home operators in prior year transactions. The Company recognized net pre-tax gains, which were included in net operating revenues during the year ended December 31, 1998, of approximately $17,900,000 as a result of these dispositions. The operations of the disposed facilities and other assets were immaterial to the Company's consolidated financial position and results of operations. In June 1998, the Company completed the sale of its ATH subsidiary to Select Medical Corporation. Prior to the sale, ATH operated 15 transitional hospitals (743 beds) in eight states which addressed the needs of patients requiring intense therapy regimens, but not necessarily the breadth of services provided within traditional acute care hospitals. The Company recognized a pre-tax gain, which was included in net operating revenues during the year ended December 31, 1998, of approximately $16,000,000 as a result of this disposition. During the year ended December 31, 1999, the Company recorded a pre-tax charge to adjust the sales price of this disposition by approximately $4,500,000, which was included in net operating revenues. The operations of ATH were immaterial to the Company's consolidated financial position and results of operations. The decrease in net operating revenues of approximately $180,100,000 from same facility operations for the year ended December 31, 1999, as compared to the same period in 1998, was due to the following: approximately $97,800,000 decrease in ancillary revenues and approximately $48,800,000 decrease in Medicare rates, both primarily due to the impact of PPS and other provisions of the 1997 Act; approximately $49,300,000 decrease due to a shift in the Company's patient mix; approximately $47,200,000 decrease due to a decline in same facility occupancy; and approximately $15,700,000 due to various other items; partially offset by an increase of approximately $78,700,000 due primarily to increases in Medicaid and private rates. The Company's same facility occupancy was 87.9% for the year ended December 31, 1999, as compared to 89.3% for the same period in 1998. The Company has implemented a series of initiatives to improve its occupancy levels and has experienced some initial success; however, it is too early to determine the long-term effectiveness of these initiatives. No assurance can be given that these initiatives will in fact improve the Company's occupancy levels. The Company's Medicare, private and Medicaid census for same facility operations was 9%, 19% and 71%, respectively, for the year ended December 31, 1999, as compared to 10%, 20% and 69%, respectively, for the same period in 1998. The increase in net operating revenues of approximately $118,500,000 for 1999, as compared to the same period in 1998, resulting from acquisitions which occurred during the years ended December 31, 1999 and 1998 are described as follows. During 1999, the Company purchased three outpatient therapy clinics, two home care centers, two nursing facilities (284 beds), one previously leased nursing facility (190 beds) and certain other assets. During 1998, the Company purchased 111 outpatient therapy clinics, 50 home care centers, eight nursing facilities (823 beds), one assisted living center (48 units), two previously leased nursing facilities (228 beds) and certain other assets. The acquisitions of these facilities and other assets were accounted for as purchases. The operations of these acquired facilities and other assets were immaterial to the Company's consolidated financial position and results of operations. OPERATING AND ADMINISTRATIVE EXPENSES The Company reported operating and administrative expenses of $2,354,328,000 during the year ended December 31, 1999 compared to $2,633,135,000 for the same period in 1998. The decrease of approximately $278,800,000 consists of the following: a decrease of approximately $216,700,000 from same facility operations; a decrease of approximately $172,300,000 due to dispositions; partially offset by an increase of approximately $110,200,000 due to acquisitions. (See above for a discussion of dispositions and acquisitions). Operating and administrative expenses decreased approximately $216,700,000 from same facility operations for the year ended December 31, 1999, as compared to the same period in 1998. This decrease was due primarily to a shift in the Company's patient mix, as well as a decline in same facility occupancy, and consists of the following: approximately $69,500,000 due to a decrease in wages and related expenses; approximately $50,200,000 due to a decrease in contracted therapy expenses; and approximately $31,100,000 due primarily to decreases in purchased ancillary products, nursing supplies and other variable costs. In addition, the Company's provision for insurance and related items decreased approximately $65,900,000 for the year ended 24 26 December 31, 1999, as compared to the same period in 1998, primarily due to a loss portfolio transfer transaction that significantly increased insurance costs during the fourth quarter of 1998. Although the Company's wages and related expenses decreased for the year ended December 31, 1999, as compared to the same period in 1998, the Company's weighted average wage rate and use of registry personnel increased, both of which underscore the increased difficulties many of the Company's nursing facilities are having attracting nursing aides, assistants and other important personnel. The Company is addressing this challenge through several ongoing programs and training initiatives. No assurance can be given that these programs and training initiatives will in fact improve the Company's ability to attract these nursing and related personnel. INTEREST EXPENSE, NET Interest income decreased to $4,335,000 for the year ended December 31, 1999, as compared to $10,708,000 for the same period in 1998 primarily due to the sale of investment securities in conjunction with a loss portfolio transfer transaction during the fourth quarter of 1998. Interest expense increased to $72,578,000 for the year ended December 31, 1999, as compared to $65,938,000 for the same period in 1998 primarily due to an increase in net borrowings under the Revolver/Letter of Credit Facility during the year ended December 31, 1999 as compared to the same period in 1998, imputed interest on the civil settlement of approximately $4,600,000, and the write-off of deferred financing costs in conjunction with certain bond refundings. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense increased to $99,160,000 for the year ended December 31, 1999, as compared to $93,722,000 for the same period in 1998. Such increase was affected by the following: approximately $8,200,000 increase due to capital additions and improvements, as well as acquisitions; partially offset by a decrease of approximately $2,800,000 due to dispositions of, or lease terminations on, certain facilities and ATH. NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for the Company during the first quarter of 2001. The Company has not completed its review of SFAS No. 133 but does not expect there to be a material effect on its consolidated financial position or results of operations. Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), provides guidance on the capitalization and amortization of costs incurred to develop or obtain computer software for internal use. The Company's adoption of SOP 98-1 during the first quarter of 1999 did not have a material effect on its consolidated financial position or results of operations. 1998 COMPARED TO 1997 RESULTS OF OPERATIONS Operating results for 1997 included the operations of Pharmacy Corporation of America ("PCA") up until the effective date of the Merger (as discussed herein). Net loss was $31,021,000 for the year ended December 31, 1998, as compared to net income of $58,593,000 for the same period in 1997. Net loss for 1998 included a pre-tax charge of approximately $69,400,000 for workforce reductions, impaired long-lived assets and other unusual items (as discussed herein). In addition, net loss for 1998 included a $1,660,000 extraordinary charge, net of income taxes, related to the write-off of unamortized deferred financing costs associated with the repayment of certain debt instruments, as well as certain bond refundings, and a cumulative effect adjustment of $4,415,000, net of income taxes, related to the adoption of SOP 98-5 (as 25 27 defined below). Net income for 1997 included a pre-tax charge of $44,000,000 relating to the December 3, 1997 Reorganization (as discussed herein). In preparing for the January 1, 1999 implementation of the new Medicare prospective payment system ("PPS"), as well as responding to other legislative and regulatory changes, the Company reorganized its inpatient rehabilitative operations, analyzed its businesses for impairment issues and implemented new care-delivery and tracking software. These initiatives, among others, resulted in a fourth quarter 1998 pre-tax charge of approximately $69,400,000, including $3,800,000 for workforce reductions, $58,700,000 for asset impairments and $6,900,000 for various other items. During the fourth quarter of 1998, the Company reorganized all employed therapy associates into a newly formed subsidiary, Beverly Rehabilitation, Inc. ("Bev Rehab"), which is part of the Company's Beverly Care Alliance segment, in order to create a more consolidated, strategic approach to managing the Company's inpatient rehabilitation business under PPS. The Company accrued approximately $2,500,000 related to the termination of 835 therapy associates in conjunction with this reorganization. During 1999, 770 therapy associates were paid approximately $2,300,000 and left the Company. The Company reversed the remaining $200,000 during 1999 for changes in its initial accounting estimates. In addition, the Company's home care and outpatient therapy units underwent the consolidation and relocation of certain services, including billing and collections, which resulted in a workforce reduction charge of approximately $1,300,000 associated with the termination of 236 associates. Of these 236 associates, 74 associates were paid $233,000 and left the Company by December 31, 1998. During 1999, 85 home care and outpatient therapy associates were paid approximately $600,000 and left the Company. The Company reversed the remaining $500,000 during 1999 for changes in its initial accounting estimates. The significant regulatory changes under PPS and other provisions of the 1997 Act were an indicator to management that the carrying values of certain of its nursing facilities may not be fully recoverable. In addition, there were certain assets that had 1998 operating losses, and anticipated future operating losses, which led management to believe that these assets were impaired. Accordingly, management estimated the undiscounted future cash flows to be generated by each facility and reduced the carrying value to its estimate of fair value, resulting in an impairment charge of approximately $9,000,000 in 1998. Management calculated the fair values of the impaired facilities by using the present value of estimated undiscounted future cash flows, or its best estimate of what that facility, or similar facilities in that state, would sell for in the open market. Management believes it has the knowledge to make such estimates of open market sales prices based on the volume of facilities the Company has purchased and sold in previous years. Also during the fourth quarter of 1998, management identified nine nursing facilities with an aggregate carrying value of approximately $14,000,000 which needed to be replaced in order to increase operating efficiencies, attract additional census or upgrade the nursing home environment. Management committed to a plan to construct new facilities to replace these buildings and reduced the carrying values of these facilities to their estimated salvage values. These assets are included in the total assets of the Company's Beverly Healthcare segment. In addition, management committed to a plan to dispose of 24 home care centers and nine outpatient therapy clinics which had 1998 and expected future period operating losses. These businesses had an aggregate carrying value of approximately $16,500,000 and were written down to their fair value less costs to sell. These assets generated pre-tax losses for the Company of approximately $5,100,000 during the year ended December 31, 1998. Substantially all of these assets were purchased during 1998. The Company disposed of a majority of these assets during 1999. These assets were included in the total assets of the Company's Beverly Care Alliance segment. The Company incurred a charge of approximately $30,300,000 related to these replacements, closings and planned disposals. These assets were included in the consolidated balance sheet captions "Property and equipment, net" and "Goodwill, net" at December 31, 1998. In addition to the workforce reduction and impairment charges, the Company recorded a fourth quarter 1998 impairment charge for other long-lived assets of approximately $19,400,000 primarily related to the write-off of software and software development costs. In conjunction with the implementation of business process changes, and the need for enhanced data-gathering and reporting required to operate effectively under 26 28 PPS, the Company installed new clinical software in each of its nursing facilities during late-1998, which made obsolete the previously employed software. In addition, certain of the Company's other ongoing software development projects were abandoned or written down due to obsolescence, feasibility or cost recovery issues. Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), provides guidance on the financial reporting of start-up and organization costs. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. Prior to 1998, the Company capitalized start-up costs in connection with the opening of new facilities and businesses. The Company adopted the provisions of SOP 98-5 in its financial statements for the year ended December 31, 1998. The effect of adopting SOP 98-5 was to decrease the Company's pre-tax loss from continuing operations in 1998 by approximately $1,000,000 and to record a charge for the cumulative effect of an accounting change, as of January 1, 1998, of $4,415,000, net of income taxes, or $0.04 per share, to expense costs that had previously been capitalized. INCOME TAXES The Company had an annual effective tax rate of 51% for the year ended December 31, 1998, compared to an annual effective tax rate of 46% for year ended December 31, 1997. The annual effective tax rate in 1998 was different than the federal statutory rate primarily due to the impact of the sale of ATH, the benefit of certain tax credits and the pre-tax charge of $69,400,000 (as discussed above) which reduced the Company's pre-tax income to a level where the impact of permanent tax differences and state income taxes had a more significant impact on the effective tax rate. The annual effective tax rate in 1997 was different than the federal statutory rate primarily due to the impact of nondeductible transaction costs associated with the Reorganization. At December 31, 1998, the Company had federal net operating loss carryforwards of $50,989,000 for income tax purposes which expire in 2018. At December 31, 1998, the Company had general business tax credit carryforwards of $5,270,000 for income tax purposes which expire in years 2008 through 2014. For financial reporting purposes, the federal net operating loss carryforwards and the general business tax credit carryforwards have been utilized to offset existing net taxable temporary differences reversing during the carryforward periods. NET OPERATING REVENUES The Company reported net operating revenues of $2,812,232,000 during the year ended December 31, 1998 compared to $3,217,099,000 for the same period in 1997. Approximately 90% and 80% of the Company's total net operating revenues for the years ended December 31, 1998 and 1997, respectively, were derived from services provided by the Company's Beverly Healthcare segment. The decrease in net operating revenues of approximately $404,900,000 for the year ended December 31, 1998, as compared to the same period in 1997, consists of the following: a decrease of approximately $599,900,000 due to the disposition of, or lease terminations on, 26 nursing facilities and ATH in 1998 and 68 nursing facilities and PCA in 1997; partially offset by an increase of approximately $155,100,000 due to the acquisitions of nursing facilities and outpatient, home care and hospice businesses during 1998 and 1997; and an increase of approximately $39,900,000 due to facilities which the Company operated during each of the years ended December 31, 1998 and 1997 ("same facility operations"). The decrease in net operating revenues of approximately $599,900,000 for 1998, as compared to the same period in 1997, resulting from dispositions and lease terminations that occurred during the year ended December 31, 1997 are as follows. (See above for discussion of 1998 dispositions). During 1997, the Company sold or terminated the leases on 68 nursing facilities (8,314 beds) and certain other assets. The Company recognized net pre-tax gains, which were included in net operating revenues during the year ended December 31, 1997, of approximately $19,900,000 as a result of these dispositions. The operations of these disposed facilities and other assets were immaterial to the Company's consolidated financial position and results of operations. On December 3, 1997, the Company completed a tax-free reorganization (the "Reorganization") in order to facilitate the merger of PCA with Capstone Pharmacy Services, Inc. (the "Merger"). As a result of the Merger, the Company received approximately $281,000,000 of cash as partial repayment for PCA's 27 29 intercompany debt, with a charge to the Company's retained earnings of approximately $45,100,000 for the remaining intercompany balance which was not repaid. Pursuant to the Merger, each of the Company's stockholders of record at the close of business on December 3, 1997 received .4551 shares of PharMerica, Inc.'s common stock for each share of the Company's Common Stock held. The conversion ratio was based on a total of 109,873,230 outstanding shares of the Company's Common Stock at the close of business on December 3, 1997 divided into the 50,000,000 shares issued by PharMerica, Inc. In connection with the Reorganization, the Company incurred $44,000,000 of transaction costs related to the restructuring, repayment or renegotiating of substantially all of the Company's outstanding debt instruments, as well as the renegotiating or making of certain payments, primarily in the form of accelerated vesting of stock-based awards, under various employment agreements with officers of the Company. Such amounts were funded with a portion of the $281,000,000 proceeds received as partial repayment of PCA's intercompany debt, as discussed above. Included in the $44,000,000 of transaction costs were approximately $18,000,000 of non-cash expenses related to various long-term incentive agreements. Total net operating revenues for PCA for the year ended December 31, 1997 were approximately $564,200,000 and represent the operations of PCA prior to the Merger. The increase in net operating revenues of approximately $155,100,000 for 1998, as compared to the same period in 1997, resulting from acquisitions which occurred during the year ended December 31, 1997 are as follows. (See above for discussion of 1998 acquisitions). During 1997, the Company purchased six previously leased nursing facilities (758 beds) and certain other assets including, among other things, 14 institutional pharmacies and 40 outpatient therapy clinics. The acquisitions of these facilities and other assets were accounted for as purchases. The operations of these acquired facilities and other assets were immaterial to the Company's consolidated financial position and results of operations. The increase in net operating revenues of approximately $39,900,000 from same facility operations for the year ended December 31, 1998, as compared to the same period in 1997, was due to the following: approximately $92,300,000 due to increases in room and board rates and approximately $6,100,000 due to various other items; partially offset by approximately $30,400,000 decrease in ancillary revenues due to a decline in the Company's Medicare census and, to a lesser extent, as a result of hiring therapists on staff as opposed to contracting for their services; approximately $19,900,000 due to a decrease in same facility occupancy to 89.3% for the year ended December 31, 1998, as compared to 90.1% for the same period in 1997; and approximately $8,200,000 due to a shift in the Company's patient mix. The Company's Medicare, private and Medicaid census for same facility operations was 10%, 20% and 69%, respectively, for the year ended December 31, 1998, as compared to 12%, 19% and 68%, respectively, for the same period in 1997. OPERATING AND ADMINISTRATIVE EXPENSES The Company reported operating and administrative expenses of $2,633,135,000 during the year ended December 31, 1998 compared to $2,888,021,000 for the same period in 1997. The decrease of approximately $254,900,000 consists of the following: a decrease of approximately $534,700,000 due to dispositions; partially offset by an increase of approximately $141,400,000 due to acquisitions; and an increase of approximately $138,400,000 from same facility operations. (See above for a discussion of dispositions and acquisitions). The increase in operating and administrative expenses of approximately $138,400,000 from same facility operations for the year ended December 31, 1998, as compared to the same period in 1997, was due to the following: approximately $66,500,000 due to an increase in the provision for insurance and related items; approximately $61,400,000 due to increased wages and related expenses principally due to higher wages and greater benefits required to attract and retain qualified personnel and the hiring of therapists on staff as opposed to contracting for their services; approximately $32,900,000 due to increases in purchased ancillary products, nursing supplies and other variable costs; and approximately $13,300,000 due to various other items. These increases in operating and administrative expenses were partially offset by approximately $35,700,000 28 30 due to a decrease in contracted therapy expenses as a result of hiring therapists on staff as opposed to contracting for their services. On December 31, 1998, Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company, completed a risk transfer of substantially all of its pre-May 1998 auto liability, general liability and workers' compensation claims liability to a third party insurer effected through a loss portfolio transfer valued as of December 31, 1998. In exchange for a premium of approximately $116,000,000 (paid primarily from restricted cash and investments), the Company acquired reinsurance of approximately $180,000,000 to insure such auto liability, general liability and workers' compensation losses. In addition, in exchange for a premium of approximately $4,000,000, the Company acquired excess coverage of approximately $20,000,000 for general liability losses. The Company's provision for insurance and related items increased approximately $82,200,000 during the fourth quarter of 1998 primarily as a result of this transaction. INTEREST EXPENSE, NET Net interest expense decreased approximately $14,300,000 to $55,230,000 for the year ended December 31, 1998, as compared to $69,512,000 for the same period in 1997 primarily due to the conversion of the Company's 5 1/2% convertible subordinated debentures to Common Stock in the third quarter of 1997, as well as the repayments of the Company's 7 5/8% convertible subordinated debentures, the 8 3/4% Notes and certain other notes and mortgages during the fourth quarter of 1997 with the proceeds from the Merger. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense decreased approximately $13,300,000 to $93,722,000 for the year ended December 31, 1998, as compared to $107,060,000 for the same period in 1997. Such decrease was affected by the following: approximately $25,900,000 decrease due to the dispositions of, or lease terminations on, certain nursing facilities, ATH and PCA; partially offset by an increase of approximately $12,600,000 due to acquisitions, as well as capital additions and improvements. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1999, the Company had approximately $24,700,000 in cash and cash equivalents, approximately $105,700,000 of net working capital and approximately $222,700,000 of unused commitments under its Revolver/Letter of Credit Facility. Net cash provided by operating activities for the year ended December 31, 1999 was approximately $189,100,000, an increase of approximately $182,400,000 from the prior year primarily due to a reduction in patient accounts receivable as a result of the sale of receivables to BFC (as defined below), as well as the Company's continuing focus on cash collections, and certain income tax refunds received during the year ended December 31, 1999. Net cash used for investing and financing activities were approximately $71,500,000 and $110,200,000, respectively, for the year ended December 31, 1999. The Company received net cash proceeds of approximately $126,000,000 from the issuance of long-term debt, approximately $41,900,000 from the dispositions of facilities and other assets and approximately $22,200,000 from collections on notes receivable. Such net cash proceeds, along with cash generated from operations, were used to repay approximately $152,000,000 of net borrowings under the Revolver/Letter of Credit Facility, to repay approximately $80,600,000 of long-term debt and to fund capital expenditures totaling approximately $95,400,000. In January 1999, the Company entered into a $65,000,000 promissory note with A.I. Credit Corp. at an annual interest rate of 6.50%. The promissory note is secured by a surety bond. In October 1999, the note was renegotiated to allow the Company to make an interest-only payment in January 2000 at an annual interest rate of 6.50%, with the principal balance payable in two equal installments in January 2001 and in January 2002 at an annual interest rate of 7.00%. The proceeds from this promissory note were used to pay down Revolver borrowings. 29 31 During the year ended December 31, 1999, the Company entered into promissory notes totaling approximately $10,820,000 in conjunction with the construction of certain nursing facilities and approximately $15,100,000 in conjunction with the acquisitions of certain facilities. Such debt instruments bear interest at rates ranging from 7.00% to 8.00%, require monthly installments of principal and interest, and are secured by mortgage interests in the real property and security interests in the personal property of the facilities. During 1999, the Company refinanced its Medium Term Notes and increased its borrowings from $40,000,000 to $70,000,000. The Medium Term Notes are collateralized by patient accounts receivable, which are sold by Beverly Health and Rehabilitation Services, Inc. ("BHRS") (currently operating as Beverly Healthcare), a wholly-owned subsidiary of the Company, to Beverly Funding Corporation ("BFC"), a wholly-owned bankruptcy remote subsidiary of the Company. As a result of this refinancing, the Company was required by Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS No. 125") to deconsolidate BFC. SFAS No. 125 provides accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, secured borrowing and collateral transactions, and the extinguishments of liabilities. It requires companies to recognize the financial and servicing assets it controls and the liabilities it has incurred and to deconsolidate financial assets when control has been surrendered in accordance with the criteria provided in SFAS No. 125. Deconsolidation of BFC, which had total assets of approximately $113,400,000, which cannot be used to satisfy claims of the Company or any of its subsidiaries, total liabilities of approximately $75,800,000 and total stockholder's equity of approximately $37,600,000 at December 31, 1999, caused a reduction in the Company's accounts receivable-patient and long-term debt. In addition, the Company recorded its ongoing investment in BFC as an increase in other, net assets. The Company's Statements of Cash Flows reflect the change in receivables sold to BFC from June 30, 1999 to December 31, 1999 in the caption Accounts receivable -- patient and the change in the Company's investment in BFC from June 30, 1999 to December 31, 1999 in the caption Other, net -- investing. The Company has a $125,000,000 financing arrangement available for the construction of certain facilities. The Company leases the facilities, under operating leases with the creditor, upon completion of construction. The Company has the option to purchase these facilities at the end of the initial lease terms at fair market value. Total construction advances under the financing arrangement as of December 31, 1999 were approximately $111,200,000. Effective September 30, 1999, the Company executed an amendment to the Credit Agreement covering the Company's $375,000,000 Revolver/Letter of Credit Facility, as well as amendments with certain of its other lenders covering debt of approximately $199,000,000 (collectively, the "Amendments"). Such Amendments were required since recording of the special charges related to the Allocation Investigations, as discussed herein, would have resulted in the Company's noncompliance with certain financial covenants contained in those debt agreements. The Amendments modified certain financial covenant levels and increased the annual interest rates for such debt. The settlements of the Allocation Investigations require payments totaling $30,000,000 ($25,000,000 for the first installment of the civil settlement reimbursement and $5,000,000 for the criminal settlement) within 30 days of signing the final separate civil and criminal settlement documents, with the remaining $145,000,000 civil settlement reimbursement to be withheld from the Company's biweekly Medicare periodic interim payments for a period of eight years. The Company used borrowings under its Revolver/Letter of Credit Facility to make the initial $30,000,000 payments during the first quarter of 2000. The Company anticipates cash flows from operations to decline approximately $18,100,000 per year as a result of the reduction in Medicare periodic interim payments and, therefore, may incur additional borrowings under the Revolver/ Letter of Credit Facility to fund ongoing cash needs. The Company currently anticipates that cash flows from operations and borrowings under its banking arrangements will be adequate to repay its debts due within one year of approximately $34,100,000, to fund the settlement obligations to the federal government, to make normal recurring capital additions and improvements of approximately $96,000,000, to make selective acquisitions, including the purchase of previously leased facilities, to construct new facilities, and to meet working capital requirements for the twelve 30 32 months ending December 31, 2000. If cash flows from operations or availability under existing banking arrangements fall below expectations, the Company may be required to delay capital expenditures, dispose of certain assets, issue additional debt securities, or consider other alternatives to improve liquidity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk because it utilizes financial instruments. The market risks inherent in these instruments are represented by the potential loss due to adverse changes in the general level of U.S. interest rates. The Company manages its interest rate risk exposure by maintaining a mix of fixed and variable rates for debt and notes receivable. The following table provides information regarding the Company's market sensitive financial instruments and constitutes a forward-looking statement.
EXPECTED MATURITY DATES 2000 2001 2002 2003 2004 THEREAFTER TOTAL - ----------------------- ------- -------- ------- ------- ------- ---------- -------- (DOLLARS IN THOUSANDS) ---------------------- Total long-term debt: Fixed Rate............ $33,408 $ 61,055 $57,675 $32,402 $40,793 $401,562 $626,895 Average Interest Rate................ 8.38% 7.43% 7.34% 8.52% 8.01% 8.88% Variable Rate......... $ 644 $114,762 $23,786 $ 905 $ 1,030 $ 12,194 $153,321 Average Interest Rate................ 6.54% 8.02% 6.42% 6.54% 6.50% 6.52% Total notes receivable: Fixed Rate............ $16,468 $ 949 $ 639 $ 3,992 $ 519 $ 2,051 $ 24,618 Average Interest Rate................ 9.54% 8.76% 8.70% 9.00% 9.00% 8.73% Variable Rate......... $ 47 $ 53 $ 56 $ 62 $ 68 $ 873 $ 1,159 Average Interest Rate................ 8.75% 8.75% 8.75% 8.75% 8.75% 8.75% FAIR VALUE FAIR VALUE DECEMBER 31, DECEMBER 31, EXPECTED MATURITY DATES 1999 1998 - ----------------------- ------------ ------------ (DOLLARS IN THOUSANDS) Total long-term debt: Fixed Rate............ $591,199 $585,394 Average Interest Rate................ Variable Rate......... $153,321 $344,060 Average Interest Rate................ Total notes receivable: Fixed Rate............ $ 19,400 $ 43,600 Average Interest Rate................ Variable Rate......... $ 1,200 $ 1,300 Average Interest Rate................
31 33 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... 33 Consolidated Balance Sheets................................. 34 Consolidated Statements of Operations....................... 35 Consolidated Statements of Stockholders' Equity............. 36 Consolidated Statements of Cash Flows....................... 37 Notes to Consolidated Financial Statements.................. 38 Supplementary Data (Unaudited) -- Quarterly Financial Data...................................................... 62
32 34 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Beverly Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Beverly Enterprises, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Beverly Enterprises, Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ERNST & YOUNG LLP Little Rock, Arkansas February 17, 2000 33 35 BEVERLY ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
DECEMBER 31, ----------------------- 1999 1998 ---------- ---------- Current assets: Cash and cash equivalents................................. $ 24,652 $ 17,278 Accounts receivable -- patient, less allowance for doubtful accounts: 1999 -- $64,398; 1998 -- $21,764........................ 319,097 463,822 Accounts receivable -- nonpatient, less allowance for doubtful accounts: 1999 -- $1,057; 1998 -- $441............................ 30,890 85,585 Notes receivable.......................................... 16,930 21,075 Operating supplies........................................ 32,276 32,133 Deferred income taxes..................................... 54,932 56,512 Prepaid expenses and other................................ 15,019 19,565 ---------- ---------- Total current assets............................... 493,796 695,970 Property and equipment, net................................. 1,110,065 1,120,315 Other assets: Notes receivable, less allowance for doubtful notes: 1999 -- $5,604; 1998 -- $2,921.......................... 3,658 21,263 Designated funds.......................................... 3,136 4,029 Goodwill, net............................................. 229,639 217,066 Other, net................................................ 142,586 101,868 ---------- ---------- Total other assets................................. 379,019 344,226 ---------- ---------- $1,982,880 $2,160,511 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 93,168 $ 85,533 Accrued wages and related liabilities..................... 92,514 96,092 Accrued interest.......................................... 14,138 12,783 Other accrued liabilities................................. 154,182 134,975 Current portion of long-term debt......................... 34,052 27,773 ---------- ---------- Total current liabilities.......................... 388,054 357,156 Long-term debt.............................................. 746,164 878,270 Deferred income taxes payable............................... 28,956 114,962 Other liabilities and deferred items........................ 178,582 33,917 Commitments and contingencies Stockholders' equity: Preferred stock, shares authorized: 25,000,000............ -- -- Common stock, shares issued: 1999 -- 110,382,356; 1998 -- 110,275,714..................................... 11,038 11,028 Additional paid-in capital................................ 875,637 876,383 Accumulated deficit....................................... (139,429) (4,782) Accumulated other comprehensive income.................... 1,061 760 Treasury stock, at cost: 1999 -- 7,886,800 shares; 1998 -- 7,886,800 shares................................ (107,183) (107,183) ---------- ---------- Total stockholders' equity......................... 641,124 776,206 ---------- ---------- $1,982,880 $2,160,511 ========== ==========
See accompanying notes. 34 36 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Net operating revenues................................... $2,546,672 $2,812,232 $3,217,099 Interest income.......................................... 4,335 10,708 13,201 ---------- ---------- ---------- Total revenues................................. 2,551,007 2,822,940 3,230,300 Costs and expenses: Operating and administrative: Wages and related................................... 1,542,148 1,664,741 1,713,224 Provision for insurance and related items........... 88,377 154,267 87,780 Other............................................... 723,803 814,127 1,087,017 Interest............................................... 72,578 65,938 82,713 Depreciation and amortization.......................... 99,160 93,722 107,060 Special charges related to settlements of federal government investigations........................... 202,447 1,865 -- Asset impairments, workforce reductions and other unusual items....................................... 23,818 69,443 44,000 Year 2000 remediation.................................. 12,402 9,719 -- ---------- ---------- ---------- Total costs and expenses....................... 2,764,733 2,873,822 3,121,794 ---------- ---------- ---------- Income (loss) before provision for (benefit from) income taxes, extraordinary charge and cumulative effect of change in accounting for start-up costs................ (213,726) (50,882) 108,506 Provision for (benefit from) income taxes................ (79,079) (25,936) 49,913 ---------- ---------- ---------- Income (loss) before extraordinary charge and cumulative effect of change in accounting for start-up costs...... (134,647) (24,946) 58,593 Extraordinary charge, net of income tax benefit of $1,057................................................. -- (1,660) -- Cumulative effect of change in accounting for start-up costs, net of income tax benefit of $2,811............. -- (4,415) -- ---------- ---------- ---------- Net income (loss)........................................ $ (134,647) $ (31,021) $ 58,593 ========== ========== ========== Income (loss) per share of common stock: Basic and diluted: Before extraordinary charge and cumulative effect of change in accounting for start-up costs........... $ (1.31) $ (.24) $ .57 Extraordinary charge................................ -- (.02) -- Cumulative effect of change in accounting for start-up costs.................................... -- (.04) -- ---------- ---------- ---------- Net income (loss)................................... $ (1.31) $ (.30) $ .57 ========== ========== ========== Shares used to compute basic per share amounts...... 102,491 103,762 102,060 ========== ========== ========== Shares used to compute diluted per share amounts.... 102,491 103,762 103,422 ========== ========== ==========
See accompanying notes. 35 37 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
RETAINED ACCUMULATED ADDITIONAL EARNINGS OTHER PREFERRED COMMON PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY STOCK STOCK CAPITAL DEFICIT) INCOME (LOSS) STOCK TOTAL --------- ------- ---------- ------------ ------------- --------- --------- Balances at January 1, 1997....... $ -- $10,443 $774,672 $ 133,957 $ -- $ (57,977) $ 861,095 Employee stock transactions, net........................... -- 54 21,314 -- -- -- 21,368 Purchase of 4,850,700 shares of common stock for treasury..... -- -- -- -- -- (62,729) (62,729) Cancellation and retirement of 6,274,108 shares of common stock held in treasury........ -- (627) (69,689) -- -- 70,316 -- Disposition of PCA.............. -- -- -- (121,230) -- -- (121,230) Forgiveness of PCA intercompany balance....................... -- -- -- (45,081) -- -- (45,081) Conversion of 5 1/2% Debentures into common stock............. -- 1,119 147,991 -- -- -- 149,110 Conversion of 7 5/8% Debentures into common stock............. -- -- 47 -- -- -- 47 Comprehensive income: Unrealized gains on securities, net of income taxes of $896............... -- -- -- -- 1,332 -- 1,332 Net income.................... -- -- -- 58,593 -- -- 58,593 --------- Total comprehensive income...... -- -- -- -- -- -- 59,925 ---- ------- -------- --------- ------- --------- --------- Balances at December 31, 1997..... -- 10,989 874,335 26,239 1,332 (50,390) 862,505 Employee stock transactions, net........................... -- 39 2,048 -- -- -- 2,087 Purchase of 3,886,800 shares of common stock for treasury..... -- -- -- -- -- (51,120) (51,120) Settlement of amounts due from 1997 purchase of 4,000,000 shares of common stock for treasury...................... -- -- -- -- -- (5,673) (5,673) Comprehensive income (loss): Unrealized gains on securities, net of income taxes of $795............... -- -- -- -- 1,183 -- 1,183 Adjustment to unrealized gains on securities, net of income tax benefit of $1,180....... -- -- -- -- (1,755) -- (1,755) Net loss...................... -- -- -- (31,021) -- -- (31,021) --------- Total comprehensive loss........ -- -- -- -- -- -- (31,593) ---- ------- -------- --------- ------- --------- --------- Balances at December 31, 1998..... -- 11,028 876,383 (4,782) 760 (107,183) 776,206 Employee stock transactions, net........................... -- 10 (746) -- -- -- (736) Comprehensive income (loss): Unrealized gains on securities, net of income taxes of $202............... -- -- -- -- 301 -- 301 Net loss...................... -- -- -- (134,647) -- -- (134,647) --------- Total comprehensive loss........ -- -- -- -- -- -- (134,346) ---- ------- -------- --------- ------- --------- --------- Balances at December 31, 1999..... $ -- $11,038 $875,637 $(139,429) $ 1,061 $(107,183) $ 641,124 ==== ======= ======== ========= ======= ========= =========
See accompanying notes. 36 38 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss)......................................... $ (134,647) $ (31,021) $ 58,593 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 99,160 93,722 107,060 Provision for reserves on patient, notes and other receivables, net.................................................. 32,089 25,249 34,341 Amortization of deferred financing costs................ 2,909 2,336 3,163 Special charges related to settlements of federal government investigations............................ 202,447 1,865 -- Asset impairments, workforce reductions and other unusual items................................................ 23,818 69,443 44,000 Extraordinary charge.................................... -- 2,717 -- Cumulative effect of change in accounting for start-up costs................................................ -- 7,226 -- (Gains) losses on dispositions of facilities and other assets, net.......................................... 4,004 (33,853) (19,901) Deferred taxes.......................................... (83,079) (28,105) 20,247 Insurance related accounts.............................. 33,500 39,587 (25,432) Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable -- patient....................... 901 (132,199) (46,639) Operating supplies................................... (800) (1,239) (3,911) Prepaid expenses and other receivables............... 1,121 240 (18,749) Accounts payable and other accrued expenses.......... (16,536) 23,080 3,377 Income taxes payable................................. 25,175 (27,729) (7,305) Other, net........................................... (921) (4,530) (4,640) ----------- ----------- ----------- Total adjustments.................................. 323,788 37,810 85,611 ----------- ----------- ----------- Net cash provided by operating activities.......... 189,141 6,789 144,204 Cash flows from investing activities: Capital expenditures...................................... (95,414) (150,451) (133,087) Payments for acquisitions, net of cash acquired........... (6,985) (162,969) (61,567) Proceeds from dispositions of facilities and other assets.................................................. 41,941 82,119 421,412 Collections on notes receivable and REMIC investment...... 22,185 6,089 32,273 Other, net................................................ (33,264) (5,374) (28,178) ----------- ----------- ----------- Net cash provided by (used for) investing activities....................................... (71,537) (230,586) 230,853 Cash flows from financing activities: Revolver borrowings....................................... 1,132,000 1,328,000 1,604,000 Repayments of Revolver borrowings......................... (1,284,000) (1,077,000) (1,745,000) Proceeds from issuance of long-term debt.................. 125,820 9,495 31,137 Repayments of long-term debt.............................. (80,605) (70,878) (166,369) Purchase of common stock for treasury..................... -- (56,793) (65,126) Proceeds from exercise of stock options................... 129 3,092 5,401 Deferred financing costs.................................. (3,830) (730) (1,251) Proceeds from designated funds, net....................... 256 659 (2,380) ----------- ----------- ----------- Net cash provided by (used for) financing activities....................................... (110,230) 135,845 (339,588) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents........ 7,374 (87,952) 35,469 Cash and cash equivalents at beginning of year.............. 17,278 105,230 69,761 ----------- ----------- ----------- Cash and cash equivalents at end of year.................... $ 24,652 $ 17,278 $ 105,230 =========== =========== =========== Supplemental schedule of cash flow information: Cash paid (received) during the year for: Interest, net of amounts capitalized.................... $ 68,314 $ 65,927 $ 81,411 Income tax payments (refunds), net...................... (21,175) 26,030 36,971
See accompanying notes. 37 39 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation References herein to the Company include Beverly Enterprises, Inc. and its wholly-owned subsidiaries. The Company provides healthcare services in 34 states and the District of Columbia. Its operations include nursing facilities, assisted living centers, home care centers, outpatient therapy clinics and rehabilitation therapy services. In addition, prior to June 30, 1998, the Company operated acute long-term transitional hospitals and, prior to the Merger, institutional and mail service pharmacies. The consolidated financial statements of the Company include the accounts of the Company and all of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less. Property and Equipment Property and equipment is stated at cost less accumulated depreciation or, where appropriate, the present value of the related capital lease obligations less accumulated amortization. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets. Intangible Assets Goodwill (stated at cost less accumulated amortization of $31,196,000 in 1999 and $25,547,000 in 1998) is being amortized over periods not to exceed 40 years using the straight-line method. Operating and leasehold rights and licenses, which are included in the consolidated balance sheet caption "Other, net," (stated at cost less accumulated amortization of $18,891,000 in 1999 and $18,307,000 in 1998) are being amortized over the lives of the related assets (principally 40 years) and leases (principally 10 to 15 years), using the straight-line method. On an ongoing basis, the Company reviews the carrying value of its intangible assets in light of any events or circumstances that indicate they may be impaired or that the amortization period may need to be adjusted. If such circumstances suggest the intangible value cannot be recovered, calculated based on undiscounted cash flows over the remaining amortization period, the carrying value of the intangible will be reduced by such shortfall. As of December 31, 1999, the Company does not believe there is any indication that the carrying value or the amortization period of its intangibles needs to be adjusted. Impairment of Long-Lived Assets Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121") requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the 38 40 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) undiscounted cash flows are not sufficient to recover the assets' carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. In accordance with SFAS No. 121, the Company assesses the need for an impairment write-down when such indicators of impairment are present. See Notes 2 and 3. Insurance General liability and professional liability costs for the long-term care industry, especially in the state of Florida, have become increasingly expensive and unpredictable. The Company and most of its competitors have experienced increases in both the number of claims and the size of the typical claim. This phenomenon is most evident in the state of Florida, where well-intended patient rights' statutes tend to be exploited by plaintiffs' attorneys, since the statutes allow for actual damages, punitive damages and plaintiff attorney fees to be included in any proven violation. The Company's provision for insurance and related items decreased approximately $65,900,000 for the year ended December 31, 1999, as compared to the same period in 1998, primarily due to the LPT (as discussed below), which significantly increased insurance costs during the fourth quarter of 1998. Despite such decrease year over year, the Company, as well as other nursing home providers with significant operations in Florida, are experiencing substantial increases in patient care and other claims, evidencing the negative trend surrounding patient care liabilities. On December 31, 1998, Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company, completed a risk transfer of substantially all of its pre-May 1998 auto liability, general liability and workers' compensation claims liability to a third party insurer effected through a loss portfolio transfer ("LPT") valued as of December 31, 1998. In exchange for a premium of approximately $116,000,000 (paid primarily from restricted cash and investments), the Company acquired reinsurance of approximately $180,000,000 to insure such auto liability, general liability and workers' compensation losses. In addition, in exchange for a premium of approximately $4,000,000, the Company acquired excess coverage of approximately $20,000,000 for general liability losses. As of December 31, 1999, based upon estimates and analyses by its outside actuaries, the Company expects the ultimate losses on such transferred general liability losses to reach the excess layer and to also exceed the total aggregate limits. The liabilities for the excess co-insurance are approximately $2,000,000, and the liabilities for those losses exceeding the total aggregate limit are approximately $2,000,000 on a discounted basis. The Company will be required to cover such excess and increased its insurance reserves during 1999 to take such expected losses into consideration. The Company's provision for insurance and related items increased approximately $82,200,000 during the fourth quarter of 1998 primarily as a result of this transaction. Prior to the LPT, and for periods not covered by the LPT, the Company insures the majority of its auto liability, general liability and workers' compensation risks through insurance policies with third parties, some of which are subject to reinsurance agreements between the insurer and Beverly Indemnity, Ltd. The liabilities for estimated incurred losses not covered by third party insurance are discounted at 10% to their present value based on expected loss payment patterns determined by independent actuaries. Had the discount rate been reduced by one-half of a percentage point, the Company would have incurred a pre-tax charge of 39 41 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) approximately $700,000 for the year ended December 31, 1999. The discounted insurance liabilities are included in the consolidated balance sheet captions as follows (in thousands):
1999 1998 ------- ------- Accrued wages and related liabilities....................... $ 1,310 $ -- Other accrued liabilities................................... 10,000 -- Other liabilities and deferred items........................ 75,224 18,151 ------- ------- $86,534 $18,151 ======= =======
On an undiscounted basis, the total insurance liabilities as of December 31, 1999 and 1998 were $99,400,000 and $22,800,000, respectively. As of December 31, 1999, the Company had deposited approximately $600,000 in funds (the "Beverly Indemnity funds") that are restricted for the payment of insured claims. In addition, the Company anticipates that approximately $8,600,000 of its existing cash at December 31, 1999, while not legally restricted, will be utilized primarily to fund certain workers' compensation and general liability claims and expenses, and the Company does not expect to use such cash for other purposes. The Company purchased traditional indemnity insurance coverage for its 1999, 1998 and 1997 workers' compensation and auto liabilities. During 1997, the Company transferred a portion of its liabilities for workers' compensation and general liability related to certain of its sold nursing facilities in the state of Texas to a third-party indemnity insurance company. As of December 31, 1999, based upon estimates and analyses by its outside actuaries, the Company expects the ultimate losses on such transferred liabilities to exceed the aggregate insurance limit available by approximately $4,000,000. The Company will be required to cover such excess and increased its insurance reserves during 1999 to take such expected losses into consideration. Stock Based Awards Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") encourages, but does not require, companies to recognize compensation expense for stock-based awards based on their fair value on the date of grant. The Company has elected to continue to account for its stock-based awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for its stock option grants which are issued at market value on the date of grant. See Note 8 for the pro forma effects on the Company's reported net income (loss) and diluted earnings per share assuming the election had been made to recognize compensation expense on stock-based awards in accordance with SFAS No. 123. Revenues The Company's revenues are derived primarily from providing long-term healthcare services. Approximately 72%, 74% and 74% of the Company's net operating revenues for 1999, 1998 and 1997, respectively, were derived from funds under federal and state medical assistance programs, and approximately 42% and 62% of the Company's net patient accounts receivable at December 31, 1999 and 1998, respectively, are due from such programs. The decrease in net patient accounts receivable derived from funds under federal and state medical assistance programs for the year ended December 31, 1999, as compared to 1998, was primarily due to the deconsolidation of Beverly Funding Corporation (see Note 6). The Company accrues for revenues when services are provided at standard charges adjusted to amounts estimated to be received under governmental programs and other third-party contractual arrangements. These revenues and receivables are reported at their estimated net realizable amounts and are subject to audit and retroactive adjustment. 40 42 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Provisions for estimated third-party payor settlements are provided in the period the related services are rendered and are adjusted in the period of settlement. Changes in estimates related to third party receivables resulted in a reduction of approximately $2,000,000 in net operating revenues for the year ended December 31, 1999 and an increase of approximately $10,900,000 and $8,900,000 in net operating revenues for the years ended December 31, 1998 and 1997, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations; however, as disclosed in Note 7, the Company has been the subject of an investigation involving allegations of potential wrongdoing, which was settled subsequent to December 31, 1999. Compliance with such laws and regulations is subject to government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Concentration of Credit Risk The Company has significant accounts receivable, notes receivable and other assets whose collectibility or realizability is dependent upon the performance of certain governmental programs, primarily Medicare and Medicaid. These receivables and other assets represent the only concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an adequate provision has been made for the possibility of these receivables and other assets proving uncollectible and continually monitors and adjusts these allowances as necessary. Income Taxes The Company follows the liability method in accounting for income taxes. The liability method provides that deferred tax assets and liabilities are recorded at currently enacted tax rates based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. 41 43 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Earnings per Share The following table sets forth the computation of basic and diluted income (loss) per share for the years ended December 31 (in thousands):
1999 1998 1997 --------- -------- -------- NUMERATOR: Numerator for basic and diluted income (loss) per share from continuing operations............... $(134,647) $(24,946) $ 58,593 ========= ======== ======== DENOMINATOR: Denominator for basic income (loss) per share -- weighted average shares............... 102,491 103,762 102,060 Effect of dilutive securities: Employee stock options......................... -- -- 1,236 Performance shares............................. -- -- 126 --------- -------- -------- Dilutive potential common shares.................. -- -- 1,362 --------- -------- -------- Denominator for diluted income (loss) per share -- adjusted weighted average shares and assumed conversions.................................... 102,491 103,762 103,422 ========= ======== ======== Basic and diluted income (loss) per share......... $ (1.31) $ (0.24) $ 0.57 ========= ======== ========
Comprehensive Income (Loss) Comprehensive income (loss) includes net income (loss), as well as charges and credits directly to stockholders' equity which are excluded from net income (loss). Accumulated other comprehensive income, net of income taxes, consists of unrealized gains on available-for-sale securities of approximately $1,061,000 and $760,000 at December 31, 1999 and 1998, respectively. New Accounting Standards Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for the Company during the first quarter of 2001. The Company has not completed its review of SFAS No. 133 but does not expect there to be a material effect on its consolidated financial position or results of operations. Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), provides guidance on the financial reporting of start-up and organization costs. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. Prior to 1998, the Company capitalized start-up costs in connection with the opening of new facilities and businesses. The Company adopted the provisions of SOP 98-5 in its financial statements for the year ended December 31, 1998. The effect of adopting SOP 98-5 was to decrease the Company's pre-tax loss from continuing operations in 1998 by approximately $1,000,000 and to record a charge for the cumulative effect of an accounting change, as of January 1, 1998, of $4,415,000, net of income taxes, or $0.04 per share, to expense costs that had previously been capitalized. 42 44 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), provides guidance on the capitalization and amortization of costs incurred to develop or obtain computer software for internal use. The Company's adoption of SOP 98-1 during the first quarter of 1999 did not have a material effect on its consolidated financial position or results of operations. Other Certain prior year amounts have been reclassified to conform with the 1999 presentation. 2. SPECIAL CHARGES RELATED TO SETTLEMENTS OF FEDERAL GOVERNMENT INVESTIGATIONS In late July 1999, the Company reached a tentative understanding with the U.S. Department of Justice to settle the separate civil and criminal aspects of all investigations by the federal government and its fiscal intermediary into the allocation of nursing labor hours to the Medicare program from 1990 to 1998 (the "Allocation Investigations"). On February 3, 2000, the Company announced that it had signed agreements with the Office of Inspector General of the Department of Health and Human Services and the U.S. Department of Justice finalizing the tentative settlements. (See Note 7). As a result, during the year ended December 31, 1999, the Company recorded a special pre-tax charge of approximately $202,400,000 ($127,500,000, net of income taxes, or $1.24 per share diluted) which includes: (i) provisions totaling approximately $128,800,000 representing the net present value of the separate civil and criminal settlements; (ii) impairment losses of approximately $17,000,000 on 10 nursing facilities that pled guilty of submitting erroneous cost reports to the Medicare program in conjunction with the criminal settlement; (iii) approximately $39,000,000 for certain prior year cost report related items affected by the settlements; (iv) approximately $3,100,000 of debt issuance and refinancing costs related to various bank debt modifications as a result of the settlements; and (v) approximately $14,500,000 for other investigation and settlement related costs. If, prior to January 1, 1999, the settlement obligations and related items had been finalized and recorded, the Company's bank debt had been refinanced and the Company had closed or sold the facilities that are impacted by the criminal settlement, the Company's results of operations, on an unaudited pro forma basis, would have been reduced by approximately $13,200,000, or $.13 per share diluted, for the year ended December 31, 1999. 3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL ITEMS During the fourth quarter of 1999, the Company recorded a pre-tax charge of approximately $23,800,000 related to restructuring of agreements on certain leased facilities; severance and other workforce reduction expenses; asset impairments; and other unusual items. The Company negotiated the terminations of lease agreements on 19 nursing facilities (2,047 beds), which resulted in a charge of approximately $17,300,000. In addition, the Company accrued approximately $5,900,000 primarily related to severance agreements associated with three executives of the Company. Substantially all of the $5,900,000 was paid during the first quarter of 2000. In preparing for the January 1, 1999 implementation of the new Medicare prospective payment system ("PPS"), as well as responding to other legislative and regulatory changes, the Company reorganized its inpatient rehabilitative operations, analyzed its businesses for impairment issues and implemented new care-delivery and tracking software. These initiatives, among others, resulted in a fourth quarter 1998 pre-tax charge of approximately $69,400,000, including $3,800,000 for workforce reductions, $58,700,000 for asset impairments and $6,900,000 for various other items. 43 45 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL ITEMS -- (CONTINUED) During the fourth quarter of 1998, the Company reorganized all employed therapy associates into a newly formed subsidiary, Beverly Rehabilitation, Inc. ("Bev Rehab"), which is part of the Company's Beverly Care Alliance segment, in order to create a more consolidated, strategic approach to managing the Company's inpatient rehabilitation business under PPS. The Company accrued approximately $2,500,000 related to the termination of 835 therapy associates in conjunction with this reorganization. During 1999, 770 therapy associates were paid approximately $2,300,000 and left the Company. The Company reversed the remaining $200,000 during 1999 for changes in its initial accounting estimates. In addition, the Company's home care and outpatient therapy units underwent the consolidation and relocation of certain services, including billing and collections, which resulted in a workforce reduction charge of approximately $1,300,000 associated with the termination of 236 associates. Of these 236 associates, 74 associates were paid $233,000 and left the Company by December 31, 1998. During 1999, 85 home care and outpatient therapy associates were paid approximately $600,000 and left the Company. The Company reversed the remaining $500,000 during 1999 for changes in its initial accounting estimates. The significant regulatory changes under PPS and other provisions of the 1997 Act were an indicator to management that the carrying values of certain of its nursing facilities may not be fully recoverable. In addition, there were certain assets that had 1998 operating losses, and anticipated future operating losses, which led management to believe that these assets were impaired. Accordingly, management estimated the undiscounted future cash flows to be generated by each facility and reduced the carrying value to its estimate of fair value, resulting in an impairment charge of approximately $9,000,000 in 1998. Management calculated the fair values of the impaired facilities by using the present value of estimated undiscounted future cash flows, or its best estimate of what that facility, or similar facilities in that state, would sell for in the open market. Management believes it has the knowledge to make such estimates of open market sales prices based on the volume of facilities the Company has purchased and sold in previous years. There were no material impairment adjustments recorded during the year ended December 31, 1997. Also during the fourth quarter of 1998, management identified nine nursing facilities with an aggregate carrying value of approximately $14,000,000 which needed to be replaced in order to increase operating efficiencies, attract additional census or upgrade the nursing home environment. Management committed to a plan to construct new facilities to replace these buildings and reduced the carrying values of these facilities to their estimated salvage values. These assets are included in the total assets of Beverly Healthcare (See Note 11). In addition, management committed to a plan to dispose of 24 home care centers and nine outpatient therapy clinics which had 1998 and expected future period operating losses. These businesses had an aggregate carrying value of approximately $16,500,000 and were written down to their fair value less costs to sell. These assets generated pre-tax losses for the Company of approximately $5,100,000 during the year ended December 31, 1998. Substantially all of these assets were purchased during 1998. The Company disposed of a majority of these assets during 1999. These assets were included in the total assets of Beverly Care Alliance (See Note 11). The Company incurred a fourth quarter 1998 charge of approximately $30,300,000 related to these replacements, closings and planned disposals. These assets were included in the consolidated balance sheet captions "Property and equipment, net" and "Goodwill, net" at December 31, 1998. In addition to the workforce reduction and impairment charges, the Company recorded a fourth quarter 1998 impairment charge for other long-lived assets of approximately $19,400,000 primarily related to the write-off of software and software development costs. In conjunction with the implementation of business process changes, and the need for enhanced data-gathering and reporting required to operate effectively under 44 46 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL ITEMS -- (CONTINUED) PPS, the Company installed new clinical software in each of its nursing facilities during late-1998, which made obsolete the previously employed software. In addition, certain of the Company's other ongoing software development projects were abandoned or written down due to obsolescence, feasibility or cost recovery issues. 4. ACQUISITIONS AND DISPOSITIONS During the year ended December 31, 1999, the Company purchased three outpatient therapy clinics, two home care centers, two nursing facilities (284 beds), one previously leased nursing facility (190 beds) and certain other assets for cash of approximately $6,000,000, acquired debt of approximately $15,100,000 and closing and other costs of approximately $1,700,000. The acquisitions of such facilities and other assets were accounted for as purchases and resulted in the Company recording goodwill of approximately $8,400,000. Also during such period, the Company sold or terminated the leases on 12 nursing facilities (1,291 beds), one assisted living center (10 units), 17 home care centers and certain other assets for cash proceeds of approximately $7,100,000 and notes receivable of approximately $1,000,000. The Company did not operate two of these nursing facilities (166 beds) which were leased to other nursing home operators in prior year transactions. The Company recognized net pre-tax losses,which were included in net operating revenues during the year ended December 31, 1999, of approximately $4,000,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. During the year ended December 31, 1998, the Company purchased 111 outpatient therapy clinics, 50 home care centers, eight nursing facilities (823 beds), one assisted living center (48 units), two previously leased nursing facilities (228 beds) and certain other assets for cash of approximately $163,200,000, acquired debt of approximately $8,000,000 and closing and other costs of approximately $7,000,000. The acquisitions of such facilities and other assets were accounted for as purchases and resulted in the Company recording goodwill of approximately $143,000,000. Also, during such period, the Company sold or terminated the leases on 26 nursing facilities (3,203 beds) and certain other assets for cash proceeds of approximately $52,500,000 (approximately $35,600,000 of which was included in accounts receivable -- nonpatient at December 31, 1998), notes receivable of approximately $21,300,000, assumed debt of approximately $4,600,000 and closing and other costs of approximately $2,300,000. The Company did not operate seven of these nursing facilities (893 beds) which were leased to other nursing home operators in prior year transactions. The Company recognized net pre-tax gains, which were included in net operating revenues, during the year ended December 31, 1998 of approximately $17,900,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. In June 1998, the Company completed the sale of American Transitional Hospitals, Inc. ("ATH"), which operated as Beverly Specialty Hospitals, to Select Medical Corporation for cash of approximately $65,300,000 and assumed debt of approximately $2,400,000. Prior to the sale, ATH operated 15 transitional hospitals (743 beds) in eight states which addressed the needs of patients requiring intense therapy regimens, but not necessarily the breadth of services provided within traditional acute care hospitals. The Company recognized a pre-tax gain, which was included in net operating revenues, of approximately $16,000,000 during the year ended December 31, 1998 as a result of this disposition. During the year ended December 31, 1999, the Company recorded a pre-tax charge to adjust the sales price of this disposition by approximately $4,500,000, which was included in net operating revenues. The operations of ATH were immaterial to the Company's consolidated financial position and results of operations. 45 47 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 4. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED) During the year ended December 31, 1997, the Company purchased six previously leased nursing facilities (758 beds) and certain other assets including, among other things, 14 institutional pharmacies and 40 outpatient therapy clinics, for cash of approximately $60,800,000 and closing and other costs of approximately $9,500,000. The acquisitions of such facilities and other assets were accounted for as purchases. Also during such period, the Company sold or terminated the leases on 68 nursing facilities (8,314 beds) and certain other assets for cash proceeds of approximately $146,800,000. The Company recognized net pre-tax gains, which were included in net operating revenues, during the year ended December 31, 1997 of approximately $19,900,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. On December 3, 1997, the Company completed a tax-free reorganization (the "Reorganization") in order to facilitate the merger of Pharmacy Corporation of America ("PCA") with Capstone Pharmacy Services, Inc. (the "Merger"). As a result of the Merger, the Company received approximately $281,000,000 of cash as partial repayment for PCA's intercompany debt, with a charge to the Company's retained earnings of approximately $45,100,000 for the remaining intercompany balance which was not repaid. Pursuant to the Reorganization, each of the Company's stockholders of record at the close of business on December 3, 1997 received .4551 shares of PharMerica, Inc.'s common stock for each share of the Company's Common Stock held. The conversion ratio was based on a total of 109,873,230 outstanding shares of the Company's Common Stock at the close of business on December 3, 1997 divided into the 50,000,000 shares issued by PharMerica, Inc. In connection with the Reorganization, the Company incurred $44,000,000 of transaction costs related to the restructuring, repayment or renegotiating of substantially all of the Company's outstanding debt instruments, as well as the renegotiating or making of certain payments, primarily in the form of accelerated vesting of stock-based awards, under various employment agreements with officers of the Company. Such amounts were funded with a portion of the $281,000,000 proceeds received as partial repayment of PCA's intercompany debt, as discussed above. Included in the $44,000,000 of transaction costs were approximately $18,000,000 of non-cash expenses related to various long-term incentive agreements. At the date of the Merger, PCA had total assets of approximately $489,200,000, total liabilities of approximately $368,000,000 and total stockholder's equity of approximately $121,200,000. Total net operating revenues for PCA for the year ended December 31, 1997 were approximately $564,200,000 and represent the operations of PCA prior to the Merger. 46 48 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 5. PROPERTY AND EQUIPMENT Following is a summary of property and equipment and related accumulated depreciation and amortization, by major classification, at December 31 (in thousands):
TOTAL OWNED LEASED ----------------------- ----------------------- ----------------- 1999 1998 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ------- ------- Land, buildings and improvements............ $1,446,004 $1,433,170 $1,412,715 $1,393,839 $33,289 $39,331 Furniture and equipment... 374,855 350,410 369,388 344,484 5,467 5,926 Construction in progress................ 32,543 31,057 32,543 31,057 -- -- ---------- ---------- ---------- ---------- ------- ------- 1,853,402 1,814,637 1,814,646 1,769,380 38,756 45,257 Less accumulated depreciation and amortization............ 743,337 694,322 716,228 662,281 27,109 32,041 ---------- ---------- ---------- ---------- ------- ------- $1,110,065 $1,120,315 $1,098,418 $1,107,099 $11,647 $13,216 ========== ========== ========== ========== ======= =======
The Company provides depreciation and amortization using the straight-line method over the following estimated useful lives: land improvements -- 5 to 15 years; buildings -- 35 to 40 years; building improvements -- 5 to 20 years; leasehold improvements -- 5 to 20 years or term of lease, if less; furniture and equipment -- 5 to 15 years. Capitalized lease assets are amortized over the remaining initial terms of the leases. Depreciation and amortization expense related to property and equipment, including the amortization of assets under capital lease obligations, for the years ended December 31, 1999, 1998 and 1997 was $83,328,000, $81,722,000 and $87,286,000, respectively. 47 49 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 6. LONG-TERM DEBT Long-term debt consists of the following at December 31 (dollars in thousands):
1999 1998 -------- -------- Credit Agreement due December 31, 2001...................... $114,000 $266,000 9% Senior Notes due February 15, 2006, unsecured............ 180,000 180,000 Notes and mortgages, less imputed interest: 1999 -- $67, 1998 -- $92; due in installments through the year 2031, at effective interest rates of 6.00% to 12.50%, a portion of which is secured by property, equipment and other assets with a net book value of $240,154 at December 31, 1999.... 199,831 167,268 Industrial development revenue bonds, less imputed interest: 1999 -- $9, 1998 -- $13; due in installments through the year 2013, at effective interest rates of 4.81% to 10.72%, a portion of which is secured by property and other assets with a net book value of $186,130 at December 31, 1999.... 145,896 169,306 A.I. Credit Corp. Note due January 2002, secured by a surety bond...................................................... 65,000 -- 8 3/4% First Mortgage Bonds due July 1, 2008, secured by first mortgages on eight nursing facilities with an aggregate net book value of $14,982 at December 31, 1999...................................................... 12,841 14,219 8 5/8% First Mortgage Bonds due October 1, 2008, secured by first mortgages on 10 nursing facilities with an aggregate net book value of $26,004 at December 31, 1999............ 20,640 21,540 Series 1995 Bonds due June 2005, at an interest rate of 6.88% with respect to $7,000 and 7.24% with respect to $18,000, secured by a letter of credit.................... 25,000 25,000 Medium Term Notes due June 15, 2000 (deconsolidated June 1999 as discussed below).................................. -- 40,000 Term Loan under the GE Capital Facility..................... 735 5,471 -------- -------- 763,943 888,804 Present value of capital lease obligations, less imputed interest: 1999 -- $384, 1998 -- $419, at effective interest rates of 6.00% to 13.00%......................... 16,273 17,239 -------- -------- 780,216 906,043 Less amounts due within one year............................ 34,052 27,773 -------- -------- $746,164 $878,270 ======== ========
In January 1999, the Company entered into a $65,000,000 promissory note with A.I. Credit Corp. at an annual interest rate of 6.50%. The promissory note is secured by a surety bond. In October 1999, the note was renegotiated to allow the Company to make an interest-only payment in January 2000 at an annual interest rate of 6.50%, with the principal balance payable in two equal installments in January 2001 and in January 2002 at an annual interest rate of 7.00%. The proceeds from this promissory note were used to pay down Revolver borrowings. During the year ended December 31, 1999, the Company entered into promissory notes totaling approximately $10,820,000 in conjunction with the construction of certain nursing facilities and approximately $15,100,000 in conjunction with the acquisitions of certain facilities. Such debt instruments bear interest at rates ranging from 7.00% to 8.00%, require monthly installments of principal and interest, and are secured by mortgage interests in the real property and security interests in the personal property of the facilities. During June 1999, the Company refinanced its Medium Term Notes and increased its borrowings from $40,000,000 to $70,000,000. The Medium Term Notes are collateralized by patient accounts receivable, which 48 50 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 6. LONG-TERM DEBT -- (CONTINUED) are sold by Beverly Health and Rehabilitation Services, Inc. ("BHRS") (currently operating as Beverly Healthcare), a wholly-owned subsidiary of the Company, to Beverly Funding Corporation ("BFC"), a wholly-owned bankruptcy remote subsidiary of the Company. As a result of this refinancing, the Company was required by Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS No. 125") to deconsolidate BFC. SFAS No. 125 provides accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, secured borrowing and collateral transactions, and the extinguishments of liabilities. It requires companies to recognize the financial and servicing assets it controls and the liabilities it has incurred and to deconsolidate financial assets when control has been surrendered in accordance with the criteria provided in SFAS No. 125. Deconsolidation of BFC, which had total assets of approximately $113,400,000, which cannot be used to satisfy claims of the Company or any of its subsidiaries, total liabilities of approximately $75,800,000 and total stockholder's equity of approximately $37,600,000 at December 31, 1999, caused a reduction in the Company's accounts receivable-patient and long-term debt. In addition, the Company recorded its ongoing investment in BFC as an increase in other, net assets. The Company's Statement of Cash Flows reflects the change from June 30, 1999 to December 31, 1999 in receivables sold to BFC in the caption Accounts receivable -- patient and the change from June 30, 1999 to December 31, 1999 in the Company's investment in BFC in the caption Other, net -- investing. Effective September 30, 1999, the Company executed an amendment to its $375,000,000 Credit Agreement (the "Credit Agreement"), as well as amendments with certain of its other lenders covering debt of approximately $199,000,000 (collectively, the "Amendments"), which modified certain financial covenant levels and increased the annual interest rates for such debt and added real and personal property as collateral, including stock of certain of the Company's subsidiaries. The Amendments were required since recording of the special charges related to the Allocation Investigations, as discussed herein, would have resulted in the Company's noncompliance with certain financial covenants contained in those debt agreements. The Credit Agreement provides for a Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). At December 31, 1999, the Company had approximately $114,000,000 of outstanding borrowings and approximately $38,300,000 of outstanding letters of credit under the Revolver/LOC Facility. Borrowings under the Credit Agreement bear interest at adjusted LIBOR plus 2.25%, the Base Rate, as defined, plus 1.25% or the adjusted CD rate, as defined, plus 2.375%, at the Company's option. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. The Company pays certain commitment fees and commissions with respect to the Revolver/LOC Facility and had approximately $222,700,000 of unused commitments under such facility at December 31, 1999. The Credit Agreement is secured by property, equipment and other assets with a net book value of approximately $14,600,000 at December 31, 1999, is guaranteed by substantially all of the Company's present and future subsidiaries (collectively, the "Subsidiary Guarantors") and imposes on the Company certain financial tests and restrictive covenants. The Company has $180,000,000 of 9% Senior Notes due February 15, 2006 (the "Senior Notes") which were sold through a public offering (the "Senior Notes offering"). The Senior Notes are unsecured obligations guaranteed by the Subsidiary Guarantors and impose on the Company certain restrictive covenants. Separate financial statements of the Subsidiary Guarantors are not considered to be material to holders of the Senior Notes since the guaranty of each of the Subsidiary Guarantors is joint and several and full and unconditional (except that liability thereunder is limited to an aggregate amount equal to the largest amount that would not render its obligations thereunder subject to avoidance under Section 548 of the Bankruptcy Code of 1978, as amended, or any comparable provisions of applicable state law), and Beverly Enterprises, Inc., the parent, has no operations or assets separate from its investment in its subsidiaries. 49 51 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 6. LONG-TERM DEBT -- (CONTINUED) Maturities and sinking fund requirements of long-term debt, including capital leases, for the years ended December 31 are as follows (in thousands):
2000 2001 2002 2003 2004 THEREAFTER TOTAL ------- -------- ------- ------- ------- ---------- -------- Future minimum lease payments............. $ 2,929 $ 2,742 $ 2,750 $ 2,106 $ 2,206 $ 16,807 $ 29,540 Less interest.......... 1,487 1,363 1,228 1,098 1,009 7,082 13,267 ------- -------- ------- ------- ------- -------- -------- Net present value of future minimum lease payments............. 1,442 1,379 1,522 1,008 1,197 9,725 16,273 Notes, mortgages and bonds................ 32,610 174,438 79,939 32,299 40,626 404,031 763,943 ------- -------- ------- ------- ------- -------- -------- $34,052 $175,817 $81,461 $33,307 $41,823 $413,756 $780,216 ======= ======== ======= ======= ======= ======== ========
Many of the capital and operating leases contain at least one renewal option (which could extend the term of the leases by five to fifteen years), purchase options, escalation clauses and provisions for payments by the Company of real estate taxes, insurance and maintenance costs. The industrial development revenue bonds were originally issued prior to 1985 primarily for the construction or acquisition of nursing facilities. Bond reserve funds are included in designated funds. These funds are invested primarily in certificates of deposit and in United States government securities and are carried at cost, which approximates market value. Net capitalized interest relating to construction was not material in 1999, 1998, or 1997. 7. COMMITMENTS AND CONTINGENCIES The future minimum rental commitments required by all noncancelable operating leases with initial or remaining terms in excess of one year as of December 31, 1999, are as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 2000........................................................ $ 87,065 2001........................................................ 76,182 2002........................................................ 63,855 2003........................................................ 44,260 2004........................................................ 29,755 Thereafter.................................................. 61,160 -------- $362,277 ========
Total future minimum rental commitments are net of approximately $4,648,000 of minimum sublease rental income due in the future under noncancelable subleases. Rent expense on operating leases, net of sublease rental income, for the years ended December 31 was as follows: 1999 -- $115,598,000; 1998 -- $113,762,000; 1997 -- $114,694,000. Sublease rent income was approximately $7,096,000, $6,772,000 and $5,638,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Contingent rent expense, based primarily on revenues, was approximately $18,000,000, $17,000,000 and $18,000,000 for the years ended December 31, 1999, 1998 and 1997, respectively. 50 52 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) The Company has a $125,000,000 financing arrangement available for the construction of certain facilities. The Company will lease the facilities, under operating leases with the creditor, upon completion of construction. The Company will have the option to purchase these facilities at the end of the initial lease terms. Total construction advances under the financing arrangement as of December 31, 1999 were approximately $111,200,000. In 1992, the Company entered into an agreement to outsource its management information systems functions for a period of seven years, with an option to renew based on mutual agreement among the parties. Such agreement was renegotiated during 1997 to allow the Company to bring the programming functions under its direct control but continue to outsource the data processing functions and to extend the term of the agreement. The future minimum commitments as of December 31, 1999 required under such agreement are as follows: 2000 -- $3,944,000; 2001 -- $3,859,000; and 2002 -- $2,849,000. The Company incurred approximately $6,515,000, $5,673,000 and $4,498,000 under such agreement during the years ended December 31, 1999, 1998 and 1997, respectively. The Company is contingently liable for approximately $60,724,000 of long-term debt maturing on various dates through 2019, as well as annual interest and letter of credit fees of approximately $5,557,000. Such contingent liabilities principally arose from the Company's sale of nursing facilities and retirement living centers. The Company operates the facilities related to approximately $27,574,000 of the principal amount for which it is contingently liable, pursuant to long-term agreements accounted for as operating leases. In addition, the Company is contingently liable for various operating leases that were assumed by purchasers and are secured by the rights thereto, as well as approximately $2,784,000 of loans to certain officers of the Company, which are collateralized by the Company's Common Stock. On February 3, 2000, the Company entered into a series of agreements with the U.S. Department of Justice and the Office of Inspector General (the "OIG") of the Department of Health and Human Services which settled the federal government investigations of the Company relating to the allocation to the Medicare Program of certain nursing labor costs in its skilled nursing facilities from 1990 to 1998 (the "Allocation Investigations"). These agreements finalized the terms of the settlements, which were tentatively announced in July 1999. The agreements consist of: (i) a Plea Agreement; (ii) a Civil Settlement Agreement; (iii) a Corporate Integrity Agreement; and (iv) an agreement concerning the disposition of 10 nursing facilities. Under the Plea Agreement, a subsidiary of the Company pled guilty to one count of mail fraud and 10 counts of making false statements to Medicare relating to the submission of certain Medicare cost reports for 10 separate nursing facilities. The subsidiary paid a criminal fine of $5,000,000 and, under a separate agreement, is obligated to dispose of the 10 nursing facilities. The subsidiary will continue to operate and staff the nursing facilities until new operators are found. Under the separate Civil Settlement Agreement, the Company will reimburse the federal government $170,000,000 as follows: (i) $25,000,000, which was paid during the first quarter of 2000, and (ii) $145,000,000 to be withheld from the Company's biweekly Medicare periodic interim payments in equal installments over eight years. The Company anticipates cash flows from operations to decline approximately $18,100,000 per year as a result of the reduction in Medicare periodic interim payments. Such installments began during the first quarter of 2000. In addition, the Company agreed to resubmit certain Medicare filings to reflect reduced labor costs. The Company also entered into a Corporate Integrity Agreement with the OIG relating to the monitoring of compliance with requirements of federal healthcare programs on an ongoing basis. Such agreement addresses the Company's obligations to ensure that it is in compliance with the requirements for participation 51 53 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) in the federal healthcare programs, and includes the Company's functional and training obligations, audit and review requirements, recordkeeping and reporting requirements, as well as penalties for breach/ noncompliance of the agreement. On July 6, 1999, an amended complaint was filed by the plaintiffs in a previously disclosed purported class action lawsuit pending against the Company and certain of its officers in the United States District Court for the Eastern District of Arkansas (the "Class Action"). Plaintiffs filed a second amended complaint on September 9, 1999 which asserted claims under Section 10(b) (including Rule 10b-5 promulgated thereunder) and under Section 20 of the Securities Exchange Act of 1934 arising from practices that were the subject of the Allocation Investigations. The defendants filed a motion to dismiss that complaint on October 8, 1999. Due to the preliminary state of the Class Action and the fact the second amended complaint does not allege damages with any specificity, the Company is unable at this time to assess the probable outcome of the Class Action or the materiality of the risk of loss. However, the Company believes that it acted lawfully with respect to plaintiff investors and will vigorously defend the Class Action. However, there can be no assurances that the Company will not experience an adverse effect on its consolidated financial position, results of operations or cash flows as a result of these proceedings. In addition, since July 29, 1999, eight derivative lawsuits have been filed in the state courts of Arkansas, California and Delaware (collectively, the "Derivative Actions"). The Derivative Actions each name the Company's directors as defendants, as well as the Company as a nominal defendant. Some actions also name as defendants certain of the Company's officers. The Derivative Actions each allege breach of fiduciary duties to the Company and its stockholders arising primarily out of the Company's alleged exposure to loss due to the Class Action and the Allocation Investigations. Due to the preliminary state of the Derivative Actions and the fact the complaints do not allege damages with any specificity, the Company is unable at this time to assess the probable outcome of the Derivative Actions or the materiality of the risk of loss. However, the Company believes that it acted lawfully with respect to the allegations of the Derivative Actions and will vigorously defend the Derivative Actions. However, there can be no assurances that the Company will not experience an adverse effect on its consolidated financial position, results of operations or cash flows as a result of these proceedings. There are various other lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages that are generally not covered by insurance. The Company does not believe that the ultimate resolution of such other matters will have a material adverse effect on the Company's consolidated financial position or results of operations. 8. STOCKHOLDERS' EQUITY The Company had 300,000,000 shares of authorized $.10 par value common stock ("Common Stock") at December 31, 1999 and 1998. The Company is subject to certain restrictions under its long-term debt agreements related to the payment of cash dividends on its Common Stock. The Company had 25,000,000 shares of authorized $1 par value preferred stock at December 31, 1999 and 1998, all of which remain unissued. The Board of Directors has authority, without further stockholder action, to set rights, privileges and preferences for any unissued shares of preferred stock. In June 1996, the Company announced that its Board of Directors had authorized a stock repurchase program whereby the Company may repurchase, from time to time on the open market, up to a total of 10,000,000 shares of its outstanding Common Stock. In December 1997, the Company repurchased 4,000,000 shares of its Common Stock through an accelerated stock repurchase transaction at a cost of approximately $56,100,000 (approximately $5,700,000 of which was paid during 1998). During 1998, the Company 52 54 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 8. STOCKHOLDERS' EQUITY -- (CONTINUED) repurchased 3,000,000 shares of its Common Stock, through a similar transaction, and approximately 900,000 shares on the open market at a total cost of approximately $51,100,000. The repurchases were financed primarily through borrowings under the Company's Revolver/LOC Facility. On June 2, 1998, the Company announced that its Board of Directors had authorized an increase in its stock repurchase program. The Company may repurchase from time to time on the open market, up to an additional 10,000,000 shares of its outstanding Common Stock. From June 1996 through December 1998, the Company had repurchased approximately 10,200,000 shares of its outstanding Common Stock under the stock repurchase program. During the first quarter of 2000, the Company repurchased approximately 1,000,000 additional shares of its outstanding Common Stock under the stock repurchase program. The repurchases were financed primarily through borrowings under the Company's Revolver/LOC Facility. If, prior to January 1, 1999, the Company had repurchased these additional shares, the Company's results of operations, on an unaudited pro forma basis, would have been a net loss of approximately $134,816,000, or $1.33 per share diluted, for the year ended December 31, 1999. The Company is subject to certain restrictions under its credit arrangements related to the repurchase of its outstanding Common Stock. During 1997, the New Beverly 1997 Long-Term Incentive Plan was approved (the "1997 Long-Term Incentive Plan"). Such plan became effective December 3, 1997 and will remain in effect until December 31, 2006, subject to early termination by the Board of Directors. The Compensation Committee of the Board of Directors (the "Committee") is responsible for administering the 1997 Long-Term Incentive Plan and has complete discretion in determining the number of shares or units to be granted, in setting performance goals and in applying other restrictions to awards, as needed, under the plan. The Company has 10,000,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under the 1997 Long-Term Incentive Plan in the form of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance awards, bonus stock and other stock unit awards. Except for options granted upon the assumption of, or in substitution for, options of another company in which the Company participates in a corporate transaction or the options affected by the Reorganization (as discussed below), nonqualified and incentive stock options must be granted at a purchase price equal to the market price on the date of grant. Options shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine and expire no later than 10 years from the grant date. Stock appreciation rights may be granted alone, in tandem with an option or in addition to an option. Stock appreciation rights shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine and expire no later than 10 years from the grant date. Restricted stock awards are outright stock grants which have a minimum vesting period of one year for performance-based awards and three years for other awards. Performance awards, bonus stock and other stock unit awards may be granted based on the achievement of certain performance or other goals and will carry certain restrictions, as defined. During 1997, the New Beverly Non-Employee Directors Stock Option Plan was approved (the "Non-Employee Directors Stock Option Plan"). Such plan became effective December 3, 1997 and will remain in effect until December 31, 2007, subject to early termination by the Board of Directors. The Company has 300,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under the Non-Employee Directors Stock Option Plan. The Non-Employee Directors Stock Option Plan was amended by the Board of Directors on December 11, 1997 to provide that each nonemployee director be granted an option to purchase 3,375 shares of the Company's Common Stock on June 1 of each year until the plan is terminated, subject to the availability of shares. Such options are granted at a purchase price equal to fair market value on the date of grant, become exercisable one year after date of grant and expire 10 years after date of grant. 53 55 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 8. STOCKHOLDERS' EQUITY -- (CONTINUED) The following table summarizes stock option, restricted stock and other stock units data relative to the Company's long-term incentive plans for the years ended December 31:
1999 1998 1997 --------------------- ---------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE --------- --------- ---------- --------- ---------- --------- Options outstanding at beginning of year........................... 8,163,565 $9.20 6,561,903 $9.29 4,908,727 $10.55 Changes during the year: Granted........................... 121,627 6.51 3,341,994 8.81 2,944,522 10.87 Exercised......................... (40,450) 6.44 (428,069) 6.89 (1,047,423) 8.06 Cancelled......................... (937,283) 9.88 (1,312,263) 9.42 (243,923) 14.64 --------- ---------- ---------- Options outstanding at end of year.............................. 7,307,459 9.08 8,163,565 9.20 6,561,903 9.29 ========= ========== ========== Options exercisable at end of year.............................. 4,107,067 8.56 3,761,259 8.50 5,073,903 8.23 ========= ========== ========== Options available for grant at end of year........................... 2,413,967 1,701,426 3,738,097 ========= ========== ========== Restricted stock outstanding at beginning of year........................... -- -- 145,200 Changes during the year: Granted........................... 84,491 -- 10,500 Vested............................ (16,972) -- (134,711) Forfeited......................... -- -- (20,989) --------- ---------- ---------- Restricted stock outstanding at end of year........................... 67,519 -- -- ========= ========== ========== Phantom units outstanding at beginning of year................. -- -- 76,769 Changes during the year: Granted........................... -- -- -- Vested............................ -- -- (76,316) Cancelled......................... -- -- (453) --------- ---------- ---------- Phantom units outstanding at end of year.............................. -- -- -- ========= ========== ========== Performance shares outstanding at beginning of year................. -- -- 992,000 Changes during the year: Granted........................... -- -- 16,000 Vested............................ -- -- (759,389) Cancelled......................... -- -- (248,611) --------- ---------- ---------- Performance shares outstanding at end of year....................... -- -- -- ========= ========== ==========
On February 16, 2000, the Company granted 2,095,900 stock options to certain of its officers and employees. 54 56 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 8. STOCKHOLDERS' EQUITY -- (CONTINUED) Exercise prices for options outstanding as of December 31, 1999 ranged from $3.24 to $16.06. The weighted-average remaining contractual life of these options is seven years. The following table provides certain information with respect to stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING ----------------------------------------------- WEIGHTED- OPTIONS EXERCISABLE WEIGHTED- AVERAGE ------------------------------ OPTIONS AVERAGE REMAINING OPTIONS WEIGHTED-AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE - ------------------------ ----------- -------------- ---------------- ----------- ---------------- $ 3.24 - $ 6.75.................. 3,026,641 $ 5.68 8.73 1,396,768 $ 4.76 $ 7.06 - $10.00.................. 1,768,128 9.09 6.47 1,636,366 9.19 $10.19 - $13.75.................. 1,570,211 12.51 7.69 908,609 12.23 $14.00 - $16.06.................. 942,479 14.26 8.17 165,324 14.28 --------- --------- $ 3.24 - $16.06.................. 7,307,459 $ 9.08 7.15 4,107,067 $ 8.56 ========= =========
As a result of the Reorganization (as discussed herein), immediately prior to the Distribution, (i) each option to purchase the Company's Common Stock then outstanding became fully vested and exercisable, (ii) all restrictions on outstanding restricted shares lapsed and became fully vested, (iii) each outstanding award of phantom units became fully vested, and (iv) each outstanding performance share became fully vested. The Company incurred expenses of approximately $18,000,000 in 1997 as it related to these stock-based awards, which was included in the $44,000,000 of transaction costs. In addition, all options outstanding immediately after the Distribution were cancelled and replaced with new options issued by the Company under the 1997 Long-Term Incentive Plan. Such options are exercisable upon the same terms and conditions (except that all options are 100% vested) as under the applicable option agreement issued thereunder, except that (i) the number of shares for which such options may be converted, and (ii) the option exercise price per share of such options were adjusted to take into account the effect of the Reorganization. The Company recognizes compensation expense for its restricted stock grants, performance share grants (when the performance targets are achieved) and other stock unit awards. The total charges to the Company's consolidated statements of operations for the years ended December 31, 1999, 1998 and 1997 related to these stock-based awards were approximately $198,000, $0 and $19,767,000, respectively. The total charges for 1997 included approximately $18,000,000 related to the impact of the Reorganization on the Company's stock- based awards (as discussed above). Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its 1999, 1998 and 1997 stock option and performance share grants under the fair value method as prescribed by such statement. The fair value for stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 1999, 1998 and 1997, respectively: risk-free interest rates of 6.8%, 5.0% and 5.9%; volatility factors of the expected market price of the Company's Common Stock of .46, .41 and .35; and weighted-average expected option lives of 9 years, 10 years and 8 years. The Company does not currently pay cash dividends on its Common Stock and no future dividends are currently planned. Such weighted-average assumptions resulted in a weighted average fair value of options granted during 1999, 1998 and 1997 of $4.27 per share, $5.35 per share and $7.84 per share, respectively. The fair value of the performance share grants was based on the market value of the Company's Common Stock on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models 55 57 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 8. STOCKHOLDERS' EQUITY -- (CONTINUED) require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the stock options and performance shares is amortized to expense over their respective vesting periods. The pro forma effects on reported net income (loss) and diluted earnings per share assuming the Company had elected to account for its stock option and performance share grants in accordance with SFAS No. 123 for the years ended December 31, 1999, 1998 and 1997 would have been a net loss of $137,015,000 or $1.34 per share, a net loss of $32,202,000 or $.31 per share and net income of $47,244,000 or $.46 per share, respectively. The pro forma amounts for 1997 reflect the impact of the Reorganization on the Company's outstanding stock options (as discussed above). Such pro forma effects are not necessarily indicative of the effect on future years. The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and restated) enables all full-time employees having completed one year of continuous service to purchase shares of Common Stock at the current market price through payroll deductions. The Company makes contributions in the amount of 30% of the participant's contribution. Each participant specifies the amount to be withheld from earnings per two-week pay period, subject to certain limitations. The total charges to the Company's consolidated statements of operations for the years ended December 31, 1999, 1998 and 1997 related to this plan were approximately $1,723,000, $2,435,000 and $2,449,000, respectively. 9. INCOME TAXES The provision for (benefit from) taxes on income (loss) before extraordinary charge and the cumulative effect of change in accounting for start-up costs (see Note 1) consists of the following for the years ended December 31 (in thousands):
1999 1998 1997 -------- -------- ------- Federal: Current............................................. $ -- $ -- $22,997 Deferred............................................ (72,001) (28,227) 20,404 State: Current............................................. 4,000 2,169 6,669 Deferred............................................ (11,078) 122 (157) -------- -------- ------- $(79,079) $(25,936) $49,913 ======== ======== =======
The Company had an annual effective tax rate of 37% for the year ended December 31, 1999, compared to annual effective tax rates of 51% and 46% for the years ended December 31, 1998 and 1997, respectively. The annual effective tax rate in 1999 was different than the federal statutory rate primarily due to the impact of state income taxes. The annual effective tax rate in 1998 was different than the federal statutory rate primarily due to the impact of the sale of ATH (see Note 4), the benefit of certain tax credits, and the pre-tax charge of approximately $69,400,000 (see Note 3) which reduced the Company's pre-tax income to a level where the impact of permanent tax differences and state income taxes had a more significant impact on the effective tax rate. The annual effective tax rate in 1997 was different than the federal statutory rate primarily due to the impact of nondeductible transaction costs associated with the Reorganization (see Note 4). 56 58 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 9. INCOME TAXES -- (CONTINUED) A reconciliation of the provision for (benefit from) income taxes, computed at the statutory rate, to the Company's annual effective tax rate is summarized as follows (dollars in thousands):
1999 1998 1997 -------------- -------------- ------------- AMOUNT % AMOUNT % AMOUNT % -------- --- -------- --- ------- --- Tax (benefit) at statutory rate....... $(74,804) 35 $(17,809) 35 $37,977 35 General business tax credits.......... (2,470) 1 (2,315) 5 -- -- State tax provision, net.............. (4,601) 2 1,489 (3) 4,233 4 Nondeductible amortization of intangibles......................... 1,192 -- (74) -- 1,702 2 Sale of ATH........................... -- -- (6,867) 13 -- -- Effect of Reorganization and Merger... -- -- -- -- 5,618 5 Other................................. 1,604 (1) (360) 1 383 -- -------- -- -------- -- ------- -- $(79,079) 37 $(25,936) 51 $49,913 46 ======== == ======== == ======= ==
Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary differences giving rise to the Company's deferred tax assets and liabilities at December 31, 1999 and 1998 are as follows (in thousands):
DECEMBER 31, 1999 DECEMBER 31, 1998 -------------------- -------------------- ASSET LIABILITY ASSET LIABILITY -------- --------- -------- --------- Insurance reserves........................ $ 25,512 $ -- $ 11,988 $ -- General business tax credit carryforwards........................... 8,850 -- 5,270 -- Alternative minimum tax credit carryforwards........................... 15,772 -- 16,568 -- Provision for dispositions................ 35,454 3,882 37,805 3,152 Provision for Medicare repayment.......... 55,175 -- -- -- Depreciation and amortization............. 6,582 132,863 12,711 136,096 Operating supplies........................ -- 13,004 -- 13,241 Federal net operating loss carryforwards........................... 29,491 -- 17,846 -- Other..................................... 24,707 25,818 22,728 30,877 -------- -------- -------- -------- $201,543 $175,567 $124,916 $183,366 ======== ======== ======== ========
At December 31, 1999, the Company had federal net operating loss carryforwards of $84,259,000 for income tax purposes which expire in years 2018 through 2019. At December 31, 1999, the Company had general business tax credit carryforwards of $8,850,000 for income tax purposes which expire in years 2008 through 2015. For financial reporting purposes, the federal net operating loss carryforwards and the general business tax credit carryforwards have been utilized to offset existing net taxable temporary differences reversing during the carryforward periods. The Company's net deferred tax assets at December 31, 1999 will be realized primarily through the reversal of temporary taxable differences and future taxable income. Accordingly, the Company does not believe that a deferred tax valuation allowance is necessary at December 31, 1999. 10. FAIR VALUES OF FINANCIAL INSTRUMENTS Financial Accounting Standards Statement No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation 57 59 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 10. FAIR VALUES OF FINANCIAL INSTRUMENTS --(CONTINUED) techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates its fair value. Notes Receivable, Net (Including Current Portion) For variable-rate notes that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed-rate notes are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Beverly Indemnity Funds The carrying amount reported in the consolidated balance sheets for the Beverly Indemnity funds approximates its fair value and is included in the consolidated balance sheet caption "Prepaid expenses and other". During the fourth quarter of 1998, Beverly Indemnity, Ltd. completed a risk transfer of substantially all of its pre-May 1998 auto liability, general liability and workers' compensation claims liability to a third party insurer effected through a loss portfolio transfer (see Note 1) which resulted in the sale of securities with a book value of approximately $61,600,000. Also during 1998, various other securities were sold with a book value of approximately $33,700,000. Beverly Indemnity, Ltd. received gross proceeds of approximately $98,000,000 from the sale of these securities and recognized gross gains on the sales of these securities of approximately $3,000,000. In addition, an adjustment was recorded to accumulated other comprehensive income for unrealized gains on these securities of $1,755,000, net of income taxes. Long-term Debt (Including Current Portion) The carrying amounts of the Company's variable-rate borrowings approximate their fair values. The fair values of the remaining long-term debt are estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. Federal Government Settlements (Including Current Portion) The carrying amount of the Company's obligations to the federal government resulting from the settlements of the Allocation Investigations is included in the consolidated balance sheet captions "Other accrued liabilities" and "Other liabilities and deferred items." Such obligations are non-interest bearing, and as such, were imputed at their approximate fair market rate of 9% for accounting purposes. Therefore, the carrying amount of such obligations should approximate its fair value. 58 60 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 10. FAIR VALUES OF FINANCIAL INSTRUMENTS --(CONTINUED) The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1999 and 1998 are as follows (in thousands):
1999 1998 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Cash and cash equivalents................. $ 24,652 $ 24,652 $ 17,278 $ 17,278 Notes receivable, net (including current portion)................................ 20,588 20,600 42,338 44,900 Beverly Indemnity funds................... 561 561 1,600 1,600 Long-term debt (including current portion)................................ 780,216 744,520 906,043 929,454 Federal government settlements (including current portion)........................ 133,314 133,314 -- --
During 1999 and 1998, the Company defeased long-term debt with aggregate carrying values of $8,135,000 and $5,650,000, respectively. The fair values of such defeased debt were estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements, and were approximately $14,071,000 and $5,819,000 at December 31, 1999 and 1998, respectively. In order to consummate certain dispositions and other transactions, the Company has agreed to guarantee the debt assumed or acquired by the purchaser or the performance under a lease, by the lessor. It is not practicable to estimate the fair value of the Company's off-balance sheet guarantees (See Note 7). The Company does not charge a fee for entering into such agreements and contracting with a financial institution to estimate such amounts could not be done without incurring excessive costs. In addition, unlike the Company, a financial institution would not be in a position to assume the underlying obligations and operate the nursing facilities collateralizing the obligations, which would significantly impact the calculation of the fair value of such off-balance sheet guarantees. In addition, the Company guarantees approximately $2,784,000 of loans to certain officers of the Company, which are collateralized by the Company's Common Stock. The fair values of such loans were estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements, and were approximately $2,806,000 at December 31, 1999. 11. SEGMENT INFORMATION Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" provides disclosure guidelines for segments of a company based on a management approach to defining operating segments. Description of the Types of Services from which each Operating Segment Derives its Revenues At December 31, 1999 and 1998, the Company was organized into two operating segments, which support the Company's delivery of long-term healthcare services. These operating segments included: (i) Beverly Healthcare, which provides long-term healthcare through the operation of nursing facilities and assisted living centers; and (ii) Beverly Care Alliance, which operates outpatient therapy clinics, home care centers and a rehabilitation services business. At December 31, 1997, in addition to the two operating segments mentioned above, the Company owned Beverly Specialty Hospitals, which operated the Company's transitional hospitals. In June 1998, the Company 59 61 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 11. SEGMENT INFORMATION -- (CONTINUED) completed the sale of this segment to Select Medical Corporation (see Note 4). In addition to the three operating segments mentioned above, the Company owned PCA, which operated the Company's institutional and mail service pharmacy businesses. In December 1997, the Company completed the Merger of PCA with Capstone Pharmacy Services, Inc. (see Note 4). Measurement of Segment Income or Loss and Segment Assets The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (see Note 1). The Company evaluates performance and allocates resources based on income or loss from operations before income taxes, excluding any unusual items. Factors Management Used to Identify the Company's Operating Segments The Company's operating segments are strategic business units that offer different services within the long-term healthcare continuum. Business in each operating segment is conducted by one or more corporations headed by a president who is also a senior officer of the Company. The corporations comprising each operating segment also have separate boards of directors. 60 62 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 11. SEGMENT INFORMATION -- (CONTINUED) The following table summarizes certain information for each of the Company's operating segments (in thousands):
BEVERLY BEVERLY PHARMACY BEVERLY CARE SPECIALTY CORPORATION HEALTHCARE ALLIANCE HOSPITALS OF AMERICA ALL OTHER(1) TOTALS ---------- -------- --------- ----------- ------------ ---------- Year ended December 31, 1999 Revenues from external customers................. $2,305,341 $237,014 $ -- -- $ 4,317 $2,546,672 Intercompany revenues........ -- 140,216 -- -- 11,643 151,859 Interest income.............. 240 88 -- -- 4,007 4,335 Interest expense............. 28,434 425 -- -- 43,719 72,578 Depreciation and amortization.............. 79,454 13,228 -- -- 6,478 99,160 Pre-tax income (loss)........ 109,884 23,417 -- -- (347,027) (213,726) Total assets................. 1,501,670 325,771 -- -- 155,439 1,982,880 Capital expenditures......... 73,029 10,518 -- -- 11,867 95,414 Year ended December 31, 1998 Revenues from external customers................. $2,531,496 $192,627 $61,775 -- $ 26,334 $2,812,232 Intercompany revenues........ -- 13,518 539 -- 10,682 24,739 Interest income.............. 410 160 3 -- 10,135 10,708 Interest expense............. 29,359 108 93 -- 36,378 65,938 Depreciation and amortization.............. 78,269 8,662 1,578 -- 5,213 93,722 Pre-tax income (loss)........ 165,707 6,878 (670) -- (222,797) (50,882) Total assets................. 1,526,091 303,913 -- -- 330,507 2,160,511 Capital expenditures......... 87,209 15,149 4,937 -- 43,156 150,451 Year ended December 31, 1997 Revenues from external customers................. $2,583,758 $ 60,103 $99,783 $472,861 $ 594 $3,217,099 Intercompany revenues........ -- 15,643 1,708 91,338 10,269 118,958 Interest income.............. 302 -- 3 125 12,771 13,201 Interest expense............. 32,264 19 275 14,965 35,190 82,713 Depreciation and amortization.............. 77,162 3,402 2,517 18,281 5,698 107,060 Pre-tax income (loss)........ 173,363 2,801 819 33,450 (101,927) 108,506 Total assets................. 1,504,437 101,364 48,964 -- 418,704 2,073,469 Capital expenditures......... 90,699 6,468 5,198 11,725 18,997 133,087
- --------------- (1) All Other consists of the operations of the Company's corporate headquarters and related overhead, as well as certain non-operating revenues and expenses, and unusual items. 61 63 BEVERLY ENTERPRISES, INC. SUPPLEMENTARY DATA (UNAUDITED) QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following is a summary of the quarterly results of operations for the years ended December 31, 1999 and 1998.
1999 1999 ------------------------------------------------------- ------------------------------ 1ST 2ND 3RD 4TH TOTAL 1ST 2ND 3RD -------- --------- -------- -------- ---------- -------- -------- -------- Total revenues...................... $635,029 $ 633,678 $638,331 $643,969 $2,551,007 $697,427 $717,648 $700,635 ======== ========= ======== ======== ========== ======== ======== ======== Income (loss) before provision for (benefit from) income taxes, extraordinary charge and cumulative effect of change in accounting for start-up costs..................... $ 9,377 $(183,901) $ 12,535 $(51,737) $ (213,726) $ 29,099 $ 31,803 $ 32,822 Provision for (benefit from) income taxes.............................. 3,470 (68,044) 4,638 (19,143) (79,079) 11,058 10,258 11,487 -------- --------- -------- -------- ---------- -------- -------- -------- Income (loss) before extraordinary charge and cumulative effect of change in accounting for start-up costs.............................. 5,907 (115,857) 7,897 (32,594) (134,647) 18,041 21,545 21,335 Extraordinary charge................ -- -- -- -- -- -- -- -- Cumulative effect of change in accounting for start-up costs...... -- -- -- -- -- (4,415) -- -- -------- --------- -------- -------- ---------- -------- -------- -------- Net income (loss)................... $ 5,907 $(115,857) $ 7,897 $(32,594) $ (134,647) $ 13,626 $ 21,545 $ 21,335 ======== ========= ======== ======== ========== ======== ======== ======== Income (loss) per share of common stock: Basic: Before extraordinary charge and cumulative effect of change in accounting for start-up costs.... $ .06 $ (1.13) $ .08 $ (.32) $ (1.31) $ .17 $ .21 $ .21 Extraordinary charge............... -- -- -- -- -- -- -- -- Cumulative effect of change in accounting for start-up costs.... -- -- -- -- -- (.04) -- -- -------- --------- -------- -------- ---------- -------- -------- -------- Net income (loss).................. $ .06 $ (1.13) $ .08 $ (.32) $ (1.31) $ .13 $ .21 $ .21 ======== ========= ======== ======== ========== ======== ======== ======== Shares used to compute per share amounts.......................... 102,480 102,494 102,495 102,496 102,491 106,006 103,682 103,019 ======== ========= ======== ======== ========== ======== ======== ======== Diluted: Before extraordinary charge and cumulative effect of change in accounting for start-up costs.... $ .06 $ (1.13) $ .08 $ (.32) $ (1.31) $ .17 $ .20 $ .21 Extraordinary charge............... -- -- -- -- -- -- -- -- Cumulative effect of change in accounting for start-up costs.... -- -- -- -- -- (.04) -- -- -------- --------- -------- -------- ---------- -------- -------- -------- Net income (loss).................. $ .06 $ (1.13) $ .08 $ (.32) $ (1.31) $ .13 $ .20 $ .21 ======== ========= ======== ======== ========== ======== ======== ======== Shares used to compute per share amounts.......................... 102,693 102,494 102,715 102,496 102,491 107,479 105,112 103,610 ======== ========= ======== ======== ========== ======== ======== ======== Common stock price range: High............................... $ 6.94 $ 8.19 $ 8.00 $ 5.19 $ 15.56 $ 16.25 $ 14.81 Low................................ $ 4.50 $ 4.31 $ 3.88 $ 3.50 $ 12.25 $ 13.50 $ 7.38 1999 ---------------------- 4TH TOTAL --------- ---------- Total revenues...................... $ 707,230 $2,822,940 ========= ========== Income (loss) before provision for (benefit from) income taxes, extraordinary charge and cumulative effect of change in accounting for start-up costs..................... $(144,606) $ (50,882) Provision for (benefit from) income taxes.............................. (58,739) (25,936) --------- ---------- Income (loss) before extraordinary charge and cumulative effect of change in accounting for start-up costs.............................. (85,867) (24,946) Extraordinary charge................ (1,660) (1,660) Cumulative effect of change in accounting for start-up costs...... -- (4,415) --------- ---------- Net income (loss)................... $ (87,527) $ (31,021) ========= ========== Income (loss) per share of common stock: Basic: Before extraordinary charge and cumulative effect of change in accounting for start-up costs.... $ (.84) $ (.24) Extraordinary charge............... (.02) (.02) Cumulative effect of change in accounting for start-up costs.... -- (.04) --------- ---------- Net income (loss).................. $ (.86) $ (.30) ========= ========== Shares used to compute per share amounts.......................... 102,389 103,762 ========= ========== Diluted: Before extraordinary charge and cumulative effect of change in accounting for start-up costs.... $ (.84) $ (.24) Extraordinary charge............... (.02) (.02) Cumulative effect of change in accounting for start-up costs.... -- (.04) --------- ---------- Net income (loss).................. $ (.86) $ (.30) ========= ========== Shares used to compute per share amounts.......................... 102,389 103,762 ========= ========== Common stock price range: High............................... $ 8.13 Low................................ $ 5.25
- --------------- The Company had an annual effective tax rate of 37% for the year ended December 31, 1999 compared to an annual effective tax rate of 51% for the year ended December 31, 1998. The annual effective tax rate in 1999 was different than the federal statutory rate primarily due to the impact of state income taxes. The annual effective tax rate in 1998 was different than the federal statutory rate primarily due to the impact of the sale of ATH (see Note 4), the benefit of certain tax credits, and the $69,400,000 pre-tax charge (see Note 3) which reduced the Company's pre-tax income to a level where the impact of permanent tax differences and state income taxes had a more significant impact on the effective tax rate. 62 64 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 25, 2000, to be filed pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION. Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 25, 2000, to be filed pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 25, 2000, to be filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Jon E.M. Jacoby, a director, serves as Executive Vice President, Chief Financial Officer and director of Stephens Group, Inc. During the years ended December 31, 1998 and 1997, the Company used Stephens Group, Inc., or its affiliates, for investment banking services. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1 and 2. The Consolidated Financial Statements and Consolidated Financial Statement Schedule The consolidated financial statements and consolidated financial statement schedule listed in the accompanying index to consolidated financial statements and financial statement schedules are filed as part of this annual report. 3. Exhibits The exhibits listed in the accompanying index to exhibits are incorporated by reference herein or are filed as part of this annual report. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1999. (c) Exhibits See the accompanying index to exhibits referenced in Item 14(a)(3) above for a list of exhibits incorporated herein by reference or filed as part of this annual report. (d) Financial Statement Schedule See the accompanying index to consolidated financial statements and financial statement schedules referenced in Item 14(a)1 and 2, above. 63 65 BEVERLY ENTERPRISES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEM 14(a))
PAGE ---- 1. Consolidated financial statements: Report of Ernst & Young LLP, Independent Auditors........ 33 Consolidated Balance Sheets at December 31, 1999 and 1998................................................... 34 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1999...... 35 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1999................................................... 36 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1999...... 37 Notes to Consolidated Financial Statements............... 38 Supplementary Data (Unaudited) -- Quarterly Financial Data................................................... 62 2. Consolidated financial statement schedule for each of the three years in the period ended December 31, 1999: II -- Valuation and Qualifying Accounts.................. 65 All other schedules are omitted because they are either not applicable or the items do not exceed the various disclosure levels.
64 66 BEVERLY ENTERPRISES, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
CHARGED DUE TO BALANCE AT (CREDITED) ACQUISITIONS BALANCE BEGINNING TO WRITE-OFFS/ AND AT END DESCRIPTION OF YEAR OPERATIONS RECOVERIES DEPOSITIONS OTHER OF YEAR - ----------- ---------- ----------- ----------- ------------ ------ ------- Year ended December 31, 1999: Allowance for doubtful accounts: Accounts receivable -- patient................. $21,764 $67,400(A) $(26,901) $ 1,901 $ 234 $64,398 Accounts receivable -- nonpatient.............. 677 963 17 -- (234) 1,423* Notes receivable.......... 2,921 3,733 (1,400) -- 350 5,604 ------- ------- -------- ------- ------ ------- $25,362 $72,096 $(28,284) $ 1,901 $ 350 $71,425 ======= ======= ======== ======= ====== ======= Year ended December 31, 1998: Allowance for doubtful accounts: Accounts receivable -- patient................. $17,879 $25,549 $(19,807) $(1,857) $ -- $21,764 Accounts receivable -- nonpatient.............. 862 (90) (13) (82) -- 677* Notes receivable.......... 2,917 (210) (66) -- 280 2,921 ------- ------- -------- ------- ------ ------- $21,658 $25,249 $(19,886) $(1,939) $ 280 $25,362 ======= ======= ======== ======= ====== ======= Year ended December 31, 1997: Allowance for doubtful accounts: Accounts receivable -- patient................. $25,618 $35,343 $(34,858) $(8,224) $ -- $17,879 Accounts receivable -- nonpatient.............. 637 209 (218) -- 234 862* Notes receivable.......... 4,951 (1,211) (306) (1,453) 936 2,917 ------- ------- -------- ------- ------ ------- $31,206 $34,341 $(35,382) $(9,677) $1,170 $21,658 ======= ======= ======== ======= ====== =======
- --------------- (A) Includes $39,000,000 for certain prior year cost report related items affected by the Allocation Investigations, as well as $1,007,000 for additional accounts receivable-patient reserves required on the 10 nursing facilities required to be disposed of as a result of the settlements of such investigations, and are included in the "Special charges related to settlements of federal government investigations." * Includes amounts classified in long-term other assets as well as current assets. 65 67 BEVERLY ENTERPRISES, INC. INDEX TO EXHIBITS (ITEM 14(a)(3))
EXHIBIT NUMBER - -------------- 3.1 -- Form of Restated Certificate of Incorporation of New Beverly Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 3.2 -- Form of Certificate of Amendment of Certificate of Incorporation of New Beverly Holdings Inc., changing its name to Beverly Enterprises, Inc. (incorporated by reference to Exhibit 3.2 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 3.3 -- By-Laws of Beverly Enterprises, Inc. (incorporated by reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on June 4, 1997 (File No. 333-28521)) 4.1 -- Indenture dated as of February 1, 1996 between Beverly Enterprises, Inc. and Chemical Bank, as Trustee, with respect to Beverly Enterprises, Inc.'s 9% Senior Notes due February 15, 2006 (the "9% Indenture") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995) 4.2 -- Form of Supplemental Indenture No. 2 to the 9% Indenture dated as of November 19, 1997 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on September 8, 1997 (File No. 333-35137)) 4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage Bond Indenture"), among Beverly Enterprises, Inc., Delaware Trust Company, as Corporate Trustee, and Richard N. Smith, as Individual Trustee, with respect to First Mortgage Bonds (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.4 -- First Supplemental Indenture dated as of April 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 3/4% First Mortgage Bonds due 2008 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 5/8% First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated July 15, 1993) (incorporated by reference to Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 4.6 -- Trust Indenture dated as of December 1, 1994 from Beverly Funding Corporation, as Issuer, to Chemical Bank, as Trustee (the "Chemical Indenture") (incorporated by reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No.33-57663)) 4.7 -- First Amendment and Restatement, dated as of June 1, 1999, of Trust Indenture, dated as of December 1, 1994, from Beverly Funding Corporation, as Issuer, to The Chase Manhattan Bank, as Trustee (incorporated by reference to Exhibit 10.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999)
66 68
EXHIBIT NUMBER - -------------- 4.8 -- Series Supplement dated as of December 1, 1994 to the Chemical Indenture (incorporated by reference to Exhibit 10.46 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 4.9 -- Series Supplement, dated as of June 1, 1999, by and between Beverly Funding Corporation and The Chase Manhattan Bank ("1999-1 Series Supplement") (incorporated by reference to Exhibit 10.3 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999) 4.10 -- First Amendment, dated as of July 14, 1999, to the 1999-1 Series Supplement (incorporated by reference to Exhibit 10.4 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999) In accordance with item 601(b)(4)(iii) of Regulation S-K, certain instruments pertaining to Beverly Enterprises, Inc.'s long-term obligations have not been filed; copies thereof will be furnished to the Securities and Exchange Commission upon request. 10.1* -- Beverly Enterprises, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.2* -- New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan (the "1997 LTIP") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 8, 1997 (File No. 333-41669)) 10.3* -- Amendment No. 1 to the 1997 LTIP dated as of December 3, 1997 (incorporated by reference to Exhibit 10.3 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.4* -- New Beverly Holdings, Inc. Non-Employee Directors' Stock Option Plan (the "Directors' Option Plan") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 12, 1997 (File No. 333-42131)) 10.5* -- Amendment No. 1 to the Directors' Option Plan dated as of December 3, 1997 (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.6* -- Executive Medical Reimbursement Plan (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987) 10.7* -- Amended and Restated Beverly Enterprises, Inc. Executive Life Insurance Plan and Summary Plan Description (the "Executive Life Plan") (incorporated by reference to Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993) 10.8* -- Amendment No. 1, effective September 29, 1994, to the Executive Life Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.9* -- Executive Physicals Policy (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 10.10* -- Amended and Restated Deferred Compensation Plan effective July 18, 1991 (incorporated by reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991)
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EXHIBIT NUMBER - -------------- 10.11* -- Amendment No. 1, effective September 29, 1994, to the Deferred Compensation Plan (incorporated by reference to Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.12* -- Executive Retirement Plan (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987) 10.13* -- Amendment No. 1, effective as of July 1, 1991, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.14* -- Amendment No. 2, effective as of December 12, 1991, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.15* -- Amendment No. 3, effective as of July 31, 1992, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992) 10.16* -- Amendment No. 4, effective as of January 1, 1993, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.17* -- Amendment No. 5, effective as of September 29, 1994, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.18* -- Amendment No. 6, effective as of January 1, 1996, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.19* -- Amendment No. 7, effective as of September 1, 1997, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.20* -- Amendment No. 8, dated as of December 11, 1997, to the Executive Retirement Plan, changing its name to the "Executive SavingsPlus Plan" (incorporated by reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.21* -- Beverly Enterprises, Inc.'s Supplemental Executive Retirement Plan effective as of January 1, 1998 (incorporated by reference to Exhibit 10.21 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.22* -- Beverly Enterprises, Inc.'s Executive Deferred Compensation Plan (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 5, 1997 (File No. 333-41673)) 10.23* -- Amendment No. 1 to the Executive Deferred Compensation Plan made as of December 11, 1997 (incorporated by reference to Exhibit 10.23 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.24* -- Amendment No. 2 to the Executive Deferred Compensation Plan made as of December 11, 1997 (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997)
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EXHIBIT NUMBER - -------------- 10.25* -- Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan (the "Directors' Plan") (incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.26* -- Amendment No. 1, effective as of December 3, 1997, to the Directors' Plan (incorporated by reference to Exhibit 10.26 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.27* -- Beverly Enterprises, Inc.'s Supplemental Long-Term Disability Plan (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996) 10.28* -- Form of Indemnification Agreement between Beverly Enterprises, Inc. and its officers, directors and certain of its employees (incorporated by reference to Exhibit 19.14 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1987) 10.29* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or directors relating to indemnification rights (incorporated by reference to Exhibit 19.5 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.30* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or employees relating to indemnification rights (incorporated by reference to Exhibit 19.6 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.31* -- Agreement dated December 29, 1986 between Beverly Enterprises, Inc. and Stephens Inc. (incorporated by reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on January 18, 1990 (File No. 33-33052)) 10.32* -- Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and David R. Banks (incorporated by reference to Exhibit 10.17 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.33* -- Form of Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and certain of its officers (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.34* -- Executive Stock Option Agreement, effective as of February 19, 1998, between Beverly Enterprises, Inc. and David R. Banks (incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 10.35 -- Master Lease Document -- General Terms and Conditions dated December 30, 1985 for Leases between Beverly California Corporation and various subsidiaries thereof as lessees and Beverly Investment Properties, Inc. as lessor (incorporated by reference to Exhibit 10.12 to Beverly California Corporation's Annual Report on Form 10-K for the year ended December 31, 1985)
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EXHIBIT NUMBER - -------------- 10.36 -- Agreement dated as of December 29, 1986 among Beverly California Corporation, Beverly Enterprises -- Texas, Inc., Stephens Inc. and Real Properties, Inc. (incor- porated by reference to Exhibit 28 to Beverly California Corporation's Current Report on Form 8-K dated December 30, 1986) and letter agreement dated as of July 31, 1987 among Beverly Enterprises, Inc., Beverly California Corporation, Beverly Enterprises -- Texas, Inc. and Stephens Inc. with reference thereto (incorporated by reference to Exhibit 19.13 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1987) 10.37 -- Participation Agreement, dated as of August 28, 1998, among Vantage Healthcare Corporation, Petersen Health Care, Inc., Beverly Savana Cay Manor, Inc., Beverly Enterprises -- Georgia, Inc., Beverly Enterprises -- California, Inc., Beverly Health and Rehabilitation Services, Inc., Beverly Enterprises -- Arkansas, Inc., Beverly Enterprises -- Florida, Inc. and Beverly Enterprises -- Washington, Inc. as Lessees and Structural Guarantors; Beverly Enterprises, Inc. as Representative, Construction Agent and Parent Guarantor; Bank of Montreal Global Capital Solutions, Inc. as Agent Lessor and Lessor; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency, Bank of America National Trust and Savings Association and Bank of Montreal, as Lenders; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency as Arranger; and Bank of Montreal as Co-Arranger and Syndication Agent and Administrative Agent for the Lenders with respect to the Lease Financing of New Headquarters for Beverly Enterprises, Inc., Assisted Living and Nursing Facilities for Beverly Enterprises, Inc. (incorporated by reference to Exhibit 10.37 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998) 10.38 -- Master Amendment No. 1 to Amended and Restated Participation Agreement and Amended and Restated Master Lease and Open-End Mortgage, entered into as of September 30, 1999, among Beverly Enterprises, Inc. as Representative, Construction Agent, Parent Guarantor and Lessee; Bank of Montreal Global Capital Solutions, Inc., as Lessor and Agent Lessor; and Bank of Montreal, as Administrative Agent, Arranger and Syndication Agent (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999) 10.39 -- Amended and Restated Credit Agreement, dated as of April 30, 1998, among Beverly Enterprises, Inc., the Banks listed therein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent (incorporated by reference to Exhibit 10.38 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1998) 10.40 -- Amendment No. 1 to Amended and Restated Credit Agreement, dated as of September 30, 1999, among Beverly Enterprises, Inc., the Banks listed therein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent (incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999) 10.41 -- Master Services Agreement, dated as of September 18, 1997, by and between Alltel Information Services, Inc. and Beverly Enterprises, Inc. 10.42 -- Form of Irrevocable Trust Agreement for the Beverly Enterprises, Inc. Executive Benefits Plan (incorporated by reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s Registration Statement of Form S-4 filed on February 13, 1995 (File No. 33-57663))
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EXHIBIT NUMBER - -------------- 10.43 -- Corporate Integrity Agreement between the Office of Inspector General of the Department of Health and Human Services and Beverly Enterprises, Inc. 10.44 -- Plea Agreement 10.45 -- Addendum to Plea Agreement 10.46 -- Settlement Agreement between the United States of America, Beverly Enterprises, Inc. and Domenic Todarello 10.47 -- Agreement Regarding the Operations of Beverly Enterprises -- California, Inc. 21.1 -- Subsidiaries of Registrant 23.1 -- Consent of Ernst & Young LLP, Independent Auditors 27.1 -- Financial Data Schedule for the year ended December 31, 1999
- --------------- * Exhibits 10.1 through 10.34 are the management contracts, compensatory plans, contracts and arrangements in which any director or named executive officer participates. 71 73 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BEVERLY ENTERPRISES, INC. Registrant Dated: March 29, 2000 By: /s/ DAVID R. BANKS ---------------------------------- David R. Banks Chairman of the Board, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated: /s/ DAVID R. BANKS Chairman of the Board, March 29, 2000 - ----------------------------------------------------- Chief Executive Officer David R. Banks and Director /s/ SCOTT M. TABAKIN Executive Vice President March 29, 2000 - ----------------------------------------------------- and Chief Financial Scott M. Tabakin Officer /s/ PAMELA H. DANIELS Senior Vice President, March 29, 2000 - ----------------------------------------------------- Controller and Chief Pamela H. Daniels Accounting Officer /s/ BERYL F. ANTHONY, JR. Director March 29, 2000 - ----------------------------------------------------- Beryl F. Anthony, Jr. /s/ CAROLYNE K. DAVIS Director March 29, 2000 - ----------------------------------------------------- Carolyne K. Davis /s/ JAMES R. GREENE Director March 29, 2000 - ----------------------------------------------------- James R. Greene /s/ EDITH E. HOLIDAY Director March 29, 2000 - ----------------------------------------------------- Edith E. Holiday /s/ JON E.M. JACOBY Director March 29, 2000 - ----------------------------------------------------- Jon E. M. Jacoby /s/ RISA J. LAVIZZO-MOUREY Director March 29, 2000 - ----------------------------------------------------- Risa J. Lavizzo-Mourey /s/ MARILYN R. SEYMANN Director March 29, 2000 - ----------------------------------------------------- Marilyn R. Seymann
72 EX-10.41 2 MASTER SERVICES AGREEMENT 1 EXHIBIT 10.41 MASTER SERVICES AGREEMENT BETWEEN ALLTEL INFORMATION SERVICES, INC. AND BEVERLY ENTERPRISES, INC. - -------------------------------------------------------------------------------- DATED AS OF: __________1997 2 TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS....................................................................................................1 1.1 DEFINITIONS................................................................................................1 2. SERVICES.......................................................................................................2 2.1 SERVICES...................................................................................................2 2.2 ATTACHMENT.................................................................................................2 2.3 PROCESSING SCHEDULE........................................................................................3 3. FEES AND PAYMENT ARRANGEMENTS..................................................................................3 3.1 SERVICE FEES...............................................................................................3 3.2 PAYMENTS BY CLIENT.........................................................................................4 4. TERM...........................................................................................................4 4.1 TERM.......................................................................................................4 4.2 CLIENT RENEWAL OPTION......................................................................................5 5. EDUCATION......................................................................................................5 5.1 ALLTEL STANDARD CORPORATE TRAINING.........................................................................5 5.2 THIRD PARTY APPLICATION TRAINING...........................................................................5 6. DATA PROCESSING, PREMISES AND SECURITY.........................................................................5 6.1 DATA PROCESSING............................................................................................5 6.2 CLIENT PROCESSING PREMISES.................................................................................5 6.2.1 ALLTEL TECHNOLOGY CENTER.................................................................................6 6.2.2 ALLTEL TECHNOLOGY CENTER RELOCATION......................................................................6 6.3 SECURITY STANDARDS.........................................................................................6
i 3 7. CLIENT RESOURCES...............................................................................................6 7.1 CLIENT RESOURCES...........................................................................................6 7.2 REQUIRED CONSENTS.........................................................................................6 8. EQUIPMENT......................................................................................................7 8.1 HARDWARE...................................................................................................7 8.2 TERMINALS/WORKSTATIONS/NETWORK EQUIPMENT...................................................................7 8.3 SUPPLIES AND FORMS.........................................................................................7 8.4 CONFIDENTIALITY OF CLIENT DATA.............................................................................7 8.5 DELIVERY...................................................................................................8 9. SOFTWARE.......................................................................................................8 9.1 CLIENT SOFTWARE............................................................................................8 9.2 THIRD PARTY SOFTWARE AND MAINTENANCE......................................................................8 9.3 INSTALLATION OF NEW RELEASES, UPDATES AND ENHANCEMENTS.....................................................9 10. PERSONNEL AND COMMITTEES......................................................................................9 10.1 ALLTEL ACCOUNT RELATIONSHIP EXECUTIVE.....................................................................9 10.2 LIAISON MANAGER..........................................................................................9 10.3 ALLTEL BASE STAFF........................................................................................10 10.4 TEMPORARY RESOURCE.......................................................................................10 10.5 MUTUAL PLANNING..........................................................................................10 11. FILES AND PROGRAMS, STORAGE, AND DISASTER RECOVERY...........................................................12 11.1 FILES AND PROGRAMS.......................................................................................12 11.2 STORAGE..................................................................................................12 11.3 DISASTER RECOVERY.......................................................................................12
ii 4 12. CHANGE ORDERS................................................................................................13 13. INTELLECTUAL PROPERTY RIGHTS.................................................................................13 13.1 MODIFICATIONS TO CLIENT SOFTWARE.........................................................................13 13.2 OWNERSHIP OF ALLTEL SOFTWARE.............................................................................14 13.3 MODIFICATIONS TO ALLTEL SOFTWARE.........................................................................14 14. AUDITS.......................................................................................................14 14.1 CLIENT'S REGULATORY AUDIT................................................................................14 14.2 EXCLUDED MATERIALS.......................................................................................15 15. DISPUTE RESOLUTION...........................................................................................15 15.1 DISPUTE RESOLUTION PROCEDURES............................................................................15 15.2 CLAIMS PROCEDURES........................................................................................15 15.3 ESCALATION PROCEDURES....................................................................................16 16. LIMITATION OF LIABILITY......................................................................................17 17. INDEMNIFICATION..............................................................................................17 17.1 PERSONAL INJURY AND PROPERTY DAMAGE......................................................................17 17.2 INFRINGEMENT OF ALLTEL SOFTWARE OR ALLTEL PROVIDED THIRD PARTY SOFTWARE.................................17 17.3 INFRINGEMENTS OF CLIENT SOFTWARE OR CLIENT PROVIDED THIRD PARTY SOFTWARE................................18 17.4 PREVIOUS LIABILITIES.....................................................................................19 17.5 DISPUTE RESOLUTION.......................................................................................19 18. FORCE MAJEURE, TIME OF PERFORMANCE AND INCREASED COSTS AND ERROR CORRECTION..................................19 18.1 FORCE MAJEURE............................................................................................19 18.2 TIME OF PERFORMANCE AND INCREASED COSTS..................................................................21 18.3 ERROR CORRECTION.........................................................................................21
iii 5 19. NOTICES......................................................................................................21 19.1 NOTICES..................................................................................................21 19.2 CHANGE OF ADDRESS........................................................................................22 20. TERMINATION..................................................................................................22 20.1 TERMINATION..............................................................................................22 20.2 TERMINATION UPON ALLTEL'S MATERIAL BREACH................................................................23 20.3 TERMINATION UPON CLIENT'S MATERIAL BREACH................................................................24 20.4 OPERATIONS DURING THE TERMINATION PERIOD.................................................................25 20.5 TRANSITIONAL COOPERATION.................................................................................26 20.6 SURVIVAL UPON EXPIRATION OR TERMINATION..................................................................26 20.7 TERMINATION FOR CONVENIENCE..............................................................................26 21. CONFIDENTIALITY..............................................................................................27 21.1 CONFIDENTIALITY OBLIGATION...............................................................................27 21.2 NON-DISCLOSURE COVENANT..................................................................................27 21.3 EXCEPTIONS...............................................................................................27 21.4 CONFIDENTIALITY OF THIS AGREEMENT; PROTECTIVE ARRANGEMENTS...............................................28 22. OTHER REPRESENTATIONS, WARRANTIES AND COVENANTS..............................................................28 22.1 LICENSES AND PERMITS AND COMPLIANCE WITH LAWS............................................................28 22.2 NO INTERFERENCE WITH CONTRACTUAL RELATIONSHIP............................................................29 22.3 COVENANT OF GOOD FAITH...................................................................................29 22.4 NO INFRINGEMENT..........................................................................................29 22.5 AUTHORIZATION AND EFFECT.................................................................................30 22.6 NO ADDITIONAL REPRESENTATIONS OR WARRANTIES..............................................................30
iv 6 23. MISCELLANEOUS................................................................................................31 23.1 INDEPENDENT CONTRACTOR...................................................................................31 23.2 OMNIBUS RECONCILIATION ACT COMPLIANCE....................................................................31 23.3 ASSIGNMENT...............................................................................................32 23.4 SEVERABILITY.............................................................................................32 23.5 THIRD PARTY BENEFICIARIES................................................................................32 23.6 GOVERNING LAW............................................................................................32 23.7 EXECUTED IN COUNTERPARTS.................................................................................32 23.8 CONSTRUCTION.............................................................................................33 23.9 ENTIRE AGREEMENT........................................................................................33 23.10 AMENDMENTS AND WAIVERS..................................................................................33 23.11 REMEDIES CUMULATIVE.....................................................................................33 23.12 PRESS RELEASES..........................................................................................33 23.13 TAXES...................................................................................................34
v 7 EXHIBITS Exhibit A Service Schedules Exhibit B Processing Schedule Exhibit C Software Lists Exhibit D Equipment Exhibit E Pricing Exhibit F Staff Roles and Responsibilities Exhibit G (Intentionally left blank) Exhibit H Disaster Recovery Exhibit I * Standard Operating Procedures Exhibit J Client's Information Technology Environment * From time to time, procedures in Exhibit I will be modified and mutually agreed upon except for Exhibit I Attachment 2, Exhibit I Attachment 3, and Exhibit I Attachment 6, which are proprietary to ALLTEL. Furthermore, it is recognized that all exhibits may be more fully developed, or amended, from time to time. vi 8 MASTER SERVICES AGREEMENT This is an Agreement (the "Agreement"), dated as of the ____day of _______1997 ("Effective Date"), by and between ALLTEL INFORMATION SERVICES, INC., a Delaware corporation, 4001 Rodney Parham Road, Little Rock, Arkansas 72212-2496 ("ALLTEL") and BEVERLY ENTERPRISES, INC. located at 1200 South Waldron Road, Suite 155, Fort Smith, Arkansas 72913-3324 (the "Client"). NOW, THEREFORE, the parties agree as follows. 1. DEFINITIONS 1.1 DEFINITIONS. AS USED IN THIS AGREEMENT: (a) "Affiliate" shall mean any wholly-owned direct or indirect subsidiary of ALLTEL Corporation, and with respect to Client shall mean any wholly owned direct or indirect subsidiary of Client. (b) "ALLTEL Software" shall mean any program as described in Exhibit C, or part of such program as described in Exhibit C, which is owned or developed by ALLTEL or any ALLTEL Affiliate and all modifications, upgrades or enhancements to any such program provided under this Agreement. (c) "Client Resources" shall mean those assets, services, and rights, if any, leased, contracted for, licensed, or owned by Client, including Client Software and Client provided Third Party Software to be made available to ALLTEL by Client to facilitate ALLTEL in providing the Services. (d) "Client Software" shall mean any program or part of a program, (or any modifications, updates or enhancements to such Client Software developed in accordance with the terms of this Agreement) which is owned or developed by Client which is made available by Client to ALLTEL and which is necessary for ALLTEL to provide the Services. Under no circumstances shall the ALLTEL Software and ALLTEL Work constitute Client Software for purposes of the Agreement. (e) "Expiration Date" shall mean the earliest of (i) the later to occur of the five (5) year anniversary of the Start Date or the date to which this Agreement is extended in accordance with Section 4, or (ii) the date this Agreement is terminated in accordance with Section 20. 1 9 (f) "Required Consents" shall mean the consents required to permit the transfer to ALLTEL of the right to use any Client Resources. (g) "Start Date" shall mean, 1997. (h) "Third Party Software" shall mean any program, or part of a program which is licensed or sub-licensed to Client or ALLTEL by a third party that has the right to provide that license or sub-license, including, without limitation, those programs described in Exhibit C. (i) "ALLTEL Network" shall mean that equipment, network components and telephone leased lines between Client's Fort Smith facility and ALLTEL's Technology Center at Little Rock. Specifically included are the channel extenders, DS1 circuits between Client's Fort Smith facility and ALLTEL Technology Center in Little Rock, including CSU's required to support circuits and equipment attached to and including the Front End Processor located at the ALLTEL Technology Center in Little Rock. (j) "Client Network" shall mean all communication equipment, network components, leased and dial data circuits which terminate on Client's premises in Fort Smith. Specifically included are all LAN attached equipment, VSAT equipment, and any remaining 3X74 or 3172 equipment located in Fort Smith. 2. SERVICES 2.1 SERVICES. This Agreement sets forth the terms and conditions for the provision by ALLTEL to Client of the information systems management services, production control, operations services, technical support and consulting services during the term hereof, as described in the Service Attachment attached hereto as Exhibit A (individually and collectively the "Services"). ALLTEL, on behalf of Client, also agrees to provide certain specifically identified Services as set forth on Exhibit A to Client Affiliates. Client agrees to notify ALLTEL of new opportunities to provide similar or related Services to Client, including, without limitation, providing new outsourcing services, and to include such services within the scope of this Agreement, by written amendment to Exhibit A in situations that are mutually beneficial to Client and ALLTEL. This section in no way obligates Client to select ALLTEL to provide the above described additional services. 2.2 ATTACHMENT. All applicable terms, conditions, responsibilities and delivery schedules which apply to a particular Service (as opposed to those which apply generally to all Services and which are set forth elsewhere in this Agreement and in the other exhibits attached hereto) are identified in Exhibit A. The Service-specific terms, conditions, responsibilities and delivery schedules shall govern the provision of the relevant Service. Any new terms, conditions, responsibilities or delivery 2 10 schedules which may be specifically applicable to any particular Service, as they are negotiated through the course of business, shall be set forth in writing and executed by the parties and added to this Agreement as an amendment. Such action shall not constitute a modification or change of any provision of this Agreement or of any other provision of any other Exhibit, unless expressly stated in such written agreement. Unless otherwise agreed to by the parties hereunder, the Services to be rendered by ALLTEL to Client and the Service Beneficiaries are limited to those Services which are described in this Agreement and the Exhibits. 2.3 PROCESSING SCHEDULE. ALLTEL will process and update Client's data in accordance with Exhibit B. 3. FEES AND PAYMENT ARRANGEMENTS 3.1 SERVICE FEES. Attached hereto as Exhibit E is a schedule of fees chargeable by ALLTEL to Client for performing the Services, including, without limitation, the monthly base fee (the "Monthly Base Fee"), monthly variable fee (the "Monthly Variable Fee"), a mechanism for adjusting the Monthly Base Fee for changes in Client's volume type or quantity of Services, penalties or incentives (annually), a mechanism for changing the Monthly Variable Fee for changes in Staff, a mechanism for changing the Monthly Base Fee and Monthly Variable Fee for changes in inflation, a mechanism for changing the Monthly Base Fee for changes in the cost of hardware and software maintenance (collectively, as from time-to-time adjusted, the "Service Fees"), as well as certain out-of-pocket expenses paid to third parties by ALLTEL (the "Pass-Through Expenses"): The Monthly Base Fee set forth in Exhibit E is expressly conditioned on Client being and continuing in full compliance with ALLTEL's standard operating procedures as further defined in Exhibit I(as of and after, 6 months after the Effective Date), including, without limitation, weekly maintenance windows, operating system and hardware upgrade schedules and problem and change procedures. In the event Client fails to so comply, Client shall pay to ALLTEL a penalty in the amount of 2% of the Monthly Base Fee retroactive to the Start Date until Client comes into compliance with ALLTEL's operating procedures as described above. In the event ALLTEL is the sole cause of Client's failure to be compliant within 6 months, Client shall not pay the 2% penalty and ALLTEL will continue to invoice Client at the leveraged rate until Client is compliant. Client agrees to make best efforts to become compliant. 3 11 3.2 PAYMENTS BY CLIENT (a) INVOICING REQUIREMENTS. Client agrees and acknowledges that depending on the underlying reason for a change in the amount of the Monthly Base Fee or Monthly Variable Fee, in accordance with Exhibit E, ALLTEL shall reflect such change either as a permanent recalculation to the Monthly Base Fee and/or Monthly Variable Fee (after prior notice to Client) or as a separately delineated temporary increase to the Monthly Base Fee and/or Monthly Variable Fee. ALLTEL shall invoice Client monthly by no later than the 15th calendar day of each month for the Service Fees for the upcoming calendar month, as well as for any known Pass-Through Expenses and any other applicable charges for the immediately preceding month and other preceding months. ALLTEL's invoice shall be in such format and contain such detail and supporting backup as may be agreed upon by the parties. (b) PAYMENT TERMS. Client shall pay by method satisfactory to ALLTEL and Client, the monthly invoiced amount in full, including any amounts or portions thereof in dispute, on or prior to the first day of the month immediately following the month in which the invoice is dated. Any amount not received by the 30th day after the date that the payment was due, shall be subject to interest on the balance overdue at a rate equal to 12% per annum prorated to the date of payment. Should Client dispute in good faith all or any portion of the amount due on any invoice or require any adjustment to an invoiced amount, Client shall notify ALLTEL in writing, prior to the due date of that invoice, of the nature and basis of the dispute and/or adjustment as soon as possible using the dispute resolution procedures set forth in Section 15 of this Agreement. The parties each shall use its best efforts to resolve the dispute prior to the payment due date. If the parties, however, are unable to resolve the dispute prior to the payment due date, Client shall nevertheless pay the entire amount to ALLTEL by the due date. If it is ultimately determined that such amount should not have been paid by Client to ALLTEL, ALLTEL shall credit this amount, plus interest, in accordance with Section 15.1 of this Agreement on Client's next invoice. 4. TERM 4.1 TERM. The term of this Agreement shall begin on the Effective Date and end on the Expiration Date. At least twelve(12) months prior to the Expiration Date, ALLTEL shall submit to Client a written proposal for renewal of this Agreement for an additional term as specified in such proposal. Client shall respond to such proposal within one hundred twenty (120) days following receipt thereof. 4 12 4.2 CLIENT RENEWAL OPTION. In lieu of responding to ALLTEL's written proposal described in Section 4.1, Client shall have the right and option, exercisable at any time during the 90 day period immediately preceding the date that is six (6) months prior to the Expiration Date, to notify ALLTEL that Client elects to extend such initial term for a two year extension. Client shall have the further right and option, exercisable during the 90 day period immediately preceding the date that is six (6) months prior to the expiration of the initial two year extension to extend the Agreement for an additional two year term. The parties shall agree on any extensions to the term of the Agreement beyond the two, two year extensions. 5. EDUCATION 5.1 ALLTEL STANDARD CORPORATE TRAINING. In addition to the corporately provided ALLTEL classroom education services, ALLTEL will make available to Client personnel its standard application software training courses, which are generally held in Little Rock, Arkansas, in accordance with ALLTEL's Education and Training Department schedule, a current copy of which will be provided quarterly to Client upon request. Client personnel may attend such courses, and any other standard courses generally offered by ALLTEL to its other customers, upon payment of ALLTEL's then current published course fee, subject to normal space availability requirements and compliance with ALLTEL's standard registration and enrollment deadlines and procedure. Client will pay all of its travel and lodging expenses while attending ALLTEL courses. 5.2 THIRD PARTY APPLICATION TRAINING. Client will pay for any third party end user training associated with the implementation of third party application software. ALLTEL will work with Client to supplement and customize such training as reasonably practicable in light of the ALLTEL resources available. 6. DATA PROCESSING, PREMISES AND SECURITY. 6.1 DATA PROCESSING. ALLTEL shall provide the operation of Client's data processing systems at ALLTEL's Technology Center defined below. 6.2 CLIENT PROCESSING PREMISES. Client agrees to provide ALLTEL with adequate premises located in Fort Smith, Arkansas, in good repair, to perform its responsibilities under this Agreement (hereinafter the "Data Center"). Without limiting the generality of the foregoing, Client agrees to supply water, sewage, heat, lights, telephone lines and equipment, air conditioning, electricity, daily janitorial services, cafeteria privileges office equipment and furniture, and parking spaces for ALLTEL employees under the same conditions provided to employees of Client. ALLTEL is not responsible for any injury or damage to property or persons which occurs in or around the Data Center unless it is caused by the negligence or willful misconduct of ALLTEL. Client will provide telephone instruments and telephone service for ALLTEL to communicate with the 5 13 employees of Client and as required by ALLTEL to operate the Data Center. In the event Client desires to move the Data Center after the Effective Date, Client shall provide ALLTEL prior notice of such move and pay ALLTEL for any costs incurred by ALLTEL because of such move. 6.2.1 ALLTEL TECHNOLOGY CENTER. Throughout the term of this Agreement, ALLTEL will provide sufficient facilities to support the required mainframe equipment and operations (hereinafter the "ALLTEL Technology Center"). Throughout the term of this Agreement, ALLTEL will notify Client of any material changes in the ALLTEL Technology Center operating environment that might affect Client's operations or obligations under this Agreement. 6.2.2 ALLTEL TECHNOLOGY CENTER RELOCATION. ALLTEL may relocate the ALLTEL Technology Center by providing Client with reasonable notice of such relocation. ALLTEL will bear all costs associated with such relocation and Client shall not incur any additional costs due to such relocation. 6.3 SECURITY STANDARDS ALLTEL will adhere to such security standards with respect to Client's data mutually agreed upon by the parties. Client will reimburse ALLTEL for its actual costs incurred as a Pass-Through Expense if adherence is above the normal accepted industry security processes requested or required by Client increases ALLTEL's costs of operation. 7. CLIENT RESOURCES 7.1 CLIENT RESOURCES During the term of this Agreement, and except as otherwise described in this Agreement, Client will provide for ALLTEL's use in providing the Services, the Client Resources as described on 1.1.c.. 7.2 REQUIRED CONSENTS (a) COOPERATION. Client shall be required to obtain all Required Consents. Upon Client's request, ALLTEL shall assist Client in obtaining the Required Consents. Once each such Required Consent has been obtained, Client shall provide a copy of it to ALLTEL. Until such time as the Required Consent has been obtained by Client, any right to use the affected Client Resource shall not be deemed to have been transferred to ALLTEL, and the parties shall cooperate with each other in achieving a reasonable alternative arrangement for the use of the affected Client Resources. Client shall provide any and all consents for the use by ALLTEL of the Client provided Third Party Software listed in the Client column of Exhibit C-2. 6 14 (b) COSTS. Any cost incurred by ALLTEL at Client's request in obtaining a Required Consent shall be separately charged by ALLTEL to Client as a Pass-Through Expense. (c) TRAINING. The Base Staff shall provide training to Client's designated training staff located at Ft. Smith on all changes to the host system requiring training of Client's staff. Client shall be responsible for supplying resources for and paying the cost of end-user training. 8. EQUIPMENT 8.1 HARDWARE. Client shall pay all costs of purchasing, leasing, installing, utilizing and owning all hardware at Client facilities as required for the operation of Client's application systems and for the testing and training of such systems. A list of Client's hardware as of the Effective Date is set forth in Exhibit D. Client will also provide, at no cost to ALLTEL, all specialized workstations, printers and other hardware and software required by ALLTEL to support the Client application systems. 8.2 TERMINALS/WORKSTATIONS/NETWORK EQUIPMENT. Client will pay all costs associated with Client Network, including, without limitation, all hardware maintenance fees and software license and maintenance fees, of purchasing, leasing, installing, utilizing and owning personal computers, terminals, workstations and controllers used by Client's personnel, as well as all network equipment, including, without limitation, all communication or telephone lines, data service units, modems, hubs, routers, and LAN operating system software. 8.3 SUPPLIES AND FORMS. Client will be responsible for all cost associated with the addition of new magnetic tapes and tape cartridges above the base capacity outlined in Exhibit E required to perform ALLTEL's processing responsibilities during the term of this agreement. Client is responsible for furnishing and cost for all printer-related consumables. Client will provide all supplies for office equipment and personal computers for ALLTEL's Base Staff at all client facilities necessary to perform Client related activities. 8.4 CONFIDENTIALITY OF CLIENT DATA. ALLTEL shall make best efforts to cause all information concerning Client, its business or customers submitted to ALLTEL pursuant to this Agreement to be held in confidence by ALLTEL and not be disclosed. No person or entity, other than those employees and contractors with a need to know, shall be permitted to have access to Client's data without the written authorization of Client. All of Client's data shall be available for examination by Client, at any time during regular business hours, without notice. If ALLTEL receives any legal process requiring it to produce Client's data or that of any of its customers, ALLTEL shall notify Client promptly, and deliver copies of such orders to Client, immediately and prior to compliance with such process. 7 15 8.5 DELIVERY. Client, or its designee, is responsible for delivery of all input and output data to and from the Fort Smith Data Center and for all costs of delivery of output from the ALLTEL Technology Center. 9. SOFTWARE. 9.1 CLIENT SOFTWARE. ALLTEL will use all Client Software for the exclusive use by Client and the Service Beneficiaries in connection with providing the Services to Client and the Service Beneficiaries. Additional use of Client Software by ALLTEL shall require the written consent of Client. ALLTEL reserves the right in advance of any processing or use of Client Software to assure compatibility with equipment and consistency with other processing requirements, techniques and standards. ALLTEL's use of any, new or not supported by vendor, Client Software may result in an increase to the Service Fees. 9.2 THIRD PARTY SOFTWARE AND MAINTENANCE. (a) THIRD PARTY SOFTWARE. Exhibit C sets forth a list of all Client provided Third Party Software and ALLTEL provided Third Party Software. ALLTEL will use all Client provided Third Party Software for the exclusive use by Client in connection with the Services to Client. For any Client provided Third Party Software that is not listed on Exhibit C, ALLTEL reserves the right in advance of any processing or use of any Client provided Third Party Software to assure compatibility with equipment and consistency with other processing requirement, techniques, and standards including year 2000 compliance. Client will procure all consents and pay any reasonable expenses necessary to allow ALLTEL to use any Client provided Third Party Software. If a defect occurs in the Client provided Third Party Software (including noncompliance with year 2000 standards) or if such Client provided Third Party Software does not function in accordance with its specifications during the Term of the Agreement, Client shall cooperate fully with ALLTEL to cause such third party to promptly correct such defect to the extent required under the applicable agreement. To the extent that any Third Party Software or necessary part thereof is not made available to ALLTEL or if a defect in any Third Party Software or necessary part thereof inhibits ALLTEL's provision of the Services, ALLTEL shall be excused from providing such Services until at least the Third Party Software is made available or the defect remedied. ALLTEL agrees to reasonably contact and negotiate with Third Party Software vendors in an effort to accomplish the elimination of any problems. If a defect occurs in any ALLTEL provided Third Party Software or such ALLTEL provided Third Party Software does not function in accordance with its specifications, ALLTEL shall use its best 8 16 efforts to cause such third party to promptly correct such defect to the extent required under the applicable agreement. (b) THIRD PARTY SOFTWARE MAINTENANCE. Client will pay for all Third Party Software maintenance fees for the Client provided Third Party Software listed in Exhibit C. ALLTEL will provide as part of the Monthly Base Fee all third party software maintenance for the ALLTEL provided Third Party Software listed in Exhibit C. 9.3 INSTALLATION OF NEW RELEASES, UPDATES AND ENHANCEMENTS. All changes to the ALLTEL Software and ALLTEL provided Third Party Software, being used by Client including the installation of enhancements, updates, new releases and replacements of the ALLTEL Software and ALLTEL provided Third Party Software, shall be made only with the prior written approval of Client, which shall not be unreasonably withheld, both parties agree to provide all necessary approvals in order to ensure that the version of the ALLTEL Software and ALLTEL provided Third Party Software in production with Client shall not be more than two major releases behind that version of the ALLTEL Software and ALLTEL provided Third Party Software then generally available to the public. Similarly, for all Client Software and Client provided Third Party Software, Client agrees, upon notification by ALLTEL, and unless mutually agreed otherwise, to take all necessary steps in order to ensure that the version of the Client Software and Client provided Third Party Software in production with Client is not more than two major releases behind the version of the Client Software or Third Party Software then generally available to the public. If Client refuses to approve replacements of the ALLTEL Software or ALLTEL provided Third Party Software, Client shall pay for any reasonable and actual costs incurred by ALLTEL for supporting and maintaining the replaced software. 10. PERSONNEL AND COMMITTEES. 10.1 ALLTEL ACCOUNT RELATIONSHIP EXECUTIVE. ALLTEL will assign an individual (the "ALLTEL Account Relationship Executive") who will oversee and manage the Services and serve as ALLTEL's primary point of contact with Client with respect to the Services and will be located at the Technology Center. Prior to the selection of any replacement ALLTEL Account Relationship Executive, ALLTEL shall give prior written notice to Client of such change, will provide Client a resume of the proposed ALLTEL Account Relationship Executive and shall give Client an opportunity to interview such proposed ALLTEL Account Relationship Executive. 10.2 LIAISON MANAGER. Client will assign a mutually agreeable individual (the "Liaison Manager") who will serve as Client's primary point of contact for all communications with ALLTEL with respect to this Agreement. As of the date hereof, Client's Chief Information Officer or such officer's designee shall serve as 9 17 the initial Liaison Manager. Prior to the selection of the initial or any replacement Liaison Manager, Client shall give written notice to ALLTEL of such selection or change. 10.3 ALLTEL BASE STAFF. ALLTEL shall have responsibility for providing the human resources as required to provide the Services described in Exhibit A. ALLTEL can draw upon its own employees (at the Client's facility or elsewhere), as well as the employees of the ALLTEL Affiliates and subcontractors in order to bring together the Base Staff and to perform the Services. ALLTEL shall have the right to transfer or substitute members of the Base Staff as ALLTEL may reasonably determine after six (6) months from Start Date. 10.4 TEMPORARY RESOURCE. Client may request ALLTEL to provide additional resources or hours on a temporary basis and ALLTEL will provide such resources or hours on an as-available basis at ALLTEL's prices for such resources as set forth in Exhibit E. ALLTEL will promptly respond with a quotation for such resource. If Client wishes to utilize ALLTEL services quoted, Client will notify ALLTEL in writing, authorizing ALLTEL to provide such services. 10.5 MUTUAL PLANNING COMMITTEE. (a) MUTUAL PLANNING COMMITTEE. ALLTEL and Client agree that effective planning and communication are necessary to provide overall direction for the Services and that each will work to promote a free and open exchange of information. To that end, ALLTEL's Account Relationship Executive and Client executives(CIO and senior level or higher employees of Client) will endeavor to meet at least quarterly, but no less than annually, for the duration of this Agreement to discuss matters of mutual importance. Some of the matters to be discussed are: (i) review and approve the strategic technology plan of Client and all annual updates thereto; (ii) review and approve systems design, development and implementation project recommendations of ALLTEL concerning the Services, including, without limitation, providing human resources, utilizing available ALLTEL Software, procuring Third Party Software, providing equipment, increasing or decreasing ALLTEL supplied processing to support the Services, and forwarding recommendations for major authorizations to the Client management committee for approval; (iii) review ALLTEL's performance of the Services during the previous calendar quarter, including, without limitation, the milestones that have been completed; 10 18 (iv) review the status of the current Services that ALLTEL is performing; (v) identify any problems relating to the Services and suggest corrective actions to solve such problems, including, without limitation, the cost to Client to correct such problems; (vi) review and approve the Services that are scheduled to be provided by ALLTEL for the upcoming calendar quarter(s), including, without limitation, the scope of the Services and of any applicable performance standards, and deliverables. (vii) review, approve and establish information technology standards, policies and procedures as recommended by ALLTEL, including, without limitation, delegation of certain review and approval authority to specific Client managers and the Mutual Planning Committee; (viii) review and approve requests for major system modifications and enhancements that may be submitted by end-users; (ix) prioritize and allocate Staff resources on all systems design, development and implementation projects; (x) review and approve any ALLTEL's bids and related scope of Services and deliverables for new work; (xi) review and approve ALLTEL requests for Staff resources and changes; (xii) periodically review information provided by ALLTEL on new products and services available from ALLTEL and other key third party providers; (xiii) review at least annually the composition of the Base Staff and any planned or suggested changes; (xiv) review any other aspect of the information processing and technology requirements or desires of Client. Either party may request that this meeting may be held more or less frequently than quarterly. The Chief Information Officer of Client or his or her designee (who is a senior level or higher employee of Client) shall be the Chairman of the Mutual Planning Committee, and shall be responsible 11 19 for communicating, on behalf of the Mutual Planning Committee, to ALLTEL. All meetings shall have a published agenda issued by the ALLTEL Account Relationship Executive (as approved by the Chairman of the Mutual Planning Committee) at least five business days in advance of the meeting to allow the committee members a reasonable opportunity to prepare for the meeting. Meeting minutes will be issued by the ALLTEL Account Relationship Executive to members of the Mutual Planning Committee within five business days after the meeting. Following review by such members, the ALLTEL Account Relationship Executive will incorporate into final meeting minutes the members' accurate and reasonable comments and revisions, which shall constitute the final meeting minutes. From time to time as requested by Client ALLTEL shall submit to the Mutual Planning Committee in writing a performance report, in a form and with content mutually established by the parties, that documents ALLTEL's performance of the Services. In addition, ALLTEL will provide the Mutual Planning Committee with such documentation and other information as may be reasonably requested by the Mutual Planning Committee. 11. FILES AND PROGRAMS, STORAGE, AND DISASTER RECOVERY 11.1 FILES AND PROGRAMS. After such time as the ALLTEL employees receive and operate Client's data on appropriate media in electronic format, ALLTEL will provide and maintain reasonable backup files as required by Client. 11.2 STORAGE. ALLTEL is not responsible for off-site storage and transportation for all backup data files and programs produced at Client's facilities. 11.3 DISASTER RECOVERY. Disaster Recovery shall be provided pursuant to the terms and conditions defined in Exhibit H. 12 20 12. CHANGE ORDERS. Client may, at any time, in writing to ALLTEL, request changes to the scope or quantity of Services listed in Exhibits A, B, C, D, F or H. Such a request will be considered a "Change Order".. The parties agree and acknowledge that Client shall not request a Change Order that has the effect of terminating one or more of the Services in violation of the term of the Agreement. If any Change Order results in an increase or decrease in the cost of or time required for ALLTEL's performance of any of the Services, an equitable adjustment to the cost or delivery schedule or both shall be negotiated by the parties, and the Agreement and appropriate Exhibits shall be deemed amended to reflect such approved Change Order. ALLTEL may, but is not obligated to, begin work on the Change Order before such time as Client and ALLTEL shall have reached an equitable adjustment to the cost and delivery schedule 13. INTELLECTUAL PROPERTY RIGHTS. 13.1 MODIFICATIONS TO CLIENT SOFTWARE. Any writing or work of authorship, regardless of medium, comprising Client Software or Client-provided Third Party Software created by ALLTEL at Client's request in the course of performing the Services under this Agreement (including but not limited to software, source code, blueprints, diagrams, flow charts, specifications or functional descriptions, and specifically including any modifications, enhancements, interfaces (other than interfaces to the ALLTEL Software) (individually, a "Client Work") shall be deemed a "work for hire", and the sole and exclusive property of Client (except, no such writing or work of authorship relating to the Client-provided Third Party Software shall be a Client Work if the license agreement governing the Third Party Software prohibits the granting of such right by ALLTEL). The term "Client Work" shall not include the ALLTEL Software, or any modifications thereto, as well as any writing or work of authorship, regardless of medium, relating to or evidencing the ALLTEL Software. To the extent any Client Work is not deemed a "work for hire" under applicable law, ALLTEL hereby irrevocably assigns, transfers and conveys to Client all of its right, title and interest in such Client Work, including but not limited to, all rights of patent, copyright, trade secret, know-how and other proprietary and associated rights in such Client Work. ALLTEL agrees to execute such other documents or take such other actions as Client may reasonably request to perfect Client's ownership of any Client Work of which Client is granted ownership under this Section 13.1. The parties acknowledge that Client's ownership of any such Client Work shall not preclude ALLTEL from developing for other ALLTEL customers any work or works which are the same or substantially similar to a Client Work or Client Works, in whole or in part if such work or works are developed independently from Client Work or Client Works and if such work or works do not violate Client's intellectual property rights. 13 21 13.2 OWNERSHIP OF ALLTEL SOFTWARE. As of the date hereof, and at all times hereafter, ALLTEL shall be the sole and exclusive owner of all right, title, and interest in and to the ALLTEL Software, including, without limitation, all intellectual property and other rights with respect to the ALLTEL Software. The parties acknowledge that this Agreement in no way limits or restricts ALLTEL and the ALLTEL Affiliates from developing or marketing on their own or for any third party in the United States or internationally the ALLTEL Software as from time to time constituted (including, but not limited to, any modification, enhancement, interface, upgrade, change and all software, source code, blueprints, diagrams, flow charts, specifications, functional descriptions or training materials relating thereto) without payment of any compensation to Client, or any notice to Client. 13.3 MODIFICATIONS TO ALLTEL SOFTWARE. Any writing or work of authorship, regardless of medium, created or developed by ALLTEL or Client in the course of performing the Services under this Agreement and relating to the ALLTEL Software (including but not limited to, any modification, enhancement, interface, upgrade, change to the ALLTEL Software or ALLTEL-provided Third Party Software and all software, source code, blueprints, diagrams, flow charts, specifications, functional descriptions or training materials relating thereto) (individually an "ALLTEL Work") shall not be deemed a "work for hire" but shall be owned solely and exclusively by ALLTEL. To the extent any ALLTEL Work for any reason is determined not to be owned by ALLTEL, Client hereby irrevocably assigns, transfers and conveys to ALLTEL all of Client's right, title, and interest in such ALLTEL Work, including, but not limited to, all rights of patent, copyright, trade secret, know-how, and or other proprietary and associated rights in such ALLTEL Work. Client agrees to execute such documents and take such other actions as ALLTEL may reasonably request to perfect ALLTEL's ownership of any such ALLTEL Work. 14. AUDITS 14.1 CLIENT'S REGULATORY AUDIT. As reasonably requested by Client, ALLTEL shall cooperate with Client and its internal or external auditors for the purpose of Client's regulatory compliance at Client's facilities. Promptly following any such regulatory audit, whether conducted by Client's internal or external auditors, Client will instruct its auditors to conduct an exit conference with ALLTEL and to provide ALLTEL as soon thereafter as reasonably possible a copy of each report prepared as a result of such audit examination relating to data processing whether in draft or final form. In addition, Client will provide and instruct its external auditors to provide ALLTEL with a copy of that portion of each written report containing comments concerning ALLTEL or the Services performed by ALLTEL pursuant to this Agreement. ALLTEL shall make reasonable efforts to make changes required or recommended by the audit. Client shall reimburse ALLTEL as a Pass-Through Expense for any costs incurred by ALLTEL in cooperating with Client in connection with Client's audit except where ALLTEL's efforts are 14 22 necessary to achieve audit compliance for exceptions that are considered generally accepted practices of the outsourcing industry. 14.2 EXCLUDED MATERIALS. Nothing in this Section 14 shall be construed to require ALLTEL to provide Client with access to any records of whatever kind which contain information pertaining to any person or entity other than Client. In the event that the records contain commingled information relating to Client and a person or entity other than Client, ALLTEL shall mask or take other appropriate steps to maintain the confidentiality of the information relating to such other person or entity. 15. DISPUTE RESOLUTION. 15.1 DISPUTE RESOLUTION PROCEDURES. In the event a dispute arises between ALLTEL and Client with respect to the terms and conditions of this Agreement, or any subject matter governed by this Agreement, other than disputes regarding a party's compliance with the provisions of Section 21 (Confidentiality), such dispute shall be settled as set forth in this Section 15. At such time as the dispute is resolved, interest at a rate equal to the lesser of prime rate plus two percent per annum as announced from time to time by Boatmen's National Bank of Arkansas or five (5) percentage points above the federal discount rate as in effect from time to time for the period of dispute shall be paid to the party entitled to receive the disputed monies to compensate for the lapsed time between the date such disputed amount originally was to have been paid (or was paid) through the date monies are paid (or credited) in settlement of the dispute. 15.2 CLAIMS PROCEDURES. If any party shall have any dispute with respect to the terms and conditions of this Agreement, or any subject matter referred to in or governed by this Agreement, that party (through the ALLTEL Account Relationship Executive of ALLTEL or the Liaison Manager of Client, as the case may be) shall provide written notification to the other party (through the ALLTEL Account Relationship Executive of ALLTEL or the Liaison Manager of Client, as the case may be) in the form of a claim identifying the issue or amount disputed and including a detailed reason for the claim. The party against whom the claim is made shall respond in writing to the claim within 30 days from the date of receipt of the claim document. The party filing the claim shall have an additional 30 days after the receipt of the response to either accept the resolution offered by the other party or request implementation of the procedures set forth in Section 15.3 (the "Escalation Procedures"). Failure to meet the time limitations set forth in this Section may result in the implementation of the Escalation Procedures. 15 23 15.3 ESCALATION PROCEDURES. (a) Each of the parties agrees to negotiate, in good faith, any claim or dispute that has not been satisfactorily resolved following the claim resolution procedures described in Section 15.2. To this end, each party agrees to escalate any and all unresolved disputes or claims in accordance with Section 15.3(b) and (c) before taking further action. (b) If the negotiations conducted pursuant to Section 15.2 do not lead to resolution of the underlying dispute or claim to the satisfaction of a party involved in such negotiations, then either party may notify the other in writing that he desires to elevate the dispute or claim to the Senior Vice President and General Manager of Technology Center of ALLTEL and the Chief Information Officer of Client for resolution. Upon receipt by the other party of such written notice, the dispute or claim shall be so elevated and the Senior Vice President and General Manager of Technology Center of ALLTEL and the Chief Information Officer of Client shall negotiate in good faith and each use its reasonable best efforts to resolve such dispute or claim. The location, format, frequency, duration and conclusion of these elevated discussions shall be left to the discretion of the representatives involved. Upon agreement, the representatives may utilize other alternative dispute resolution procedures to assist in the negotiations. Discussions and correspondence among the representatives for purposes of these negotiations shall be treated as confidential information developed for purposes of settlement, exempt from discovery and production, which shall not be admissible in subsequent proceedings between the parties. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in evidence in such subsequent proceeding. (c) If the negotiations conducted pursuant to Section 15.3(b) do not lead to resolution of the underlying dispute or claim to the satisfaction of a party involved in such negotiations, then either party may notify the other in writing that he desires to elevate the dispute or claim to the President of Technology Services of ALLTEL and the Chief Executive Officer of Client for resolution. Upon receipt by the other party of such written notice, the dispute or claim shall be so elevated and the President of Technology Services of ALLTEL and the Chief Executive Officer of Client shall negotiate in good faith and each use its reasonable best efforts to resolve such dispute or claim. The location, format, frequency, duration and conclusion of these elevated discussions shall be left to the discretion of the representatives involved. Upon mutual agreement, the dispute may be mediated before either party may resort to litigation. Upon agreement, the representatives may utilize other alternative dispute resolution procedures to assist in the negotiations. Discussions and correspondence among the representatives for purposes of these negotiations shall be treated as 16 24 confidential information developed for purposes of settlement, exempt from discovery and production, which shall not be admissible in any subsequent proceedings between the parties. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in evidence in such subsequent proceeding. 16. LIMITATION OF LIABILITY. (a) Except for liability arising out of Section 17.2 herein, ALLTEL's liability for any claims or causes of action arising out of or related to this Agreement shall be limited to Client's direct damages, actually incurred, which under no circumstances shall exceed, in the aggregate, the amount paid by Client to ALLTEL under this Agreement for the twelve month period immediately preceeding the date of the breach. In no event shall ALLTEL be liable for indirect, special, punitive, incidental or consequential damages of any kind whatsoever including claims arising out of Section 17.2 herein or the claims or demands made by any third parties. (b) ALLTEL shall have no liability, express or implied, whether arising under contract, tort or otherwise which results directly or indirectly from the internal operations and performance of any Client Software and/or Client provided Third Party Software or any enhancement, development or maintenance of any such Client Software and/or Client provided Third Party Software. 17. INDEMNIFICATION. 17.1 PERSONAL INJURY AND PROPERTY DAMAGE. Each party agrees to indemnify, defend and hold harmless the other and its officers, directors, employees, affiliates (including, where applicable, the ALLTEL Affiliates and Client Affiliates), and agents from any and all liabilities, losses, costs, damages and expenses (including reasonable attorneys' fees) arising from or in connection with the damage, loss (including theft) or destruction of any real property or tangible personal property of the indemnified party resulting from the actions of any employee, agent or subcontractor of the indemnifying party insofar as such damage arises out of or in the course of fulfilling its obligations under this Agreement and to the extent such damage is due to any negligence, breach of statutory duty, omission or default of the indemnifying party, its employees, agents or subcontractors. 17.2 INFRINGEMENT OF ALLTEL SOFTWARE OR ALLTEL PROVIDED THIRD PARTY SOFTWARE. ALLTEL agrees to defend at its own expense, any claim or action brought by any third party against Client and its officers, directors, employees, Client Affiliates, and agents for actual or alleged infringement of any patent, copyright or similar intellectual property right (including, but not limited to, 17 25 misappropriation of trade secrets) based upon the ALLTEL Software or ALLTEL provided Third Party Software furnished hereunder by ALLTEL. ALLTEL further agrees to indemnify and hold Client and the Client Affiliates harmless from and against any and all liabilities, losses, costs, damages, and expenses (including reasonable attorneys' fees) associated with any such claim or action incurred by Client and the Client Affiliates. ALLTEL shall have the sole right to conduct the defense of any such claim or action and all negotiations for its settlement or compromise, unless otherwise mutually agreed to in writing between the parties hereto. ALLTEL agrees to give Client, and Client agrees to give ALLTEL, as appropriate, prompt written notice of any written threat, warning or notice of any such claim or action against ALLTEL or Client, as appropriate, or any other user or any supplier of components of the ALLTEL Software or ALLTEL provided Third Party Software covered hereunder, which could have an adverse impact on Client's use of same, provided ALLTEL or Client, as appropriate, knows of such claim or action. If in any such suit so defended, all or any part of the ALLTEL Software (or any component thereof) or the ALLTEL provided Third Party Software (or any component thereof) is held to constitute an infringement or violation of any other party's intellectual property rights and is enjoined, or if in respect of any claim of infringement, ALLTEL deems it advisable to do so, ALLTEL shall at its sole option take one or more of the following actions at no additional cost to Client: (a) procure the right to continue the use of the same without material interruption for Client; (b) replace the same with non-infringing software that meets the specifications identified in the Service Attachment; (c) modify said ALLTEL Software or ALLTEL provided Third Party Software (to the extent permitted by such third party) so as to be non-infringing, provided that the ALLTEL Software or ALLTEL provided Third Party Software as modified meets all of the specifications; or, (d) take back the infringing the ALLTEL Software or ALLTEL provided Third Party Software and credit Client with an amount equal to its list price less straight line depreciation over five (5) years. 17.3 INFRINGEMENTS OF CLIENT SOFTWARE OR CLIENT PROVIDED THIRD PARTY SOFTWARE. Client agrees to defend at its own expense, any claim or action brought by any third party against ALLTEL and its officers, directors, employees, ALLTEL Affiliates, and agents for actual or alleged infringement of any patent, copyright or similar intellectual property right (including, but not limited to, misappropriation of trade secrets) based upon the Client Software or Client provided Third Party Software furnished hereunder by Client. Client further agrees to indemnify and hold ALLTEL and the ALLTEL Affiliates harmless from and against any and all liabilities, losses, costs, damages, and expenses (including reasonable attorneys' fees) associated with any such claim or action incurred by ALLTEL and the ALLTEL Affiliates. Client shall have the sole right to conduct the defense of any such claim or action and all negotiations for its settlement or compromise, unless otherwise mutually agreed to in writing between the parties hereto. Client agrees to give ALLTEL, and ALLTEL agrees to give Client, as appropriate, prompt written notice of any written threat, warning or notice of any such claim or action 18 26 against ALLTEL or Client, as appropriate, or any other user or any supplier of components of Client Software or Client provided Third Party Software covered hereunder, which could have an adverse impact on ALLTEL's use of same, provided ALLTEL or Client, as appropriate, knows of such claim or action. If in any such suit so defended, all or any part of Client Software (or any component thereof) or the Client provided Third Party Software (or any component thereof) is held to constitute an infringement or violation of any other party's intellectual property rights and is enjoined, or if in respect of any claim of infringement, Client deems it advisable to do so, Client shall at is sole option take one or more of the following actions at no additional cost to ALLTEL: (a) procure the right to continue the use of the same without material interruption for ALLTEL; (b) replace the same with non-infringing software that meets the specifications identified in the Service Attachment; (c) modify said Client Software or Client provided Third Party Software (to the extent permitted by such third party) so as to be non-infringing, provided that Client Software as modified meets all of the specifications; or (d) relieve ALLTEL of its obligation to use such software to perform the applicable Services hereunder. 17.4 PREVIOUS LIABILITIES. The parties hereto agree to indemnify the other and hold the other and its officers, directors, employees, affiliates (including, where applicable, the ALLTEL Affiliates and Client Affiliates) and agents harmless against any liabilities, losses, costs, damages, and expenses (including reasonable attorneys' fees) arising out of any claims or lawsuits filed or subsequently filed as a result of the acts of the other party which occurred prior to the Effective Date of this Agreement. 17.5 DISPUTE RESOLUTION. The provisions of Section 15 shall apply with respect to the submission of any claim for indemnification under this Agreement and the resolution of any disputes relating to such claim. 18. FORCE MAJEURE, TIME OF PERFORMANCE AND INCREASED COSTS AND ERROR CORRECTION. 18.1 FORCE MAJEURE. Neither party shall be held liable for any delay or failure in performance of all or a portion of the Services of any part of this Agreement from any cause beyond its reasonable control and without its fault or negligence, including, but not limited to, acts of God, acts of civil or military authority, government regulations, embargoes, epidemics, war, terrorist acts, riots, insurrections, fires, explosions, earthquakes, nuclear accidents, floods, power 19 27 blackouts affecting facilities other than facilities of a kind commonly protected by redundant power systems, unless such redundant power systems are also affected by any Force Majeure condition, unusually severe weather conditions, inability to secure products or services of other persons or transportation facilities, or acts or omissions of transportation common carriers (the "Affected Performance"). Upon the occurrence of a condition described in this Section 18.1, the party whose performance is affected shall give written notice to the other party describing the Affected Performance, and the parties shall promptly confer, in good faith, to agree upon equitable, reasonable action to minimize the impact, on both parties, of such condition, including, without limitation, implementing the disaster recovery services. The parties agree that the party whose performance is affected shall use commercially reasonable efforts to minimize the delay caused by the force majeure events and recommence the Affected Performance. In the event the delay caused by the force majeure event lasts for a period of more than 30 days, the parties shall negotiate an equitable modification to this Agreement with respect to the Affected Performance. If the parties are unable to agree upon an equitable modification within 15 days after such 30 day period has expired, then either party shall be entitled to serve 30 days notice of termination on the other party with respect to only such Affected Performance. If the force majeure event for such Affected Performance is continuing upon the expiration of such 30 day notice period the portion of this Agreement relating to the Affected Performance shall automatically terminate. The remaining portion of the Agreement that does not involve the Affected Performance shall continue in full force and effect. In such event ALLTEL shall be entitled to be paid for that portion of the Affected Performance for which it has completed or in the process of completing through the termination date. In the event that the affected performance substantially diminishes the services provides hereunder and materially affects the business operations of Client, Client shall be entitled to serve 30 days notice of termination to ALLTEL. If the Force Majeure event for such Affected Performance is continuing upon the expiration of such 30 day notice period the Agreement shall terminate without penalty to Client. In such event, ALLTEL shall be entitled to be paid for the Services which it has performed through the termination date. 20 28 18.2 TIME OF PERFORMANCE AND INCREASED COSTS. ALLTEL's time of performance with respect to Services performed under this Agreement shall be enlarged, and its obligations under Exhibit A-2 shall be suspended, if and only to the extent, any of the following causes, in whole or in part, the necessity for such enlargement or suspension: (a) Client substantially fails to submit data or materials in the prescribed form or in accordance with the requirements of this Agreement, (b) Client substantially fails to perform on a timely basis or provide adequate resources to perform the tasks, functions or other responsibilities of Client described in this Agreement, (c) there occurs a Force Majeure condition described in Section 18.1 hereof which prevents timely performance, (d) Client or any governmental agency authorized to regulate or supervise Client makes any special request which substantially affects ALLTEL's normal performance schedule, (e) Client substantially fails to provide Client Resources called for by this Agreement, (f) Client substantially changes the priorities or decreases the number of the Staff, or (g) Client provided Third Party Software or the Client Software does not substantially perform in accordance with its specifications and, in each case, the same is necessary for ALLTEL's performance hereunder. In addition, if any of the above events occur, and such event will result in an increased cost to ALLTEL for providing the affected Service, ALLTEL shall so advise Client and Client may either pay any and all of such increased costs to ALLTEL or relieve ALLTEL of its responsibilities hereunder. 18.3 ERROR CORRECTION. Client will carefully review and inspect all reports prepared by ALLTEL, to balance promptly to the appropriate control totals and within a reasonable time after any error or out-of-balance control totals should be detectable. Client agrees to notify ALLTEL of any erroneous processing. If Client fails to so notify ALLTEL within 60 days after Client's receipt of the report containing such erroneous processing, Client shall be deemed to have waived its rights in respect of such error and to have assumed all risks in respect thereof, provided however, that ALLTEL shall not be relieved of its obligations to correct such error, once notified, for on-going processing. 19. NOTICES. 19.1 NOTICES. Except as otherwise provided under this Agreement or in the Exhibits, all notices, demands or requests which may be given by any party to the other party shall be in writing and shall be deemed to have been duly given on the date delivered in person, or sent via telefax, overnight mail, electronic mail with return receipt, or on the date of the third business day after deposit, postage prepaid, in the United States Mail via Certified Mail return receipt requested, and addressed as set forth below: 21 29 If to Client, to: Beverly Enterprises Inc. 5111 Rogers Avenue, Suite 40-A Fort Smith, AR 72919 Attn: Chief Information Officer With a copy to: Beverly Enterprises Inc. 5111 Rogers Avenue, Suite 40-A Fort Smith, AR 72919 Attn: General Counsel If to ALLTEL, to: ALLTEL Information Services, Inc. 4001 Rodney Parham Road Little Rock, Arkansas 72212-2496 Attn.: Vice President and General Manager of Technology Center With a copy to: ALLTEL Information Services, Inc. 4001 Rodney Parham Road Little Rock, Arkansas 72212 Attn.: General Counsel 19.2 CHANGE OF ADDRESS. The address to which such notices, demands, requests, elections or other communications are to be given by either party may be changed by written notice given by such party to the other party pursuant to this Section. 20. TERMINATION. 20.1 TERMINATION. This Agreement, except as otherwise provided herein, will continue in effect until the Expiration Date. This Agreement, including all Exhibits may be terminated by the permitted party giving written notice to the other party in accordance with Section 19.1 and the provisions of the following sentence in this Section 20.1 or the provisions of Sections 20.2, 20.3 or 20.4 hereof, as applicable. 22 30 The effective date of any such termination shall be the Termination Completion Date (as defined and determined in accordance with the provisions of Section 20.5, and such date shall be the Expiration Date in the event this Agreement is so terminated. 20.2 TERMINATION UPON ALLTEL'S MATERIAL BREACH. In the event of the material breach by ALLTEL of any provision of this Agreement, Client shall give ALLTEL written notice, and: (a) If such breach is for ALLTEL's breach of its obligations under Section 21 with respect to Client's Proprietary Information, ALLTEL shall cure the breach within 15 calendar days after receipt of such notice. If ALLTEL does not cure such breach by such date (or is not working diligently in good faith to cure such breach in cases where a breach cannot reasonably be expected to be cured within 15 days), Client may, at its sole option, elect to terminate this Agreement by giving written notice of such election to ALLTEL (the "Client Termination Election Date"). In such case, within 30 days after the Termination Completion Date, ALLTEL shall pay the Client Damages (as such term is defined below) to Client. (b) If such breach is for any failure by ALLTEL to perform in accordance with this Agreement which, in the reasonable judgment of Client, materially adversely affects Client, Client may give notice of the breach and ALLTEL shall cure such breach within 90 days after the date of such notice. If ALLTEL does not cure such breach within such period (or within 150 days after the date of such notice, if ALLTEL is working diligently in good faith to cure such breach in cases where a breach cannot reasonably be expected to be cured within 90 days), then Client may, at its sole option, elect to terminate this Agreement without penalty by giving written notice of such election to ALLTEL which date shall constitute Client Termination Election Date. In such case, within 30 days after the Termination Completion Date, ALLTEL shall pay the Client Damages (as such term is defined below) to Client. (c) For the purpose of this Agreement, Client Damages, subject to Section 16 hereof, shall consist solely of Client's direct out-of-pocket damages actually incurred, for obtaining replacement Services of a substantially similar scope and nature to the Services being provided by ALLTEL hereunder in excess of what Client would have otherwise paid ALLTEL hereunder (the "Client Damages"). (d) The failure of Client to exercise any right to elect to terminate this Agreement shall not constitute a waiver of the rights granted herein with respect to any subsequent default. 23 31 20.3 TERMINATION UPON CLIENT'S MATERIAL BREACH. In the event of the material breach by Client of any provision of this Agreement, ALLTEL shall give Client written notice, and: (a) If such breach is for Client's non-payment of amounts due under this Agreement, Client shall cure such breach within 45 calendar days after receipt of such notice, or if for Client's breach of its obligations under Section 21 with respect to ALLTEL's Proprietary Information, Client shall cure the breach within 15 calendar days after receipt of such notice. If Client does not cure such breach by such date (or in the case of a breach under Section 21 with respect to ALLTEL's Proprietary Information is not working diligently in good faith to cure such breach in cases where a breach cannot reasonably be expected to be cured within 15 days), ALLTEL may, at its sole option, elect to terminate this Agreement by giving written notice of such election to Client (the "ALLTEL Termination Election Date"). In such case, within 30 days after the ALLTEL Termination Election Date, Client shall pay ALLTEL the ALLTEL Damages (as such term is defined below). Client's payment of or agreement to pay interest on any amount past due shall in no way limit or prohibit ALLTEL's right to terminate this Agreement in accordance with this Section 20.3(a). (b) If such breach is for any failure by Client to perform in accordance with this Agreement which, in the reasonable judgment of ALLTEL, materially adversely affects ALLTEL, ALLTEL may give notice of the breach and Client shall cure such breach within 90 days after the date of such notice. If Client does not cure such breach within such period (or is not working diligently in good faith to cure such breach in cases where a breach cannot reasonably be expected to be cured within 90 days), then ALLTEL may, at its sole option, elect to terminate this Agreement by giving written notice of such election to Client which date shall constitute the ALLTEL Termination Election Date. In such case, within 30 days after the ALLTEL Termination Election Date, Client shall pay ALLTEL the ALLTEL Damages (as such term is defined below). (c) For the purposes of this Agreement, the ALLTEL Damages solely shall consist of the following: (i) all unpaid amounts due and owing to ALLTEL under the Agreement from the date hereof up to and including the ALLTEL Termination Election Date, (ii) a fee equal to the present value (using a discount rate equal to the applicable U.S. Treasury bill or note rate of an equivalent maturity) of fees due under this Agreement from the day immediately following the ALLTEL Termination Election Date through the end of the Term had the termination not occurred multiplied by [.40,] (iii) an amount equal to reasonable travel expenses, relocation and severance expenses (in accordance with ALLTEL's then current policy), and 24 32 incentive payments to provide for the continued services of ALLTEL's staff located at Client's facilities, (iv) an amount equal to the undepreciated equipment and unamortized software used to provide the Services under this Agreement, and (v) an amount equal to any other shut-down expenses, including, without limitation, relating to canceling leases, licenses, and subcontractor agreements (collectively the "ALLTEL Damages". (d) The failure of ALLTEL to exercise any right to elect to terminate this Agreement shall not constitute a waiver of the rights granted herein with respect to any subsequent default. 20.4 OPERATIONS DURING THE TERMINATION PERIOD. If either party properly elects to terminate this Agreement in accordance with Sections 20.1, 20.2, 20.3 or 20.4 then Client shall have at least six months from and after the date of the requisite ALLTEL Termination Election Date or Client Termination Election Date to make arrangements with respect to the conversion of all of Client's data then resident on ALLTEL systems to the non-ALLTEL systems. The date when all of Client's data have been substantially converted to the non-ALLTEL Systems shall hereinafter be referred to as the "Termination Completion Date" and shall be the effective date of termination of this Agreement in such events. The Termination Completion Date shall occur no sooner than six months, and no later than twelve months, after the date of the requisite ALLTEL Termination Election Date or Client Termination Election Date. Provided that Client is current in all amounts due and owing to ALLTEL, at the time of the ALLTEL Termination Election Date or Client Termination Election Date, as well as during the period between the ALLTEL Termination Election Date or Client Termination Election Date (as appropriate) and the Termination Completion Date, ALLTEL shall continue to render the Services to Client, with such changes as Client and ALLTEL may agree upon, together with such additional Services relating to such conversion as Client and ALLTEL may agree. Client shall keep ALLTEL reasonably informed of Client's decisions and activities with respect to such conversion. Client also shall give ALLTEL written notice of Client estimated Termination Completion Date promptly after a reasonably definitive projected Termination Completion Date is known by Client, and shall give written notice to ALLTEL promptly after any change in such estimated Termination Completion Date. 25 33 20.5 TRANSITIONAL COOPERATION. (a) OFFER OF EMPLOYMENT. Client and ALLTEL agree not to solicit or offer employment, directly or indirectly (including, without limitation, through the use of any third party) to any employee of the other without the prior written consent of the other, except for clerical positions. The sole and exclusive remedy for breach of this provision by either party is for the breaching party to pay the non-breaching party on amount equal to two (2) times the annual salary of the subject employee. (d) TRANSITION. ALLTEL will cooperate with Client to cause an orderly and efficient transition. Without limiting the generality of the foregoing, ALLTEL shall be obligated to provide Client with data reasonably necessary for Client to convert to or implement ALLTEL Systems, procedures, and practices. ALLTEL's obligation shall be limited to: (i) the provision of data or information in the format of, and reasonably available to, ALLTEL; (ii) one test copy of such data and one final conversion copy, and (iii) parallel testing not exceeding one month, including parallel data feeds. (c) RETURN OF MATERIAL. Within 30 days after the Termination Completion Date, ALLTEL, at Client's sole cost and expense, will return all material and property owned by Client and the Client affiliates as well as all material and property of a proprietary nature involving Client and the Client affiliates. In addition, upon Client's request, ALLTEL agrees to provide to Client copies of Client data files, records and programs on magnetic media, or to destroy Client's data files, records and programs in its possession and to certify promptly to Client as to the completed destruction of these materials. 20.6 SURVIVAL UPON EXPIRATION OR TERMINATION. The provisions of Sections 15 (Dispute Resolution), 16 (Limitation of Liability), 17 (Indemnification), 19 (Notices), 21 (Confidentiality), 23.2 (Omnibus Reconciliation Act Compliance), 23.6 (Governing Law), 23.12 (Press Release), and 23.13 (Taxes), shall survive the Termination Completion Date of this Agreement, unless otherwise agreed to in writing by both parties. 20.7 TERMINATION FOR CONVENIENCE. Client may terminate this Agreement for convenience and without cause effective as of any date after the third anniversary of the Start Date provided that Client is not in default of any of its obligations under this Agreement by (i) giving ALLTEL at least nine (9) months prior written notice designating the termination date and (ii) paying ALLTEL an amount computed as follows: One hundred eighteen thousand five hundred dollars($118,500) multiplied by the number of months remaining through 60 26 34 months from the Start Date or in the alternative, times any months remaining in any extension to the Agreement. 21. CONFIDENTIALITY. 21.1 CONFIDENTIALITY OBLIGATION. All information disclosed by Client or ALLTEL to the other during the negotiations and the term of this Agreement ("Proprietary Information") (i) shall be deemed the property of the disclosing party, (ii) shall be used solely for the purposes of administering and otherwise implementing the terms of this Agreement and (iii) shall be protected by the receiving party in accordance with the terms of this Section 21. 21.2 NON-DISCLOSURE COVENANT. The parties agree that they shall not disclose any Proprietary Information of any other party in whole or in part, including derivations, to any third party. If the parties agree to a specific nondisclosure period for a specific document, the disclosing party shall mark the document with that nondisclosure period. Proprietary Information shall be held in confidence by the receiving party and its employees, contractors or agents and shall be disclosed to only those of the receiving party's employees, contractors or agents who have a need for it in connection with the administration and implementation of this Agreement. The receiving party shall cause such contractors and agents to execute confidentiality agreements in a form acceptable to the disclosing party. The receiving party agrees to give the disclosing party copies of any such confidentiality covenants promptly upon request by the disclosing party 21.3 EXCEPTIONS. Proprietary Information shall not be deemed proprietary and the receiving party shall have no obligation with respect to any such information which: (a) is or becomes publicly known through no wrongful act, fault or negligence of the receiving party; (b) was known by the receiving party prior to disclosure and the receiving party was not under a duty of non-disclosure; (c) was disclosed to the receiving party by a third party who was free of obligations of confidentiality to the party providing the information; (d) is approved for release by written authorization of the disclosing party; (e) is publicly disclosed pursuant to a requirement or request of a governmental agency or disclosure is required by operation of law; or (f) is furnished to a third party by the disclosing party owning the Proprietary Information without a similar restriction on the third party's rights. 27 35 The parties acknowledge that without in any way lessening the proprietary nature of a party's Proprietary Information, either party in accordance with the terms and conditions of this Agreement shall be free at any time to develop the same or similar Proprietary Information independently of disclosure by the transmitting party. 21.4 CONFIDENTIALITY OF THIS AGREEMENT; PROTECTIVE ARRANGEMENTS. (a) The parties acknowledge that this Agreement contains confidential information that may be considered proprietary by one or both of the parties, and agree to limit distribution of this Agreement to those individuals in their respective companies with a need to know the contents of this Agreement. In no event may this Agreement be reproduced or copies shown to any third parties by Client or ALLTEL without the prior written consent of the other party, except as may be necessary by reason of legal, accounting or regulatory requirements beyond the reasonable control of Client or ALLTEL as the case may be, in which event Client and ALLTEL agree to exercise diligence in limiting such disclosure to the minimum necessary under the particular circumstances. The parties further agree to seek commercial confidential status for this Agreement with any regulatory commission with which this Agreement must be filed, to the extent such a designation can be secured. (b) In addition, each party agrees to give notice to the other parties of any demands to disclose or provide Proprietary Information received from the other or any third party under lawful process prior to disclosing or furnishing Proprietary Information, and agrees to cooperate in seeking reasonable protective arrangements requested by the other party. In addition, any party may disclose or provide Proprietary Information of the other party requested by a government agency having jurisdiction over the party; provided that the party uses its best efforts to obtain protective arrangements satisfactory to the party owning the Proprietary Information. The party owning the Proprietary Information may not unreasonably withhold approval of protective arrangements. 22. OTHER REPRESENTATIONS, WARRANTIES AND COVENANTS. 22.1 LICENSES AND PERMITS AND COMPLIANCE WITH LAWS. (a) LICENSES AND PERMITS. ALLTEL and Client shall each secure and maintain in force all licenses and permits required of it and its employees in the performance of this Agreement, and shall conduct its business in full compliance with all laws, ordinances and regulations applicable to its business or applicable to the other party's business to the extent that the 28 36 other party has notified ALLTEL or Client, as the case may be, of the specific laws, ordinances or regulations with which the other party must comply. (b) COMPLIANCE WITH LAWS. ALLTEL and Client shall each shall comply, at its own expense, with the provisions of all applicable municipal requirements and those state and federal laws which may be applicable to each party in the performance of their respective obligations under this Agreement. 22.2 NO INTERFERENCE WITH CONTRACTUAL RELATIONSHIP. Each party warrants that, as of the date hereof, it is not subject to any contractual obligation that would prevent it from entering into this Agreement. Client and ALLTEL each further warrant to the other that entering into this Agreement shall not cause or induce it to breach any of its other contractual obligations. 22.3 COVENANT OF GOOD FAITH. Each of the parties agree that, in its respective dealings with each other party arising out of or related to this Agreement, it shall act fairly and in good faith. 22.4 NO INFRINGEMENT. (a) ALLTEL SOFTWARE. ALLTEL warrants to Client that (i) ALLTEL has the right to furnish the Services provided to Client hereunder free of all liens, claims, encumbrances and other restrictions, and (ii) Client shall quietly and peacefully possess the ALLTEL Software, ALLTEL provided Third Party Software, documentation and other materials provided to Client hereunder, subject to and in accordance with the provisions of this Agreement. Each of ALLTEL warranties set forth above, as well as the patent and trademark indemnity provisions of Section 17.2 hereof, shall apply to the Services and to all enhancements, modifications or changes thereto. (b) CLIENT SOFTWARE. Client warrants to ALLTEL that (i) Client has the right to furnish Client Resources (including, without limitation, Client Software, Client provided Third Party Software, documentation and other materials) provided to ALLTEL hereunder and ALLTEL has the right to use the Client Resources (including, without limitation, Client Software, Client provided Third Party Software, documentation and other materials), in each case, free of all liens, claims, encumbrances and other restrictions, and (ii) ALLTEL shall quietly and peacefully possess Client Software, Client provided Third Party Software, documentation and other materials provided to ALLTEL hereunder, subject to and in accordance with the 29 37 provisions of this Agreement. Each of Client's warranties set forth above, as well as the patent and trademark indemnity provision of Section 17.3 hereof, shall apply to the Services and to all enhancements, modifications or changes thereto. 22.5 AUTHORIZATION AND EFFECT. (a) The execution and delivery by ALLTEL of its obligations under this Agreement have been duly authorized by all necessary corporate action on the part of ALLTEL. This Agreement has been duly executed and delivered by ALLTEL and, assuming the due execution and delivery of this Agreement by Client, constitutes a valid and binding obligation of ALLTEL, except as the same maybe limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditor's rights generally, and subject to the qualification that general equitable principles may limit the enforcement of certain remedies, including the remedy of specific performance. (b) The execution and delivery by Client of this Agreement and the fulfillment of its obligations under this Agreement have been duly authorized by all necessary corporate action on the part of Client. This Agreement has been duly executed and delivered by Client and, assuming the due execution and delivery of this Agreement by ALLTEL, constitutes a valid and binding obligation of Client, except as the same may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting the enforcement of creditor's rights generally, and subject to the qualification that general equitable principles may limit the enforcement of certain remedies, including the remedy of specific performance. 22.6 NO ADDITIONAL REPRESENTATIONS OR WARRANTIES. Except as provided in this Agreement, ALLTEL IS MAKING NO representation or warranty of any kind, express, implied or statutory, including but not limited to the implied warranties of merchantability and fitness for a particular purpose, and CLIENT AGREES THAT all such other representations and warranties that are not provided in this agreement are hereby excluded and disclaimed. 30 38 23. MISCELLANEOUS. 23.1 INDEPENDENT CONTRACTOR. It is agreed that ALLTEL is an independent contractor and that: (a) CLIENT SUPERVISOR POWERS. Client has no power to supervise, give directions or otherwise regulate ALLTEL's operations or its employees, except as herein provided for security of Client's data and detection of errors in processing. (b) ALLTEL'S EMPLOYEES. ALLTEL shall be solely responsible for payment of compensation to its personnel and for any injury to them in the course of their employment. ALLTEL shall assume full responsibility for payment of all federal, state and local taxes or contributions imposed or required under unemployment insurance, social security and income tax laws with respect to such persons. (c) RELATIONSHIP. The parties declare and agree that each party is engaged in a business which is independent from that of the other party and each party shall perform its obligations as an independent contractor. Neither party is an agent of the other party and has no authority to represent the other party as to any matters, except as authorized herein. 23.2 OMNIBUS RECONCILIATION ACT COMPLIANCE. As applicable under the Omnibus Reconciliation Act of 1980, until the expiration of 4 years after the furnishing of Services under this Agreement, ALLTEL shall, upon receipt of written request, and if then required to make such information available under the then-existing law, make available to the Secretary of the United States Department of Health and Human Services, the Comptroller General, or any of their duly authorized representatives, this Agreement, books, documents, and/or records of ALLTEL that are necessary to certify the nature and extent of products and services delivered under this Agreement and costs associated therewith. In addition, if ALLTEL carries out any of the duties of this Agreement through a subcontract with a value or cost of $10,000.00 or more over a 12 month period, such subcontract will contain a clause to the effect that, until the expiration of 4 years after the furnishing of such services under such subcontract, the subcontractor shall, upon receipt of written request and if then required to make such information available under the then-existing law, make available to the Secretary of the United States Department of Health and Human Services, Comptroller General, or any of their duly authorized representatives, the subcontract, books, documents, and/or records of such subcontractor that are necessary to verify the nature and extent of such costs. 31 39 23.3 ASSIGNMENT. Neither party shall assign, delegate, or otherwise convey or transfer (the "Assignment") its rights, interests or obligations under this Agreement to any person or entity without the prior written consent of the other party which consent shall not be unreasonably denied, delayed or limited. All obligations and duties of any party under this Agreement shall be binding on all successors in interest and permitted assigns of such party. If the other party consents to the Assignment, the proposed assignee or transferee shall, upon completion of the Assignment, automatically succeed to the corresponding rights, interests, and obligations of the assigning and transferring party and shall be a successor of such party for purposes of this Agreement. ALLTEL recognizes that Client anticipates temporarily transferring substantially all of its assets to a new entity, New Beverly Holding, Inc. then back to Client for the purpose of divesting its pharmacy operations. ALLTEL hereby consents to such transfer. 23.4 SEVERABILITY. In the event that any one or more of the provisions contained herein shall for any reason be held to be unenforceable in any respect under law, such unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such unenforceable provision or provisions had never been contained herein, provided that the removal of such offending term or provision does not materially alter the burdens or benefits of either of the parties under this Agreement or any Service Attachment. 23.5 THIRD PARTY BENEFICIARIES. The provisions of this Agreement are for the benefit of the parties and not for any other person. However, should any third party institute proceedings, this Agreement shall not provide any such person with any remedy, claim, liability, reimbursement, cause of action, or other right. 23.6 GOVERNING LAW. Except as otherwise expressly provided in this Agreement and Exhibits, this Agreement shall be deemed to be a contract made under the laws of the State of Arkansas and the construction, interpretation, and performance of this Agreement and Exhibits and all transactions hereunder shall be governed by the substantive law of such State. All judicial proceedings to be brought with respect to this Agreement shall be brought in the appropriate federal or state court in the state of Arkansas (the "Courts") and by execution and delivery of this Agreement, Client and ALLTEL each accepts general and unconditionally the exclusive jurisdiction of the Courts. Client and ALLTEL also each irrevocably waives any objection (including, without limitation, any objection of the laying of venue based on the grounds of forum non-conveniens) which Client or ALLTEL may now have or hereafter may have to the bringing of any new action or proceeding with respect to this Agreement in the Courts. 23.7 EXECUTED IN COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same document. 32 40 23.8 CONSTRUCTION. The headings and numbering of sections in this Agreement are for convenience only and shall not be construed to define or limit any of the terms or affect the scope, meaning or interpretation of this Agreement or the particular section to which they relate. This Agreement and the provisions contained herein shall not be construed or interpreted for or against any party because that party drafted or caused its legal representative to draft any of its provisions. 23.9 ENTIRE AGREEMENT. This Agreement, including the Exhibits attached hereto and the agreements referenced herein constitute the entire Agreement between the parties, and supersedes all prior oral or written agreements, representations, statements, negotiations, understandings, proposals and undertakings, with respect to the services to be provided by ALLTEL to Client. 23.10 AMENDMENTS AND WAIVERS. This Agreement may be amended only by written agreement signed by duly authorized representatives of each party. No waiver of any provisions of this Agreement and no consent to any default under this Agreement shall be effective unless the same shall be in writing and signed by or on behalf of the party against whom such waiver or consent is claimed. No course of dealing or failure of any party to strictly enforce any term, right or condition of this Agreement shall be construed as a waiver of such term, right or condition. Waiver by either party of any default by the other party shall not be deemed a waiver of any other default. 23.11 REMEDIES CUMULATIVE. Unless otherwise provided for under this Agreement, all rights of termination or cancellation, or other remedies set forth in this Agreement, are cumulative and are not intended to be exclusive of other remedies to which the injured party may be entitled by law or equity in case of any breach or threatened breach by the other party of any provision in this Agreement. Use of one or more remedies shall not bar use of any other remedy for the purpose of enforcing any provision of this Agreement. 23.12 PRESS RELEASES. The parties shall consult with each other in preparing any press release, public announcement, news media response or other form of release of information concerning this Agreement or the transactions contemplated hereby that is intended to provide such information to the news media or the public (a "Press Release"). Neither party shall issue or cause the publication of any such Press Release without the prior written consent of the other party; except that nothing herein will prohibit either party from issuing or causing publication of any such Press Release to the extent that such action is required by applicable law or the rules of any national stock exchange applicable to such party or its affiliates, in which case the party wishing to make such disclosure will, if practicable under the circumstances, notify the other party of the proposed time of issuance of such Press Release and consult with and allow the other party reasonable time to comment on such Press Release in advance of its issuance. 33 41 23.13 TAXES. All charges and fees to be paid by Client are exclusive of any applicable sales, use, excise or services tax which may be assessed on the provision of the Services. In the event that a sales, use, excise or services tax is assessed on the provision of any of the Services provided to Client under this Agreement, Client will pay directly or reimburse ALLTEL for such taxes. The parties will cooperate with each other in determining the extent to which any tax is due and owing under the circumstances, and shall provide and make available to each other any resale certificates, information regarding out-of-state use of materials, services or sale, and other exemption certificates or information reasonably requested by either party. The parties also agree to work together to segregate all payments under this Agreement into three payment streams, those for taxable services, those for non-taxable services, and those in which ALLTEL functions as a payment agent for Client in receiving goods, supplies or services (including leasing and licensing arrangements) that otherwise are nontaxable or have previously been subject to tax. IN WITNESS WHEREOF, the parties, acting through their authorized officers, have caused this Agreement to be duly executed and delivered as of the date first above written. ALLTEL INFORMATION BEVERLY ENTERPRISES, SERVICES, INC. INC. By: By: -------------------------------- ----------------------------------- Name: Name: ------------------------------ --------------------------------- Title: Title: ----------------------------- -------------------------------- Date: Date: ------------------------------ --------------------------------- 34 EX-10.43 3 CORPORATE INTEGRITY AGREEMENT 1 EXHIBIT 10.43 CORPORATE INTEGRITY AGREEMENT BETWEEN THE OFFICE OF INSPECTOR GENERAL OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES AND BEVERLY ENTERPRISES, INC. A. PREAMBLE Beverly Enterprises, Inc., hereby enters into this Corporate Integrity Agreement ("CIA") with the Office of Inspector General ("OIG") of the United States Department of Health and Human Services ("HHS") to ensure compliance by Beverly Enterprises, Inc. and the subsidiaries and affiliates through which it operates (these entities are collectively referred to hereinafter as "Beverly"), and Beverly's officers, directors and employees with the requirements of Medicare, Medicaid and all other Federal health care programs (as defined in 42 U.S.C. Section 1320a-7b(f)) (hereinafter collectively referred to as the "Federal health care programs.") Beverly's compliance with the terms and conditions in this CIA shall constitute an element of Beverly's present responsibility with regard to participation in the Federal health care programs. Contemporaneously with this CIA, Beverly is entering into a Settlement Agreement with the United States, and this CIA is incorporated by reference into the Settlement Agreement. II. TERM OF THE CIA The period of the compliance obligations assumed by Beverly under this CIA shall be nine years from the effective date of this CIA, or for the period of time Beverly remains obligated by the payment terms of the Settlement Agreement, whichever is shorter, but in any event for not less than five years. The effective date of this CIA will be the date on which the final signatory of this CIA executes this CIA. II. CORPORATE INTEGRITY OBLIGATIONS Beverly currently operates a Compliance Program. Beverly agrees that during the term of this CIA, its Compliance Program will be operated in a manner that meets the requirements of this CIA. A. Compliance Officers and Committees. Beverly shall maintain or establish the following positions and committees during the term of this CIA. If Beverly changes its structure in a way that affects these positions and committees, Beverly shall ensure that under the new structure Beverly devotes at least equal resources to its Compliance Program as are devoted under the structure described in this section. 1. Audit and Compliance Committee of the Board of Directors. Beverly currently has an Audit Committee and a Litigation/Compliance Committee of the 2 Board of Directors and will maintain during the term of this CIA an Audit and Compliance Committee of the Board of Directors (the "Board Committee") comprised of four or more outside directors of Beverly Enterprises, Inc. The Board Committee shall be responsible for the review of matters related to the Compliance Program, this CIA, and compliance with requirements of Federal health care programs. The Board Committee shall meet at least semi-annually. When new members of the Board Committee are appointed or the responsibilities or authorities of the Board Committee are substantially changed, Beverly shall notify the OIG, in writing, within 15 days of such a change. 2. Compliance Officer. Beverly has appointed a Compliance Officer, who is and shall be responsible for developing and implementing policies, procedures, and practices designed to ensure compliance with the requirements of Federal health care programs and the obligations set forth in this CIA. The Compliance Officer shall be a member of senior management of Beverly (i.e., not subordinate to Beverly's general counsel or CFO) with unrestricted access to the Board Committee, who shall make regular (at least semi-annual) reports regarding compliance matters directly to the CEO and the Board Committee, and who shall be authorized to report to the Board Committee at any time. The Compliance Officer is and shall remain responsible for monitoring the day-to-day activities engaged in by Beverly to further its compliance objectives as well as for any reporting obligations created under this CIA. The Compliance Officer, or his or her designees who have been directed to bring all issues concerning Beverly's compliance with Federal health care program requirements to the attention of the Compliance Officer, shall also review the portions of all Beverly internal audit reports that relate to Federal health care program compliance and take all reasonable steps to ensure that problems identified by the Compliance Program or internal audits are appropriately addressed through corrective action plans. In the event a new Compliance Officer is appointed during the term of this CIA, Beverly shall notify the OIG, in writing, within 15 days of such a change. Should it become necessary to pursue employment of a new Compliance Officer, Beverly shall appoint an acting Compliance Officer who shall be granted authority equal to that of the Compliance Officer. 3. Compliance Committee. Beverly has appointed a Compliance Working Group ("Compliance Committee"). The Compliance Committee includes and shall continue to include the Compliance Officer and other appropriate officers and/or department heads as necessary to meet the requirements of this CIA within Beverly's corporate structure (e.g., representatives of each major function, such as internal audit, quality management, labor relations, Medicare coverage and compliance group, prospective payment group, and regulatory review group). The Compliance Officer shall chair the Compliance Committee and the Committee shall support the Compliance Officer in fulfilling his/her responsibilities. 3 4. Compliance Liaisons. Beverly has designated its Group Vice Presidents as Compliance Liaisons. During the term of this CIA, Group Vice Presidents (or their compliance equivalent within Beverly) shall perform the role of Compliance Liaisons. Compliance Liaisons are and shall continue to be responsible for monitoring and ensuring execution of the Compliance Program and the relevant requirements of this CIA at their operational level and at the groups and Beverly facilities for which the Compliance Liaison is responsible. Compliance Liaisons are and shall remain responsible for: providing leadership and support regarding compliance issues at the group and facility levels; developing and distributing written compliance-related materials; ensuring the provision of appropriate training and the proper documentation of such training; ensuring the appropriate distribution of internal and external audit reports and monitoring of corrective action related to such reports or other identified compliance-related issues; ensuring proper reporting and responses to compliance-related issues; and monitoring facilities' Executive Directors and group-level staff in the execution of their compliance- related functions. Compliance Liaisons shall be responsible for supervising staff at each group level who will assist the Compliance Liaison in fulfilling his or her compliance functions. Group level compliance functions are currently performed by Group Vice Presidents, group HR managers, group business office consultants and group clinical managers/nurse consultants. If these group functions change, Beverly shall devote equal resources to the group-level compliance functions. Compliance Liaisons shall certify annually that all plans of correction related to identified problems in facilities or Beverly operations for which they are responsible have been implemented and that all Compliance Program concerns have been reported. Such certifications shall be maintained by the Compliance Officer and shall be available to the OIG upon request. False certifications by the Compliance Liaison shall be grounds for immediate termination, and proper execution of Compliance Liaison duties shall be a major component of the performance evaluations of Group Vice Presidents (or the Compliance Liaison equivalent within Beverly). 5. Executive Directors. Each Beverly facility is managed by an Executive Director. The Executive Directors will continue to be responsible for compliance in their facilities. Execution of compliance duties shall be a major component of the performance evaluations of Executive Directors. Should it become necessary to pursue employment of a new Executive Director, Beverly shall appoint an acting Executive Director who shall be granted authority equal to that of the Executive Director to carry out all required duties, including those with respect to Beverly's Compliance Program. A. Written Standards. 1. Code of Conduct. Beverly has established a Code of Conduct and Business Ethics ("Code of Conduct"). 4 a. CONTENTS. The Code of Conduct includes and shall continue to include the following: 1) Beverly's commitment to full compliance with all statutes, regulations, and guidelines applicable to Federal health care programs, including its commitment to prepare and submit accurate billings and reports consistent with Federal health care program statutes, regulations, procedures and instructions otherwise communicated by appropriate regulatory agencies, e.g., the Health Care Financing Administration ("HCFA"), and/or fiscal intermediaries or carriers; 2) Beverly's requirement that all of its covered persons shall be expected to comply with all statutes, regulations, and guidelines applicable to Federal health care programs and with Beverly's own Policies and Procedures (including the requirements of this CIA); 3) the requirement that all of Beverly's covered persons shall be expected to report suspected violations of any statute, regulation, or guideline applicable to Federal health care programs or of Beverly's own Policies and Procedures; 4) the possible consequences to both Beverly and covered persons of failure to comply with all statutes, regulations, and guidelines applicable to Federal health care programs and with Beverly's own Policies and Procedures or of failure to report such non-compliance; and 5) the right of all covered persons to use the Confidential Disclosure Program, as well as Beverly's commitment to confidentiality and non-retaliation with respect to disclosures. b. DEFINITIONS. For the purposes of this CIA, a "covered person" is any of Beverly's officers, directors or employees who provide patient-care to Federal health care program beneficiaries or who are involved in Beverly's billings or related submissions to Federal health care programs. c. DISTRIBUTION AND CERTIFICATION. Beverly currently requires the Code of Conduct to be distributed to all employees during each employee's orientation and thereafter, as revisions occur or replacement copies are needed. Within 90 days of the effective date of this CIA, Beverly shall distribute the Code of Conduct to all covered persons who have not already received a copy of the current Code of Conduct. Within 90 days of the effective date of the CIA, each covered person shall certify, in writing, that he or she has received, read, understands, and will abide by Beverly's Code of Conduct. New covered persons shall continue to receive the Code of 5 Conduct during orientation and shall complete the required certification within 30 days after becoming a covered person or within 90 days of the effective date of the CIA, whichever is later. The certifications required by this section shall be made available to the OIG upon request. The promotion of, and adherence to, the Code of Conduct is and shall continue to be an element in evaluating the performance of all covered persons. Beverly will annually review the Code of Conduct and will revise or supplement it as necessary. Beverly shall distribute revisions and supplements to the Code of Conduct to covered persons within 30 days of such changes being completed. Covered persons shall certify on an annual basis that they have received, read, understand and will abide by the Code of Conduct. d. COVERED CONTRACTOR REQUIREMENTS. For each of its Covered Contractors, Beverly shall: (1) require in its contract with the Covered Contractor that the Covered Contractor acknowledges Beverly's Compliance Program and Code of Conduct; (2) ensure that the Code of Conduct is provided (either by Beverly or the Covered Contractor) to all Covered Contractors; (3) require in the contract with the Covered Contractor that the Covered Contractor obtain and retain (subject to review by Beverly and/or the OIG) signed certification from all of its employees who provide patient care to Federal health care program beneficiaries at Beverly facilities that they have received, read, and understand the Code of Conduct and agree to abide by the requirements of the Compliance Program. Beverly shall require future contracts with Covered Contractors to include the above-described provisions. Within 90 days of the execution of this CIA, Beverly shall attempt in good faith to reform contracts with its then-current Covered Contractors to include a provision pursuant to which the contractors will provide assurance satisfactory to Beverly that these requirements will be met. For the purposes of this CIA, a "Covered Contractor" is an entity (or individual) that, although not a covered person, nevertheless provides patient care to Federal health care program beneficiaries in Beverly facilities or participates in Beverly's billings or related submissions to Federal health care programs for Beverly on a regular basis (i.e., more often than two weeks over a 52-week period). 2. Policies and Procedures. Beverly has developed written Policies and Procedures regarding its Compliance Program and its compliance with relevant Federal and state health care statutes, regulations, and guidelines, including the requirements of the Federal health care programs. Beverly shall continue to assess and update as necessary the Policies and Procedures at least annually and more frequently, as appropriate. The Policies and Procedures will be available to OIG upon request. Beverly shall continue to ensure that relevant portions of the Policies and Procedures are distributed to the appropriate covered persons. Compliance staff or supervisors are and 6 shall continue to be available to explain any and all Policies and Procedures. At a minimum, the Policies and Procedures shall specifically address: a. measures intended to ensure that Beverly fully complies with the particular provisions of Titles XVIII and XIX of the Social Security Act, 42 U.S.C. Sections 1395-1395ggg (1999) and 1396-1396v (1997), and all regulations (including but not limited to 42 C.F.R. Parts 442 and 483) and guidelines promulgated pursuant to these statutes, including: 1) consistent with the provisions of 42 C.F.R. Part 483, policies requiring use of a coordinated interdisciplinary approach to providing care to patients, including, but not limited to, policies addressing resident assessment and care planning; nutrition, diabetes care and wound care; infection control; abuse and neglect policies and reporting procedures; appropriate drug therapies; appropriate mental health services; provision of basic care needs; incontinence care; resident rights and restraint use; activities of daily living (ADL) care; therapy services; quality of life, including accommodation of needs and activities; and assessment of patient competence to make treatment decisions; and 2) policies addressing compliance with the requirements applicable to Medicare's Prospective Payment System ("PPS") for skilled nursing facilities, including, but not limited to, billing and cost report preparation policies and procedures; b. measures designed to ensure that compliance issues identified internally (e.g., through reports to supervisors, internal audits) or externally (e.g., audits performed by Beverly's audit or accounting firm(s) or any other externally performed reviews) are promptly and appropriately investigated and, if the investigation substantiates compliance issues, Beverly implements appropriate corrective action plans and monitors compliance with such plans; c. non-retaliation policies and methods for employees to make disclosures or otherwise report on compliance issues to Beverly management through the Confidential Disclosure Program required by section III.E; and d. disciplinary policies designed to ensure that individuals whose conduct has contributed to a violation of Beverly's Compliance Program or of Federal health care program requirements are retrained, and/or disciplined, and/or terminated, as appropriate. C. Training and Education. Beverly shall continue to conduct semi-annual training programs and shall ensure that the training meets the following requirements. The training requirements are cumulative (not exclusive) so that one person may be required to attend training in both general and substantive areas. Persons providing the training must continue to be knowledgeable about the relevant subject area. All training 7 requirements set forth below shall become effective within 90 days of the effective date of this CIA and shall be repeated annually during the term of the CIA. 1. General Training. Beverly shall continue to conduct and document training regarding its Compliance Program and Code of Conduct for each covered person. As part of its first semi-annual training program conducted following implementation of this CIA, Beverly will provide general training to each covered person. Beverly shall provide at least two hours of general training to each covered person during each year while the CIA is in effect. This general training shall explain Beverly's: a. Corporate Integrity Agreement requirements; b. Compliance Program (including the Policies and Procedures as they pertain to general compliance issues); and c. Code of Conduct. 2. Specific Training. Each covered person who is involved directly in the delivery of patient care or in the preparation or submission of information (including claims, bills, and reports) to any Federal health care program will continue to receive specific training pertinent to his or her responsibilities (as described below) in addition to the general training provided above. At least annually, two hours of specific training to covered persons who are involved directly in the delivery of patient care or in the preparation or submission of information (including claims, bills, and reports) to any Federal health care program will include a discussion of: a. the submission of accurate information, e.g., Minimum Data Set ("MDS"), to Federal health care programs, if relevant to the person's duties; b. policies, procedures and other requirements applicable to the documentation of medical records, if relevant to the person's duties; c. the personal obligation of each individual involved in the patient care, documentation, or reimbursement processes to ensure that such information provided is accurate; d. applicable statutes, regulations, program requirements and directives relevant to the person's duties; e. the legal sanctions for improper submissions to Federal health care programs; and f. examples of relevant billing practices found to have been improper. 3. New Covered Persons. New covered persons shall be cycled into Beverly's training programs and shall participate in the next training cycle after they become a covered person. New covered persons involved directly in the delivery of patient care or in the preparation or submission of information (including claims, bills, 8 and reports) to any Federal health care program shall be supervised by trained covered persons until they have completed the specific training relevant to their delivery of patient care and/or their preparation or submission of information to Federal health care programs. New covered persons involved directly in the delivery of patient care or in the preparation or submission of information (including claims, bills, and reports) to any Federal health care program shall have begun to receive specific training within 30 days of employment, and shall have completed specific training within 90 days of employment. 4. Certifications and Retention. An attendance log shall document the attendance of each person who is required to attend training. The Executive Director, Compliance Liaison or other person providing the training shall certify the accuracy of the attendance log. The attendance log shall specify the type of training received and the date received. The Compliance Officer shall retain the attendance logs and certifications as well as the specific course materials and make all of these logs, certifications and materials available to OIG upon request. D. Review Procedures. Beverly performs certain reviews as part of its Compliance Program and its ongoing operations. Beverly will continue these reviews and modify them as necessary to comply with certain additional reviews required by this CIA. The review procedures described in this section shall be performed on an annual basis for each calendar year during the term of this CIA. The Annual Reports required by this CIA will include reports on the findings and results of all of the review procedures required by this section during the year covered by that Annual Report. 1. Statistical Sampling and Appraisal Method. All matters related to this CIA that involve statistical sampling or appraisal shall be conducted using the OIG's Office of Audit Services Statistical Sampling Software, also known as "RAT-STATS," available on the Internet at www.hhs.gov/oas/ratstat.html. Wherever the CIA requires the use of a random sample, the sample shall be selected and appraised using RAT-STATS and Beverly shall retain all of the supporting documentation related to the selection and appraisal of the samples. 2. Beverly Quality Reviews. Beverly currently performs Quality Reviews under its "Beverly Quality System." The Quality Reviews (including Quality Review Follow-ups) are described in a June 1999 notebook, which Beverly has furnished to the OIG. Beverly shall continue to conduct its Quality Reviews in the manner described in the June 1999 notebook or in a manner that devotes at least equal resources to performing the function of quality review at Beverly Facilities. Beverly shall notify the OIG within 15 days of any material changes to the form, manner, or frequency of these Quality Reviews. 9 3. Independent Review Organization. Beverly shall retain an entity, such as an accounting, auditing or consulting firm (hereinafter "Independent Review Organization" or "IRO"), to perform review procedures to assist Beverly and the OIG in assessing the adequacy of Beverly's submissions to Federal health care programs and its compliance with this CIA. The IRO must be independent from Beverly and must have expertise in the billing, reporting and other requirements of the Federal health care programs from which Beverly seeks reimbursement. The IRO must be retained to conduct the review of the first year (2000) within 120 days of the effective date of this CIA. The IRO shall produce a separate report for each engagement. The IRO will conduct two separate types of engagements. One will be an analysis of Beverly's claims submissions to the Federal health care programs to assist Beverly and OIG in determining compliance with all applicable statutes, regulations, and directives/guidance ("submissions engagement"). The submissions engagement will assess, in part, Beverly's internal audits, which are described below. The second engagement will determine whether Beverly is in compliance with this CIA ("compliance engagement"). 4. Beverly's MDS (Minimum Data Set) Audit. Beverly's Internal Audit Department ("Internal Audit") shall implement and oversee an MDS Audit, which will review Medicare (Part A) claims and will focus on the minimum data set ("MDS"). Beverly shall ensure that the MDS Audit is conducted by qualified individuals (including, but not limited to, clinical and medical personnel). To the extent any facility personnel are involved in the MDS Audits, Beverly shall ensure that the individual who was involved in preparing the original claim (including through input in the entries on the MDS) on behalf of a Beverly facility is not involved in the review of that particular facility's claims submissions to Federal health care programs. In order to ensure the integrity of the MDS Audit process, Beverly will issue a policy emphasizing the importance of accurately completing the reviews discussed below, and the possible consequences, up to and including termination, for failure to comply with this policy. The MDS Audit shall consist of a variable appraisal (dollar amount in error) sample. Because this engagement is designed as a variable appraisal, for the purposes of determining dollar amounts associated with errors, the final sampling unit will be a single claim (UB-92) and each associated MDS. The MDS Audit shall consist of a two-stage process of claim reviews. The first stage shall be conducted using a random sample of a minimum of 15% of Beverly's facilities, but in no event less than seventy-five (75) facilities. Beverly shall retain copies of all of its work papers compiled with respect to its internal audits, which work papers shall be available to the OIG upon request. a. FIRST STAGE. The first stage of the MDS Audit shall consist of a probe sample of thirty (30) claims at each facility selected as part of the random sample. 10 The Compliance Officer, or his or her designee, shall select a stratified random sample of paid Medicare claims (UB-92) throughout the year for each of the facilities previously selected by the Compliance Officer. The probe sample cannot be used as part of any full sample reviewed during the second stage of the MDS Audit. The probe sample will be used to identify facilities that have exceeded a designated financial error rate and to determine the appropriate sample sizes for expanded sample reviews of the designated facilities in accordance with specified RAT-STATS parameters. b. SELECTION OF FACILITIES FOR SECOND STAGE. The second stage of the MDS Audit will be performed for each individual facility selected as part of the probe sample for which the financial error rate (i.e., a downward change in a Resource Utilization Group ("RUG") assignment that would result in an over-payment) in the first stage was greater than 5%. Nothing in this section shall relieve Beverly of its responsibility to correct inaccuracies noted in its probe sample. (The 5% financial error threshold only applies to criteria for sample expansion, not for extrapolation of an error rate.) c. SECOND STAGE. The second stage shall be a full sample of Medicare paid claims (UB-92) (randomly selected by Internal Audit using the RAT-STATS software referenced above) during the annual reporting period by each applicable facility. This sample shall be selected at the end of each year. The full sample must contain a sufficient number of sample units to generate sample results that provide, at a minimum, a 90% confidence interval and a maximum precision (relative precision, i.e., semi-width of the confidence interval) of plus or minus 25% of the point estimate (i.e., the upper and lower bounds of the 90% confidence interval shall not exceed 125% and shall not fall below 75% of the midpoint of the confidence interval, respectively). d. CLAIM REVIEWS. For each claim selected in the first and second stage, the associated MDS and the medical record documentation supporting the MDS will be reviewed. The review process shall entail an evaluation of the MDS and verification that each entry that affects the RUG code outcome for the MDS is supported by the medical record for the corresponding period of time consistent with the assessment reference date ("ARD") specified on the MDS. In addition, data from the MDS will be re-entered into Beverly's Grouper (MDS data entry software program) to verify that the correct RUG code assignment was properly assigned on the UB-92. A financial error will be logged if there is insufficient support for an MDS data point(s) that results in a downward change in RUG assignment that would result in an overpayment. 5. Ongoing Internal Audits. If Beverly becomes aware that any facilities (including those not selected to be included as part of an annual MDS Audit) are potentially experiencing noncompliance with the Federal health care program requirements for claims submissions, Beverly shall, after reasonably determining further 11 review is warranted, in addition to its other CIA obligations, conduct an internal audit to review the situation. If warranted, Internal Audit shall obtain a plan of correction and conduct appropriate follow-up to ensure that any inappropriate or improper practice related to claims submission identified is appropriately addressed, and shall report all such instances to the OIG, as specified in this CIA. 6. Submissions Engagement. The Submissions Engagement shall be performed by the aforementioned Independent Review Organization. As part of the Submissions Engagement, the IRO shall review Beverly's performance of the MDS Audit. The IRO shall review and evaluate the processes and controls used by Internal Audit in the MDS Audit. In addition, the IRO shall conduct its own analysis of a random sample of 10% of the claims reviewed in the MDS Audit. The reviews conducted by the IRO will follow the same standards set forth above with respect to the manner in which Internal Audit is to implement and oversee its review process, including, but not limited to, an evaluation of the MDS and verification that each entry that affects the RUG code outcome for the MDS is supported by the medical record. With respect to the entry of MDS data, the Independent Review Organization shall use its own MDS data entry software program to compare resulting outputs (i.e., RUGs). The results of the reviews performed by Internal Audit and the reviews performed by the IRO will be communicated to the OIG in the annual report. Each annual Submission Engagement analysis shall include the following components in its methodology: 1. Submissions Engagement Objective: a clear statement of the objective intended to be achieved by the submissions engagement and the procedure or combination of procedures that will be applied to achieve the objective. 2. Submissions Engagement Population: the identity of the population, which is the group about which information is needed and an explanation of the methodology used to develop the population and provide the basis for this determination. 3. Sources of Data: a full description of the source of the information upon which the submissions engagement conclusions will be based, including the legal or other standards applied, documents relied upon, payment data, and/or any contractual obligations. 4. Sampling Unit: a definition of the sampling unit (submitted claim), which is any of the designated elements that comprise the population of interest. 5. Sampling Frame: the identity of the sampling frame, which is the totality of the sampling units from which the sample will be selected. 12 The Submissions Engagement shall provide: a. findings regarding Beverly's documentation, billing, and reporting (e.g., reporting of MDS and other information relevant to RUG) operations (including, but not limited to, the operation of the reporting system, strengths and weaknesses of this system, internal controls, effectiveness of the system); b. findings regarding whether Beverly is submitting accurate claims and resident assessments (MDS); c. findings regarding Beverly's procedures and adequacy of controls to correct inaccurate claims and resident assessments (MDS); d. findings regarding whether Beverly has complied with its obligations under the Settlement Agreement: (1) not to resubmit to any Federal health care program payers any previously denied claims related to the conduct addressed in the Settlement Agreement, and its obligations not to appeal any such denials of claims for any reason associated with the conduct addressed in the Settlement Agreement; and (2) not to charge to, or otherwise seek payment from, Federal payers for unallowable costs (as defined in the Settlement Agreement) and its obligations to identify and adjust any past charges of unallowable costs; and e. findings regarding the steps Beverly is taking and adequacy of controls to bring its operations into compliance or to correct problems (including whether Beverly has effectively implemented corrective action plans to address such problems) identified by these engagements, internal or external audits, or fiscal intermediary audits. The OIG may obtain documentation from Beverly regarding the work Beverly has performed on these reviews, to assist the OIG in determining the appropriateness of the filings. 7. Cost Reports. Beverly's Internal Audit will continue its practice of testing Medicaid cost report processes and data in connection with its facility audits performed at 10% of Beverly's facilities on an annual basis. These facility audits include tests of square footage statistics, payroll costs, other operating costs and the proper classification of costs as reported in the facilities' general ledgers. In addition, Internal Audit randomly selects five Medicaid cost reports of facilities in states where the cost report has an effect upon Medicaid reimbursement. For these cost reports, Internal Audit tests the classification of costs from the general ledgers to the cost report. The IRO will continue its practice of reviewing the results of Internal Audit's facility audits and tests of Medicaid cost reports. The IRO will review and test 10% of Internal Audit's work for reliance in its financial statement audit of Beverly. If there is any change in this Internal Audit procedure, based upon a change in the manner in which Beverly is reimbursed by 13 the Federal health care programs, Beverly will notify the OIG within two (2) weeks of making any such change. As part of the IRO's submissions engagement, the IRO shall perform agreed-upon-procedures on selected Medicaid cost reports, designed to assist the parties in determining that the expenses as reported in the facility's financial statements are accurately summarized in cost reports and that the cost reports are filed in accordance with Federal health care program requirements. The IRO shall randomly select for audit at least five cost reports submitted to states in which the cost report has an effect on Medicaid reimbursement. These five randomly selected cost reports by the IRO will not necessarily be the same cost reports as those randomly selected for review by Beverly's Internal Audit, as set forth in the preceding paragraph. Beverly shall report the findings of all of the audits described above as part of its Annual Report. The OIG may obtain documentation from Beverly regarding the work Beverly has performed on these reviews, to assist the OIG in determining the appropriateness of the filings. 8. Compliance Engagement. An Independent Review Organization shall also conduct a compliance engagement, under which it shall perform agreed-upon-procedures designed to assist the parties in determining whether Beverly's program, policies, procedures, and operations comply with the terms of this CIA. This engagement shall include section by section findings regarding the requirements of this CIA. Beverly shall report the findings of the IRO's compliance engagement in its Annual Report to the OIG. 9. Verification/Validation. In the event that the OIG has reason to believe that Beverly's Submissions Engagement or Compliance Engagement fails to conform to its obligations under the CIA or indicates improper submissions not otherwise adequately addressed in the audit report, and thus determines that it is necessary to conduct an independent review to determine whether or the extent to which Beverly is complying with its obligations under this CIA, Beverly agrees to pay for the reasonable cost of any such review or engagement by the OIG or any of its designated agents. E. Confidential Disclosure Program. Beverly operates a Confidential Disclosure Program, which includes a toll-free telephone Hotline. The Confidential Disclosure Program enables covered persons and other individuals to disclose, to the Compliance Officer or some other person who is not in the disclosing individual's chain of command, any identified issues or questions associated with Beverly's policies, practices or procedures with respect to a Federal health care program, believed by the individual to be inappropriate. Beverly shall continue to publicize the existence of the hotline (e.g., in training, e-mail, intranet, newsletters to employees). 14 The Confidential Disclosure Program shall continue to emphasize a non-retribution, non-retaliation policy, and include a reporting mechanism for anonymous, confidential communication. Upon receipt of a disclosure, the Compliance Officer (or designee) shall gather the information in such a way as to elicit all relevant information from the disclosing individual. The Compliance Officer (or designee) shall make a preliminary good faith inquiry into the allegations set forth in every disclosure to ensure that he or she has obtained all of the information necessary to determine whether a further review should be conducted. For any disclosure that is sufficiently specific so that the Compliance Officer or his or her designee reasonably determines further review is warranted, the Compliance Officer shall conduct such further review of the allegations and ensure that appropriate follow-up is conducted and that any inappropriate or improper practice identified is appropriately addressed. The Compliance Officer shall continue to maintain a confidential disclosure log, which shall continue to include a record and summary of each allegation received, the status of the respective investigations, and any corrective action taken in response to the investigation. In its Annual Reports, Beverly shall provide: (1) its Monthly Customer Response Report Summaries; and (2) the more detailed Customer Response Report Log Entries for all calls categorized as "Quality Management" or "Billing" or any other calls that relate to Federal health care program billings or requests for reimbursement that relate to the period of the Annual Report. Beverly shall maintain and make available to the OIG upon request any other documents related to confidential disclosures (including their investigation and resolution) for at least two years after the reporting year in which the matter was resolved. F. Ineligible Persons and Criminal Background Checks. 1. Definition of Ineligible Person. For purposes of this CIA, an "Ineligible Person" shall be any individual or entity who: (i) is currently excluded, suspended, debarred or otherwise ineligible to participate in the Federal health care programs; or (ii) has been convicted of a criminal offense related to the provision of health care items or services (unless that person has been reinstated in the Federal health care programs after a period of exclusion, suspension, debarment, or ineligibility). 2. Screening Requirements. Beverly currently has policies and procedures as part of its hiring process regarding the screening of prospective employees and contractors to prevent the hiring of, or contracting with, any Ineligible Person. Beverly shall continue to screen all employees and prospective contractors prior to engaging their services by: (i) requiring applicants to disclose whether they are Ineligible Persons; and (ii) reviewing the General Services Administration's List of Parties Excluded from Federal Programs (available through the Internet at http://www.arnet.gov/epls) and the HHS/OIG List of Excluded Individuals/Entities (available through the Internet at 15 http://www.hhs.gov/oig) (these lists will hereinafter be referred to as the "Exclusion Lists"). 3. Review and Removal Requirement. Within 120 days of the effective date of this CIA, Beverly will review its list of current employees and contractors against the Exclusion Lists. (For purposes of this paragraph, a contractor is a person or entity that Beverly pays directly.) Thereafter, Beverly will review the list semi-annually. If Beverly has notice that an employee or contractor has become an Ineligible Person, Beverly will remove such person from responsibility for, or involvement with, Beverly's business operations related to the Federal health care programs and shall remove such person from any position for which the person's salary or the items or services rendered, ordered, or prescribed by the person are paid in whole or part, directly or indirectly, by Federal health care programs or otherwise with Federal funds at least until such time as the person is reinstated into participation in the Federal health care programs. This paragraph does not impose any requirement on Beverly with respect to the screening of individual physicians who have no employment or contractual relationship with Beverly, even if such physicians provide services to residents of Beverly Nursing Facilities. 4. Pending Charges and Proposed Exclusions. If Beverly has notice that an employee or contractor is charged with a criminal offense related to any Federal health care program, or is proposed for exclusion during his or her employment or contract, Beverly shall take all appropriate actions to ensure that the responsibilities of that employee or contractor do not adversely affect the quality of care rendered to any patient or resident, or the accuracy of any claims submitted to any Federal health care program. 5. Criminal Background Checks. Beverly conducts criminal background checks of potential employees pursuant to its Compliance Program. Beverly shall ensure that it: (a) complies with all Federal and state requirements regarding criminal background checks for covered persons; and (b) performs and completes a timely criminal background check on all individuals offered employment in a position that involves direct care of patients (and the offer of employment must be conditioned upon the results of the check). For the purposes of this CIA: (1) in states where Beverly or a vendor performs the background check, a timely criminal background check means a check completed within 15 days of the offer of employment to the individual; or (2) in states where Beverly or its vendor must use a state agency to conduct the criminal background check, a timely criminal background check means a check conducted and completed as soon as reasonably possible (including providing the relevant information to the state agency prior to the offer of employment). G. Notification of Proceedings. Within 30 days of discovery, Beverly shall notify OIG, in writing, of any ongoing investigation or legal proceeding conducted or brought by a governmental entity or its agents involving an allegation that Beverly has committed 16 a crime or has engaged in fraudulent activities. This notification shall include a description of the allegation, the identity of the investigating or prosecuting agency, and the status of such investigation or legal proceeding. Beverly shall also provide written notice to OIG within 30 days of the resolution of the matter, and shall provide OIG with a description of the findings and/or results of the proceedings, if any. H. Reporting. 1. Reporting of Overpayments. Beverly shall continue to review its quarterly and annual costs reports and PIP requests as well as its internal and external audit reports. If, during any of its reviews or by any other means, Beverly identifies or learns of any billing, reporting, or other policies, procedures and/or practices that have resulted in an overpayment, Beverly shall continue its practice of correcting the overpayment by revising the next quarterly PIP request or filing an amended cost report, as appropriate and unless otherwise instructed by the payor, and shall take appropriate action to prevent the underlying problem and the overpayments from recurring. Within 30 days of each quarterly PIP request, Beverly shall continue to file with its fiscal intermediary a Quarterly Adjustment Report setting forth the existence of any billing errors, overpayments, or other technical, process, or documentation errors related to the reimbursement process. If an overpayment cannot be addressed in a Quarterly Adjustment Report, Beverly shall notify the payor within 30 days of discovering the overpayment and take remedial steps within 60 days of discovery (or such additional time as may be agreed to by the payor) to repay the overpayment and correct the problem, including preventing the underlying problem and the overpayments from recurring. 2. Reporting of Material Deficiencies. If Beverly determines that there is a material deficiency, Beverly shall notify the OIG within 30 days of discovering the material deficiency. The notification to the OIG shall include: (a) a complete description of the material deficiency (including the relevant facts, persons involved, and legal and program authorities); (b) the amount of overpayment (if any) due to the material deficiency; (c) Beverly's actions (and future plans of action) to correct the material deficiency and to prevent such material deficiency from recurring; (d) the payor's name, address, and contact person where the overpayment (if any) was sent; and (e) the date of the check and identification number (or electronic transaction number) on which the overpayment (if any) was repaid. 3. Definition of "Overpayment." For purposes of this CIA, an "overpayment" shall mean the amount of money Beverly has received in excess of the amount due and payable under the Federal health care programs' statutes, regulations or program directives, including carrier and intermediary instructions. 4. Definition of "Material Deficiency." For purposes of this CIA, a "material deficiency" means: (i) a substantial overpayment from any Federal health care 17 program; (ii) a matter that a reasonable person would consider a potential violation of 42 U.S.C. Sections 1320a-7, 1320a-7a or 1320a-7b, or another criminal or civil law applicable to any Federal health care program (even though not reported under subsection (i) as a substantial overpayment); or (iii) a violation of the obligation to provide items or services of a quality that meets professionally recognized standards of health care where such violation has occurred in one or more instances that presents an imminent danger to the health, safety or well-being of a Federal health care program beneficiary or places the beneficiary unnecessarily in high-risk situations. A material deficiency may be the result of an isolated event or a series of occurrences. IV. NEW BUSINESS UNITS OR LOCATIONS A. Notice of New Business Units or Locations. Prior to purchasing, establishing, selling, or divesting a facility, Beverly shall notify the OIG in writing of the proposed action. This notification shall include the location of the existing or new operation(s), phone number, fax number, Federal health care program provider number(s) (if any), and the corresponding payor(s) (contractor specific) that has issued each provider number. Beverly shall further notify the OIG in writing once such proposed purchase, establishment, sale, or divestiture has been completed. B. Obligations of New Business Units and Locations. Once a new business unit or location has been established, all covered persons at such locations shall be subject to the requirements in this CIA that apply to new covered persons (e.g., completing certifications and undergoing training). V. IMPLEMENTATION AND ANNUAL REPORTS A. Implementation Report. Within 150 days after the effective date of this CIA, Beverly shall submit a written report to OIG summarizing the status of its implementation of the requirements of this CIA. This Implementation Report shall include: 1. the name, address, phone number and position description of all of the individuals in positions described in section III.A; 2. a copy of Beverly's Code of Conduct required by section III.B.1; 3. the summary of the Policies and Procedures required by section III.B.2; 4. a description of the training programs required by section III.C, including a description of the targeted audiences and a schedule of when the training sessions were held; 5. a certification by the Compliance Officer that, to the best of his or her knowledge: a. the Policies and Procedures required by section III.B have been developed, are being implemented, and have been distributed to all pertinent covered persons; 18 b. all covered persons have completed the Code of Conduct certification required by section III.B.1; and c. all covered persons have completed the training and executed the certification required by section III.C. 6. a description of the confidential disclosure program required by section III.E; 7. the identity of the Independent Review Organization(s) and the proposed start and completion date of the engagements for the first year; 8. a summary of personnel actions taken pursuant to section III.F; and 9. a list of all of Beverly's locations (including mailing addresses), the corresponding name under which each location is doing business, the corresponding phone numbers and fax numbers, each location's Federal health care program provider identification number(s), and the name, address, and telephone number of the payor (specific contractor) that issued each provider identification number. B. Annual Reports. Beverly shall submit to OIG Annual Reports with respect to the status and findings of Beverly's compliance activities for each of the calendar years for which this CIA has been in effect, starting with calendar year 2000. Each Annual Report shall be due on March 31 of the year following the calendar year covered in the Annual Report (e.g., the Annual Report for year 2000 shall be due on March 31, 2001). Each Annual Report shall include: 1. any change in the identity or position description of individuals in positions described in section III.A; 2. a certification by the Compliance Officer that, to the best of his or her knowledge: a. all covered persons have completed the annual Code of Conduct certification required by section III.B.1; b. all covered persons have completed the training and executed the certification required by section III.C; and c. Beverly has complied with its obligations under the Settlement Agreement: (i) not to resubmit to any Federal health care program payors any previously denied claims related to the conduct addressed in the Settlement Agreement, and its obligation not to appeal any such denials of claims; and (ii) not to charge to or otherwise seek payment from Federal or state payors for unallowable costs (as defined in the Settlement Agreement) and its obligation to identify and adjust any past charges of unallowable costs; and d. Beverly has effectively implemented all plans of correction related to problems identified under this CIA, Beverly's Compliance Program, or internal audits; 19 3. notification (including the actual change or a detailed description of the change) of any changes or amendments to the Policies and Procedures required by section III.B and the reasons for such changes (e.g., change in contractor policy); 4. a complete copy of the original reports prepared pursuant to the Independent Review Organization's submissions and compliance engagements, including all of the information required in section III.D; 5. Beverly's response/corrective action plan to any issues raised by the Independent Review Organization; 6. a summary of material deficiencies identified and reported pursuant to section III.H and the corresponding corrective action plans; 7. a report of the aggregate overpayments that have been returned to the Federal health care programs that were discovered as a direct or indirect result of implementing this CIA and a summary of the corrective actions taken to address such overpayments. Overpayment amounts shall be broken down into the following categories: Medicare, Medicaid (report each applicable state separately) and other Federal health care programs; 8. a copy of the (1) Monthly Customer Response Report Summaries; and (2) the Customer Response Report Log Entries for all calls categorized as "Quality Management" or "Billing" or any other calls that relate to the quality of care provided to patients or to billing or requests for reimbursement, as required by section III.E; 9. a description of any personnel actions (other than hiring) taken by Beverly as a result of the obligations in section III.F, and the name, title, and responsibilities of any person that falls within the ambit of section III.F.4, and the actions taken in response to the obligations set forth in that section; 10. a summary describing any ongoing investigation or legal proceeding conducted or brought by a governmental entity involving an allegation that Beverly has committed a crime or has engaged in fraudulent activities, which was required to have been reported pursuant to section III.G. The statement shall include a description of the allegation, the identity of the investigating or prosecuting agency, and the status of such investigation, legal proceeding or requests for information; and 11. a description of all changes to the most recently provided list (as updated) of Beverly's locations (including mailing addresses), the corresponding name under which each location is doing business, the corresponding phone numbers and fax numbers, each location's Federal health care program provider identification number(s) and the payor (specific contractor) that issued each provider identification number. C. Certifications. The Implementation Report and Annual Reports shall include a certification by the Compliance Officer, under penalty of perjury, that: (1) Beverly is in compliance with all of the requirements of this CIA (unless the non-compliance is clearly 20 and explicitly described in the Annual Report), to the best of his or her knowledge; and (2) the Compliance Officer has reviewed the Report and has made reasonable inquiry regarding its content and believes that, upon such inquiry, the information is accurate and truthful. VI. NOTIFICATIONS AND SUBMISSION OF REPORTS Unless otherwise stated in writing subsequent to the effective date of this CIA, all notifications and reports required under this CIA shall be submitted to the entities listed below: OIG: Civil Recoveries Branch - Compliance Unit Office of Counsel to the Inspector General Office of Inspector General U.S. Department of Health and Human Services Cohen Building, Room 5527 330 Independence Avenue, SW Washington, DC 20201 Phone 202.619.2078 Fax 202.205.0604 Beverly: Cletus Hess Compliance Officer Beverly Enterprises, Inc. 5111 Rogers Avenue, Suite 40-A Fort Smith, AR 72919 Phone 877.823.8375 Direct 501.201.4813 Fax 501.201.4801; 4802 VII. OIG INSPECTION, AUDIT AND REVIEW RIGHTS In addition to any other rights OIG may have by statute, regulation, or contract, OIG or its duly authorized representative(s), may examine Beverly's books, records, and other documents and supporting materials and/or conduct an on-site review of any of Beverly's locations for the purpose of verifying and evaluating: (a) Beverly's compliance with the terms of this CIA; and (b) Beverly's compliance with the requirements of the Federal health care programs in which it participates. The documentation described above shall be made available by Beverly to OIG or its duly authorized representative(s) at all reasonable times for inspection, audit or reproduction. Furthermore, for purposes of this provision, OIG or its duly authorized representative(s) may interview any of Beverly's employees, contractors, or agents who consent to be interviewed at the individual's place of business during normal business hours or at such other place and 21 time as may be mutually agreed upon between the individual and OIG. Beverly agrees to assist OIG in contacting and arranging interviews with such individuals upon OIG's request. Beverly's employees may elect to be interviewed with or without a representative of Beverly present. VIII. DOCUMENT AND RECORD RETENTION Beverly shall maintain for inspection all documents and records: (1) related to reimbursement from the Federal health care programs for at least seven years after the submission of the request for reimbursement; and (2) necessary to establishing Beverly's compliance with this CIA for at least three years following the submission of the Annual Report covering the relevant year. IX. DISCLOSURES Subject to HHS's Freedom of Information Act ("FOIA") procedures, set forth in 45 C.F.R. Part 5, the OIG shall make a reasonable effort to notify Beverly prior to any release by OIG of information submitted by Beverly pursuant to its obligations under this CIA and identified upon submission by Beverly as trade secrets, commercial or financial information and privileged and confidential under the FOIA rules. With respect to the disclosure of such information, Beverly shall have all the rights set forth in 45 C.F.R. Section 5.65(d). Beverly shall refrain from identifying any information as trade secrets, commercial or financial information and privileged and confidential that does not meet the criteria for exemption from disclosure under FOIA. Nothing in this CIA, or any communication or report made pursuant to this CIA, shall constitute or be construed as any waiver by Beverly of Beverly's attorney-client, work product or other applicable privileges. Notwithstanding that fact, the existence of any such privilege does not affect Beverly's obligation to comply with the provisions of this CIA. X. BREACH AND DEFAULT PROVISIONS Beverly is expected to fully and timely comply with all of the obligations herein throughout the term of this CIA or other time frames herein agreed to. A. Stipulated Penalties for Failure to Comply with Certain Obligations. As a contractual remedy, Beverly and OIG hereby agree that failure to comply with certain obligations set forth in this CIA may lead to the imposition of the following monetary penalties (hereinafter referred to as "Stipulated Penalties") in accordance with the following provisions. 1. A Stipulated Penalty of $2,500 (which shall begin to accrue on the day after the date the obligation became due) for each day, beginning 90 days after the effective date of this CIA and concluding at the end of the term of this CIA, Beverly fails to have in place any of the following: a. a Compliance Officer (or functional equivalent); 22 b. Audit and Compliance Committee of the Board of Directors (or its functional equivalent); c. Compliance Liaisons at the Group Vice President level (or functional equivalents); d. a Compliance Committee; e. a written Code of Conduct; f. written Policies and Procedures; g. a training program; and h. a Confidential Disclosure Program. 2. A Stipulated Penalty of $2,500 (which shall begin to accrue on the day after the date the obligation became due) for each day Beverly fails meet any of the deadlines to submit the Implementation Report or the Annual Reports to the OIG. 3. A Stipulated Penalty of $2,000 (which shall begin to accrue on the date the failure to comply began) for each day Beverly: a. hires or enters into a contract with an Ineligible Person after that person has been listed by a federal agency as excluded, debarred, suspended or otherwise ineligible for participation in the Medicare, Medicaid or any other Federal health care program (as defined in 42 U.S.C. Section 1320a-7b(f)) (this Stipulated Penalty shall not be demanded for any time period during which Beverly can demonstrate that it did not discover the person's exclusion or other ineligibility after making a reasonable inquiry (as described in section III.F) as to the status of the person); or b. employs or contracts with an Ineligible Person and that person: (i) has responsibility for, or involvement with, Beverly's business operations related to the Federal health care programs; or (ii) is in a position for which the person's salary or the items or services rendered, ordered, or prescribed by the person are paid in whole or part, directly or indirectly, by Federal health care programs or otherwise with Federal funds (this Stipulated Penalty shall not be demanded for any time period during which Beverly can demonstrate that it did not discover the person's exclusion or other ineligibility after making a reasonable inquiry (as described in section III.F) as to the status of the person). 4. A Stipulated Penalty of $1,500 (which shall begin to accrue on the date Beverly fails to grant access) for each day Beverly fails to grant access to the information or documentation as required in section VII of this CIA. 5. A Stipulated Penalty of $1,000 (which shall begin to accrue 10 days after the date that OIG provides notice to Beverly of the failure to comply) for each day Beverly fails to comply fully and adequately with any obligation of this CIA. In its notice to Beverly, the OIG shall state the specific grounds for its determination that Beverly has failed to comply fully and adequately with the CIA obligation(s) at issue and 23 a basis for Beverly to cure noncompliance before accrual of any penalty that will be deemed acceptable to the OIG. B. Payment of Stipulated Penalties. 1. Demand Letter. Upon a finding that Beverly has failed to comply with any of the obligations described in section X.A and determining that Stipulated Penalties are appropriate, OIG shall notify Beverly by personal service or certified mail of: (a) Beverly's failure to comply; and (b) the OIG's exercise of its contractual right to demand payment of the Stipulated Penalties (this notification is hereinafter referred to as the "Demand Letter"). Within 10 business days of receiving the Demand Letter, Beverly shall either: (a) cure the breach to the OIG's satisfaction and pay the applicable stipulated penalties if any have accrued; or (b) request a hearing before an HHS administrative law judge ("ALJ") to dispute the OIG's determination of noncompliance, pursuant to the agreed upon provisions set forth below in section X.D. In the event Beverly elects to request an ALJ hearing, the Stipulated Penalties shall continue to accrue until Beverly cures, to the OIG's satisfaction, the alleged breach in dispute. Failure to respond to the Demand Letter in one of these two manners within the allowed time period shall be considered a material breach of this CIA and shall be grounds for exclusion under section X.C. 2. Timely Written Requests for Extensions. The OIG will reasonably consider any timely written request by Beverly for an extension of time to perform any act or file any notification or report required by this CIA. Notwithstanding any other provision in this section, if OIG grants the timely written request with respect to an act, notification, or report, Stipulated Penalties for failure to perform the act or file the notification or report shall not begin to accrue until one day after Beverly fails to meet the revised deadline set by OIG. Notwithstanding any other provision in this section, if OIG denies such a timely written request, Stipulated Penalties for failure to perform the act or file the notification or report shall not begin to accrue until two (2) business days after Beverly receives OIG's written denial of such request. A "timely written request" is defined as a request in writing received by OIG at least five (5) business days prior to the date by which any act is due to be performed or any notification or report is due to be filed. 3. Form of Payment. Payment of the Stipulated Penalties shall be made by certified or cashier's check, payable to "Secretary of the Department of Health and Human Services," and submitted to OIG at the address set forth in section VI. 4. Independence from Material Breach Determination. Except as otherwise noted, these provisions for payment of Stipulated Penalties shall not affect or otherwise set a standard for the OIG's decision that Beverly has materially breached this CIA, which 24 decision shall be made at the OIG's discretion and governed by the provisions in section X.C, below. C. Exclusion for Material Breach of this CIA 1. Notice of Material Breach and Intent to Exclude. Upon a determination by OIG that Beverly has materially breached this CIA and that exclusion should be imposed, the OIG shall notify Beverly by certified mail of: (a) Beverly's material breach; and (b) OIG's intent to exercise its contractual right to impose exclusion (this notification is hereinafter referred to as the "Notice of Material Breach and Intent to Exclude"). 2. Opportunity to Cure. Beverly shall have 30 days from the date it receives the Notice of Material Breach and Intent to Exclude to demonstrate to the OIG's satisfaction that: a. Beverly is in full compliance with this CIA; b. the alleged material breach has been cured; or c. the alleged material breach cannot be cured within the 35-day period, but that: (i) Beverly has begun to take action to cure the material breach; (ii) Beverly is pursuing such action with due diligence; and (iii) Beverly has provided to OIG a reasonable timetable for curing the material breach. 3. Exclusion Letter. If at the conclusion of the 30-day period, Beverly fails to satisfy the requirements of section X.C.2, OIG may exclude Beverly from participation in the Federal health care programs. OIG will notify Beverly in writing of its determination to exclude Beverly (this letter shall be referred to hereinafter as the "Exclusion Letter"). Subject to the Dispute Resolution provisions in section X.D, below, the exclusion shall go into effect 30 days after the date of the Exclusion Letter. The exclusion shall have national effect and shall also apply to all other federal procurement and non-procurement programs. If Beverly is excluded under the provisions of this CIA, Beverly may seek reinstatement pursuant to the provisions at 42 C.F.R. Sections 1001.3001-.3004. 4. Material Breach. A material breach of this CIA means: a. a failure by Beverly to report a material deficiency, take corrective action and pay the appropriate refunds, as provided in section III.H; b. repeated or flagrant violations of the obligations under this CIA that have not been cured in a timely fashion, including, but not limited to, the obligations addressed in section X.A of this CIA; c. a failure to respond to a Demand Letter concerning the payment of Stipulated Penalties in accordance with section X.B above; or d. a failure to retain and use an Independent Review Organization for review purposes in accordance with section III.D. 25 D. Dispute Resolution 1. Review Rights. Upon the OIG's delivery to Beverly of its Demand Letter or of its Exclusion Letter, and as an agreed-upon contractual remedy for the resolution of disputes arising under the obligation of this CIA, Beverly shall be afforded certain review rights comparable to the ones that are provided in 42 U.S.C. Section 1320a-7(f) and 42 C.F.R. Part 1005 as if they applied to the Stipulated Penalties or exclusion sought pursuant to this CIA. Specifically, the OIG's determination to demand payment of Stipulated Penalties or to seek exclusion shall be subject to review by an ALJ and, in the event of an appeal, the Departmental Appeals Board ("DAB"), in a manner consistent with the provisions in 42 C.F.R. Sections 1005.2-1005.21. Notwithstanding the language in 42 C.F.R. Section 1005.2(c), the request for a hearing involving stipulated penalties shall be made within 10 business days after receiving the Demand Letter and the request for a hearing involving exclusion shall be made within 30 days after receiving the Exclusion Letter. 2. Stipulated Penalties Review. Notwithstanding any provision of Title 42 of the United States Code or Chapter 42 of the Code of Federal Regulations, the only issues in a proceeding for stipulated penalties under this CIA shall be: (a) whether Beverly was in full and timely compliance with the obligations of this CIA for which the OIG demands payment; and (b) the period of noncompliance. Beverly shall have the burden of proving its full and timely compliance and the steps taken to cure the noncompliance, if any. If the ALJ finds for the OIG with regard to a finding of a breach of this CIA and orders Beverly to pay Stipulated Penalties, such Stipulated Penalties shall become due and payable 20 days after the ALJ issues such a decision notwithstanding that Beverly may request review of the ALJ decision by the DAB. 3. Exclusion Review. Notwithstanding any provision of Title 42 of the United States Code or Chapter 42 of the Code of Federal Regulations, the only issues in a proceeding for exclusion based on a material breach of this CIA shall be: (a) whether Beverly was in material breach of this CIA; (b) whether such breach was continuing on the date of the Exclusion Letter; and (c) whether the alleged material breach could not have been cured within the 30-day period, but that (i) Beverly had begun to take action to cure the material breach within that period, (ii) Beverly has pursued and is pursuing such action with due diligence, and (iii) Beverly provided to OIG within that period a reasonable timetable for curing the material breach. For purposes of the exclusion herein, exclusion shall take effect only after an ALJ decision that is favorable to the OIG. Beverly's election of its contractual right to appeal to the DAB shall not abrogate the OIG's authority to exclude Beverly upon the issuance of the ALJ's decision. If the ALJ sustains the determination of the OIG and determines that exclusion is authorized, such exclusion shall take effect 20 days after the ALJ issues such a decision, notwithstanding that Beverly may request review of the ALJ decision by the DAB. 26 4. Finality of Decision. The parties to this CIA agree that the DAB's decision (or the ALJ's decision if not appealed) shall be considered final for purposes of stipulated penalties imposed under this CIA and Beverly agrees to waive any right it may have to appeal the decision to impose stipulated penalties administratively, judicially or otherwise seek review by any court or other adjudicative forum. 5. Reviews Independent of this CIA. Nothing in this agreement shall affect the right of the Health Care Financing Administration or any other Federal or State agency to enforce any statutory or regulatory authorities with respect to Beverly's compliance with applicable Federal and State health care program requirements or Beverly's rights to pursue its statutory, regulatory or other legal remedies with respect to such actions. XI. EFFECTIVE AND BINDING AGREEMENT Consistent with the provisions in the Settlement Agreement pursuant to which this CIA is entered, and into which this CIA is incorporated, Beverly and OIG agree as follows: A. This CIA shall be binding on the successors, assigns, and transferees of Beverly (except that the obligations of this CIA shall not apply to facilities that Beverly or a Beverly successor does not own or operate); B. This CIA shall become final and binding on the date the final signature is obtained on the CIA and shall supersede and replace any other Corporate Integrity Agreements obligating Beverly or any of its facilities at the time of execution of this CIA; C. Any modifications to this CIA shall be made with the prior written consent of the parties to this CIA; and D. The undersigned Beverly signatories represent and warrant that they are authorized to execute this CIA. The undersigned OIG signatory represents that he is signing this CIA in his official capacity and that he is authorized to execute this CIA. ON BEHALF OF BEVERLY - ------------------------------------- ----------------------- David Banks DATE Chief Executive Officer Beverly Enterprises, Inc. 27 - ------------------------------------- ----------------------- Mark Biros, Esq. DATE Proskauer Rose LLP 1233 20th Street, NW Suite 800 Washington, DC 20036-2396 ON BEHALF OF THE OFFICE OF INSPECTOR GENERAL OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES - ------------------------------------- ----------------------- LEWIS MORRIS DATE Assistant Inspector General for Legal Affairs Office of Inspector General U. S. Department of Health and Human Services EX-10.44 4 PLEA AGREEMENT 1 EXHIBIT 10.44 ROBERT S. MUELLER, III (CSBN 59775) United States Attorney DAVID SHAPIRO (NYSBN ) Chief, Criminal Division GEORGE D. HARDY (CSBN 86037) Special Assistant U.S. Attorney Attorneys for Plaintiff UNITED STATES OF AMERICA UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA UNITED STATES OF AMERICA, ) NO. CR. ) Plaintiff, ) PLEA AGREEMENT ) v. ) ) BEVERLY ENTERPRISES-CALIFORNIA, INC. ) ) Defendant. ) - ----------------------------------------- ) Defendant BEVERLY ENTERPRISES--CALIFORNIA, INC. ("BEVERLY-CALIFORNIA"), a California corporation, by and through its counsel of record, as ratified by its Board of Directors, enters into this Plea Agreement with the United States Department of Justice, by the United States Attorney's Office for the Northern District of California (the "United States"), pursuant to Rule 11(e)(1)(C) of the Federal Rules of Criminal Procedure. This Agreement binds only the United States, as defined herein, not any state or local prosecuting authorities. DEFENDANT'S PLEA 1. BEVERLY-CALIFORNIA agrees to waive indictment and plead guilty to an information charging it with one count of wire fraud, in violation of 18 U.S.C. Section 1343, and ten counts of making false statements to Medicare, in violation of 18 U.S.C. Section 1001. 1 2 THE NATURE OF THE OFFENSES 2. BEVERLY-CALIFORNIA understands that at any trial the government would be required to prove the following elements of the offenses to which it is pleading guilty: A. Wire Fraud-Count One B. a. BEVERLY-CALIFORNIA devised and intended to devise a scheme to defraud the United States and to obtain money from the Medicare program by means of false and fraudulent pretenses and representations. C. b. It was a part of the scheme that BEVERLY-CALIFORNIA would and did defraud the United States of its right to have the Medicare program administered honestly and free from deceit and fraud and to have the federal funds therein disbursed in accordance with the laws of the United States. D. c. It was a further part of the scheme that BEVERLY-CALIFORNIA would and did submit Medicare cost reports to its fiscal intermediary for the Medicare program that contained false and fictitious statements relating to nursing service costs. E. d. For the purpose of executing the scheme and artifice to defraud and to obtain money by means of false and fraudulent pretenses and representations, BEVERLY-CALIFORNIA did transmit and cause to be transmitted by means of wire communication in interstate commerce, cost reports for nursing homes, which contained false and fictitious statements relating to nursing service costs. F. False Statements to Government-Counts Two through Eleven G. a. BEVERLY-CALIFORNIA knowingly created and used documents, namely, Medicare cost reports, knowing that those reports contained materially false, fictitious, and fraudulent statements and entries relating to nursing service costs. H. b. On or about May 27, 1997, BEVERLY-CALIFORNIA submitted ten such cost reports to its fiscal intermediary for the purpose of obtaining payment of those costs by Medicare. I. c. BEVERLY-CALIFORNIA's claim for payment from Medicare was a matter within the jurisdiction of the executive branch of the Government of the United States. 2 3 J. THE MAXIMUM STATUTORY PENALTIES K. 3. BEVERLY-CALIFORNIA understands that the maximum statutory penalties for each count to which it is pleading guilty are: B. Wire Fraud a. Five years' probation; b. Fine of the greater of $500,000 or twice the pecuniary gain from the offense; c. Mandatory special assessment of $400 per count, which is to be paid at the time of sentencing; d. Restitution as ordered by the Court. B. False Statements to Government a. Five years' probation; b. Fine of the greater of $500,000 or twice the pecuniary gain from the offense; c. Mandatory special assessment of $400 per count, which is to be paid at the time of sentencing; d. Restitution as ordered by the Court. FACTUAL BASIS 4. BEVERLY-CALIFORNIA is guilty of the offenses to which it will plead guilty, including all of the elements as set forth in Paragraph 2 above. BEVERLY-CALIFORNIA agrees that the following facts are true: a. BEVERLY-CALIFORNIA is a wholly-owned subsidiary of Beverly Health and Rehabilitation Services, Inc., which is itself a subsidiary of Beverly Enterprises, Inc., a Delaware corporation headquartered in Ft. Smith, Arkansas ("Beverly Enterprises"). Beverly Enterprises is the largest nursing home chain in the United States and through various subsidiaries owns and operates homes in 32 states. BEVERLY-CALIFORNIA is one such subsidiary. b. Nursing homes provide a variety of nursing, therapeutic and custodial services, typically to patients who because of their physical conditions are unable to remain at their homes or in acute care hospitals. Nursing homes are compensated for providing these services in a variety of ways, including cash, private insurance, and public insurance, such as the Medicare Program. c. Nursing homes employ Registered Nurses, Licensed Vocational Nurses, and Certified Nurses Aides, among other personnel, in providing services to patients. Salaries paid to these nurses represent the single most expensive cost of operating a nursing home. 3 4 THE MEDICARE PROGRAM d. The Social Security Act (Title 42, United States Code, Section 1395, et seq.), which established the Medicare Program, provides that participating nursing home operators can be reimbursed certain costs. Medicare is not designed, however, to pay for the long-term care of nursing home patients. Rather, it is intended for Medicare-eligible patients who need follow-up skilled nursing care following a hospital stay. The benefits last for a maximum of 100 days. If a nursing home patient requires nursing care for more than 100 days and is unable to pay, reimbursement generally is made by Medicaid, a joint federal-state insurance program. The reimbursement rates paid by Medicaid are significantly less than those paid by Medicare. e. Many nursing homes care for Medicare, Medicaid and other patients. A facility seeking reimbursement from the Medicare program must demonstrate that the system it employs for recording and accumulating the number of hours of nursing services is capable of audit and equitably allocates the nursing service costs between the Medicare part and non-Medicare parts of the facility. f. There are two generally accepted methods for allocating nursing service costs between the Medicare and non-Medicare parts of a facility. One is the "actual time basis," under which the actual number of hours of nursing service provided for each part of the facility is the basis for allocation of nursing service costs. The other is the "average cost per diem basis," under which total nursing service costs for the entire facility are divided by the total patient days for the entire facility to arrive at an average nursing service cost per diem. This average nursing service cost per diem is then multiplied by the number of patient days in the Medicare part of the facility to determine the nursing service costs that may be allocated to the Medicare program. COST REPORTING g. Medicare funds generally are distributed to nursing homes through "fiscal intermediaries"; that is, private insurance companies that have a contract with the government to administer a Medicare program. At all times pertinent, the "fiscal intermediary" for BEVERLY-CALIFORNIA was Aetna Insurance Company (Aetna) or Blue Cross of California (Blue Cross). h. Nursing homes participating in the Medicare program generally are required to submit annual 5 Medicare cost reports describing costs relating to health care services rendered to Medicare beneficiaries. In the meantime, in order to maintain its operations during the year, the nursing home bills the Medicare program through the fiscal intermediary. The fiscal intermediary processes the bills and makes interim payments to the nursing home that are calculated to approximate costs. At the end of the nursing home's accounting year, the interim payments received by the nursing home are compared to the costs reported in the annual cost report. If the nursing home has incurred costs greater than the total of the interim payments, then it receives the difference from the fiscal intermediary. If the nursing home has incurred costs less than the total of the interim payments, then the nursing home is required to pay the difference to the fiscal intermediary. SCHEME TO DEFRAUD i. Beginning in approximately 1992 and continuing through 1998, the defendant BEVERLY-CALIFORNIA participated in a scheme to defraud the Medicare program and to obtain money by means of false and fraudulent representations, that is, by filing annual Medicare cost reports that contained fabricated nursing services costs. Specifically, BEVERLY-CALIFORNIA calculated its Medicare nursing costs based not on actual time or average per diem Medicare nursing costs, but according to prescribed ratios or other calculations designed to enable BEVERLY-CALIFORNIA to approach or surpass targeted revenue levels and budgeted profit. j. In order to conceal the fraudulent nature of its Medicare cost reports, and to create "back-up" documentation for the fabricated costs, BEVERLY-CALIFORNIA manufactured and altered documents to make it appear that nurses were devoting significantly more time to Medicare patients than they actually were. Among the fabricated documents were phony nursing "sign-in sheets" that purported to record hours worked by particular nurses on particular dates and times. k. For the purpose of executing the scheme and artifice to defraud and to obtain money by means of false and fraudulent pretenses and representations, on or about May 27, 1997, defendant BEVERLY-CALIFORNIA did transmit and cause to be transmitted by means of wire communication in interstate commerce Medicare cost reports containing fabricated and inflated costs for direct nursing services provided at BEVERLY-CALIFORNIA nursing homes. l. On or about May 27, 1997, BEVERLY-CALIFORNIA submitted ten cost reports for the 6 purpose of obtaining payment of those costs by Medicare, knowing that those cost reports contained materially false statements and entries, a matter within the jurisdiction of the executive branch of the Government of the United States. WAIVER OF RIGHTS 5. BEVERLY-CALIFORNIA understands and agrees that by pleading guilty it is giving up the following rights which it would have if the case went to trial: a. the rights to plead not guilty, to be presumed innocent, and to require the government to prove all of the elements of the crimes beyond a reasonable doubt; b. the right to a speedy and public jury trial with the assistance of an attorney; c. the right to a unanimous jury verdict; d. the right to confront and cross-examine government witnesses; e. the right to present evidence and/or witnesses on its own behalf, and to compulsory process; f. the right not to present evidence or have adverse inferences drawn if it did not do so; g. the rights to pursue any affirmative defenses, Fourth or Fifth Amendment claims, or any other claims presented or that could be presented in any pretrial or post-trial motion; h. the rights to both appeal and collaterally attack, the guilty plea, the judgment of guilt, orders of the Court, and any part of the sentence imposed by the Court; i. the right to be indicted by a grand jury for the felony charge to which it is pleading guilty; and j. the right to challenge venue in the Northern District of California. SENTENCING PROCEDURES AND FACTORS 6. If acceptable to the Court, the parties agree that sentence should be imposed on the date of the plea and without a presentence investigation and report, in accordance with Rule 32(b)(1)(A) of the Federal Rules of Criminal Procedure. 7. BEVERLY-CALIFORNIA understands that, notwithstanding Paragraph 6 and Paragraph 9 below, its sentencing is governed by the United States Sentencing Guidelines. 8. The parties agree to the following Sentencing Guideline calculations (pursuant to the November 1, 1998 7 revision of the Sentencing Guidelines): a. Pursuant to U.S.S.G. Sections 8C2.1 and 8C2.4(a)(2), and U.S.S.G. Section 2F1.1, the base offense level is 21. b. Pursuant to U.S.S.G. Sections 8C2.1 and 8C2.4(a)(2), and U.S.S.G. Section 2F1.1, since the offense involved more than minimal planning, the adjusted offense level is 23. c. Pursuant to U.S.S.G. Section 8C2.5(a), and (b)(3), the culpability score is 8. d. Pursuant to U.S.S.G. Section 8C2.5(g)(3), the final culpability score is 7. e. Pursuant to U.S.S.G. Section 8C2.6, the minimum multiplier is 1.40 and the maximum multiplier is 2.80. f. Pursuant to U.S.S.G. Section 8C2.7, the Guidelines fine range falls between a minimum of $2,240,000 and a maximum of $4,480,000. 9. Pursuant to Rule 11(e)(1)(C) of the Federal Rules of Criminal Procedure, the parties agree that an appropriate disposition of this case is that BEVERLY-CALIFORNIA receive the following sentence: a. BEVERLY-CALIFORNIA will not be placed on probation. b. BEVERLY-CALIFORNIA will pay a criminal fine of $5,000,000. BEVERLY-CALIFORNIA recognizes that this amount represents an upward departure from the applicable guidelines range. BEVERLY-CALIFORNIA consents to the upward departure. c. BEVERLY-CALIFORNIA will pay a special assessment of $4400. d. BEVERLY-CALIFORNIA will not be required to pay restitution as part of its criminal sentence. 10. BEVERLY-CALIFORNIA understands that both the United States and BEVERLY-CALIFORNIA retain the right to withdraw from the Agreement, and this Agreement will be null and void, if the Court rejects the Agreement and refuses to be bound by the sentence agreed to in Paragraph 9. In addition, the United States retains the right to withdraw from this Agreement if Beverly Enterprises fails to execute the agreements set forth in paragraphs 12 and 13 within 30 days of the date this agreement is executed. 11. The amount listed in Paragraph 9(b) shall be paid to the Financial Litigation Unit, United States 8 9 Attorney's Office, Northern District of California, by FEDWIRE. Payment shall be made on or before the next business day following the date of sentence. 12. Beverly Enterprises will execute a civil settlement agreement with the United States relating to this and additional conduct. Under the terms of that agreement, Beverly Enterprises will pay the United States the amount of $170,000,000. 13. Beverly Enterprises will enter a corporate compliance agreement with the Department of Health and Human Services, Office of Inspector General. 14. BEVERLY-CALIFORNIA understands and agrees that, should it withdraw its plea in accordance with Paragraph 10, it may thereafter be prosecuted for any criminal violation of which the government has knowledge, notwithstanding the expiration of any applicable statute of limitations following the signing of this agreement. BEVERLY-CALIFORNIA agrees that it will not raise the expiration of any statute of limitations as a defense to any such prosecution. 15. BEVERLY-CALIFORNIA understands that this agreement does not bind the Internal Revenue Service ("IRS"). Further, BEVERLY-CALIFORNIA understands that the United States takes no position as to the proper tax treatment of any of the payments made by BEVERLY-CALIFORNIA pursuant to this Plea Agreement, or payments by Beverly Enterprises pursuant to the Civil Settlement Agreement. THE UNITED STATES' COMMITMENT 16. In exchange for BEVERLY-CALIFORNIA's guilty plea and its performance of its other obligations under this Agreement as set forth above, as well as Beverly Enterprises' execution of the Civil Settlement Agreement and the Corporate Compliance Agreement, the United States agrees to do the following: a. It will not file any other criminal charges against BEVERLY-CALIFORNIA, its parent corporation, or any affiliated corporations, including Beverly Enterprises, for offenses relating to the allocation of direct nursing service costs in Medicare cost reports filed for the years 1992 to 1998; and, b. It will agree, pursuant to Rule 11(e)(1)(C), to the sentence set forth in Paragraph 9 above. MODIFICATION OF PLEA AGREEMENT 17. This Agreement sets forth all the terms of the plea agreement between BEVERLY-CALIFORNIA and 10 the United States. BEVERLY-CALIFORNIA understands that no modifications of or additions to this Agreement shall be valid unless they are in writing and signed by the United States, BEVERLY-CALIFORNIA's attorney, and a duly authorized representative of BEVERLY-CALIFORNIA. STATEMENT BY BEVERLY-CALIFORNIA -- KNOWING AND VOLUNTARY PLEA This Agreement has been authorized, following consultation with counsel, by the BEVERLY-CALIFORNIA Board of Directors, by corporate resolution dated October ___, 1999. A certified copy of the corporate resolution is attached as Exhibit A to this agreement and incorporated herein. Except as set forth in this plea agreement, BEVERLY-CALIFORNIA has received no promises or inducements to enter its guilty plea, nor has anyone threatened BEVERLY-CALIFORNIA or any other person to cause it to enter its guilty plea. Dated: October ___, 1999 David Banks - ------------------------------------------ On behalf of BEVERLY-CALIFORNIA DEFENSE COUNSEL AFFIRMATION -- KNOWING AND VOLUNTARY PLEA We have discussed with and fully explained to BEVERLY-CALIFORNIA: the facts and circumstances of the case; all rights with respect to the offense charged in the Information; possible defenses to the offense charged in the Information; all rights with respect to the Sentencing Guidelines; and all of the consequences of entering into this plea agreement and entering guilty pleas. We have reviewed the entire plea agreement with our client, through its authorized representatives. In our judgment, BEVERLY-CALIFORNIA, through its authorized representatives, understands the terms and conditions of the plea agreement, and we believe BEVERLY-CALIFORNIA's decision to sign the agreement is knowing and voluntary. BEVERLY-CALIFORNIA's execution of and entry into the plea agreement is done with our consent. DATED: October ___, 1999 --------------------------- Mark J. Biros PROSKAUER ROSE, LLP 11 DATED: October ___, 1999 Griffin B. Bell Joseph Sedwick Sollers, III KING & SPALDING Counsel for Defendant BEVERLY-CALIFORNIA 12 UNITED STATES' SIGNATURE DATED: October ___, 1999 ROBERT S. MUELLER, III United States Attorney ------------------------------- GEORGE D. HARDY Special Assistant U.S. Attorney EX-10.45 5 ADDENDUM TO PLEA AGREEMENT 1 EXHIBIT 10.45 ROBERT S. MUELLER, III (CSBN 59775) United States Attorney DAVID SHAPIRO (NYSBN ) Chief, Criminal Division GEORGE D. HARDY (CSBN ) Special Assistant U.S. Attorney Attorneys for Plaintiff UNITED STATES OF AMERICA UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA UNITED STATES OF AMERICA, ) NO. CR. ) Plaintiff, ) ADDENDUM TO PLEA AGREEMENT ) v. ) ) BEVERLY ENTERPRISES-CALIFORNIA, INC. ) ) Defendant. ) _____________________________________ ) Defendant BEVERLY ENTERPRISES--CALIFORNIA, INC. ("BEVERLY-CALIFORNIA"), a California corporation, by and through its counsel of record, as ratified by corporate resolution, and the United States Department of Justice, by the United States Attorney's Office for the Northern District of California (the "United States"), agree to the following addendum (the "Addendum") to the Plea Agreement previously signed by all parties. This Addendum modifies the terms of the Plea Agreement as set forth below. The Addendum binds only the United States, as defined herein, not any state or local prosecuting authorities. 1. Paragraph 1 is amended to substitute "one count of fraud by interstate carrier" for "one count of wire fraud", and to substitute "18 U.S.C. Section 1341" for "18 U.S.C. Section 1343". 2. The heading of Paragraph 2(A) is amended to read as follows: "Fraud by Interstate Carrier-Count One". 2 3. Paragraph 2 (A)(d) is amended to read as follows: "For the purpose of executing the scheme and artifice to defraud and to obtain money by means of false and fraudulent pretenses and representations, BEVERLY-CALIFORNIA did cause to be deposited for delivery by private and commercial interstate carrier cost reports for nursing homes, which contained false and fictitious statements relating to nursing service costs." 4. Paragraph 2(B)(b) is amended to read as follows: "In or about May 1996, BEVERLY-CALIFORNIA submitted one such cost report to its fiscal intermediary for the purpose of obtaining payment of those costs by Medicare. On or about June 5, 1997, BEVERLY-CALIFORNIA submitted nine additional such cost reports for the purpose of obtaining payment of those costs by Medicare." 5. The heading of Paragraph 3(A) is amended to read "Fraud by Interstate Carrier." 6. Paragraph 4(k) is amended to read as follows: "For the purpose of executing the scheme and artifice to defraud and to obtain money by means of false and fraudulent pretenses and representations, in or about May 1996, BEVERLY-CALIFORNIA did cause to be deposited for delivery by private and commercial interstate carrier a Medicare cost report containing fabricated and inflated costs for direct nursing services provided at a BEVERLY-CALIFORNIA nursing homes, namely, Pinewood Terrace, located in Colvill, Washington." 7. Paragraph 4(l) is amended to read as follows: "In or about May 1996, and on or about June 5, 1997, BEVERLY-CALIFORNIA submitted a total of ten cost reports for the purpose of obtaining payment of those costs by Medicare, knowing that those cost reports contained materially false statements and entries, a matter within the jurisdiction of the executive branch of the Government of the United States." 11. The Plea Agreement and Addendum set forth all the terms of the plea agreement (the "Agreement") between BEVERLY-CALIFORNIA and the United States. BEVERLY-CALIFORNIA understands that no further modifications of or additions to the Agreement shall be valid unless they are in writing and signed by the United States, 3 BEVERLY-CALIFORNIA's attorney, and a duly authorized representative of BEVERLY-CALIFORNIA. DATED: January , 2000 -------------------------------------- Mark J. Biros PROSKAUER ROSE, LLP DATED: January , 2000 ------------------------------------- Griffin B. Bell Joseph Sedwick Sollers, III KING & SPALDING Counsel for Defendant BEVERLY-CALIFORNIA UNITED STATES' SIGNATURE DATED: January , 2000 ROBERT S. MUELLER, III United States Attorney ------------------------------------- LESLIE R. CALDWELL Chief, Economic Crime EX-10.46 6 SETTLEMENT AGREEMENT 1 EXHIBIT 10.46 SETTLEMENT AGREEMENT I. PARTIES This Settlement Agreement ("Agreement") is entered into between the United States of America, acting through the United States Department of Justice and on behalf of the Office of Inspector General ("OIG-HHS") of the Department of Health and Human Services ("HHS") (collectively the "United States"); Beverly Enterprises, Inc. ("Beverly Enterprises"), and Domenic Todarello ("Relator") (collectively, "the Parties"), through their authorized representatives. II. PREAMBLE As a preamble to this Agreement the Parties agree to the following: A. Beverly Enterprises is a corporation organized pursuant to the laws of the State of Delaware, with its principal place of business in Fort Smith, Arkansas. Beverly Enterprises operates, through its subsidiaries, a chain of nursing homes and is a provider under the Medicare program, administered by the Health Care Financing Administration ("HCFA"). B. Relator is an individual resident of the State of Arizona. On October 18, 1995, Relator filed a qui tam action in the United States District Court for the District of Arizona, styled United States ex rel Todarello v. Beverly Enterprises, CIV 95-2248 PHX RCB, which was transferred to the North District of California on or about September 27, 1996, and has been styled United States ex rel Todarello v. Beverly Enterprises, C96-3697 TEH (N.D. Cal.) (the "Civil Action"). C. The United States and Relator contend that Beverly Enterprises submitted or caused to be submitted claims for payment to the Medicare Program ("Medicare"), Title XVII of the Social Security Act, 42 U.S.C. Sections 1395-1395ddd (1997). D. The United States and Relator contend that they have certain civil claims against Beverly Enterprises under the False Claims Act, 31 U.S.C. Sections 3729-3733, and the United States also contends it has certain civil claims against Beverly Enterprises under other federal statutes and/or common law doctrines, in the amount of four hundred sixty million ($460,000,000), for 2 2 engaging in the following conduct during the period from 1992 through 1998: submitting Medicare skilled nursing facility cost reports, for cost report years 1992-1998, that overstated the costs reimbursable to the facilities' Medicare certified units by mis-allocating labor hours to the Medicare units (the "Covered Conduct"). E. The United States also contends that it has certain administrative claims against Beverly Enterprises under the provisions for permissive exclusion from the Medicare, Medicaid and other federal health care programs, 42 U.S.C. Section 1320a-7(b), and the provisions for civil monetary penalties, 42 U.S.C. Section 1320a-7a, for the Covered Conduct. F. Except as so expressly admitted in the plea agreement executed by Beverly Enterprises - California, Inc., in connection with the criminal action, United States v. Beverly Enterprises - California, Inc. (N.D. Calif.), Beverly Enterprises does not admit the contentions of the United States or the Relator as set forth in Paragraphs D and E, above. G. In order to avoid the delay, uncertainty, inconvenience and expense of protracted litigation of these claims, the Parties have reached a full and final settlement as set forth below. III. TERMS AND CONDITIONS NOW, THEREFORE, in consideration of the mutual promises, covenants, and obligations set forth below, and for good and valuable consideration as stated herein, the Parties agree as follows: 1. Beverly Enterprises agree to pay to the United States One Hundred Seventy Million Dollars ($170,000,000) (the "Settlement Amount"), which Settlement Amount shall be a debt, arising out of a compromise of claims for an alleged overpayment under the Medicare Provider Agreements held by Beverly Enterprises' skilled nursing facilities, immediately due and owing to the United States on the date of execution of this Agreement, as follows: a. Beverly Enterprises shall pay Twenty-Five Million Dollars ($25,000,000) within thirty days of the effective date of this Agreement. Beverly Enterprises shall satisfy this obligation by Fedwire electronic funds transfer to the "Department of Justice," as arranged through the 3 3 Financial Litigation Unit, United States Attorney's Office, Northern District of California. b. In addition to the payment described in Paragraph a, the balance of the Settlement Amount shall be paid by Beverly Enterprises by accepting a reduction to its periodic payment from the Medicare program, beginning with the first payment on or after January 1, 2000, and extending for a period of eight years thereafter, by an equal pro-rata amount sufficient to total One Hundred Forty Five Million Dollars ($145,000,000) (without interest). These payments shall be in the form of a reduction, or withhold, to be implemented by the Medicare program by means of a recoupment imposed pursuant to 42 C.F.R. Section 405.370-.375, and Beverly Enterprises waives all notice provisions in connection with such recoupment. The Medicare program will withhold $18,124,999.98 per year (under current HCFA payment methodologies, this will be accomplished by withholding $697,115.38 from each of the twenty-six interim payments to Beverly Enterprises each year). Beverly Enterprises agrees that it will elect to use a single, national Fiscal Intermediary with respect to each cost reporting year or period from the effective date of this Agreement until the full Settlement Amount has been paid. Beverly Enterprises agrees to notify its Fiscal Intermediary in writing if Beverly Enterprises intends to sell, close or otherwise dispose of facilities where such sale or disposition will result in a reduction of the interim payment to Beverly Enterprises below $697,115.38. (Nothing in this Agreement affects HCFA's right to deny any request for a change of Fiscal Intermediary consistent with 42 C.F.R. Part 421). If any interim payment equals less than $697,115.38, Beverly Enterprises must, within five days of the receipt of notice of the interim payment, pay the difference to the United States, through electronic funds transfer to "Department of Justice," as arranged through the Financial Litigation Unit, United States Attorney's Office, Northern District of California. In the event that HCFA payment mechanisms change, Beverly agrees to maintain the same repayment schedule so that recoupment is completed within eight years. 2. Subject to the exceptions in Paragraph 4 below, in consideration of the obligations of Beverly Enterprises set forth in this Agreement, and conditioned upon Beverly Enterprises's payment in full of the Settlement Amount, and subject to Paragraphs 22 and 23 below 4 4 (concerning bankruptcy proceedings commenced within 91 days of any payment (or reduction in any HCFA payment) under this Agreement), the United States (on behalf of itself, its officers, agents, agencies and departments) agrees to release Beverly Enterprises and its subsidiaries, directors, officers, employees, agents and shareholders from any civil or administrative monetary claim the United States has under the False Claims Act, 31 U.S.C. Sections 3729-3733; the Civil Monetary Penalties Law, 42 U.S.C. Section 1320a-7a; the Program Fraud Civil Remedies Act, 31 U.S.C. Sections 3801-3812; or the common law theories of payment by mistake, unjust enrichment, breach of contract and fraud, for the Covered Conduct. No individuals are released by this Paragraph. 3. In consideration of the obligations of Beverly Enterprises set forth in this Agreement and the Corporate Integrity Agreement incorporated by reference, conditioned upon Beverly Enterprises's payment in full of the Settlement Amount, and subject to Paragraphs 22 and 23, below (concerning bankruptcy proceedings commenced within 91 days of any payment (or reduction in the periodic interim payment) under this Agreement), the OIG-HHS agrees to release and refrain from instituting, directing or maintaining any administrative claim or any action seeking exclusion from the Medicare, Medicaid or any other federal health care program (as defined in 42 U.S.C. Section 1320a-7b(f)) against Beverly Enterprises, or its subsidiaries, directors, officers, employees, agents and shareholders, under 42 U.S.C. Section 1320a-7a (Civil Monetary Penalties Law), or 42 U.S.C. Section 1320a-7(b) (permissive exclusion), for the Covered Conduct, except as reserved in Paragraph 4, below, and as reserved in this Paragraph. Nothing in this Paragraph precludes the OIG-HHS from taking action against entities or persons, or for conduct and practices, for which civil claims have been reserved in Paragraph 4, below. No individuals are released by this Paragraph. 4. Notwithstanding any term of this Agreement, specifically reserved and excluded from the scope and terms of this Agreement as to any entity or person (including Beverly Enterprises) are any and all of the following. 5. (1) Any civil, criminal or administrative claims arising under Title 26, U.S. Code (Internal Revenue Code); 5 5 6. (2) Any criminal liability; 7. (3) Except at explicitly stated in this Agreement, any administrative liability, including mandatory exclusion from Federal health care programs; 8. (4) Any liability to the United States (or its agencies) for any conduct other than the Covered Conduct; 9. (5) Any claims based upon such obligations as are created by this Agreement; 10. (6) Any express or implied warranty claims or other claims, to the extent such claims may otherwise exist at law, for defective or deficient products or services, including quality of goods and services, provided by Beverly Enterprises. 11. (7) Except as provided with respect to Relator, any civil or administrative claims against individuals, including current or former directors, officers, employees, agents or shareholders of defendant Beverly Enterprises. 12. Beverly Enterprises has entered into a Corporate Integrity Agreement with HHS, attached as Exhibit A, which is incorporated into this Agreement by reference. Beverly Enterprises will immediately, upon execution of this Agreement, commence the implementation of its obligations under the Corporate Integrity Agreement. 13. The United States has obtained statements publicly filed by Beverly Enterprises with the Securities and Exchange Commission (collectively, the "Financial Statements"). The United States has relied on the accuracy and completeness of the Financial Statements in reaching this Agreement. Beverly Enterprises and its subsidiaries represent that each of the Financial Statements (including the related notes) presents fairly, in all material respects, the consolidated financial position and consolidated results of operations and cash flows of Beverly Enterprises and its subsidiaries as of the respective dates for the respective periods set forth therein, all in conformity with generally accepted accounting principles consistently applied during the periods involved except as noted therein, and subject, in the case of the unaudited interim financial statements, to normal and recurring year-end audit adjustments that have not been and are not 6 6 expected to be material in amount. As such, Beverly Enterprises and its subsidiaries further warrant that they do not own or have an interest in any assets which are not accounted for by the Financial Statements. 14. a. Beverly Enterprises represents that Financial Statements did not contain any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 15. b. In the event the United States learns that the Financial Statements contained any untrue statement of a material fact or omitted to state a material fact required to make the statement not misleading with respect to the existence of asset(s) in which Beverly Enterprises and/or its subsidiaries had an interest at the time of this Agreement, and in the event such nondisclosure or misrepresentation changes the estimated net worth of Beverly Enterprises set forth on the Financial Statements by one million dollars ($1,000,000) or more, the United States may at its option: (1) rescind this Agreement and file suit upon the underlying claims described in paragraphs D and E (with Relator retaining all rights and interests under 31 U.S.C. Section 3730); or (2) let the Agreement stand and collect from Beverly Enterprises the full Settlement Amount plus one hundred percent (100%) of the value of the previously undisclosed net worth of Beverly Enterprises. Beverly Enterprises agrees not to contest in any judicial or administrative forum any collection action undertaken by the United States pursuant to this provision. 16. In the event that the United States, pursuant to Paragraph 6(b), above, opts to rescind this Agreement, Beverly Enterprises expressly waives and agrees not to plead, argue or otherwise raise any defenses under the theories of statute of limitations, laches, estoppel or similar theories, based on the passage of time, to any civil or administrative claims which (1) are filed by the United States within thirty calendar days of written notification to Beverly Enterprises and Relator that this Agreement has been rescinded, and (2) relate to the Covered Conduct, except to the extent these defenses were available on October 18, 1995. 7 7 17. With the exception of administrative claims regarding Routine Cost Limit Exceptions ("RCLEs") which are separately addressed in Paragraphs 10 and 11 of this Agreement, any administrative claims which HCFA may assert regarding Beverly Enterprises' 1996, 1997 and 1998 cost reports other than those relating to the Covered Conduct will be handled in the normal administrative process set out in the pertinent federal regulations covering the Medicare program. Pending Routine Cost Limit (RCLE) requests for cost years 1996-1998 will be handled as provided for in Paragraphs 9 and 10, below. 18. With respect to the 1995 cost reports used as a basis for Skilled Nursing Facilities Prospective Payment System reimbursement during the transition period, HCFA reserves its right, if any, to reopen 1995 cost reports and, in accordance with applicable Medicare law, regulations and manual provisions, including, but not limited to, Beverly Enterprises' rights to appeal any determination regarding any adjustment as a result of any reopening, to recalculate the facility specific rate for Beverly Enterprises' facilities based on the direct nursing labor allocation issue, but HCFA agrees that the payment effect of any adjustments will not exceed Thirty Seven Million Dollars ($37,000,000) in the aggregate over the relevant three-year reimbursement period (1999-2001). 19. Beverly Enterprises agrees that the RCLEs previously submitted for the year 1996 will be denied. However, within one year of the effective date of this Agreement, Beverly Enterprises may submit to the fiscal intermediary revised RCLEs for the year 1996. Beverly Enterprises agrees that as part of its resubmission of 1996 RCLEs as described above, it will reduce the total direct labor cost in the facility certified unit by 13%. HCFA will adjudicate any administrative claims regarding the 1996 RCLEs in the normal administrative claims process set out in the pertinent federal regulations covering the Medicare program. 20. HCFA shall complete a statistically valid sample audit of Covered Conduct for cost reports filed for the limited purpose of calculating an average percentage adjustment, if any, to be applied to the direct labor cost component of the pending RCLEs for the years 1997 and 1998. Any sample audit conducted by HCFA with respect to the Covered Conduct shall include at least 10% of the facilities, randomly selected, and shall employ a statistically valid sampling 8 8 methodology and generally accepted auditing standards including adjustment methodology. HCFA will adjudicate any administrative claims regarding the sampling methodology selected, the audit methodology and protocols applied and the method of extrapolating the sampled results with respect to the 1997 and 1998 direct labor component of the RCLEs in the normal administrative process set out in pertinent federal regulations covering the Medicare program. In the event that the audits contemplated under this Paragraph result in the reduction of amounts claimed by Beverly, the recoupment by HCFA of any amounts paid to Beverly with respect to the 1997 and 1998 RCLEs shall be limited to an annual recoupment of no more than $7 million in principal, plus accrued interest per annum, until such recoupment amounts have been fully liquidated. Nothing in this section shall limit HCFA's right to audit non-Covered Conduct costs with respect to the years 1997 and 1998. 21. The United States and the Relator agree that the Relator is entitled, pursuant to 31 U.S.C. Section 3730(d)(1), to a share equal to 17 percent (17%) of the United States' recovery of the Settlement Amount under Paragraphs 1.a. and 1.b. and that Relator is not entitled to any share of any future reduction by HCFA as described in Paragraphs 9, 10, and 11 of this Agreement. The United States agrees that, within a reasonable time after it receives or effects a reduction or withhold that results in any payment of the Settlement Amount or a payment pursuant to Paragraph 6 of the Agreement from Beverly Enterprises, it will pay Relator an amount equal to 17 percent (17%) of the payment. All payments to Relator under this Agreement shall be made by electronic funds transfer in accordance with the written instructions of Relator's counsel. 22. The Relator and Beverly Enterprises agree that pursuant to 31 U.S.C. Section 3730(d)(1), the Relator is entitled to his necessary expenses, reasonable costs and attorneys' fees from Beverly Enterprises in the amount of $103,000.00. Beverly Enterprises shall pay this amount by electronic funds transfer to the Relator within five days of the effective date of this Agreement. 23. Pursuant to 31 U.S.C. Section 3730(c)(2)(B), the Relator agrees that the settlement of claims in the Civil Action is fair, adequate and reasonable under all the circumstances. Further, in consideration of the obligations of Beverly Enterprises set forth in this Agreement, conditioned 9 9 upon Beverly Enterprises's payment in full of the Settlement Amount, and subject to Paragraphs 22 and 23, below (concerning bankruptcy proceedings (or reduction in any HCFA payment) under this Agreement), on the effective date of this Agreement, the Relator, for himself, his heirs, representatives, successors and assigns, releases and forever discharges: a. Beverly Enterprises, and its present or former officers, directors, employees, shareholders, and agents from claims the Relator has or may have arising from or relating to the Covered Conduct or relating to the Civil Action; and b. The United States from any claims arising from or relating to the filing of the Civil Action, or, pursuant to 31 U.S.C. Section 3730(d)(1), for a share of any recoveries relating to or arising out of the Civil Action beyond that specified in Paragraph 11 of this Agreement. 24. Beverly Enterprises waives and will not assert any defenses Beverly Enterprises may have to any criminal prosecution or administrative action relating to the Covered Conduct, based in whole or in part on a contention that, under the Double Jeopardy Clause in the Fifth Amendment of the Constitution, or under the Excessive Fines Clause in the Eighth Amendment of the Constitution, this Settlement bars a remedy sought in such criminal prosecution or administrative action. Beverly Enterprises agrees that this Agreement is not punitive in purpose or effect. Nothing in this Paragraph or any other provision of this Agreement constitutes an agreement by the United States concerning the characterization of the Settlement Amount for purposes of the Internal Revenue Laws, Title 26 of the United States Code. 25. Beverly Enterprises fully and finally releases the Relator and his attorneys, the United States, its agencies, employees, servants, and agents from any claims (including attorneys' fees, costs, and expenses of every kind and however denominated) which Beverly Enterprises has asserted, could have asserted, or may assert in the future against the Relator and his attorneys, the United States, its agencies, employees, servants, and agents, related to the Covered Conduct or the United States', Relator's and Relator's counsel's investigation and prosecution of the Civil Action. 10 10 26. Beverly Enterprises agrees that all costs (as defined in the Federal Acquisition Regulations ("FAR") Section 31.205-47 and in Titles XVIII and XIX of the Social Security Act, 42 U.S.C. Sections 1395-1395ddd (1997) and 1396-1396v(1997), and the regulations promulgated thereunder) incurred by or on behalf of Beverly Enterprises, its subsidiaries and its present or former officers, directors, employees, shareholders, and agents, in connection with: (1) the matters covered by this Agreement, (2) the Government's audit(s) and the civil and criminal investigation(s) of the matters covered by this Agreement, (3) Beverly Enterprises' investigation, defense, and corrective actions undertaken in response to the Government's audit(s) and the civil and criminal investigations in connection with the matters covered by this Agreement (including attorneys' fees), including any new obligations undertaken pursuant to the Corporate Integrity Agreement incorporated in this Settlement Agreement, (4) the negotiation of this Agreement, the Corporate Integrity Agreement and any plea agreement, and (5) the payment made pursuant to this Agreement, are unallowable costs on Government contracts and under the Medicare Program, Medicaid Program, TRICARE Program, Veterans Affairs (VA) Program, and the Federal Employees Health Benefits program (FEHBP) (hereafter, "unallowable costs"). These unallowable costs will be separately estimated and accounted for by Beverly Enterprises, and Beverly Enterprises and its subsidiaries will not charge such unallowable costs directly or indirectly to any contracts with the United States, or seek payment for such unallowable costs through any cost report, cost statement, information statement or payment request submitted by Beverly Enterprises or any of its subsidiaries to the Medicare, Medicaid, TRICARE, VA or FEHBP programs. 27. Beverly Enterprises further agrees that within 120 days of the effective date of this Agreement, it will identify to applicable Medicare and TRICARE intermediaries, carriers and/or contractors, and Medicaid, VA, and FEHBP fiscal agents, any unallowable costs (as defined in this Paragraph) included in payments previously sought from the United States or any State Medicaid Program, including, but not limited to, payments sought in any cost reports, cost statements, 11 11 information reports, or payment requests already submitted by Beverly Enterprises or any of its subsidiaries, and will request, and agree, that such cost reports, cost statements, information reports or payment requests, even if already settled, be adjusted to account for the effect of the inclusion of the unallowable costs. Beverly Enterprises agrees that the United States will be entitled to recoup from Beverly Enterprises any overpayment as a result of the inclusion of such unallowable costs on previously-submitted cost reports, information reports, cost statements or requests for payment. Any payments due after the adjustments have been made shall be paid to the United States pursuant to the direction of the Department of Justice, and/or the affected agencies. The United States reserves its rights to disagree with any calculations submitted by Beverly Enterprises or any of its subsidiaries on the effect of inclusion of unallowable costs (as defined in this paragraph) on Beverly Enterprises or any of its subsidiaries' cost reports, cost statements or information reports. Nothing in this Agreement shall constitute a waiver of the rights of the United States to examine or reexamine the unallowable costs described in this Paragraph. 28. Beverly Enterprises covenants to cooperate fully and truthfully with the United States' investigation of individuals and entities not specifically released in this Agreement, for the Covered Conduct. Upon reasonable notice, Beverly Enterprises will make reasonable efforts to facilitate access to, and encourage the cooperation of, its directors, officers, and employees, for interviews and testimony, consistent with the rights and privileges of such individuals, and will furnish to the United States, upon reasonable request, all non-privileged documents and records in its possession , custody or control relating to the Covered Conduct. Beverly Enterprises agrees to consent to a motion filed by the United States to permit access by the Office of Counsel to the Inspector General to information covered by Rule 6(e) of the Federal Rules of Criminal Procedure. 29. This Agreement is intended to be for the benefit of the Parties, only, and by this instrument the Parties do not release any claims against any other person entity. 30. Beverly Enterprises agrees that it will not seek payment for any of the health care billings covered by this Agreement from any health care beneficiaries or their parents or sponsors. Beverly Enterprises waives any causes of action against these beneficiaries or their parents or sponsors based upon the claims for payment covered by this Agreement. 12 12 31. Beverly Enterprises expressly warrants that it has reviewed its financial situation after recording a pre-tax charge for the entire payment obligation hereunder and believes that it currently is solvent within the meaning of 11 U.S.C. Section 547(b)(3). Further, the Parties expressly warrant that, in evaluating whether to execute this Agreement, the Parties (i) have intended that the mutual promises, covenants and obligations set forth herein constitute a contemporaneous exchange for new value given to Beverly Enterprises, within the meaning of 11 U.S.C. Section 547(c)(1), and (ii) have concluded that these mutual promises, covenants and obligations do, in fact, constitute such a contemporaneous exchange. 32. In the event Beverly Enterprises commences, or a thirty party commences, within 91 days of any payment (or reduction in any HCFA payments) under this Agreement, any case, proceeding, or other action (i) under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have any order for relief of Beverly Enterprises' debts, or seeking to adjudicate Beverly Enterprises as bankrupt or insolvent, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for Beverly Enterprises or for all or any substantial part of Beverly Enterprises's assets, Beverly Enterprises agrees as follows: 33. Beverly Enterprises will not plead, argue or otherwise take the position in any such case, proceeding or action that: (a) Beverly Enterprises was insolvent at the time this Agreement was entered into, or became insolvent as a result of the payments (or reduction in the HCFA payments) made to the United States and/or Relator hereunder; or (b) the mutual promises, covenants and obligations set forth in this Agreement do not constitute a contemporaneous exchange for new value given to Beverly Enterprises. 34. In the event Beverly Enterprises commences, or a third party commences, any case, proceeding, or other action (i) under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have any order for relief of Beverly Enterprises' debts, or seeking to adjudicate Beverly Enterprises as bankrupt or insolvent, or (ii) seeking appointment of a receiver, trustee, custodian or other similar official for Beverly Enterprises or for all or any substantial part of Beverly Enterprises' assets, Beverly Enterprises agrees as follows: 13 13 a. If, in any of the proceedings or actions described above in Paragraph 23, Beverly Enterprises does not or is unable to honor the payment obligations hereunder, the United States shall hold a valid, allowed, liquidated, noncontingent, undisputed claim for $460 million under the False Claims Act and other federal statutes and/or common law doctrines, as specifically enumerated above, less payments received pursuant to this Agreement, or any other applicable law in any case, proceeding, or other action described in the first clause of this Paragraph, and in consideration for the final settlement of the United States' claims against it in the Civil Action as described herein, Beverly Enterprises expressly waives and agrees not to plead, argue or otherwise raise any defenses otherwise available to it regarding the claim asserted by the Untied States as set forth above in Paragraph 23.a. in such proceeding or other action; b. $170 million of the amount specified in Paragraph 23.a. shall constitute an overpayment under the Medicare Provider Agreements held by Beverly Enterprises' skilled nursing facilities; c. If and to the extent that Beverly Enterprises' obligations hereunder are avoided for any reason, including, but not limited to, through the exercise of any avoidance powers under the Bankruptcy Code, the United States, at its sole option, may rescind the releases in this Agreement, return to Beverly Enterprises any payments collected hereunder, and bring any civil and/or administrative claim, action or proceeding against Beverly Enterprises for the claims that otherwise are covered by the releases provided in Paragraphs 2, 3 and 14, above, with Relator retaining all rights and interests under 31 U.S.C. Section 3730; d. If the United States chooses to rescind the releases in accordance with Paragraph 23.c., Beverly Enterprises agrees that (i) any such claims, actions or proceedings brought by the United States (including any proceedings to exclude Beverly Enterprises from participation in Medicare, Medicaid and other Federal health care programs) are not subject to the automatic stay imposed by 11 U.S.C. Section 362(a) as a result of the action, case or proceeding described in the first clause of this paragraph, and (ii) it will not plead, argue or otherwise contend that the United States' claims, actions or proceedings are subject to such automatic stay; (iii) it will not seek relief under 14 14 11 U.S.C. Section 105 to enjoin or restrain the United States from pursuing such claims, actions or proceedings; and (iv) it will not plead, argue or otherwise raise any defenses under the theories of statute of limitations, laches estoppel or similar theories, to any such civil or administrative claims, actions or proceeding which are brought by the United States within thirty calendar days of written notification to Beverly Enterprises that the releases herein have been rescinded pursuant to this Paragraph, except to the extent such defenses were available on October 18, 1995; and e. Beverly Enterprises will not (a) oppose any attempt by the United States, including, but not limited to, a motion filed by the United States seeking relief from the automatic stay imposed by 11 U.S.C. Section 362, to recover, either through set off or recoupment, monies owed by Beverly Enterprises to the United States (either under this Agreement or otherwise) against any monies owed by the United States to Beverly Enterprises or (b) seek relief under 11 U.S.C. Section 105 to enjoin or restrain the United States from exercising these rights. 35. Beverly Enterprises further agrees that the express waivers set forth in Paragraphs 22 and 23 are in consideration for the final settlement of the United States' claims against it in the Civil Action as described herein. In consideration for the final settlement of the United States' claims against it in the Civil Action as described herein, and in the event, and only in the event, a proceeding or other actions in commenced as described in Paragraph 23, Beverly Enterprises expressly waives and agrees not to plead, argue or otherwise raise any defenses otherwise available to it regarding the claim asserted by the United States as set forth above in Paragraph 23.a. in such proceeding or other action. 36. Upon receipt of the payment described in Paragraph 1.a. above, the United States and Relator shall promptly sign and file in the Civil Action a Notice of Intervention and Joint Stipulation of Dismissal with prejudice of the Civil Action pursuant to the terms of the Agreement. 37. Except as otherwise provided, each party to this Agreement will bear its own legal and other costs incurred in connection with this matter, including the preparation and performance of this Agreement. 15 15 38. Beverly Enterprises represents that this Agreement is freely and voluntarily entered into without any degree of duress or compulsion whatsoever. 39. This Agreement is governed by the laws of the laws of the United States. The Parties agree that the exclusive jurisdiction and venue for any dispute arising between and among the Parties under this Agreement will be the United States District Court for the Northern District of California, except that disputes arising under the Corporate Integrity Agreement shall be resolved exclusively under the provisions in the Corporate Integrity Agreement. 40. This Agreement and the Corporate Integrity Agreement which is incorporated herein by reference constitutes the complete agreement between the Parties. This Agreement may not be amended except by written consent of the Parties except that only Beverly Enterprises and OIG-HHS must agree in writing to modification of the Corporate Integrity Agreement. 41. The undersigned individuals signing this Agreement on behalf of Beverly Enterprises represent and warrant that they are authorized by Beverly Enterprises to execute this Agreement. The undersigned United States signatories represent that they are signing this Agreement in their official capacities and that they are authorized to execute this Agreement. 42. This Agreement may be executed in counterparts, each of which constitutes an original and all of which constitute one and the same agreement. 43. This Agreement is effective on the date of signature of the last signatory to the Agreement. 44. This Agreement is binding on successors, transferees, and assignees of the Parties. THE UNITED STATES OF AMERICA Dated: BY: ------------------ ------------------------------- Laurie A. Oberembt Trial Attorney Commercial Litigation Branch Civil Division U.S. Department of Justice Robert S. Mueller III United States Attorney 16 16 Dated: BY: ------------------ ------------------------------- Gail Killefer Assistant United States Attorney Northern District of California Dated: BY: ------------------ ------------------------------- Lewis Morris Assistant Inspector General Office of Counsel to the Inspector General Office of Inspector General United States Department of Health and Human Services THE RELATOR Dated: BY: ------------------ ------------------------------- Domenic Todarello Relator Dated: BY: ------------------ ------------------------------- Francis J. Balint, Jr. Bonnett, Fairbourn, Friedman & Balint, P.C. Counsel for the Relator Dated: BY: ------------------ ------------------------------- John J. Stoia, Jr. Jeffrey W. Lawrence Milberg Weiss Bershad Hynes & Lerach LLP Counsel for the Relator BEVERLY ENTERPRISES - DEFENDANT Dated: BY: ------------------ ------------------------------- Beverly Enterprises, Inc. 17 17 Dated: BY: ------------------ ------------------------------- Griffin B. Bell, Esq. J. Sedwick Sollers III, Esq. King & Spaulding Counsel for Beverly Enterprises, Inc. Dated: BY: ------------------ ------------------------------- Joseph E. Casson, Esq. Proskauer Rose LLP Counsel for Beverly Enterprises, Inc. EX-10.47 7 OPERATIONS AGREEMENT 1 EXHIBIT 10.47 AGREEMENT BETWEEN THE OFFICE OF INSPECTOR GENERAL OF THE U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES AND BEVERLY ENTERPRISES, INC. REGARDING THE OPERATIONS OF BEVERLY ENTERPRISES-CALIFORNIA, INC. PRIOR TO ITS EXCLUSION PURSUANT TO 42 U.S.C. SECTION 1320a-7(a)(1) 1. This Agreement is entered into between the Office of Inspector General ("OIG") of the United States Department of Health and Human Services ("HHS") and Beverly Enterprises, Inc. ("Beverly") (collectively, the "parties"). This Agreement addresses the arrangement between the parties regarding the operations of certain Beverly nursing facilities and of Beverly Enterprises-California, Inc. ("Beverly-California"), after its conviction and prior to its exclusion, as further described below. 2. Beverly-California will enter a plea of guilty and be convicted in the Northern District of California of one count of wire fraud (18 U.S.C. Section 1343) and 10 counts of false statements (18 U.S.C. Section 1001) (the entry of the Judgment in this matter is hereinafter referred to as the "Conviction"). Beverly, Beverly-California, and the OIG agree that as a result of the Conviction, Beverly-California will be subject to mandatory exclusion from participation in all Federal health care programs pursuant to 42 U.S.C. Section 1320a-7(a)(1). 3. At the time of the Conviction, Beverly-California will be comprised of the 10 nursing facilities listed on Exhibit A (the "Facilities"). 4. In order to ensure that the mandatory exclusion of Beverly-California will not result in disruption or harm to the residents of the Facilities, Beverly agrees that the Facilities shall be divested from Beverly-California to unrelated parties in a manner consistent with this Agreement and the OIG agrees to withhold notice of exclusion in a manner consistent with this Agreement. 5. Beverly agrees that to the extent the interests of Beverly-California in any Facilities are not divested to unrelated parties, Beverly must ensure that the only interest in such Facilities held by Beverly-related entities after the time of Conviction will be the interest in the Facilities held by Beverly-California. 6. Beverly shall operate the Facilities in a manner consistent with this Agreement. Beverly shall not attempt to transfer the Facilities to any related entity, subsidiary, or affiliate of Beverly other than Beverly-California. Beverly shall not: close the Facilities 2 prior to any exclusion, convert the Facilities to "private pay," or transfer residents eligible for coverage by Federal health care programs from the Facilities unless such residents request transfers. 7. Within 120 days after the Conviction, Beverly (or Beverly-California) shall be Under Contract (as defined in paragraph 17) with unrelated third parties to divest itself, absolutely and in good faith, of any interest in the Facilities, including such additional ancillary assets it owned within the Facilities as are necessary to assure the operability and marketability of the Facilities. Beverly also shall make all arrangements within its control that are necessary to assure the operability and marketability of the Facilities until such time as Beverly-California divests itself of all interest in the Facilities as required under this Agreement. 8. Until Beverly and Beverly-California have completely divested themselves of ownership of all of the Facilities and new owners are operating all of the Facilities, Beverly shall: (a) ensure that employees provide the legally required quality of care to the Facilities' residents and meet all of the requirements applicable to nursing facilities participating in Medicare and other Federal health care programs, e.g., 42 C.F.R. Part 483; and (b) take such actions as are necessary to maintain the present marketability, viability, and competitiveness of all of the Facilities, and to prevent the destruction, removal, wasting, deterioration, or impairment of any of the Facilities or the assets and businesses ancillary to the Facilities (except for ordinary wear and tear). If a temporary manager appointed pursuant to paragraph 12 is managing a Facility, Beverly is responsible to meet the requirements of this paragraph only to the extent that Beverly has control over the Facility and its employees. Nothing in this Agreement shall limit the ability of the Health Care Financing Administration to take whatever enforcement actions it deems necessary against Beverly facilities should it determine that quality of care has deteriorated in a manner that causes a facility not to be in substantial compliance with Federal certification requirements at 42 C.F.R. Part 483. Nothing in this Agreement shall limit Beverly's rights in any such enforcement proceedings. 9. As soon as possible and prior to entering actively into divestiture negotiations, Beverly shall provide the OIG with written notice of the identity of potential future operators of the Facilities. Beverly agrees that Beverly-California shall only become Under Contract to divest its interest in the Facilities to third-party operators who have been approved by the OIG. The OIG agrees that it will not unreasonably withhold consent to the divestiture of Beverly's (or Beverly-California's) interest in any of the Facilities (or to the transfer of Facilities' provider agreements) to qualified third-party nursing home operators. Once Beverly has provided the identity of potential future operators of a Facility, the time periods applicable to that Facility shall be tolled until the OIG provides Beverly with written notice of: (a) approval of at least one such potential future operator; or (b) disapproval of the proposed future operators and the grounds for such disapproval. The OIG agrees to provide written assurance to any approved potential 3 future operator that, upon divestiture, a Facility will be permitted to operate free from any encumbrances or limitations imposed by this Agreement or the Conviction of Beverly-California. 10. Within 120 days after the Conviction, Beverly may notify the OIG in writing of its inability to find a third party willing or able to enter into a contract to divest Beverly-California of its interest in any Facility and request substitution for such a Facility or appointment of a Trustee. Such a notice shall include a description of Beverly's efforts to identify such a third party for the Facility. After receiving such notification and considering Beverly's report, the OIG, in its sole discretion, may replace the Facility identified by Beverly with any appropriate nursing facility owned by Beverly or any of its subsidiaries chosen by the OIG (such a facility shall be referred to as an "Alternate Facility") or appoint a Trustee. In addition, if any Facility is not Under Contract within 120 days after the Conviction, the OIG, in its sole discretion, may substitute an Alternate Facility for such a Facility. If the OIG exercises the authority described in this paragraph to substitute a Facility, Beverly shall immediately take all necessary steps to divest the Alternate Facility in a manner consistent with this Agreement. Ownership of the substituted original Facility shall not be transferred from Beverly-California until the Alternate Facility has been divested in a manner consistent with this Agreement to a purchaser not affiliated with Beverly. Upon divestiture of an Alternate Facility, the substituted original Facility may be transferred to any Beverly entity or third party and may continue to operate free from any encumbrances or limitations imposed by this Agreement or the Conviction of Beverly-California. 11. In the event that, pursuant to paragraph 10, the OIG notifies Beverly that it must substitute an Alternate Facility for a Facility, that Alternate Facility will then be treated as one of the original Facilities for the purposes of this Agreement. Thus, the obligations of Beverly under this Agreement related to Facilities shall apply to any Alternate Facility for which the OIG has given notice to Beverly to transfer ownership, e.g., Beverly shall be obligated to divest the Alternate Facility as if it had been a Facility listed on Exhibit A at the time of the Conviction. However, with respect to an Alternate Facility, the time limits set forth in this Agreement shall be extended by 60 days plus the number of days (if any) that elapsed between Beverly's submission of the notice described in paragraph 10 and the OIG's acceptance of substitution of that Alternate Facility in response to that notice. If Beverly is not Under Contract to divest itself of all interest in the Alternate Facility within the amended time period (the original deadline plus 60 days plus the number of days that elapsed between Beverly's submission of the notice described in paragraph 10 and the OIG's substitution of that Alternate Facility in response to that notice), the OIG shall have the authority to use the remedies set forth in this Agreement with respect to that Alternate Facility. 12. If Beverly (or Beverly-California) is not Under Contract for divestiture of the interest of Beverly-California in any one or more of the Facilities within 120 days after 4 the Conviction, the OIG may appoint a temporary manager for that Facility. If the OIG (or its authorized representative) appoints a temporary manager, the temporary manager shall have full authority to manage the Facility in a commercially reasonable manner for up to 120 days or until another facility is substituted for such Facility pursuant to the provisions of this Agreement. If Beverly (or Beverly-California) is not Under Contract for the divestiture of at least eight of the Facilities within 120 days after the Conviction, the OIG has the authority to appoint a Trustee who shall be authorized to divest Beverly (or Beverly-California) of its interest in the Facilities that remain undivested. If the OIG appoints a Trustee, the Trustee will also have full authority to operate any Facilities not Under Contract on terms determined by the OIG, but shall not otherwise be permitted to obligate Beverly beyond 120 days, or, if the Facility becomes Under Contract within 120 days, beyond the time of divestiture. The temporary manager and/or Trustee will report directly to the OIG or OIG's designee (e.g., the appropriate state agency). Beverly shall pay the reasonable costs associated with all temporary managers and/or Trustees appointed pursuant to this Agreement. 13. Beverly and the OIG agree to the following provisions for the imposition of penalties, in the OIG's sole discretion, in the event the Facilities (or Alternate Facilities to the extent that they are substituted for Facilities) are not divested in a manner consistent with this Agreement. For each day after the 120th day after the Conviction that a Facility is not Under Contract, the OIG may impose penalties on Beverly of up to $10,000 per day per facility for each such Facility (up to a limit of 180 days of such penalties for any particular Facility). The 120-day time frame of this paragraph shall be extended by 60 days with respect to any Facility that was originally an Alternate Facility. Beverly agrees not to contest these penalties in any state or federal court or administrative forum, except that Beverly may seek review of a penalty under this Agreement as if the penalty were a Stipulated Penalty described in section X.A.1 of the Corporate Integrity Agreement entered into between Beverly and the OIG on or about the date of this Agreement. The only issues in such a proceeding will be whether: (a) any Facility was not Under Contract after the 120th day after the Conviction (or 180th day after the Conviction with respect to former Alternate Facilities); and (b) for how long after the 120th day after the Conviction (or 180th day after the Conviction with respect to former Alternate Facilities) such Facility was not Under Contract. 14. In exchange for the above agreements made by Beverly and Beverly-California in this Agreement, the OIG agrees that it will not implement an exclusion of Beverly-California based on the Conviction until after the earlier of: (1) the date on which Beverly-California has fully divested itself of the Facilities; or (2) the 120th day after the Conviction (except to the extent that the time frame applicable to a Facility has been extended pursuant to paragraph 11), except that the OIG will not exclude Beverly-California while a Facility is Under Contract. The OIG retains sole discretion to determine the date of implementation of any exclusion after the conditions set forth in this paragraph have been met. 5 15. Upon written notice from the OIG (consistent with paragraph 14), Beverly-California hereby agrees to be permanently excluded pursuant to 42 U.S.C. Section 1320a-7(a)(1) from participation in Medicare, Medicaid, and all other Federal health care programs as defined in 42 U.S.C. Section 1320a-7b(f). Such exclusion will have national effect and will also apply to all other Federal procurement and non-procurement programs. Beverly-California waives any further notice of the exclusion and agrees not to contest the exclusion either administratively or in any state or federal court. 16. If the OIG determines that Beverly owes money due to any of the provisions of this Agreement, e.g., paragraphs 12 or 13, the OIG shall make a written request for payment to Beverly including the amount owed and instructions for paying. Beverly agrees to promptly pay such amounts upon receiving such a request, except that if Beverly exercises its review rights under paragraph 13 Beverly shall promptly pay any amount owed if and when it is due under the process referenced in that paragraph. If Beverly does not make payment as instructed by the OIG within 10 days of receiving the request for payment (either under this paragraph or under the process referenced in paragraph 13), the OIG may: (a) file an action for specific performance of this Agreement; (b) offset the remaining unpaid balance, inclusive of interest (calculated at 10% per annum, compounded daily, from the date the request for payment was received by Beverly), from any amounts due and owing to Beverly by any department, agency, or agent of the United States at the time of default; and/or (c) exercise any other right granted by law, or under the terms of this Agreement, or recognizable at common law or in equity. Except as provided for under the review process described in paragraph 13, Beverly agrees not to contest any offset imposed pursuant to this provision, either administratively or in any state or federal court. In addition, Beverly will pay the OIG all reasonable costs of collection and enforcement of this Agreement, including attorney's fees and expenses. 17. For the purposes of the Agreement, a Facility shall be considered "Under Contract" if Beverly has entered into a definitive agreement to divest, to an unrelated third party, its interest in the Facility and has provided to the appropriate state agency a notice of its intent to transfer its interest in and the operation of the Facility, with a copy of the divestiture agreement, if required. Notwithstanding the previous sentence, the Facility cannot become Under Contract if: (a) Beverly has failed to provide notice to the OIG required by paragraph 9 regarding the proposed future operator(s); or (b) the OIG has notified Beverly of its disapproval of the proposed future operator(s) consistent with paragraph 9. In the event a Facility becomes Under Contract and the appropriate state agency subsequently disapproves the proposed divestiture, the Facility will no longer be considered Under Contract for the purposes of this Agreement. As explicitly set forth in other paragraphs, the applicable time frames set forth in this Agreement shall be tolled with respect to a Facility while that Facility is Under Contract. Such time periods shall further be tolled during any time period that Beverly has an outstanding request for: (1) 6 substitution of a Facility pursuant to paragraph 10; or (2) an extension of time pursuant to paragraph 18. The tolling of the time periods applicable to one Facility shall not affect the time periods applicable to the other Facilities. 18. If, prior to the 120th day after the Conviction, at least eight of the Facilities are Under Contract, Beverly may request an extension of time to become Under Contract with respect to the remaining Facilities. With any such request, Beverly shall provide the OIG with a description of Beverly's efforts to become Under Contract with respect to the Facility and a timetable for having the Facility Under Contract and completing the divestiture of the Facility. After receiving such request and reasonably considering Beverly's report, the OIG, in its sole discretion, may deny the request or grant an extension that the OIG deems appropriate. Notwithstanding any other provision in this Agreement, if OIG grants the timely written request for extension, penalties for failure to meet time frames shall not begin to accrue until one day after Beverly fails to meet the revised deadline set by OIG. Notwithstanding any other provision in this Agreement, if OIG denies such a timely written request, penalties shall not begin to accrue until two (2) business days after Beverly receives OIG's written denial of such request. 19. This Agreement expires when Beverly-California receives notice of exclusion from participation in the Federal health care programs. 20. This Agreement shall be binding on the successors, assigns, and transferees of Beverly (except that the obligations of this Agreement shall not apply to facilities that Beverly or a Beverly successor does not own or operate). 21. This Agreement shall become final and binding on the date the final signature is obtained on the Agreement. This Agreement may be executed in counterparts, each of which constitutes an original and all of which constitute one and the same agreement. 22. Any modifications to this Agreement shall be made with the prior written consent of the parties to this Agreement. 23. The undersigned Beverly signatories represent and warrant that they are authorized to execute this Agreement and the undersigned OIG signatory represents that he is signing this Agreement in his official capacity and that he is authorized to execute this Agreement. The remainder of this page intentionally left blank. 7 ON BEHALF OF BEVERLY - ----------------------------------------- --------------------- DAVID BANKS DATE Chief Executive Officer Beverly Enterprises, Inc. - ----------------------------------------- --------------------- MARK BIROS, Esq. DATE Proskauer Rose LLP 1233 20th Street, NW Suite 800 Washington, DC 20036-2396 ON BEHALF OF THE OFFICE OF INSPECTOR GENERAL OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES - ----------------------------------------- --------------------- LEWIS MORRIS DATE Assistant Inspector General for Legal Affairs Office of Inspector General U. S. Department of Health and Human Services 8 Exhibit A 1. Beverly Manor, Escondido, California; 2. Beverly Manor, San Francisco, California; 3. College Oak Nursing and Rehabilitation Center, Sacramento, California; 4. Hy-Long Convalescent Center, Sunnyvale, California; 5. Torreno Gardens, Los Gatos, California; 6. Hearthstone Nursing Center, St. John, Kansas; 7. Countryside Estates, Iola, Kansas; 8. Hospitality of Macon, Macon, Georgia; 9. Beverly Health and Rehabilitation Center, Aiken, South Carolina; 10. Pinewood Terrace, Colville, Washington. EX-21.1 8 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE DECEMBER 31, 1999
STATE OF CORPORATION INCORPORATION - ----------- ------------- A-1 Home Health Services, Inc. Georgia AdviNet, Inc. Delaware AGI-Camelot, Inc. Missouri Arborland Management Company, Inc. South Carolina Associated Physical Therapy Practitioners, Inc. Pennsylvania Bercy International, Inc. California Beverly Assisted Living, Inc. Delaware Beverly Enterprises, Inc. Delaware Beverly Enterprises International Limited California Beverly Enterprises - Alabama, Inc. California Beverly Enterprises - Arizona, Inc. California Beverly Enterprises - Arkansas, Inc. California Beverly Enterprises - California, Inc. California Beverly Enterprises - Colorado, Inc. California Beverly Enterprises - Connecticut, Inc. California Beverly Enterprises - Delaware, Inc. California Beverly Enterprises - Distribution Services, Inc. California Beverly Enterprises - District of Columbia, Inc. California Beverly Enterprises - Florida, Inc. California Beverly Enterprises - Garden Terrace, Inc. California Beverly Enterprises - Georgia, Inc. California Beverly Enterprises - Hawaii, Inc. California Beverly Enterprises - Idaho, Inc. California Beverly Enterprises - Illinois, Inc. California
1 2 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1999
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly Enterprises - Indiana, Inc. California Beverly Enterprises - Iowa, Inc. California Beverly Enterprises - Kansas, Inc. California Beverly Enterprises - Kentucky, Inc. California Beverly Enterprises - Louisiana, Inc. California Beverly Enterprises - Maine, Inc. California Beverly Enterprises - Maryland, Inc. California Beverly Enterprises - Massachusetts, Inc. California Beverly Enterprises - Michigan, Inc. California Beverly Enterprises - Minnesota, Inc. California Beverly Enterprises - Mississippi, Inc. California Beverly Enterprises - Missouri, Inc. California Beverly Enterprises - Montana, Inc. California Beverly Enterprises - Nebraska, Inc. California Beverly Enterprises - Nevada, Inc. California Beverly Enterprises - New Hampshire, Inc. California Beverly Enterprises - New Jersey, Inc. California Beverly Enterprises - New Mexico, Inc. California Beverly Enterprises - North Carolina, Inc. California Beverly Enterprises - North Dakota, Inc. California Beverly Enterprises - Ohio, Inc. California Beverly Enterprises - Oklahoma, Inc. California Beverly Enterprises - Oregon, Inc. California Beverly Enterprises - Pennsylvania, Inc. California
2 3 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1999
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly Enterprises - Rhode Island, Inc. California Beverly Enterprises - South Carolina, Inc. California Beverly Enterprises - Tennessee, Inc. California Beverly Enterprises - Texas, Inc. California Beverly Enterprises - Utah, Inc. California Beverly Enterprises - Vermont, Inc. California Beverly Enterprises - Virginia, Inc. California Beverly Enterprises - Washington, Inc. California Beverly Enterprises - West Virginia, Inc. California Beverly Enterprises - Wisconsin, Inc. California Beverly Enterprises - Wyoming, Inc. California Beverly - Bella Vista Holding, Inc. Delaware Beverly - Branson Holdings, Inc. Delaware Beverly Clinical, Inc. Delaware Beverly Funding Corporation Delaware Beverly Health and Rehabilitation Services, Inc. California Beverly Healthcare Acquisition, Inc. Delaware Beverly Healthcare - California, Inc. California Beverly Holdings 1, Inc. Delaware Beverly Indemnity, Ltd. Vermont Beverly Manor Inc. of Hawaii California Beverly Manor Inc. of Phoenix California Beverly - Missouri Valley Holding, Inc. Delaware Beverly - Plant City Holdings, Inc. Delaware
3 4 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1999
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly - Rapid City Holding, Inc. Delaware Beverly Real Estate Holdings, Inc. Delaware Beverly Rehabilitation, Inc. Delaware Beverly Savana Cay Manor, Inc. California Beverly - Tamarac Holdings, Inc. Delaware Beverly - Tampa Holdings, Inc. Delaware Carrolton Physical Therapy Clinic, Inc. Texas Catawba Rehabilitation Services, Inc. South Carolina Columbia-Valley Nursing Home, Inc. Ohio Commercial Management, Inc. Iowa Community Care, Inc. North Carolina Compassion and Personal Care Services, Inc. North Carolina Continental Care Centers of Council Bluffs, Inc. Iowa Eastern Carolina Home Health Agency, Inc. North Carolina Eastern Home Health Supply & Equipment Co., Inc. North Carolina ECT, Inc. North Carolina Edgewood Convalescent Hospital California Forest City Building Ltd. Missouri Greenville Rehabilitation Services, Inc. Texas Hallmark Convalescent Homes, Inc. Michigan HomeCare Preferred Choice, Inc. Delaware Home Health and Rehabilitation Services, Inc. Texas Home Health Care of Carteret County, Inc. North Carolina Home Technology Healthcare - Mid Cumberland, Inc. Tennessee
4 5 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1999
STATE OF CORPORATION INCORPORATION - ----------- ------------- Home Technology Healthcare - Mid South, Inc. Delaware Home Technology Healthcare - Nursing, Inc. Delaware Home Technology Healthcare - St. Louis, Inc. Delaware Home Technology Healthcare - Tennessee, Inc. Tennessee Hospice of Eastern Carolina, Inc. North Carolina Hospice of Tennessee, Inc. Delaware Hospice Preferred Choice, Inc. Delaware HTHC Holdings, Inc. Delaware Kenwood View Nursing Home, Inc. Kansas Las Colinas Physical Therapy Center, Inc. Texas Liberty Nursing Homes, Incorporated Virginia Long Beach Sports Medicine and Physical Therapy Center, Inc. California MATRIX Occupational Health, Inc. Delaware MATRIX Rehabilitation, Inc. Delaware MATRIX Rehabilitation - South Carolina, Inc. Delaware Medical Arts Health Facility of Lawrenceville, Inc. Georgia Moderncare of Lumberton, Inc. North Carolina Nebraska City S-C-H, Inc. Nebraska Network for Physical Therapy, Inc. Texas North Dallas Physical Therapy Associates, Inc. Texas Nursing Home Operators, Inc. Ohio Petersen Health Care, Inc. Florida Physician's Home Health Care, Incorporated Tennessee
5 6 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1999
STATE OF CORPORATION INCORPORATION - ----------- ------------- Piedmont No. 1, Inc. Missouri PPI, Inc. New Mexico PT Net, Inc. Tennessee PT Net (Colorado), Inc. Colorado Rehabilitation Associates of Lafayette, Inc. Louisiana Riverside Physical Therapy, Inc. California Shastina Properties Inc. California Shastina Realty Inc. California South Alabama Nursing Home, Inc. Alabama South Dakota - Beverly Enterprises, Inc. California Spectra Healthcare Alliance, Inc. Delaware Tar Heel Health Care Services, Inc. North Carolina Tar Heel Holdings, Inc. Delaware Tar Heel Home Health, Inc. North Carolina Tar Heel Home Health of Cape Fear, Inc. North Carolina Tar Heel Home Health of Dare County, Inc. North Carolina Tar Heel Home Health of North Central North Carolina, Inc. North Carolina Tar Heel Infusion Company, Inc. North Carolina The Parks Physical Therapy and Work Hardening Center, Inc. Texas Theraphysics Corp. Delaware Theraphysics Corp. of New York IPA, Inc. New York Theraphysics Partners of Colorado, Inc. Delaware Theraphysics Partners of Louisiana, Inc. Delaware
6 7 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1999
STATE OF CORPORATION INCORPORATION - ----------- ------------- Theraphysics Partners of Western Pennsylvania, Inc. Delaware Theraphysics Partners of Texas, Inc. Delaware TMD Disposition Company Florida Vantage Healthcare Corporation Delaware Vaughn Home Health Care & Services, Inc. Illinois
7 EX-23.1 9 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements and amendments thereto Form S-8 No. 33-21505 Employee Stock Purchase Plan Form S-8 No. 333-41671 Non-Employee Director Deferred Compensation Plan Form S-8 No. 333-41669 1997 Long-Term Incentive Plan Form S-8 No. 333-41673 Executive Deferred Compensation Plan Form S-8 No. 333-42131 Non-Employee Directors' Stock Option Plan
of Beverly Enterprises, Inc. of our report dated February 17, 2000 with respect to the consolidated financial statements and schedule of Beverly Enterprises, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ ERNST & YOUNG LLP Little Rock, Arkansas March 27, 2000 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 DEC-31-1999 24,652 0 432,372 65,455 32,276 493,796 1,853,402 743,337 1,982,880 388,054 746,164 0 0 11,038 630,086 1,982,880 2,546,672 2,551,007 0 2,354,328 337,827 0 72,578 (213,726) (79,079) (134,647) 0 0 0 (134,647) (1.31) (1.31) EXCLUDES $9,262 OF LONG-TERM NOTES RECEIVABLE. EXCLUDES $5,604 OF ALLOWANCE FOR LONG-TERM NOTES RECEIVABLE. INCLUDED IN TOTAL COSTS AND EXPENSES LINE.
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