-----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, DtYo55FFELa3fmpwpvwz4gFO50QLFiUpeUk///K4xXsR89D1GXyA0wtkF/6FhqhF yq9mpqryIltSM3r2zVtPOA== 0000950134-01-501935.txt : 20010516 0000950134-01-501935.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950134-01-501935 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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-Q SEC ACT: SEC FILE NUMBER: 001-09550-2B FILM NUMBER: 1637019 BUSINESS ADDRESS: STREET 1: ONE THOUSAND BEVERLY WAY CITY: FORT SMITH STATE: AR ZIP: 72919 BUSINESS PHONE: 5014526712 MAIL ADDRESS: STREET 1: ONE THOUSAND BEVERLY WAY CITY: FORT SMITH STATE: AR ZIP: 72919 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEVERLY HOLDINGS INC DATE OF NAME CHANGE: 19970604 10-Q 1 d87223e10-q.txt FORM 10-Q FOR QUARTER ENDED MARCH 31, 2001 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ------------ TO ------------ 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.)
ONE THOUSAND BEVERLY WAY FORT SMITH, ARKANSAS 72919 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (501) 201-2000 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. YES X NO --- ----- SHARES OF REGISTRANT'S COMMON STOCK, $.10 PAR VALUE, OUTSTANDING, EXCLUSIVE OF TREASURY SHARES, AT APRIL 30, 2001 - 103,641,593 2 BEVERLY ENTERPRISES, INC. FORM 10-Q MARCH 31, 2001 TABLE OF CONTENTS
PART I -- FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets ................... 2 Condensed Consolidated Statements of Operations ......... 3 Condensed Consolidated Statements of Cash Flows ......... 4 Notes to Condensed Consolidated Financial Statements .... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................... 11 PART II -- OTHER INFORMATION Item 1. Legal Proceedings ................................................ 17 Item 6. Exhibits and Reports on Form 8-K ................................. 19
1 3 PART I BEVERLY ENTERPRISES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND DECEMBER 31, 2000 (DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31, 2001 2000 ---- ---- (UNAUDITED) (NOTE) ASSETS Current assets: Cash and cash equivalents ................................................... $ 25,861 $ 25,908 Accounts receivable - patient, less allowance for doubtful accounts: 2001 - $86,717; 2000 - $91,636 ........................................... 328,213 323,143 Accounts receivable - nonpatient, less allowance for doubtful accounts: 2001 - $776; 2000 - $1,106 ............................................... 9,356 19,831 Notes receivable, less allowance for doubtful notes: 2001 - $72; 2000 - $72 . 17,781 2,197 Operating supplies .......................................................... 26,681 29,134 Deferred income taxes ....................................................... 69,124 24,379 Assets held for sale ........................................................ 122,079 -- Prepaid expenses and other .................................................. 19,600 18,787 ----------- ----------- Total current assets ................................................. 618,695 443,379 Property and equipment, net of accumulated depreciation and amortization: 2001 - $734,097; 2000 - $805,557 ............................................ 863,939 1,063,247 Other assets: Goodwill, net ............................................................... 201,295 203,742 Deferred income taxes ....................................................... 26,891 27,721 Other, less allowance for doubtful accounts and notes: 2001 - $3,727; 2000 - $3,767 ............................................. 132,779 137,904 ----------- ----------- Total other assets ................................................... 360,965 369,367 ----------- ----------- $ 1,843,599 $ 1,875,993 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................ $ 89,122 $ 84,420 Accrued wages and related liabilities ....................................... 102,965 106,300 Accrued interest ............................................................ 7,519 15,744 Other accrued liabilities ................................................... 102,008 99,136 Current portion of long-term debt ........................................... 62,568 227,111 ----------- ----------- Total current liabilities ............................................ 364,182 532,711 Long-term debt .................................................................. 703,928 564,247 Other liabilities and deferred items ............................................ 237,942 195,042 Commitments and contingencies Stockholders' equity: Preferred stock, shares authorized: 25,000,000 .............................. -- -- Common stock, shares issued: 2001 - 112,157,746; 2000 - 112,818,798 ........ 11,216 11,282 Additional paid-in capital .................................................. 880,918 876,981 Accumulated deficit ......................................................... (246,205) (193,931) Accumulated other comprehensive income ...................................... 896 718 Treasury stock, at cost: 2001 - 8,515,758 shares; 2000 - 9,061,300 shares .. (109,278) (111,057) ----------- ----------- Total stockholders' equity ........................................... 537,547 583,993 ----------- ----------- $ 1,843,599 $ 1,875,993 =========== ===========
NOTE: The balance sheet at December 31, 2000 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See accompanying notes. 2 4 BEVERLY ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 --------- --------- Net operating revenues ............................................. $ 659,468 $ 646,102 Interest income .................................................... 387 825 --------- --------- Total revenues ............................................... 659,855 646,927 Costs and expenses: Operating and administrative: Wages and related .............................................. 397,962 389,716 Provision for insurance and related items ...................... 27,163 20,513 Other .......................................................... 178,512 181,646 Interest .......................................................... 19,110 19,618 Depreciation and amortization ..................................... 24,464 25,336 Asset impairments, workforce reductions and other unusual items ... 107,689 -- --------- --------- Total costs and expenses ..................................... 754,900 636,829 --------- --------- Income (loss) before provision for (benefit from) income taxes ..... (95,045) 10,098 Provision for (benefit from) income taxes .......................... (42,771) 3,837 --------- --------- Net income (loss) .................................................. $ (52,274) $ 6,261 ========= ========= Net income (loss) per share of common stock: Basic and diluted net income (loss) per share of common stock .. $ (0.50) $ 0.06 ========= ========= Shares used to compute basic net income (loss) per share ....... 103,705 102,281 ========= ========= Shares used to compute diluted net income (loss) per share ..... 103,705 102,402 ========= =========
See accompanying notes. 3 5 BEVERLY ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED) (IN THOUSANDS)
2001 2000 --------- --------- Cash flows from operating activities: Net income (loss) ..................................................................... $ (52,274) $ 6,261 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization ...................................................... 24,464 25,336 Provision for reserves on patient, notes and other receivables, net ................ 7,112 5,564 Amortization of deferred financing costs ........................................... 666 624 Asset impairments, workforce reductions and other unusual items .................... 107,689 -- Gains on dispositions of facilities and other assets, net .......................... (1,099) (2,162) Deferred income taxes .............................................................. (44,035) 3,567 Insurance related accounts ......................................................... 28,494 5,660 Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable - patient .................................................... (12,584) (36,590) Operating supplies ............................................................... (171) 503 Prepaid expenses and other receivables ........................................... (1,571) (1,973) Accounts payable and other accrued expenses ...................................... (25,267) (42,142) Income taxes payable ............................................................. (621) (23) Other, net ....................................................................... (1,204) (858) --------- --------- Total adjustments ............................................................. 81,873 (42,494) --------- --------- Net cash provided by (used for) operating activities .......................... 29,599 (36,233) Cash flows from investing activities: Capital expenditures ............................................................... (13,941) (19,982) Proceeds from dispositions of facilities and other assets .......................... 4,415 9,926 Payments for acquisitions, net of cash acquired .................................... (74) (1,263) Collections on notes receivable .................................................... 19 294 Other, net ......................................................................... 347 (2,352) --------- --------- Net cash used for investing activities ........................................ (9,234) (13,377) Cash flows from financing activities: Revolver borrowings ................................................................ 369,000 539,000 Repayments of Revolver borrowings .................................................. (351,000) (485,000) Repayments of long-term debt ....................................................... (39,166) (5,649) Purchase of common stock for treasury .............................................. -- (3,289) Proceeds from exercise of stock options ............................................ 698 -- Deferred financing costs paid ...................................................... (356) (38) Proceeds from designated funds, net ................................................ 412 119 --------- --------- Net cash provided by (used for) financing activities .......................... (20,412) 45,143 --------- --------- Net decrease in cash and cash equivalents ................................................ (47) (4,467) Cash and cash equivalents at beginning of period ......................................... 25,908 24,652 --------- --------- Cash and cash equivalents at end of period ............................................... $ 25,861 $ 20,185 ========= ========= Supplemental schedule of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized $ 26,669 $ 23,667 Income tax payments, net 1,885 293
See accompanying notes. 4 6 BEVERLY ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) (1) References throughout this document to the Company include Beverly Enterprises, Inc. and its wholly owned subsidiaries. In accordance with the Securities and Exchange Commission's "Plain English" guidelines, this Quarterly Report on Form 10-Q has been written in the first person. In this document, the words "we", "our", "ours" and "us" refer only to Beverly Enterprises, Inc. and its wholly owned subsidiaries and not to any other person. We have prepared the condensed consolidated financial statements, without audit. In management's opinion, they include all normal recurring adjustments necessary for a fair presentation of the results of operations for the three months ended March 31, 2001 and 2000 in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures required by generally accepted accounting principles have been condensed or omitted, we believe that the disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read along with our 2000 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Our results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results for a full year. Generally accepted accounting principles require management to make estimates and assumptions when preparing financial statements that affect: - the reported amounts of assets and liabilities at the date of the financial statements; and - the reported amounts of revenues and expenses during the reporting period. They also require management to make estimates and assumptions regarding any contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Approximately 77% and 74% of our net operating revenues for the three months ended March 31, 2001 and 2000, respectively, were derived from funds under federal and state medical assistance programs. We accrue for revenues when services are provided at standard charges. These charges are adjusted to amounts that we estimate to receive under governmental programs and other third-party contractual arrangements based on contractual terms and historical experience. These revenues are reported at their estimated net realizable amounts and are subject to audit and retroactive adjustment. Retroactive adjustments are considered in the recognition of revenues on an estimated basis in the period the related services are rendered. Such amounts are adjusted in future periods as adjustments become known or as cost reporting years are no longer subject to audits, reviews or investigations. Due to the complexity of the laws and regulations governing the Medicare and Medicaid programs, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term. 5 7 BEVERLY ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 (UNAUDITED) The following table sets forth the calculation of basic and diluted earnings per share for the three months ended March 31 (in thousands):
2001 2000 ---- ---- NUMERATOR: Numerator for basic and diluted net income (loss) per share ..... $ (52,274) $ 6,261 ========= ========= DENOMINATOR: Denominator for basic net income (loss) per share - weighted average shares ................................................ 103,705 102,281 Effect of dilutive securities: Employee stock options ......................................... -- 121 --------- --------- Denominator for diluted net income (loss) per share - adjusted weighted average shares and assumed conversions ............... 103,705 102,402 ========= ========= Basic and diluted net income (loss) per share ................... $ (0.50) $ 0.06 ========= =========
Comprehensive income (loss) includes net income (loss), as well as charges and credits to stockholders' equity not included in net income (loss). The components of comprehensive income (loss), net of income taxes, consist of the following for the three months ended March 31 (in thousands):
2001 2000 ---- ---- Net income (loss) .................................................. $(52,274) $ 6,261 Foreign currency translation adjustments, net of income taxes ...... (44) 469 Net unrealized gains (losses) on available-for-sale securities, net of income taxes .................................................. 222 (768) -------- -------- Comprehensive income (loss) ........................................ $(52,096) $ 5,962 ======== ========
The components of accumulated other comprehensive income, net of income taxes, consist of the following (in thousands):
MARCH 31, DECEMBER 31, 2001 2000 ---- ---- Foreign currency translation adjustments .......... $339 $383 Unrealized gains on available-for-sale securities . 557 335 ---- ---- $896 $718 ==== ====
Certain prior year amounts have been reclassified to conform with the 2001 financial statements presentation. 6 8 BEVERLY ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 (UNAUDITED) (2) The provision for (benefit from) income taxes for the three months ended March 31, 2001 and 2000 were based on estimated annual effective tax rates of 45% and 38%, respectively. Our estimated annual effective tax rates for 2001 and 2000 were different than the federal statutory rate primarily due to the impact of state income taxes, amortization of nondeductible goodwill and the benefit of certain tax credits. Our estimated annual effective tax rate increased to 45% in 2001 primarily due to the pre-tax charge for asset impairments, workforce reductions and other unusual items of approximately $107,700,000, which reduced our pre-tax income to a level where the impact of permanent tax differences and state income taxes had a significant impact on the effective tax rate. Our net deferred tax assets at March 31, 2001 are expected to be realized through the reversal of temporary taxable differences, future taxable income and the implementation of tax planning strategies, as needed. Therefore, we do not believe that a deferred tax valuation allowance is necessary at March 31, 2001. The provision for (benefit from) income taxes consists of the following for the three months ended March 31 (in thousands):
2001 2000 -------- -------- Federal: Current $ 311 $ 88 Deferred (42,603) 2,949 State: Current 953 182 Deferred (1,432) 618 -------- -------- $(42,771) $ 3,837 ======== ========
(3) During the three months ended March 31, 2001, we acquired a parcel of land and certain other assets for cash of approximately $62,000 and closing and other costs of approximately $65,000. The acquisitions of such assets were accounted for as purchases. Also during such period, we sold, closed or terminated the leases on nine nursing facilities (815 beds) and one outpatient therapy clinic for cash proceeds of approximately $7,000,000 and a note receivable of approximately $300,000. We did not operate two of the nursing facilities (234 beds) which had been leased to another nursing home operator. We recognized net pre-tax gains, which were included in net operating revenues during the first quarter of 2001, of approximately $1,100,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to our consolidated financial position and results of operations. During the three months ended March 31, 2001, we restructured the lease agreement related to 10 nursing facilities in the state of Indiana. In addition, we terminated the lease on one nursing facility (223 beds) leased from the same landlord. We recorded a pre-tax charge of approximately $3,300,000 related to the termination of this lease, including the write-off of the net book value of this property. (4) During the first quarter of 2001, a formal plan was initiated by management to pursue the sale of our nursing home operations in Florida. Such decision was made due to the excessive patient care liability costs that we have been incurring in recent periods in the state of Florida. Accordingly, the property and equipment, identifiable intangibles and operating supplies of our Florida nursing home operations at March 31, 2001 were considered assets to be disposed of, as that term is defined in 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"). Management estimated the fair value less selling costs of such assets based upon verbal and non-binding purchase prices from potential buyers and determined that an impairment write-down was necessary as of March 31, 2001. The pre-tax charge related to this write-down was approximately $68,900,000. In addition, we recorded a pre-tax charge of approximately $17,200,000 for certain costs to exit the Florida facilities (as defined below). These costs relate to severance agreements, termination payments on certain contracts and various other items. Such pre-tax charges have been included in the condensed consolidated statement of operations caption "Asset impairments, workforce reductions and other unusual items." At March 31, 2001, the assets held for sale totaled approximately $122,100,000 and are classified as current assets in the condensed consolidated balance sheet, as we expect to close a transaction on the Florida facilities in 2001. 7 9 BEVERLY ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 (UNAUDITED) Our Florida nursing home operations include 49 nursing facilities (6,129 beds) and four assisted living centers (315 units) (the "Florida facilities") currently being marketed as a group, as well as one additional nursing facility (56 beds) and certain other assets which we plan to sell in separate transactions. All of these assets are included in the total assets of our nursing facilities segment (see Note 7). We are currently negotiating with a potential purchaser of all of the Florida facilities. Other potential purchasers have expressed an interest in purchasing all or portions of the Florida facilities. During the three months ended March 31, 2001, our Florida nursing home operations recorded a pre-tax loss of approximately $1,100,000. Included in this pre-tax loss was depreciation and amortization expense of approximately $2,600,000. In accordance with SFAS No. 121, depreciation and amortization expense will be excluded from our consolidated statement of operations during the period these assets are held for sale, as these assets are now recorded at their estimated net realizable value. (5) In January 2001, we filed a registration statement under Form S-8 with the Securities and Exchange Commission registering 1,174,500 shares of our Common Stock. These shares were previously repurchased by the Company and held in treasury. Such shares are expected to be issued under the Beverly Enterprises, Inc. Stock Grant Plan (the "Stock Grant Plan"). Shares of Common Stock will be issued under the Stock Grant Plan to holders of restricted shares who, by virtue of the terms of their employment contracts, severance agreements or other similar arrangements, have a claim to the immediate vesting of their restricted stock. In conjunction with the reorganization in the first quarter of 2001 (as discussed in Note 7), 545,542 shares of Common Stock under the Stock Grant Plan were issued to various officers who made such claims, and the shares of restricted stock held by such officers were cancelled. During the first quarter of 2001, we incurred a pre-tax charge of approximately $3,700,000 related to the issuance of shares under the Stock Grant Plan, which was included in the workforce reductions and other reorganization costs (as discussed in Note 7). During April 2001, we completed the restructuring of our $375,000,000 credit facility, which was scheduled to mature on December 31, 2001. We entered into a new $150,000,000 revolving credit facility (the "Credit Facility") and issued $200,000,000 of 9 5/8% senior notes due 2009 (the "Senior Notes") through a private placement. The Senior Notes are unsecured obligations, guaranteed by substantially all of our present and future subsidiaries (the "Subsidiary Guarantors") and impose on us certain restrictive covenants. The net proceeds from issuance of the Senior Notes were used to repay borrowings under the $375,000,000 credit facility and for general corporate purposes. The Credit Facility provides for a Revolver/Letter of Credit Facility. Borrowings under the Credit Facility will bear interest according to a pricing schedule based on our financial leverage and will bear an initial interest rate of adjusted LIBOR plus 2.875%, the Base Rate, as defined, plus 1.875% or the adjusted CD rate, as defined, plus 3%, at our option. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. The Credit Facility is secured by mortgages on certain nursing facilities, is guaranteed by the Subsidiary Guarantors and imposes on us certain financial tests and restrictive covenants. (6) There are various 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. We do not believe that the ultimate resolution of such matters will have a material adverse effect on our consolidated financial position or results of operations. (See "Part II, Item 1. Legal Proceedings"). (7) 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. 8 10 BEVERLY ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 (UNAUDITED) In January 2001, we implemented a new three-year strategic plan aimed at accomplishing four fundamental strategies: - streamline our nursing home portfolio to strengthen our long-term financial position; - accelerate the growth of our service and knowledge business; - establish a leadership position in eldercare; and - reengineer our organization in order to focus our resources on profitable growth and new opportunities. In order to support the implementation of these strategies, in the first quarter of 2001, we reorganized our business into three primary operating segments: - nursing facilities, which provide long-term healthcare through the operation of nursing homes and assisted living centers; - innovation and services group, which include rehabilitation therapy, hospice, home care and a business strategy and development division; and - Matrix/Theraphysics, which operate outpatient therapy clinics and a managed care network. As a result of this reorganization, we recorded a pre-tax charge of approximately $18,300,000 during the first quarter of 2001. Approximately $17,400,000 related to severance and other employment agreements for 108 associates. Approximately $14,300,000 was paid during the first quarter of 2001, with the remainder expected to be paid throughout 2001. Included in the pre-tax charge were non-cash expenses of approximately $3,700,000 related to the issuance of shares under the Stock Grant Plan and $600,000 related to other long-term incentive agreements. During the fourth quarter of 2000, we incurred a pre-tax charge of approximately $3,500,000 primarily due to severance agreements associated with four executives who were notified prior to December 31, 2000 of the Company's intent to terminate their employment in conjunction with this reorganization. Substantially all of this amount was paid during the first quarter of 2001. 9 11 BEVERLY ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2001 (UNAUDITED) The following table summarizes certain information for each of our operating segments (in thousands):
INNOVATION NURSING AND SERVICES MATRIX/ FACILITIES GROUP THERAPHYSICS ALL OTHER (1) TOTALS ---------- ----- ------------ ------------- ------ Three months ended March 31, 2001 Revenues from external customers ...... $ 608,057 $ 27,141 $ 23,460 $ 810 $ 659,468 Intercompany revenues ................. -- 42,004 -- 2,829 44,833 Interest income ....................... 57 -- 32 298 387 Interest expense ...................... 6,341 30 12 12,727 19,110 Depreciation and amortization ......... 19,485 1,071 2,444 1,464 24,464 Pre-tax income (loss) ................. 20,579 10,060 (3,248) (122,436) (95,045) Total assets .......................... 1,420,591 109,285 163,659 150,064 1,843,599 Capital expenditures .................. 12,102 990 554 295 13,941 Three months ended March 31, 2000 Revenues from external customers ...... $ 593,363 $ 27,475 $ 23,462 $ 1,802 $ 646,102 Intercompany revenues ................. -- 35,505 -- 2,880 38,385 Interest income ....................... 47 -- 30 748 825 Interest expense ...................... 6,883 53 32 12,650 19,618 Depreciation and amortization ......... 19,897 1,003 2,693 1,743 25,336 Pre-tax income (loss) ................. 22,404 6,271 (2,120) (16,457) 10,098 Total assets .......................... 1,524,956 107,937 217,047 142,855 1,992,795 Capital expenditures .................. 15,196 1,333 850 2,603 19,982
- ---------- (1) Consists of the operations of our corporate headquarters and related overhead, as well as certain non-operating revenues and expenses. Such amounts also include pre-tax charges related to asset impairments, workforce reductions and other unusual items totaling approximately $107,700,000 for 2001. 10 12 BEVERLY ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MARCH 31, 2001 (UNAUDITED) GENERAL FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q, and other information we provide 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 our expected future financial position, results of operations or cash flows, our continued performance improvements, our ability to service and refinance our debt obligations, our ability to finance growth opportunities, our ability to control our patient care liability costs, our ability to respond to changes in government regulations, our ability to execute our three-year strategic plan, our ability to execute a transaction with respect to our Florida nursing operations 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 our 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, utilities and materials; - the effect of government regulations and changes in regulations governing the healthcare industry, including our compliance with such regulations; - changes in Medicare and Medicaid payment levels and methodologies and the application of such methodologies by the government and its fiscal intermediaries; - 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 "Part II, Item 1. Legal Proceedings"); - our ability to attract and retain qualified personnel; - the availability and terms of capital to fund acquisitions and capital improvements; - the competitive environment in which we operate; - our ability to maintain and increase census levels; and - demographic changes. Investors should also refer to Item 1. Business in our 2000 Annual Report on Form 10-K for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the risks inherent in them. Given these risks and uncertainties, we can give no assurances that any forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. OPERATING RESULTS FIRST QUARTER 2001 COMPARED TO FIRST QUARTER 2000 RESULTS OF OPERATIONS We reported a net loss for the first quarter of 2001 of $52,274,000, compared to net income of $6,261,000 for the same period in 2000. Net loss for 2001 included pre-tax charges totaling approximately $107,700,000, including $68,900,000 for asset impairments, $18,300,000 for workforce reductions and other reorganization costs and $20,500,000 for Florida exit costs and other unusual items. 11 13 BEVERLY ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MARCH 31, 2001 (UNAUDITED) During the first quarter of 2001, a formal plan was initiated by management to pursue the sale of our nursing home operations in Florida. Such decision was made due to the excessive patient care liability costs that we have been incurring in recent periods in the state of Florida. Accordingly, the property and equipment, identifiable intangibles and operating supplies of our Florida nursing home operations at March 31, 2001 were considered assets to be disposed of, as that term is defined in 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"). Management estimated the fair value less selling costs of such assets based upon verbal and non-binding purchase prices from potential buyers and determined that an impairment write-down was necessary as of March 31, 2001. The pre-tax charge related to this write-down was approximately $68,900,000. In addition, we recorded a pre-tax charge of approximately $17,200,000 for certain costs to exit the Florida facilities (as defined below). These costs relate to severance agreements, termination payments on certain contracts and various other items. Such pre-tax charges have been included in the condensed consolidated statement of operations caption "Asset impairments, workforce reductions and other unusual items." At March 31, 2001, the assets held for sale totaled approximately $122,100,000 and are classified as current assets in the condensed consolidated balance sheet, as we expect to close a transaction on the Florida facilities in 2001. Our Florida nursing home operations include 49 nursing facilities (6,129 beds) and four assisted living centers (315 units) (the "Florida facilities") currently being marketed as a group, as well as one additional nursing facility (56 beds) and certain other assets which we plan to sell in separate transactions. All of these assets are included in the total assets of our nursing facilities segment. We are currently negotiating with a potential purchaser of all of the Florida facilities. Other potential purchasers have expressed an interest in purchasing all or portions of the Florida facilities. During the three months ended March 31, 2001, our Florida nursing home operations recorded a pre-tax loss of approximately $1,100,000. Included in this pre-tax loss was depreciation and amortization expense of approximately $2,600,000. In accordance with SFAS No. 121, depreciation and amortization expense will be excluded from our consolidated statement of operations during the period these assets are held for sale, as these assets are now recorded at their estimated net realizable value. In January 2001, we implemented a new three-year strategic plan aimed at accomplishing four fundamental strategies: - streamline our nursing home portfolio to strengthen our long-term financial position; - accelerate the growth of our service and knowledge business; - establish a leadership position in eldercare; and - reengineer our organization in order to focus our resources on profitable growth and new opportunities. In order to support the implementation of these strategies, in the first quarter of 2001, we reorganized our business into three primary operating segments: - nursing facilities, which provide long-term healthcare through the operation of nursing homes and assisted living centers; - service companies, which include rehabilitation therapy, hospice, home care and a research and development division; and - Matrix/Theraphysics, which operate outpatient therapy clinics and a managed care network. 12 14 BEVERLY ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MARCH 31, 2001 (UNAUDITED) As a result of this reorganization, we recorded a pre-tax charge of approximately $18,300,000 during the first quarter of 2001. Approximately $17,400,000 related to severance and other employment agreements for 108 associates. Approximately $14,300,000 was paid during the first quarter of 2001, with the remainder expected to be paid throughout 2001. Included in the pre-tax charge were non-cash expenses of approximately $3,700,000 related to the issuance of shares under the Stock Grant Plan and $600,000 related to other long-term incentive agreements. During the fourth quarter of 2000, we incurred a pre-tax charge of approximately $3,500,000 primarily due to severance agreements associated with four executives who were notified prior to December 31, 2000 of the Company's intent to terminate their employment in conjunction with this reorganization. Substantially all of this amount was paid during the first quarter of 2001. Also during the first quarter of 2001, we restructured the lease agreement related to 10 nursing facilities in the state of Indiana. In addition, we terminated the lease on one nursing facility (223 beds) leased from the same landlord. We recorded a pre-tax charge of approximately $3,300,000 related to the termination of this lease, including the write-off of the net book value of this property. INCOME TAXES We had estimated annual effective tax rates of 45% and 38% for the quarters ended March 31, 2001 and 2000, respectively. Our estimated annual effective tax rates for 2001 and 2000 were different than the federal statutory rate primarily due to the impact of state income taxes, amortization of nondeductible goodwill and the benefit of certain tax credits. Our estimated annual effective tax rate increased to 45% in 2001 primarily due to the pre-tax charge for asset impairments, workforce reductions and other unusual items of approximately $107,700,000, which reduced our pre-tax income to a level where the impact of permanent tax differences and state income taxes had a significant impact on the effective tax rate. Our net deferred tax assets at March 31, 2001 are expected to be realized through the reversal of temporary taxable differences, future taxable income and the implementation of tax planning strategies, as needed. Therefore, we do not believe that a deferred tax valuation allowance is necessary at March 31, 2001. NET OPERATING REVENUES We reported net operating revenues of $659,468,000 during the first quarter of 2001 compared to $646,102,000 for the same period in 2000. Approximately 92% of our total net operating revenues for the quarters ended March 31, 2001 and 2000 were derived from services provided by our nursing facilities segment. The increase in net operating revenues of approximately $13,400,000 for the first quarter of 2001, as compared to the same period in 2000, consists of the following: - an increase of $36,200,000 due to facilities which we operated during each of the quarters ended March 31, 2001 and 2000 ("same facility operations"); - an increase of $10,200,000 due to acquisitions and openings of newly-constructed facilities; and - a decrease of $33,000,000 due to dispositions. The increase in net operating revenues of $36,200,000 from same facility operations for the first quarter of 2001, as compared to the same period in 2000, was primarily due to an increase in Medicaid, Medicare and private rates totaling $44,900,000. Such increase was partially offset by decreases of: - $5,900,000 due to one less calendar day during the first quarter of 2001, as compared to the same period in 2000; - $5,400,000 due to a decline in same facility occupancy to 87.2% for the first quarter of 2001, as compared to 87.4% for the same period in 2000; and - $1,800,000 due to a shift in our patient mix. 13 15 BEVERLY ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MARCH 31, 2001 (UNAUDITED) Our Medicare, private and Medicaid census for same facility operations was 10%, 18% and 71%, respectively, for the first quarter of 2001, as compared to 10%, 19% and 70%, respectively, for the same period in 2000. Acquisitions and openings of newly-constructed facilities which occurred during the three months ended March 31, 2001 and the year ended December 31, 2000 caused our net operating revenues to increase $10,200,000 for the first quarter of 2001, as compared to the same period in 2000. During the three months ended March 31, 2001, we acquired a parcel of land and certain other assets. During 2000, we acquired seven nursing facilities (1,210 beds), one previously leased nursing facility (105 beds) and certain other assets. In addition, we opened four newly-constructed nursing facilities (418 beds) during 2000. The acquisitions of the facilities and other assets were accounted for as purchases. The operations of the acquired facilities and other assets, as well as the newly-constructed facilities, were immaterial to our consolidated financial position and results of operations. Dispositions that occurred during the three months ended March 31, 2001 and the year ended December 31, 2000 caused our net operating revenues to decrease $33,000,000 for the first quarter of 2001, as compared to the same period in 2000. During the three months ended March 31, 2001, we sold, closed or terminated the leases on 10 nursing facilities (1,038 beds) and one outpatient therapy clinic. We recognized net pre-tax gains, which were included in net operating revenues during the three months ended March 31, 2001, of approximately $1,100,000 as a result of these dispositions. During 2000, we sold, closed or terminated the leases on 39 nursing facilities (4,263 beds) and certain other assets. We recognized net pre-tax gains, which were included in net operating revenues during the year ended December 31, 2000, of approximately $2,000,000 as a result of these dispositions. The operations of the disposed facilities and other assets were immaterial to our consolidated financial position and results of operations. OPERATING AND ADMINISTRATIVE EXPENSES We reported operating and administrative expenses of $603,637,000 during the first quarter of 2001 compared to $591,875,000 for the same period in 2000. The increase of approximately $11,800,000 consists of the following: - an increase of $29,400,000 due to same facility operations; - an increase of $11,500,000 due to acquisitions and openings of newly-constructed facilities; and - a decrease of $29,100,000 due to dispositions. The increase in operating and administrative expenses of $29,400,000 from same facility operations for the first quarter of 2001, as compared to the same period in 2000, was due primarily to the following: - $20,400,000 of additional wages and related expenses primarily due to an increase in our weighted average wage rate; - $6,600,000 due to an increase in our provision for insurance and related items; and - $1,900,000 due to an increase in other contracted services. 14 16 BEVERLY ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MARCH 31, 2001 (UNAUDITED) INTEREST EXPENSE, NET Interest income decreased to $387,000 for the first quarter of 2001, as compared to $825,000 for the same period in 2000 primarily due to the payoff of various notes receivable. Interest expense decreased to $19,110,000 for the first quarter of 2001, as compared to $19,618,000 for the same period in 2000 primarily due to the paydown of the A.I. Credit Corp. note in January 2001, as well as various other debt paydowns. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense decreased to $24,464,000 for the first quarter of 2001, as compared to $25,336,000 for the same period in 2000, primarily due to dispositions of, or lease terminations on, certain facilities. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, we had approximately $25,900,000 in cash and cash equivalents, approximately $254,500,000 of net working capital and approximately $160,200,000 of unused commitments under our $375,000,000 credit facility. Net cash provided by operating activities for the first quarter of 2001 was approximately $29,600,000. This amount was up approximately $65,800,000 from the first quarter of 2000 primarily due to the following: - the $25,000,000 civil and $5,000,000 criminal settlement payments made during the first quarter of 2000, which negatively impacted the first quarter of 2000 operating cash flows; - proceeds received during the first quarter of 2001 of $28,900,000 related to a refund of certain workers compensation premiums and a settlement on certain insurance policies; and - a reduction in patient accounts receivable during the first quarter of 2001 compared to the first quarter of 2000. Net cash used for investing and financing activities were approximately $9,200,000 and $20,400,000, respectively, for the first quarter of 2001. We received net cash proceeds of approximately $4,400,000 from the dispositions of facilities and other assets. Such net cash proceeds, along with net borrowings under our $375,000,000 credit facility of approximately $18,000,000, cash generated from operations and cash on hand, were used to repay approximately $39,200,000 of long-term debt and to fund capital expenditures totaling approximately $13,900,000. In January 2001, we filed a registration statement under Form S-8 with the Securities and Exchange Commission registering 1,174,500 shares of our Common Stock. These shares were previously repurchased by the Company and held in treasury. Such shares are expected to be issued under the Beverly Enterprises, Inc. Stock Grant Plan (the "Stock Grant Plan"). Shares of Common Stock will be issued under the Stock Grant Plan to holders of restricted shares who, by virtue of the terms of their employment contracts, severance agreements or other similar arrangements, have a claim to the immediate vesting of their restricted stock. In conjunction with the reorganization in the first quarter of 2001 (as discussed above), 545,542 shares of Common Stock under the Stock Grant Plan were issued to various officers who made such claims, and the shares of restricted stock held by such officers were cancelled. We incurred a pre-tax charge of approximately $3,700,000 related to the issuance of shares under the Stock Grant Plan, which was included in the workforce reductions and other reorganization costs (as discussed above). 15 17 BEVERLY ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) MARCH 31, 2001 (UNAUDITED) At March 31, 2001, we leased 11 nursing facilities (6 of which are in Florida), one assisted living center and our corporate headquarters under an off-balance sheet financing arrangement subject to operating leases with the creditor. We have the option to purchase the facilities at the end of the initial lease terms at fair market value. Such financing arrangement was entered into for the construction of these facilities and had an original commitment of $125,000,000. In April 2000, the agreement covering this financing arrangement was amended whereby availability under the original commitment was reduced to $113,500,000, which equaled the total construction advances made as of the date of the amended agreement. During April 2001, we completed the restructuring of our $375,000,000 credit facility, which was scheduled to mature on December 31, 2001. We entered into a new $150,000,000 revolving credit facility (the "Credit Facility") and issued $200,000,000 of 9 5/8% senior notes due 2009 (the "Senior Notes") through a private placement. The Senior Notes are unsecured obligations, guaranteed by substantially all of our present and future subsidiaries (the "Subsidiary Guarantors") and impose on us certain restrictive covenants. The net proceeds from issuance of the Senior Notes were used to repay borrowings under the $375,000,000 credit facility and for general corporate purposes. The Credit Facility provides for a Revolver/Letter of Credit Facility. Borrowings under the Credit Facility will bear interest according to a pricing schedule based on our financial leverage and will bear an initial interest rate of adjusted LIBOR plus 2.875%, the Base Rate, as defined, plus 1.875% or the adjusted CD rate, as defined, plus 3%, at our option. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. The Credit Facility is secured by mortgages on certain nursing facilities, is guaranteed by the Subsidiary Guarantors and imposes on us certain financial tests and restrictive covenants. We currently anticipate that cash flows from operations and borrowings under our banking arrangements will be adequate to repay our debts due within one year of approximately $62,600,000, to make normal recurring capital additions and improvements of approximately $77,000,000, to make selective acquisitions, including the purchase of previously leased facilities, to construct new facilities, and to meet working capital requirements for the twelve months ending March 31, 2002. If cash flows from operations or availability under our existing banking arrangements fall below expectations, we may be required to delay capital expenditures, dispose of certain assets, issue additional debt securities, or consider other alternatives to improve liquidity. 16 18 PART II BEVERLY ENTERPRISES, INC. OTHER INFORMATION MARCH 31, 2001 (UNAUDITED) ITEM 1. LEGAL PROCEEDINGS On February 3, 2000, we 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. These agreements settled the federal government's investigations of the Company relating to our allocation to the Medicare program of certain nursing labor costs in our skilled nursing facilities from 1990 to 1998 (the "Allocation Investigations"). The agreements consist of: - a Plea Agreement; - a Civil Settlement Agreement; - a Corporate Integrity Agreement; and - an agreement concerning the disposition of 10 nursing facilities. Under the Plea Agreement, one of our subsidiaries pled guilty to one count of mail fraud and 10 counts of making false statements to Medicare and paid a criminal fine of $5,000,000 during the first quarter of 2000. Under the Civil Settlement Agreement, we paid the federal government $25,000,000 during the first quarter of 2000 and are reimbursing the federal government an additional $145,000,000 through withholdings from our biweekly Medicare periodic interim payments in equal installments through the first quarter of 2008. In addition, we agreed to resubmit certain Medicare filings to reflect reduced labor costs allocated to the Medicare program. Under the Corporate Integrity Agreement, we are required to monitor, on an ongoing basis, our compliance with the requirements of the federal healthcare programs. This agreement addresses our obligations to ensure that we comply with the requirements for participation in the federal healthcare programs. It also includes our functional and training obligations, audit and review requirements, recordkeeping and reporting requirements, as well as penalties for breach/noncompliance of the agreement. We believe that we are in substantial compliance with the requirements of the Corporate Integrity Agreement. In accordance with our agreement to dispose of 10 nursing facilities, we disposed of seven of the facilities during 2000 and two of the facilities during the first quarter of 2001. We expect to dispose of the remaining facility during 2001. The carrying value of this facility has been adjusted to our best estimate of its net realizable value. 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 our 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. Oral agreement on this motion was held on April 6, 2000. Due to the preliminary state of the Class Action and the fact the second amended complaint does not allege damages with any specificity, we are unable at this time to assess the probable outcome of the Class Action or the materiality of the risk of loss. We believe that we acted lawfully with respect to plaintiff investors and will vigorously defend the Class Action. However, we can give no assurances of the ultimate impact on our consolidated financial position, results of operations or cash flows as a result of these proceedings. 17 19 BEVERLY ENTERPRISES, INC. OTHER INFORMATION (CONTINUED) MARCH 31, 2001 (UNAUDITED) In addition, since July 29, 1999, eight derivative lawsuits have been filed in the federal and state courts of Arkansas, California and Delaware, as well as the federal district court in Arkansas, (collectively, the "Derivative Actions"), including: - 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; - 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; - Elles Trading Company v. David R. Banks, et al., was filed in the Superior Court for San Francisco County, California on or about August 4, 1999 and removed to federal district court; - 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; and - 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 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. The parties have agreed to stay the consolidated action pending the outcome of the motion to dismiss in the Class Action. The plaintiffs in the Elles Trading Company action filed a notice of voluntary dismissal on February 3, 2000. The Kushner and Richardson actions were ordered to be consolidated as In Re Beverly Enterprises, Inc. Derivative Litigation and by agreed motion, Plaintiffs filed an amended, consolidated complaint on April 21, 2000. Defendants filed a motion to dismiss the consolidated derivative complaint and a motion to strike portions thereof on July 21, 2000. The parties have agreed to stay the consolidated action pending the outcome of the motion to dismiss in the Class Action, but the stipulation has not been entered by the Court. 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. 18 20 BEVERLY ENTERPRISES, INC. OTHER INFORMATION (CONTINUED) MARCH 31, 2001 (UNAUDITED) Due to the preliminary state of the Derivative Actions and the fact the complaints do not allege damages with any specificity, we are unable at this time to assess the probable outcome of the Derivative Actions or the materiality of the risk of loss. We believe that we acted lawfully with respect to the allegations of the Derivative Actions and will vigorously defend the Derivative Actions. However, we can give no assurances of the ultimate impact on our 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. We do not believe that the ultimate resolution of such other matters will have a material adverse effect on our consolidated financial position or results of operations. ITEM 6(a). EXHIBITS
EXHIBIT NUMBER DESCRIPTION 10.1 Form of Employment and Severance Agreement, made as of March 31, 2001, between the Company and Scott M. Tabakin
ITEM 6(b). REPORTS ON FORM 8-K We filed a Current Report on Form 8-K, dated March 30, 2001, which reported under Item 5 that our preliminary operating results for the first quarter of 2001 should equal or slightly exceed the six cents per share earned during the first quarter of 2000. 19 21 SIGNATURES Pursuant to the requirements 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: May 15, 2001 By: /s/ PAMELA H. DANIELS ------------------------------ Pamela H. Daniels Senior Vice President, Controller and Chief Accounting Officer 20 22 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 10.1 Form of Employment and Severance Agreement, made as of March 31, 2001, between the Company and Scott M. Tabakin
EX-10.1 2 d87223ex10-1.txt EMPLOYMENT AND SEVERANCE AGREEMENT-SCOTT TABAKIN 1 EXHIBIT 10.1 EMPLOYMENT AND SEVERANCE AGREEMENT AGREEMENT made as of March 31, 2001 between BEVERLY ENTERPRISES, INC., a Delaware corporation (the "Company"), and SCOTT M. TABAKIN (the "Executive"). WHEREAS, Executive is currently employed by the Company; and WHEREAS, in connection with this Agreement and in exchange for the consideration described herein (the receipt and sufficiency of which is hereby acknowledged), the Executive has agreed to waive any rights he may currently have under the Employment Contract dated August 22, 1997 and any change in control, severance, or employment agreement or other compensation or employee benefit plan with or previously assumed by the Company and has agreed to waive any claim that any previous sale, transfer of assets, acquisition, spin-off, merger, restructuring, reorganization, or any other corporate transaction constitutes a "Change in Control" or "Termination of Employment for Good Reason" under any such agreements or other employee benefit or compensation plans with the Company or its predecessors except as set forth herein; and WHEREAS, it is the intent of the parties that all the terms of the Employment Contract dated August 22, 1997 shall be superceded by this Agreement and the rights and obligations of the parties shall be governed by this Agreement as of its Effective Date; and WHEREAS, the Company desires to assure itself of the management services of the Executive by directly engaging the Executive as the Executive Vice President and Chief Financial Officer of the Company; and WHEREAS, the Company recognizes that the Executive's contribution to the Company's growth and success will be substantial; and WHEREAS, the Company wishes to encourage the Executive to remain with and devote full time and attention to the business affairs of the Company and wishes to provide income protection to the Executive for a period of time in the event of an involuntary Termination of Employment without Cause or a voluntary Termination of Employment for Specific Reason, whether or not in connection with a Change in Control; NOW, THEREFORE, in consideration of the mutual agreements and understandings set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Company and the Executive hereby agrees as follows: 1. Definitions. (a) "Base Salary" shall mean the Executive's regular annual rate of base pay, as set forth in Paragraph 4(a), as of the date in question. 2 (b) The "Benefit Multiplier" shall be equal to 2.0, except that if Executive's Termination of Employment is pursuant to Paragraph 7(b), it shall be equal to 3.0. (c) The "Benefit Period" shall be the period of years equal to the Benefit Multiplier which follows the Executive's Termination of Employment. (d) "Cause" shall mean the Executive's (i) conviction of a crime involving moral turpitude or theft or embezzlement of property from the Company or (ii) willful misconduct or willful failure substantially to perform the duties of his position, but only if such has continued after receipt of notice from the Company's Board of Directors and such reasonable cure period as is set forth in such notice. (e) A "Change in Control" shall be deemed to have taken place if: (i) any person, corporation, or other entity or group, including any "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, other than any employee benefit plan then maintained by the Company, becomes the beneficial owner of shares of the Company having 30 percent or more of the total number of votes that may be cast for the election of Directors of the Company; (ii) as the result of, or in connection with, any contested election for the Board of Directors of the of the Company, or any tender or exchange offer, merger or other business combination or sale of assets, or any combination of the foregoing (a "Transaction"), the persons who were Directors of the Company before the Transaction shall cease to constitute a majority of the Board of Directors of the Company or any successor to the Company or its assets or (iii) at any time (a) the Company shall consolidate with, or merge with, any other Person and the Company shall not be continuing or surviving corporation, (b) any Person shall consolidate with, or merge with the Company, and the Company shall be the continuing or surviving corporation and in connection therewith, all or part of the outstanding Company stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, (c) the Company shall be a party to a statutory share exchange with any other Person after which the Company is a subsidiary of any other Person, or (d) the Company shall sell or otherwise transfer 50% or more of the assets of earning power of the Company and its subsidiaries (taken as a whole) to any Person or Person; provided, however, that notwithstanding anything to the contrary herein, a Change in Control shall not include any transfer to a consolidated subsidiary, reorganization, spin-off, split-up, distribution, or other similar or related transaction(s) or any combination of the foregoing in which the core business and assets of the Company and its subsidiaries (taken as a whole) are transferred to another entity ("Controlled") with respect to which (1) the majority of the Board of Directors of the Company (as constituted) immediately prior to such transaction(s)) also serve as directors of Controlled and immediately after such transaction(s) constitute a majority of Controlled's board of directors, and (2) more than 70% of the shareholders of the Company (immediately prior to such transaction(s)) become shareholders of other owners of Controlled and immediately after the transaction(s) control more than 70% of the ownership and voting rights of Controlled. 2 3 (f) The "Change in Control Date" shall mean the date immediately prior to the effectiveness of the Change in Control. (g) The "Committee" shall mean the Compensation Committee of the Company's Board of Directors. (h) The "Competitive Businesses" shall mean any of the health care businesses in which the Company is engaged on the effective date of the Distribution. (i) "Effective Date" shall mean the date first written above. (j) "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Securities Exchange Act of 1934 and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d). (k) "Target Bonus" shall mean the target bonus (100% level) established for the Executive for the year in question under the Company's Long Term Incentive Plan." (l) "Termination of Employment" shall mean the termination of the Executive's employment by the Company or by the Executive with Specific Reason other than such a termination by the Company in connection with an offer of immediate reemployment by a successor or assign of the Company or purchaser of the Company or its assets under terms and conditions which would not permit the Executive to terminate his employment for Specific Reason. (m) "Specific Reason" shall mean Termination of Employment triggered by Executive at any time by giving written notice of intent to terminate employment to Company's Executive Vice President, Law and Government Relations, and Secretary. Company and Executive recognize and agree that the Company's reorganization in January, 2001 created a right for Executive to terminate his employment for "Good Reason" under his Employment Contract dated August 22, 1997 which entitled Executive to receive severance benefits. Because Executive has elected to continue his employment with the Company notwithstanding his entitlement to severance benefits under his August 22, 1997 Employment Contract, Company agrees that Executive will receive the severance and other benefits described in this Agreement at such time as he triggers Termination of Employment for "Specific Reason". 2. Term. The initial term of this Agreement shall be for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date. The renewal Term shall be automatically extended by one additional day for each day beyond the Effective Date of this Agreement that the Executive remains employed by the Company until such time as the Company elects to cease such extension by giving ninety (90) days written notice to the Executive. In such event, the Agreement shall thus terminate at the end of such notice period. 3. Position and Duties. During the Term, the Executive shall serve, as an employee, as the Executive Vice President and Chief Financial Officer of the Company and shall 3 4 have such duties, functions, responsibilities and authority as are consistent with the Executive's position as the senior executive officer in charge of financial affairs for the Company. 4. Compensation and Related Matters. (a) Annual Base Salary. The Executive shall receive a Base Salary at a rate of $371,000 per annum through December 31, 2001 and thereafter at any such greater rate as is determined by the Committee. (b) Benefits. During the Term, the Executive shall be entitled to all of the following and any other benefits and prerequisites offered by the Company to executives generally: (i) Participate in the Company's present and future Long-Term Incentive Stock Plan and any other stock option, restricted stock, phantom stock and other similar equity-based incentive plans, pursuant to their terms. (ii) Participate in the Company's Employee Stock Purchase Plan, pursuant to its terms; (iii) Participate in the Company's Executive Deferred Compensation Plan, pursuant to its terms; (iv) Participate in the Company's Executive SavingsPlus Plan, pursuant to its terms; (v) $300,000 of individual life insurance coverage under the Company's Executive Split Dollar Life Insurance Plan; (vi) $362,000 (or such greater amount as the Company may make available to its senior executives generally) of group term life insurance coverage; (vii) $100,000 (or such greater amount as the Company may make available to its senior executives generally) of business travel accident insurance coverage when traveling on Company business; (viii) Participate in the Company's Medical Plan, and Dental Plan, pursuant to their terms, except that the premium cost for such shall be treated as a benefit under the Company's Executive Medical Reimbursement Plan; (ix) Participate in the Company's Executive Medical Reimbursement Plan (with a maximum benefit of $5,000 (or such greater or lesser amount as the Company may make available to its senior executives generally), a portion of which shall be deemed applied to the payment of premiums under the Company's Medical Plan and Dental Plan as described above), pursuant to its terms; 4 5 (x) Participate in the Company's group Long-Term Disability Plan, at the maximum benefit level, pursuant to its terms, and participate in the Company's Supplemental Long-Term Disability Plan, according to its terms; (xi) 4 weeks of paid vacation; (xii) Participate in or receive benefits under any other employee benefit plan or other arrangement made available by the Company to any of its employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plan or arrangement. (c) Annual Bonus. As additional compensation for services rendered, the Executive shall be eligible to receive an annual bonus in cash pursuant to the Company's Long Term Incentive Plan. (d) Expenses. The Company shall promptly reimburse the Executive for all reasonable travel and other business expenses incurred by the Executive in the performance of his duties to the Company hereunder. (e) Reporting. The Executive shall report directly to the President and Chief Executive Officer of the Company. 5. Non-Solicitation. (a) Executive shall not at any time during the period of his employment with the Company, or during the two (2) year period immediately following his Termination of Employment with the Company ("Non-Solicitation Period"), without the prior written consent of the Company, on behalf of himself or any other person, solicit for employment or employ any of the current officers or employees of the Company; provided, however, that nothing contained herein shall prohibit Executive from hiring employees of the Company when such employment results from general solicitations for employment. (b) Executive shall not at any time during the period of his employment with the Company, or during the Non-Solicitation Period, without the prior written consent of the Company, solicit for his own use, or for the use of any company or person by whom he is employed, or for whom he may be acting, any of the current customers of the Company, nor shall he divulge to any other person any information or fact relating to the management, business (including prospective business), finances, its customers or the terms of any of the contracts of the Company which has heretofore or which may hereafter come to the knowledge of Executive which is not freely available to the public. (c) Executive shall not, during the Non-Solicitation Period, in any way defame the Company or disparage its business capabilities, products, plans or management to any customer, potential customer, vendor, supplier, contractor, subcontractor of the Company so as to affect adversely the goodwill or business of the Company. 5 6 (d) Executive covenants and agrees that a breach of these subparagraphs (a), (b) or (c) would immediately and irreparably harm the Company and that a remedy at law would be inadequate to compensate the Company for its losses by reason of such breach and therefore that the Company shall, in addition to any rights and remedies available under this Agreement, at law or otherwise, be entitled to any injunction to be issued by any court of competent jurisdiction enjoining and restraining Executive from committing any violation of these subparagraphs (a), (b) or (c), and Executive hereby consent to the issuance of such injunction. (e) For purposes of this Paragraph 5 and in consideration of this Agreement, this non-solicitation agreement has been separately negotiated and bargained for, and constitutes a substantial portion of the consideration for this Agreement. 6. Non-disclosure of Proprietary Information, Surrender of Records; Inventions and Patents. (a) Proprietary Information. Executive shall not during the term of employment or at any time thereafter (irrespective of the circumstances under which Executive's employment terminates), directly or indirectly use for his own purpose or for the benefit of any person or entity other than Company, nor otherwise disclose, any proprietary information, as defined below, to any individual or entity, unless such disclosure has been authorized in writing by the Company or is otherwise required by law. For purposes of this Agreement, the term "proprietary information" shall include, but is not limited to: (a) the name or address of any client or affiliate of Company or any information concerning the transactions or relations of any client or affiliate of Company with Company or any of its shareholders; (b) any information concerning any product, service, methodology, analysis, presentation, technology or procedure employed by Company but not generally known to its clients or competitors, or under development by or being tested by Company but not at the time offered generally to clients; (c) any information relating to Company's computer software, computer systems, pricing or marketing methods, capital structure, operating results, borrowing arrangements or business plans; (d) any information which is generally regarded as confidential or proprietary in any line of business engaged in by Company; (e) any information contained in any of Company's written or oral policies and procedures or employee manuals; (f) any information belonging to clients or affiliates of Company which Company has agreed to hold in confidence; (g) any inventions, innovations or improvements covered by subparagraph 6(c) below; (h) any other information which Company has reasonably determined to be confidential or proprietary; and (i) all written, graphic, electronic and other material relating to any of the foregoing. Information that is not novel or copyrighted or patented may nonetheless be proprietary information. Proprietary information, however, shall not include any information that is or becomes generally known to the industries in which Company competes through sources independent of Company or Executive or through authorized publication by Company to persons other than Company's employees. (b) Confidentiality and Surrender of Records. Executive shall not during the term of employment or at any time thereafter (irrespective of the 6 7 circumstances under which Executive's employment terminates), except as required by law, directly or indirectly give or disclose any "confidential records" (as hereinafter defined) to, or permit any inspection of copying of confidential records by, any individual or entity other than in the ordinary course and scope of such individual's or entity's employment or retention by Company, nor shall he use or retain any of the same following termination of his employment. Executive shall promptly return to Company all "confidential records" upon the termination of Executive's employment with Company. For purposes hereof, "confidential records" means all correspondence, memoranda, files, analyses, studies, reports, notes, documents, manuals, books, lists, financial, operating or marketing records, computer software, magnetic tape, or electronic or other media or equipment of any kind which may be in Executive's possession or under his control or accessible to him which contain any proprietary information as defined in subparagraph 6(a) above. All confidential records shall be and remain the sole property of Company during the term of employment and thereafter. (c) Inventions, Patents, and Copyrights. All inventions, innovations or improvements in Company's method of conducting its business (including policies, procedures, products, improvements, software, ideas and discoveries, whether or not patentable or copyrightable) conceived or made by Executive, either alone or jointly with others, during the term of employment belong to Company. Executive will promptly disclose in writing such inventions, innovations or improvements to Company and perform all actions reasonably requested by Company to establish and confirm such ownership by Company, including, but not limited to, cooperating with and assisting Company in obtaining patents and copyrights for Company in the United States and in foreign countries. Any patent or copyright application filed by Executive within a year after termination of his employment hereunder shall be presumed to relate to an invention or work of authorship which was made during the term of employment unless Executive can provide conclusive evidence to the contrary. 7. Eligibility for Severance Benefits. The Executive shall be eligible for the benefits described in Paragraph 8 (the "Severance Benefits") if: (a) during the Term, the Executive has a Termination of Employment triggered (i) by the Company without Cause (this shall include a unilateral determination by William R. Floyd, President and Chief Executive Officer, that he wishes to terminate Executive without Cause, which shall be given to Executive in writing) or (ii) by the Executive for Specific Reason, and subparagraph (b) does not apply, (b) during the Term either (i) there has been a Change in Control and during the two year period commencing on the Change in Control Date the Executive has a Termination of Employment which is initiated by the Company without Cause or by the Executive for Specific Reason, or (ii) the Executive has a Termination of Employment initiated by the Company without Cause or by the Executive for Specific Reason following the commencement of any discussion with a third person that ultimately results in a Change in Control with such third person within 12 months of the commencement of such discussions (in which case, the date of such discussion shall be substituted for the 7 8 Change in Control Date wherever appropriate, including in the definition of "Specific Reason" and in Paragraph 8 hereof). 8. Severance Benefit. Upon satisfaction of the requirements set forth in Paragraph 7, and subject to Paragraphs 9 and 12, the Executive shall be entitled to the following Severance Benefits: (a) Cash Payment. In the event of a Termination of Employment under Paragraph 7 (a), the Executive shall be entitled to receive an amount of cash equal to the Benefit Multiplier times: (i) the sum of the Executive's Base Salary as in effect upon the Termination of Employment, and the greater of (A) the Executive's Target Bonus as in effect upon the Termination of Employment or, (B) the Executive's actual bonus under the Company's "Annual Incentive Plan" for the year prior to the year of the Executive's Termination of Employment; or (b) Cash Payment. In the event of a Termination of Employment under Paragraph 7 (b), the Executive shall be entitled to receive an amount of cash equal to the Benefit Multiplier times: (i) the sum of the Executive's Base Salary as in effect on the Change in Control Date, and the greater of (A) the Executive's Target Bonus as in effect upon the Change in Control Date or, (B) the Executive's actual bonus under the Company's "Annual Incentive Plan" for the year prior to the Change in Control Date. The payment shall be made in a single lump sum within ten days following the Executive's Termination of Employment. (c) Long-Term Incentive Award; Equity-Based Compensation. (i) In the event the Executive's Termination of Employment arises under Paragraph 7(a), the Executive's interest in any outstanding and unvested shares of Restricted Stock awarded under any of the Company's Long-Term Incentive Plan(s) shall vest in equal one-third (1/3) amounts beginning on the date of Termination of Employment and continuing on each of the next two (2) annual anniversary dates from the date of Termination of Employment and any unvested stock options shall be fully vested on the date of Termination of Employment, notwithstanding any restricted stock or stock option agreement to the contrary; or 8 9 (ii) In the event the Executive's Termination of Employment arises under Paragraph 7(b), the Executive's interest under all of the Company's long-term incentive plans shall be fully vested. Any and all (i) options to purchase Company stock and (ii) restricted stock of the Company, owned by the Executive shall be fully vested. (d) Continuation of Benefits. (i) For the Benefit Period, the Executive shall be treated as if he had continued to be an executive employee for all purposes under the Company's Medical Plan, Executive Medical Reimbursement Plan and Dental Plan, as described in Paragraph 4(b). Following this period, the Executive shall be entitled to receive continuation coverage under Part Six of Title I of ERISA ("COBRA Benefits") treating the end of this period as a termination of the Executive's employment (other than for gross misconduct). (ii) The Company shall fully vest and maintain in force, at its own expense, for the remainder of the Executive's life, the life insurance in effect under the Company's Executive Split Dollar Life Insurance Plan (as described in Paragraph 4(b)) as of the Change in Control Date or as of the date of Termination of Employment, whichever is greater. (e) Relocation Benefit. If, within two (2) years after the Executive's Termination of Employment with the Company, the Executive gives the Company written notice that he desires to relocate within the continental United States, the Company will reimburse the Executive for any reasonable relocation expenses (in accordance with the Company's general relocation policy for executives as then in effect, or, at the Executive's election, as in effect on the Change in Control Date) in connection with such relocation. (f) Executive SavingsPlus Plan. For the year of the Executive's Termination of Employment, the Company will make the contribution to the Executive SavingsPlus Plan on behalf of the Executive that it would have made if the Executive had not had a Termination of Employment, but in no event less than the percentage contribution it made for the Executive in the immediately preceding year (and increased to take account of the additional year of Service), in each case taking account of the Executive's annualized rate of "Compensation" (as defined in the Executive SavingsPlus Plan) and the percentage of such Compensation that the Executive is contributing to the Executive SavingsPlus Plan) and the percentage of such Compensation that the Executive is contributing to the Executive SavingsPlus Plan, as of the date of Termination of Employment, and the Company's matching contribution rate for such year (or, if greater, the preceding year). The portion of the Company's matching contribution which is based on the preceding year's contribution percentage shall be contributed to the Executive SavingsPlus Plan on behalf of the Executive immediately upon the Executive's Termination of Employment and any additional contribution required shall be paid as soon as the amount is determined. 9 10 (g) Executive Deferred Compensation Plan. For the year of the Executive's Termination of Employment, the Company will make the contribution to its Executive Deferred Compensation Plan (the "EDC Plan") that it would have made if the Executive had not had a Termination of Employment determined based on the Executive's deferral for such year. At Executive's election, the Company contribution shall be paid to the Executive immediately upon his Termination of Employment. (h) Disability. For the Benefit Period, the Company shall provide long-term disability insurance benefits coverage to Executive equivalent to the coverage that the Executive would have had had he remained employed under the Company's Long-Term Disability Plan and Supplemental Long-Term Disability Plan as described in Paragraph 4(b) applicable to Executive on the date of Termination of Employment, or, at the Executive's election, the plan or plans applicable to Executive as of the Change in Control Date. Should Executive become disabled during such period, Executive shall be entitled to receive such benefits, and for such duration, as the applicable plan(s) provide. (i) Plan Amendments. The Company shall adopt such amendments to its employee benefit plans and insurance policies as are necessary to effectuate the provisions of this Agreement. If and to the extent any benefits under this Paragraph 7 are not paid or payable or otherwise provided to the Executive or his dependents or beneficiaries under any such plan or policy (whether due to the terms of the plan or policy, the termination thereof, applicable law, or otherwise), then the Company itself shall pay or provide for such benefits. 9. Golden Parachute Gross-Up. If, in the written opinion of a Big 6 accounting firm engaged by either the Company or the Executive for this purpose (at the Company's expense), or if so alleged by the Internal Revenue Service, the aggregate of the benefit payments under Paragraph 8 would cause the payment of one or more of such benefits to constitute an "excess paragraph payment" as defined in Section 280G(b) of the Internal Revenue Code ("Code"), then the Company will pay to the Executive an additional amount in cash (the "Gross-Up Payment") equal to the amount necessary to cause the net amount retained by the Executive, after deduction of any (i) excise tax on payments under Paragraph 8, (ii) federal, state or local income tax on the Gross-Up Payment, and (iii) excise tax on the Gross-Up Payment, to be equal to the aggregate remuneration the Executive would have received under Paragraph 8, excluding such Gross-Up Payment (net of all federal, state and local excise and income taxes), as if Sections 280G and 4999 of the Code (and any successor provisions thereto) had not been enacted into law. The Gross-Up Payment provided for in this Paragraph shall be made within ten (10) days after the termination of Executive's employment, provided however, that if the amount of the payment cannot be finally determined at the time, the Company shall pay to Executive an estimate as determined in good faith by the Company of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the date of termination. Any dispute concerning the application of this Paragraph shall be resolved pursuant to Paragraph 11, and if Paragraph 12 applies, any reference in this Paragraph to Paragraph 8 shall also be deemed to include a reference to Paragraph 12 as well. 10 11 10. Waiver and Release of Other Severance Benefits. The benefits payable pursuant to this Agreement are in lieu of any other severance benefits which may otherwise be payable to the Executive upon termination of employment with the Company, whether or not in connection with a Change in Control (including, without limitation, any benefits to which Executive might otherwise have been entitled under any employment, change in control, or severance agreement or other compensation or employee benefit plan to which the Company was a party or which was assumed by the Company), except those benefits which are to be made available to the Executive as required by applicable law. Specifically, Executive waives and releases any claims Executive may have under the Employment Contract dated August 22, 1997 for any severance benefits including but not limited to the immediate vesting of any shares of Restricted Stock held by Executive. 11. Disputes. Any dispute or controversy arising under, out of, in connection with or in relation to this Agreement shall, at the election and upon written demand of either party, be finally determined and settled by binding arbitration in the city of Fort Smith, Arkansas, using a single arbitrator, in accordance with the Labor Arbitration rules and procedures of the American Arbitration Association, and judgment upon the award may be entered in any court having jurisdiction thereof. The arbitrator shall have the power to order specific performance, mandamus, or other appropriate legal or equitable relief to enforce the provisions of this Agreement. The Company shall pay all costs of the arbitration and all reasonable attorney's and accountant's fees of the Executive in connection therewith. 12. Additional Payments Due to Dispute. Notwithstanding anything to the contrary herein, and without limiting the Executive's rights at law or in equity, if the Company fails or refuses to timely pay to the Executive the benefits due under Paragraphs 8 and/or 9 hereof, then the benefits under Paragraph 8(a) shall be increased and the benefits under Paragraphs 8(c), 8(d), and 8(g) shall each be continued by one additional day for each day of any such failure or refusal of the Company to pay. In addition, any Gross-Up Payment due under Paragraph 9 shall be increased to take in to account any increased benefits under this Paragraph. 13. No Set-Off. There shall be no right of set-off or counterclaim in respect of any claim, debt, or obligation against any payment to or benefit for the Executive provided for in this Agreement. 14. No Mitigation Obligation. The parties hereto expressly agree that the payment of the benefits by the Company to the Executive in accordance with the terms of this Agreement will be liquidated damages, and that the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise. 15. Successors: Binding Agreement. (a) This Agreement shall not be terminated by the voluntary or involuntary dissolution of the Company or by any merger or consolidation where the Company is not the surviving corporation, or upon any transfer of all or substantially all 11 12 of the Company's assets, or any other Change in Control. The Company shall require any purchaser, assign, surviving corporation or successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement shall be binding upon and insure to the benefit of the Company and any purchaser, assign, surviving corporation or successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by purchase, merger, consolidation, reorganization, transfer of all of substantially all of the business or assets of the Company, or otherwise (and such purchaser, assign, surviving corporation or successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but this Agreement shall not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and/or legatees. (c) This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in this Paragraph 15. Without limiting the generality of the foregoing, the Executive's right to receive payments hereunder shall not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, or otherwise subject to anticipation, alienation, sale encumbrance, charge, hypothecation, or set-off in respect of any claims, debt, or obligation, or to execution, attachment, levy or similar process, or assignment by operation of law, other than by a transfer by his will or by the laws of descent and distribution. Any attempt, voluntary or involuntarily, to effect any action prohibited by this Paragraph shall be null, void, and of no effect. 16. Notices. Any notice, request, claim, demand, document and other communication hereunder to any party shall be effective upon receipt (or refusal of receipt) and shall be writing and delivered personally or sent by telex, telecopy, or certified or registered mail, postage prepaid, or other similar means of communication, as follows: (a) If to the Company, addressed to its principal executive offices to the attention of its Secretary; (b) If to the Executive, to him at the address set forth below under the Executive's signature, or at any such other address as either party shall have specified by notice in writing to the other. 17. Amendments: Waivers. This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by the Executive and by a duly authorized representative of the Board of Directors except as set forth in Paragraph 2. By an 12 13 instrument in writing similarly executed, either party may waive compliance by the other party with any provision of this Agreement that such other party was or is obligated to comply with or perform; provided, however, that such waiver shall not operate as a waiver of, or estoppel with respect to, any other or subsequent failure. No failure to exercise and no delay in exercising any right, remedy, or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, or power provided herein or by law or in equity. 18. Entire Agreement. This Agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 19. Severability; Enforcement. If any provision of this Agreement, or the application thereof to any person, place, or circumstance shall be held by a court of competent jurisdiction to be invalid, unenforceable or void, the remainder of this Agreement and such provisions as applied to other persons, places and circumstances shall remain in full force and effect. 20. Indemnification. Executive has entered into an Indemnification Agreement dated October 1, 1992 which shall govern the rights and obligations of the parties with respect to indemnification. 21. Governing Law. This Agreement shall be interpreted, administered and enforced in accordance with the law of the State of Arkansas, except (i) to the extent pre-empted by Federal law and (ii) Paragraph 20 which shall be interpreted, administered and enforced in accordance with the law of the state of Delaware. 22. Severance Agreement and Release. To obtain any severance benefits under this Agreement, Executive agrees to execute the attached form of Severance Agreement and Release of Claims within twenty-one (21) days of his Termination of Employment unless he agrees to a shorter period of time for consideration of the Severance Agreement and Release of Claims. 13 14 The parties have duly executed this Agreement as of the date first written above. BEVERLY ENTERPRISES, INC. EXECUTIVE By: -------------------------------- ----------------------------------- William R. Floyd Scott M. Tabakin President and Chief Executive Officer 1808 Wheaton Trace Fort Smith, AR 72908 By: -------------------------------- Douglas J. Babb Executive Vice President - Law and Government Relations and Secretary 14 -----END PRIVACY-ENHANCED MESSAGE-----