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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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark if Registrant is an accelerated filer as of June 30, 2002 (as defined in Exchange Act Rule 12b-2). Yes þ No o

The aggregate market value of the voting stock held by nonaffiliates of Registrant was $790,263,327 as of June 28, 2002.

(Number of shares of common stock outstanding, net of treasury shares, as of February 28, 2003)

Part III is incorporated by reference from the Proxy Statement for the Annual Stockholders Meeting to be held on May 22, 2003.

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 Annual Report on Form 10-K 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 any other person. The Company’s website — www.beverlycares.com — provides access to the Company’s Securities and Exchange Commission reports within 24 hours of filing.

This Annual Report on Form 10-K, 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, continued performance improvements, ability to service, refinance and comply with our debt obligations, ability to finance growth opportunities, ability to control our patient care liability costs, ability to respond to changes in government regulations, ability to execute our three-year strategic plan 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;

	•	the effects of adopting new accounting standards;

	•	liabilities and other claims asserted against the Company, including patient care liabilities, as well as the resolution of lawsuits brought about by the announcement or settlement of federal government investigations and the announcement of increases in reserves for patient care liabilities (see Item 3. Legal Proceedings);

	•	our ability to predict future reserve levels for patient care liabilities;

	•	our ability to execute strategic divestitures in a timely manner at fair value;

	•	our ability to improve our fundamental business processes and reduce costs throughout the organization;

	•	our ability to attract and retain qualified personnel;

	•	the availability and terms of capital to fund acquisitions, capital improvements and ongoing operations;

	•	the competitive environment in which we operate;

	•	our ability to maintain and increase census levels; and

	•	demographic changes.

See Item 1. Business for a discussion of various governmental regulations and other operating factors relating to the healthcare industry and the related risk factors. You should carefully consider the risks described herein before making any investment decisions in the Company. These risks and uncertainties are not the only ones facing the Company. There may be additional risks that we do not presently know of or that we currently deem immaterial. If any of these risks actually occur, our business, financial condition, results of operations or cash flows could be materially and adversely affected. In that case, the trading price of our Common Stock could decline, and you may lose all or part of your investment. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, we caution investors not to place undue reliance on them.

Our business consists principally of providing healthcare services, including the operation of nursing facilities, assisted living centers, hospice and home care centers, outpatient clinics and rehabilitation therapy services. We are one of the largest operators of nursing facilities in the United States. On December 31, 2002, we operated 452 nursing facilities with 49,667 licensed beds. Our nursing facilities are located in 26 states and the District of Columbia, and range in capacity from 20 to 355 licensed beds. On December 31, 2002, we also operated 29 assisted living centers containing 841 units, 151 outpatient clinics, and 49 hospice and home care centers. (See Item 2. Properties.) Our nursing facilities had average occupancy, based on operational beds, of 87.9%, 86.9% and 87.0% during the years ended December 31, 2002, 2001, and 2000, respectively.

In the first quarter of 2002, we reorganized our operations into four primary operating segments, which include:


	•	Nursing facilities, which provide long-term healthcare through the operation of nursing homes and assisted living centers. Our nursing facilities provide residents with routine long-term care services, including daily nursing, dietary, social and recreational services and a full range of pharmacy services and medical supplies. Our skilled staff also provides complex and intensive medical services to residents with higher acuity disorders outside the traditional acute care hospital setting. In addition, certain of our nursing facilities provide assisted living services. Approximately 95% of our net operating revenues are derived from services provided by our Nursing Facilities segment;

	•	AEGIS, which provides rehabilitation therapy services under contract to Beverly and non-Beverly facilities. Approximately 2% of our net operating revenues are derived from services provided by our AEGIS segment;

	•	Home Care, which provides home health, hospice and home medical equipment services. Approximately 3% of our net operating revenues are derived from services provided by our Home Care segment. A portion of this segment, MK Medical, was held for sale as of December 31, 2002, and as such its operations are included in discontinued operations in the accompanying consolidated statements of operations; and

	•	Matrix, which operates outpatient therapy and other clinics and a managed care network. This segment was held for sale as of December 31, 2002, and as such its operations are included in discontinued operations in the accompanying consolidated statements of operations. We sold the outpatient rehabilitation therapy clinic operations and the managed care network of Matrix in January 2003.

Business in each operating segment is conducted by one or more corporations. The corporations comprising each of the four operating segments also have separate boards of directors. See Item 8 — Note 13 for segment information.

We Rely on Reimbursement from Governmental Programs for a Majority of Our Revenues.

As a provider of healthcare services, we are subject to various federal, state and local healthcare statutes and regulations. We must comply with state licensing requirements in order to operate healthcare facilities and to participate in government-sponsored healthcare funding programs, such as Medicaid and Medicare. Medicaid is a medical assistance program for the indigent, operated by individual states with the financial participation of the federal government. Medicare is a health insurance program for the elderly and certain other chronically disabled individuals, operated by the federal government. These programs are increasingly seeking to control healthcare costs and to reduce or limit increases in reimbursement rates for healthcare services. Changes in the reimbursement policies of these funding programs as a result of budget cuts by federal


	•	each of the states in which our facilities are located under the applicable Medicaid program;

	•	the federal government under the Medicare program and the Department of Veterans Affairs; and

	•	private payors, including commercial insurers and managed care payors.


	•	nursing facility patient days derived from the indicated sources of payment as a percentage of total nursing facility patient days; and

	•	revenues derived from the indicated sources of payment as a percentage of total net operating revenues.

Changes in the mix of our patient population among the Medicaid, Medicare and private categories can significantly affect our revenues and profitability. In most states, private patient care is the most profitable, and Medicaid patient care is the least profitable. We receive ancillary revenues by providing occupational, physical, speech, respiratory and intravenous therapy, as well as sales of pharmaceuticals and other services.

Medicaid programs currently exist in all of the 26 states, and the District of Columbia, in which we operate nursing facilities. These programs differ in certain respects from state to state, but they are all subject to federal-imposed requirements. At least 50% of the funds available under these programs is provided by the federal government under a matching program.

Currently, many state Medicaid programs use a cost-based reimbursement system. This means that a facility is reimbursed for the reasonable direct and indirect allowable costs it incurs in providing routine patient care services (as defined by the programs). In addition, certain states provide for efficiency incentives or a return on equity, subject to certain cost ceilings. These costs normally include allowances for administrative and general costs, as well as the costs of property and equipment (e.g. depreciation and interest, fair rental allowance or rental expense).

State Medicaid reimbursement programs vary as to the level of allowable costs which are reimbursed to operators. In some states, cost-based reimbursement is subject to retrospective adjustment through cost report settlement. In other states, reimbursements made to a facility that are subsequently determined to be less than or in excess of allowable costs may be adjusted through future reimbursements to the facility and to other facilities owned by the same operator. Still other states reimburse facilities based upon costs from a prior base year, adjusted for inflation. Several states in which we currently operate have enacted reimbursement programs which are based on patient acuity versus traditional cost-based methodologies. Many other states are actively developing reimbursement systems based on patient acuity or that follow a methodology similar to Medicare’s prospective payment system (see below). We are unable to estimate the ultimate impact of any changes in state reimbursement programs on our future consolidated financial position, results of operations, or cash flows.

While federal regulations do not provide states with grounds to curtail funding of their Medicaid cost reimbursement programs due to state budget deficiencies, states have done so in the past. No assurance can be given that states will not do so in the future or that the future funding of Medicaid programs will remain at levels comparable to the present levels. In August 1997, the Balanced Budget Act of 1997 (the “1997 Act”)

was signed into law. Under the 1997 Act, states are authorized to develop their own standards for setting payment rates. It requires each state to use a public process for establishing proposed rates whereby the methodologies and justifications used for setting such rates are available for public review and comment. This requires facilities to become more involved in the rate setting process since failure to do so may interfere with a facility’s ability to challenge rates later. Currently, several states in which we have substantial operations are experiencing deficits in their fiscal operating budgets. There can be no assurance that these states, as well as other states in which we operate, will not reduce payment rates.

Under the Nursing Home Resident Protection Amendments of 1999, a nursing facility is required to continue providing care to Medicaid residents, as well as current non-Medicaid residents who may qualify for Medicaid in the future, even if the facility decides to withdraw from the Medicaid program.

Healthcare system reform and concerns over rising Medicare and Medicaid costs have been priorities for both the federal and state governments. The 1997 Act included numerous program changes directed at balancing the federal budget. The legislation changed Medicare and Medicaid policy in a number of ways, including the phase-in of the Medicare prospective payment system (“PPS”) for skilled nursing facilities. PPS reimburses a skilled nursing facility based upon the acuity level of Medicare patients. Acuity level is determined by classifying a patient into one of 44 Resource Utilization Grouping (“RUG”) categories, based on the nature of the patient’s condition and services needed.

In 1999 and 2000, certain refinements were made to the 1997 Act. These refinements restored substantial Medicare funding to skilled nursing facilities and other healthcare providers originally eliminated by the 1997 Act. Certain of these refinements were eliminated effective September 30, 2002, including, among other things:


	•	a 16.66% add-on to the nursing component of all 44 RUG categories; and

	•	a 4% overall increase in the adjusted rates for all 44 RUG categories.

Our net operating revenues were reduced in 2002 by approximately $14.0 million as a result of the elimination of these add-ons in the fourth quarter. Assuming a similar volume and mix of Medicare patients in 2003, we anticipate our net operating revenues will decline an additional $42.0 million from 2002, for an annual impact of $56.0 million. While it is possible that the federal government may restore some or all of these payments in the future, we can give no assurances that will occur, or if it should occur, when it might happen and whether it will be retroactive.

Certain of the refinements made in 1999 and 2000 remain in place today including, among other things:


	•	a 20% add-on for the high acuity non-therapy RUG categories; and

	•	a 6.7% add-on for all rehabilitation RUG categories.

In addition, the 1999 and 2000 refinements to the 1997 Act included a three year moratorium on the two $1,500 Part B therapy caps. This moratorium expired on December 31, 2002. However, on February 7, 2003, the Centers for Medicare and Medicaid Services (“CMS”), formerly known as the Health Care Financing Administration (“HCFA”) of the Department of Health and Human Services (“HHS”), announced that the Part B therapy caps will be implemented on July 1, 2003. Implementation will be on a prospective basis only. Based on the current volume of Part B therapy in our nursing homes, the decrease in our annual net operating revenues is anticipated to be approximately $16.0 million. Our AEGIS outside therapy contract business will likely be further impacted in terms of revenue and may be required to adjust therapy staffing levels to offset a portion of this revenue impact.

The 20% add-on for high acuity non-therapy RUG categories and the 6.7% add-on for all rehabilitation RUG categories will expire when CMS releases their refinements to the current RUG payment system. We generate approximately $38.6 million in annual net operating revenues related to these add-ons. We cannot currently predict when CMS will release their refinements nor can we predict what their ultimate impact will be on our operating results or cash flows.

On February 10, 2003, CMS published a proposed rule to reduce by 30 percent the amount that Medicare reimburses skilled nursing facilities and other non-hospital providers for bad debts arising from uncollectible Medicare coinsurance and deductibles. The proposal is to phase in the reduction over a three-year period at 10 percent per year beginning October 1, 2003. Based on our current volume of Medicare bad debts, the proposed change would reduce our net operating revenues for the fourth quarter of 2003 by approximately $425,000 (calculated at the 10% reduction level). The annual impact of this proposed change at the 30% reduction level would be approximately $5.1 million.

Our Industry is Heavily Regulated by the Government which Requires Our Compliance with a Variety of Laws.

The operation of our facilities and the services we provide are subject to periodic inspection by governmental authorities to ensure that we are complying with standards established for continued licensure under state law and certification for participation under the Medicare and Medicaid programs. Additionally, in certain states, certificates of need or other similar approvals are required for expansion of our operations. We could be adversely affected if we are unable to obtain these approvals, if the standards applicable to approvals or the interpretation of those standards change, and by possible delays and expenses associated with obtaining approvals. Our failure to obtain, retain or renew any required regulatory approvals, licenses or certificates could prevent us from being reimbursed for certain of our services.

CMS published survey, certification and enforcement guidelines in July 1999 and December 1999 to implement the Medicare and Medicaid provisions of the Omnibus Budget Reconciliation Act of 1987 (“OBRA 1987”). OBRA 1987 authorized CMS to develop regulations governing survey, certification and enforcement of the requirements for participation by skilled nursing facilities under Medicare and nursing facilities under Medicaid. Among the provisions that CMS adopted were requirements that:


	•	surveys focus on residents’ outcomes;

	•	all deviations from the participation requirements will be considered deficiencies, but all deficiencies will not constitute noncompliance; and

	•	penalties will result for certain types of deficiencies.

The regulations also identify remedies, as alternatives to termination from participation, and specify the categories of deficiencies for which these remedies will be applied. These remedies include:


	•	installation of temporary management;

	•	denial of payment for new admissions;

	•	denial of payment for all patients;

	•	civil monetary penalties of $50 to $3,000 per day;

	•	closure of facility and/or transfer of patients in emergencies;

	•	directed plans of correction; and

	•	directed in-service training.


	•	mandate the immediate application of remedies before the provider has an opportunity to correct the deficiency;

	•	impose a “per instance” civil monetary penalty up to $10,000 per day; and

	•	allow termination in as few as two days.

We could be adversely affected if a substantial portion of our programs or facilities were eventually determined not to be in compliance with the CMS regulations.

In the ordinary course of our business, we receive notices of deficiencies for failure to comply with various regulatory requirements. We review all such notices and take timely and appropriate corrective action. In most cases, the facility and the reviewing agency will agree upon the steps to be taken to bring the facility into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take a number of adverse actions against a facility. These adverse actions include:


	•	the imposition of fines;

	•	temporary suspension of admission of new patients to the facility;

	•	decertification from participation in the Medicaid or Medicare programs; or

	•	in extreme circumstances, revocation of a facility’s license.

We have been subject to certain of these adverse actions in the past and could be subject to adverse actions in the future which could result in significant penalties, as well as adverse publicity.

We utilize a program called the “Beverly Quality System” to help ensure quality care is provided in all of our facilities. The program is comprised of four elements: facility-based Quality Assurance and Assessment Committees; Quality Councils; facility performance assessments and a performance improvement model. All elements of the Beverly Quality System are addressed by a multi-disciplinary team which includes regional and district level business leaders and clinical consultants. Additional consultative support is provided by designated Quality Management Directors within the organization.

During 2002, CMS conducted a pilot project in five states, Colorado, Maryland, Ohio, Rhode Island and Washington, where it publicly reported on the performance of each nursing home in those states in terms of quality of care. This reporting used a set of quality indicators calculated from the minimum data set assessments prepared by the nursing homes on each resident. This project was extended to all facilities nationwide in November 2002, and is expected to assist consumers in evaluating nursing homes, and to assist CMS in working with the nursing home industry to develop quality improvement programs where needed.

The Social Security Act and regulations of HHS state that providers and related persons who have been convicted of a criminal offense related to the delivery of an item or service under the Medicare or Medicaid program or who have been convicted, under state or federal law, of a criminal offense relating to neglect or abuse of residents in connection with the delivery of a healthcare item or service cannot participate in the Medicare and Medicaid programs. Furthermore, providers and related persons who have been convicted of fraud, who have had their licenses revoked or suspended, or who have failed to provide services of adequate quality may be excluded from the Medicare and Medicaid programs.

In February 2000, as part of the settlement of an investigation by the federal government into our allocation of certain costs to the Medicare program, we entered into a Corporate Integrity Agreement with the Office of Inspector General (the “OIG”) of HHS. This agreement requires that we 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 generally in compliance with the requirements of the Corporate Integrity Agreement and file annual reports with the OIG documenting our compliance.

There are “fraud and abuse” anti-kickback provisions in the Social Security Act (the “Antifraud Amendments”) which make it a criminal felony offense to knowingly and willfully offer, pay, solicit or receive payment in order to induce business for which reimbursement is provided under government health programs, including Medicare and Medicaid. In addition, violators can be subject to civil penalties, as well as exclusion from future participation in government health programs. The Antifraud Amendments have been broadly interpreted to make payment of any kind, including many types of business and financial arrangements among providers and between providers and beneficiaries, potentially illegal if any purpose of the payment or financial arrangement is to induce a referral. Accordingly, joint ventures, space and equipment rentals, management

From time to time, HHS puts into effect regulations describing, or clarifying, certain arrangements that are not subject to enforcement action under the Antifraud Amendments (the “Safe Harbors”). The Safe Harbors described in the regulations are narrow, leaving a wide range of economic relationships, which many hospitals, physicians and other healthcare providers consider to be legitimate business arrangements, possibly subject to enforcement action under the Antifraud Amendments. The regulations do not intend to comprehensively describe all lawful relationships between healthcare providers and referral sources. The regulations clearly state that just because an arrangement does not qualify for Safe Harbor protection does not mean it violates the Antifraud Amendments. However, it may subject a particular arrangement or relationship to increased regulatory scrutiny.

In addition to the Antifraud Amendments, Section 1877 of the Social Security Act (known as the “Stark Law”) imposes restrictions on financial relationships between physicians and certain entities. The Stark Law provides that if a physician (or an immediate family member of a physician) has a financial relationship with an entity that provides certain designated health services, the physician may not refer a Medicare or Medicaid patient to the entity. In addition, the entity may not bill for services provided by that physician unless an exception to the financial relationship exists. Designated health services include physical therapy, occupational therapy, prescription drugs and home health. The types of financial relationships that can trigger the referral and billing prohibitions include ownership or investment interests, as well as compensation arrangements. Penalties for violating the law are severe, and include:


	•	denial of payment for services provided;

	•	civil monetary penalties of $15,000 for each service claimed;

	•	refunds of any amounts collected;

	•	assessments of up to twice the amount claimed for each service;

	•	civil monetary penalties up to $100,000 for each arrangement or scheme designed to circumvent the Stark Law’s prohibitions; and

	•	exclusion from the Medicare and Medicaid programs.

Many states where we operate have laws similar to the Antifraud Amendments and the Stark Law, but with broader effect since they apply regardless of the source of payment for care. These laws typically provide criminal and civil penalties, as well as loss of licensure. The scope of these state laws is broad and little precedent exists for their interpretation or enforcement.

The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) includes comprehensive revisions or supplements to the Antifraud Amendments. Under HIPAA, it is a federal criminal offense to commit healthcare fraud. Healthcare fraud is defined as knowingly and willfully executing or attempting to execute a “scheme or device” to defraud any healthcare benefit program. In addition, for the first time, federal enforcement officials have the ability to exclude from the Medicare and Medicaid programs any investors, officers and managing employees associated with business entities that have committed healthcare fraud, even if the investor, officer or employee had no actual knowledge of the fraud. HIPAA established that it is a violation to pay a Medicare or Medicaid beneficiary so as to influence such beneficiary to order or receive services from a particular provider or practitioner. Many of the HIPAA provisions became effective January 1, 1997.

The 1997 Act also contained a significant number of new fraud and abuse provisions. For example, civil monetary penalties may also be imposed for violations of the Antifraud Amendments (previously, exclusion or criminal prosecution were the only actions under the Antifraud Amendments), as well as for contracting with an individual or entity that a provider knows or should know is excluded from a federal healthcare program. The 1997 Act provides for civil monetary penalties of $50,000 and damages of not more than three times the amount of payment received from the prohibited activity.

In 1976, Congress established the OIG at HHS to identify and eliminate fraud, abuse and waste in HHS programs and to promote efficiency and economy in HHS departmental operations. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to healthcare providers on ways to engage in legitimate business practices and avoid scrutiny under the fraud and abuse statutes, the OIG has from time to time issued “fraud alerts” identifying segments of the healthcare industry and particular practices that are vulnerable to abuse. The fraud alerts encourage persons having information about potentially abusive practices or transactions to report such information to the OIG. The OIG has issued three fraud alerts targeting the skilled nursing industry:


	•	an August 1995 alert which relates to the providing of medical supplies to nursing facilities, the fraudulent billing for medical supplies and equipment and fraudulent supplier transactions;

	•	a May 1996 alert which focuses on the providing of fraudulent professional services to nursing facility residents; and

	•	a March 1998 alert which addresses the interrelationship between hospice services and the nursing home industry, and potentially illegal practices and arrangements.

In addition to laws addressing referral relationships, several federal laws impose criminal and civil sanctions for fraudulent and abusive billing practices. The federal False Claims Act imposes sanctions, consisting of monetary penalties of up to $11,000 for each claim and three times the amount of damages, on entities and persons who knowingly present or cause to be presented to the federal government a false or fraudulent claim for payment. The Social Security Act prohibits the knowing and willful making of a false statement or misrepresentation of a material fact with respect to the submission of a claim for payment under government health programs (including the Medicare and Medicaid programs). Violations of this provision are a felony offense punishable by fines and imprisonment. The HIPAA provisions establish criminal penalties for fraud, theft, embezzlement, and the making of false statements with respect to healthcare benefit programs (which includes private, as well as government programs). Government prosecutors are increasing their use of the federal False Claims Act to prosecute quality of care deficiencies in healthcare facilities. Their theory behind this is that the submission of a claim for services provided in a manner which falls short of quality of care standards can constitute the submission of a false claim. Under federal law, private parties may bring qui tam whistle-blower lawsuits alleging false claims. Some states have adopted similar whistle-blower and false claims provisions.

In addition to increasing the resources devoted to investigating allegations of fraud and abuse in the Medicare and Medicaid programs, federal and state regulatory and law enforcement authorities are taking an increasingly strict view of the requirements imposed on healthcare providers by the Social Security Act and Medicare and Medicaid regulations. From time to time, the Company, like other healthcare providers, is required to provide records to state or federal agencies to aid in such investigations. It is possible that these entities could initiate investigations in the future at facilities we operate and that such investigations could result in significant penalties, as well as adverse publicity.

A joint federal/state initiative, Operation Restore Trust, was created in 1995 to focus audit and law enforcement efforts on geographic areas and provider types receiving large concentrations of Medicare and Medicaid funds. Under Operation Restore Trust, the OIG and CMS have undertaken a variety of activities to address fraud and abuse by nursing homes, home health providers and medical equipment suppliers. These activities include financial audits, creation of a Fraud and Waste Report Hotline, and increased investigations and enforcement activity.

In addition to its antifraud provisions, HIPAA also requires improved efficiency in healthcare delivery by standardizing electronic data interchange and by protecting the confidentiality and security of health data. More specifically, HIPAA calls for:


	•	standardization of electronic patient health, administrative and financial data;

	•	unique health identifiers for individuals, employers, health plans and healthcare providers; and


	•	privacy and security standards protecting the confidentiality and integrity of individually identifiable health information.

In August 2000, final regulations establishing standards for electronic data transactions and code sets, as required under HIPAA, were released. These standards will allow entities within the healthcare system to exchange medical, billing and other information and to process transactions in a more timely and cost effective manner. These new transactions and code sets standards were required to be implemented by October 2002, unless a covered entity applied for, and was granted, an extension of up to one year. We have updated our systems and are compliant with the new standards for electronic transactions and code sets. However, we applied for and were granted an extension until October 2003, primarily because several of our trading partners, including some state Medicaid agencies, were not prepared to implement the new transactions and code sets.

In December 2000, HIPAA privacy standards were released, and were then further revised in August 2002. Most covered entities under HIPAA must implement the privacy standards by April 2003. The privacy standards are designed to protect the privacy of certain individually identifiable health information. The privacy standards have required us to make certain updates to our policies and procedures and we are conducting training for our associates surrounding these standards. We expect to be in full compliance with the privacy standards by April 2003.

On February 20, 2003, CMS issued final regulations with respect to HIPAA’s security standards and modifications to the electronic data transactions and code sets. Most covered entities must comply with the security standards by April 14, 2005. The regulations governing electronic data transaction standards, which are effective on March 24, 2003, will not delay our October 2003 compliance deadline. All standards are required to be fully implemented within two years of final issuance, with civil and criminal penalties established for noncompliance.

HHS has estimated that implementation of the electronic transactions and code sets, the privacy standards and the security standards will cost the healthcare industry between $1.8 billion and $6.3 billion over a five year period. We continue to evaluate and update our processes and procedures to meet the requirements of the new standards; however, we do not believe their ongoing implementation will have a material impact on our consolidated financial position, results of operations or cash flows.

We are Subject to Increasingly Expensive and Unpredictable Patient Care Liability Costs and the Risk of Insolvency of Our Insurance Carriers.

General liability and professional liability costs for the long-term care industry have become increasingly expensive and difficult to estimate. We have experienced substantial increases in both the number of claims and lawsuits, as well as the size of the typical claim and lawsuit. This was most evident for us in the state of Florida, where well-intended patient rights’ statutes tend to be exploited by plaintiffs’ attorneys. This growth in patient care liability claims and lawsuits in Florida reached a level where it was not possible for us to continue to operate profitably in the state and precipitated the disposition of our Florida operations in December 2001. However, there are other states where the laws have, and will continue to attract plaintiffs’ attorneys for similar reasons.

Primarily as a result of these issues, insurance companies are ceasing to insure long-term care companies, or severely limiting their capacity to write long-term care general and professional liability insurance. In addition, in the wake of the September 11, 2001 events, the insurance environment in general has become unstable, making it increasingly difficult to obtain coverage for patient care liabilities and other risks. When insurance coverage is available, insurance carriers are typically requiring companies to significantly increase their liability retention levels and/or pay substantially higher premiums for reduced coverage. We are experiencing higher premiums and retention levels.

including review of published ratings by recognized rating agencies, advice from national brokers and consultants, and review of trade information sources. There exists a risk that any of these insurance companies may become insolvent and unable to fulfill their obligation to defend, pay or reimburse us when that obligation becomes due. Although we believe the companies we have purchased insurance from are solvent, in light of the dramatic changes occurring in the insurance industry in recent years, we can not be assured that they will remain solvent and able to fulfill their obligations.

Our Failure to Attract and Retain Qualified Personnel Could Harm Our Business.

At December 31, 2002, we had approximately 55,000 associates. We are subject to both federal minimum wage and applicable federal and state wage and hour laws. In addition, we maintain various employee benefit plans.

In recent years, we have experienced periodic difficulty attracting and retaining nursing assistants, certified nurses’ aides and other facility-based personnel. In addition, there has been a growing shortage of registered and licensed nurses in this country. We continue to address these challenges through recruiting, orientation, retention and training initiatives. In the past year, we have experienced a leveling off of the growth in our weighted average wage rate and a decline in our use of contract nursing personnel. Our inability to control labor availability and cost could have a material adverse affect on our future operating results.

Approximately 7% of our associates, employed in approximately 100 of our nursing facilities, are represented by various labor unions. Certain labor unions have publicly stated that they are concentrating their organizing efforts within the long-term healthcare industry. Being one of the largest employers within the long-term healthcare industry, we have been the target of a “corporate campaign” by two AFL-CIO affiliated unions attempting to organize certain of our facilities. Although our facilities have never experienced any material work stoppages and we believe that our relations with associates and labor organizations are generally good, we cannot predict the effect continued union representation or organizational activities will have on our future operations.

Excessive litigation is a tactic common to “corporate campaigns” and one that is being employed against us. There are several proceedings before the National Labor Relations Board and the appellate courts which consolidate individual cases from separate facilities. We are vigorously defending these proceedings and do not believe that the ultimate resolution of these cases will have a material adverse affect on our consolidated financial position, results of operations, or cash flows.

Certain Trends in the Healthcare Industry are Putting Pressure on Our Ability to Maintain Nursing Facility Census.

Over the past decade a number of trends have developed that impact our census (volume and payor mix of patients). These trends include:


	•	overbuilding of nursing facilities in states that have eliminated the certificate of need process for new construction;

	•	creation of nursing facilities by acute care hospitals to keep discharged patients within their complex;

	•	rapid growth of assisted living facilities, which sometimes are more attractive to less medically complex patients; and

	•	the availability of eldercare services delivered to the home.

The negative impact of these trends on nursing facility census varies from facility to facility, from community to community and from state to state.

Our Substantial Indebtedness Could Adversely Affect Our Financial Condition.

We have a significant amount of indebtedness and other obligations. At December 31, 2002, our consolidated balance sheet reflected approximately $630.2 million of outstanding indebtedness and approxi-

mately $73.9 million of amounts we owe to the federal government under the civil settlement agreement. In addition, we have $139.5 million of off-balance sheet financing. (See Item 8 — Notes 8 and 9.) Our substantial indebtedness could:


	•	require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate activities;

	•	limit our flexibility in planning for, or reacting to, changes in our business and industry;

	•	place us at a competitive disadvantage compared to other less leveraged competitors;

	•	increase our vulnerability to general adverse economic and industry conditions; or

	•	limit our ability to pursue business opportunities that may be in our interest.

During 2002, we reduced our balance sheet indebtedness by $111.5 million, our amounts owed to the federal government under the civil settlement agreement by $11.0 million and our off-balance sheet financing by $42.9 million. However, if we add new indebtedness to our existing debt levels, it could increase the related risks that we face.

If We are Unable to Generate Sufficient Cash Flow to Service Our Indebtedness, Our Business and Financial Results Could Suffer.

Our ability to make payments on our indebtedness and to fund planned expenditures depends on our ability to generate cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds under our secured revolving credit facility depends on our satisfying various covenants. These covenants, among other things:


	•	limit our ability, and the ability of our subsidiaries, to borrow and place liens on our assets;

	•	require us to comply with certain debt service coverage ratio tests;

	•	require us to maintain a minimum consolidated net worth;

	•	limit our ability to merge with other parties or sell all or substantially all of our assets; and

	•	limit our, and our subsidiaries’, ability to make investments.

In February 2003, we executed an amendment to our Credit Facility (see Item 8 — Note 8) and our off-balance sheet lease arrangement (collectively, the “2003 Amendments”). The 2003 Amendments provide for:


	•	modification of certain financial covenant levels;

	•	changes in the interest rates on our borrowings;

	•	the pledging of additional assets as collateral for certain of the lenders;

	•	use of a portion of the proceeds from the sales of assets to repay obligations or reduce available borrowings;

	•	reduced availability under the Credit Facility;

	•	accelerated maturity for the lease arrangement to the same date as our Credit Facility and various other items.

We believe we will be able to comply with the amended covenants throughout 2003 and the availability under our Credit Facility, if required, is expected to be adequate to supplement any liquidity needs in 2003.

We cannot assure you that our business will generate cash flow from operations or that future borrowings will be available to us under our Credit Facility in an amount sufficient to enable us to pay our indebtedness or

The market price of our common stock is based in large part on professional securities analysts’ expectations that our business will continue to grow and that we will achieve certain profit levels. If our financial performance in a particular quarter does not meet the expectations of securities analysts, this may adversely affect the views of those securities analysts concerning our growth potential and future financial performance. If the rating agencies lower their ratings or outlook on the Company, or if the securities analysts who regularly follow our stock lower their ratings or projections of our future growth and financial performance, the market price of our common stock and of our publicly traded senior notes could be impacted.

Each executive officer is elected or appointed by the Board of Directors. The executive officers as of February 28, 2003, are as follows:

Mr. Floyd joined the Company in April 2000 as President and Chief Operating Officer. He was elected Chief Executive Officer in February 2001 and Chairman of the Board in December 2001. From 1996 to 1998, he was Chief Executive Officer of Choice Hotels International, and from 1995 to 1996, he was Chief Operating Officer of Taco Bell Corporation. He has been a director of the Company since July 2000.

Mr. Babb joined the Company in April 2000 as Executive Vice President, General Counsel and Secretary. He was named head of Government Relations in January 2001 and Chief Administrative and Legal Officer in October 2002. Mr. Babb was Senior Vice President and Chief of Staff for Burlington Northern Santa Fe Corporation (“BNSF”) from 1995 to 1997 and Senior Vice President — Merchandise Business Unit for BNSF from 1997 to 1999.

Mr. Devereaux joined the Company in August 1998 as Senior Vice President — Operations for the Specialty Services Division of the Nursing Facilities segment. He was elected President of the corporations

Mr. Freimark joined the Company in January 2002 as Executive Vice President and Chief Financial Officer. He became head of Information Technology in October 2002. From May 2001 to January 4, 2002 he was Senior Executive Vice President and Chief Financial Officer of OfficeMax, Inc. From March 1997 to May 2001 he was with The Grand Union Company where he held positions as Executive Vice President, Chief Financial Officer and President and Chief Executive Officer.

Ms. Acosta joined the Company in October 1996 as Vice President — Risk Management. She was elected Senior Vice President — Professional Services in January 2001. From January 1995 to September 1996, Ms. Acosta was Vice President — Risk Management at Regency Health Services.

Ms. Daniels joined the Company in May 1988 as Audit Coordinator. She was elected Vice President, Controller and Chief Accounting Officer in October 1996 and Senior Vice President in December 1999.

Mr. Griffith joined the Company in November 1995 as Senior Vice President — Investor Relations and Corporate Communications.

Ms. Kolling joined the Company in February 1989 as a rehabilitation consultant. She was elected Vice President — Rehabilitation in 1994, Vice President — PPS in 1998 and Vice President — Medicare Programs in 2000. She was elected Senior Vice President — Compliance in October 2002.

Mr. Mercadante joined the Company in 2002 as Senior Vice President — Marketing and New Business Innovation. From 1999 to 2002, he was President of Blazing Insights Group and from 1996 to 1999 he was Executive Vice President — Marketing at Universal Studios.

Mr. Price joined the Company in August 2002 as Senior Vice President — Sales and Business Development. Prior to that, he worked with Beverly on a consulting basis for 18 months. Before becoming a consultant, he was Vice President — Strategic Relations and Business Development for SelfCare, Inc. from 1999 to 2000. For the 17 years prior, he held various positions with Nova Care, Inc. ultimately as Senior Vice President — Sales and Marketing.

Mr. Skelly joined the Company in April 2002 as Senior Vice President and Treasurer. From September 2001 to March 2002, he served as Senior Vice President and Treasurer of OfficeMax, Inc. From June 1997 to August 2001, he held various positions with The Grand Union Company, including Acting Chief Financial Officer and Treasurer.

Ms. Wright joined the Company in April 2001 as Senior Vice President — Human Resources. From May 1994 to March 2001 she was Vice President — Human Resources of CONDEA Vista Company, predecessor to SASOL North America.

Mr. Roussos joined the Company in August 2001 as a management designee of Matrix Rehabilitation. He was elected President of Matrix Rehabilitation in February 2002 and President of CERES Strategies in October 2002. From 2000 to 2001 he was Division General Manager of American Homestar and from 1996 to 2000 he was General Manager of Fleetwood Enterprises.

Ms. Susienka joined the Company in June 1998 as President — AEGIS Therapies. From 1987 to 1998 she held various positions at NovaCare, Inc., including Regional Vice President.

On December 31, 2002, we operated 452 nursing facilities, 29 assisted living centers, 151 outpatient clinics and 49 hospice and home care centers in 32 states and the District of Columbia. Most of our 136 leased nursing facilities are subject to “net” leases which require us to pay all taxes, insurance and maintenance costs. Most of these leases have original terms from ten to fifteen years and contain at least one renewal option. Renewal options typically extend the original terms of the leases by five to fifteen years. Many of these leases also contain purchase options. We consider our physical properties to be in good operating condition and suitable for the purposes for which they are being used. Certain of our nursing facilities and assisted living

The following is a summary of our nursing facilities, assisted living centers, outpatient clinics and hospice and home care centers at December 31, 2002:


(1)	As of December 31, 2002, the outpatient clinics were held for sale. We disposed of 141 of these clinics in January 2003, retaining 10 locations in North Carolina that continue to be held for sale.

(2)	As of December 31, 2002, MK Medical, a durable medical equipment business with 7 units in California and one in Nevada, was held for sale.

(a) As previously reported, on October 2, 1998, a purported class action lawsuit was filed in the United States District Court for the Eastern District of Arkansas by Jack Kushner against the Company and certain of its officers (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. (See Item 8 — Note 9.) The defendants filed a motion to dismiss that complaint on October 8, 1999. Oral argument on this motion was held on April 6, 2000. By order and judgment dated October 17, 2001, defendants’ motion to dismiss was granted, and the complaint was dismissed with prejudice. Plaintiffs appealed this decision to the Eighth Circuit Court of Appeals (Case No. 01-3677). On January 23, 2003, the Eighth Circuit entered an order affirming the district court’s order dismissing the case with prejudice. The plaintiffs appealed the order of the Eighth Circuit en banc, but, on February 27, 2003, the Eighth Circuit denied the petition. The Eighth Circuit is obligated to issue a mandate within seven days of the date of the order denying the petition, thereby ordering the district court to enforce its ruling and dismiss the case. If the plaintiffs decide to petition for a writ of certiorari to the United States Supreme Court within 90 days, plaintiffs may move to stay the mandate pending the filing of this petition.

(b) On October 31, 2002, a shareholder derivative action entitled Paul Dunne and Helene Dunne, derivatively on behalf of nominal defendant Beverly Enterprises, Inc. v. Beryl F. Anthony, Jr., et al. was filed in the Circuit Court of Sebastian County, Arkansas, Fort Smith Division (No. CIV-2002-1241). This case is purportedly brought derivatively on behalf of the Company against various current and former officers and directors. We learned of this case when it was served on one defendant on January 22, 2003. The complaint alleges causes of action for breach of fiduciary duty against the defendants based on: (1) allegations that defendants failed to establish and maintain adequate accounting controls such that the Company failed to record adequate reserves for patient care liability costs; and (2) allegations that certain defendants sold Company stock while purportedly in possession of material non-public information. While this case is in its preliminary stages, we do not believe there is any merit to this lawsuit.

(c) Effective October 15, 2002, we entered into a Settlement Agreement with CMS. The Settlement Agreement resolved reimbursement issues relating to all Medicare cost reporting periods ending on or before December 31, 2000, including all outstanding issues from the February 2000 settlement of the federal government’s investigation of our allocation to the Medicare program of certain nursing labor costs in our skilled nursing facilities. Under the terms of the Settlement Agreement, we paid CMS $35.0 million in November 2002. This cash payment was included in the fourth quarter 2001 estimated pre-tax charge related to this matter of $77.5 million. The Settlement Agreement did not result in any increase to the fourth quarter 2001 estimated charge.

(d) As previously disclosed, we notified federal and California healthcare regulatory authorities (CMS, OIG, the California Attorney General’s office and the California Department of Health) of our intent to conduct an internal investigation of past billing practices relating to MK Medical, our medical equipment business unit based in Fresno, California. An independent accounting firm has reviewed MK Medical’s government payor billings since October 1, 1998, the date Beverly acquired the unit. Deficiencies identified by the accounting firm primarily relate to inadequate documentation supporting Medicare and Medi-Cal claims for reimbursement for drugs, wheelchairs, and other durable medical equipment distributed by MK Medical. Specifically, the review identified instances of missing or incomplete certificates of medical necessity, treatment authorization requests, prescriptions, and other documentation MK Medical is required to maintain in order to be entitled to reimbursement from government payors. Based on the results of the accounting firm’s review, we have estimated our potential overpayment from government payors to be approximately $18.0 million for the period from October 1, 1998 to 2002. We have reduced MK Medical’s operating revenues, through discontinued operations on the 2002 consolidated statement of operations, and have established a reserve, included in “Other accrued liabilities” on the 2002 consolidated balance sheet, for this amount. We have advised regulatory authorities of the accounting firm’s results. Our liability with respect to this matter could exceed the reserved amount. We can give no assurance of the final outcome of this matter or its impact on our financial position, results of operations and cash flows.

(e) On August 16, 2002, August 26, 2002, and September 26, 2002, respectively, Ernest Baer v. Beverly Enterprises, Inc., et. al. (CIV. No. 02-2190) (the “Baer Case”), Stanley V. Kensic v. Beverly Enterprises, Inc., et. al. (CIV. No. 02-2193) (the “Kensic Case”) and Charles Krebs v. Beverly Enterprises, Inc., et. al. (CIV. No. 02-2222) (the “Krebs Case) were filed in the United States District Court, Western District of Arkansas, Fort Smith Division. The Baer Case, the Kensic Case and the Krebs Case were filed as purported securities fraud class actions under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

Each of the Baer Case, the Kensic Case and the Krebs Case separately named Beverly Enterprises, Inc. as a defendant along with various current officers and our independent auditors. In all three cases, the purported class period runs from October 16, 2000 to and including July 19, 2002. Plaintiffs claim that the defendants, during the purported class period, made multiple false and misleading statements. Due to the preliminary state of the Baer Case, the Kensic Case and the Krebs Case and the fact that none of these cases alleges damages with any specificity, we are unable at this time to assess the probable outcome of the cases. We believe that plaintiffs’ allegations that the defendants acted unlawfully are without merit and the defendants will vigorously defend the Baer Case, the Kensic Case and the Krebs Case. 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.

(f) On August 1, 2002, the Company and the State of California reached an agreement on the settlement of an investigation by the Attorney General’s office and the District Attorney of Santa Barbara County of patient care issues in several California nursing facilities. In accordance with the terms of the settlement agreement, Beverly Enterprises — California, Inc. has entered a plea of nolo contendere to two felony charges under California’s Elder Abuse statute and during July 2002, paid a fine of $54,000 related to the plea. In addition, Beverly Enterprises — California, Inc. reimbursed the Attorney General and the Santa Barbara County District Attorney $533,000 for the costs of their investigations and will pay a $2.0 million civil penalty in four equal, quarterly installments of $500,000, which began in the third quarter of 2002.

In addition, a Permanent Injunction (“Permanent Injunction”) was entered requiring nursing facilities in California, operated by subsidiaries of the Company, to comply with all applicable laws and regulations and to conduct certain training and education programs. The Company recorded a pre-tax charge against earnings of $6.3 million during the second quarter of 2002 to reflect the terms of the settlement and related costs, and we expect to incur additional annual costs for implementation of the Permanent Injunction. Certain revisions were made to our Corporate Integrity Agreement (“CIA”) in conjunction with the Permanent Injunction requiring:


	•	additional training for clinical associates, contractors and agents who perform services in our California nursing facilities; and

	•	hiring an independent quality monitor to assess the effectiveness, reliability and thoroughness of our quality care systems and our response to quality of care issues in our nursing facilities in California, Arizona, Hawaii and Washington.

(g) As previously reported, the following derivative lawsuits have been filed in the state courts of Arkansas and Delaware, as well as the federal district court in Arkansas, assertedly on behalf of the Company (collectively, the “Derivative Actions”):


	•	Norman M. Lyons v. David R. Banks, et al., Case No. OT99-4041, was filed in the Chancery Court of Pulaski County, Arkansas (4th Division) on or about July 29, 1999, and the parties filed an Agreed Motion to Stay the proceedings on January 17, 2000;

	•	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, was removed to federal district court and was dismissed February 3, 2000;

	•	Kushner v. David R. Banks, et al., Case No. LR-C-98-646, was filed in the United States District Court for the Eastern District of Arkansas (Western Division) on September 30, 1999 and was appealed to the Eighth Circuit Court of Appeals on November 5, 2001; 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. In February 2002, the Delaware Chancery Court entered a stipulation of dismissal without prejudice. 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. See paragraph (a) above for a description of the status of the Class Action.

The Derivative Actions each name the Company’s directors as defendants, as well as the Company as a nominal defendant. The Lyons action also names as defendants certain of the Company’s current and former officers. The Derivative Actions each allege breach of fiduciary duties to the Company and its stockholders as a result of alleged conduct giving rise to the Class Action. The Lyons and Richardson actions also assert claims for abuse of control and constructive fraud arising from the same allegations and the Richardson action also claims unjust enrichment.

Due to the preliminary state of the Derivative Actions and the fact the complaints do not allege damages with any specificity, 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 plaintiffs’ allegations that the defendants acted unlawfully are without merit and the defendants 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.

(h) We are party to various legal matters relating to patient care, including claims that our services have resulted in injury or death to residents of our facilities. We have experienced an increasing trend in the number and severity of the claims asserted against us. We believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on us.

(i) 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, results of operations or cash flows.

There were no matters submitted to a vote of our security holders during the last quarter of our fiscal year ended December 31, 2002.

Our Common Stock is listed on the New York and Pacific Stock Exchanges under the symbol BEV. The table below sets forth, for the periods indicated, the range of high and low sales prices of our Common Stock as reported on the New York Stock Exchange composite tape.

We are subject to certain restrictions under our long-term debt agreements related to the payment of cash dividends on, and the repurchase of, our Common Stock. During 2002 and 2001, we did not pay any cash dividends on, or repurchase any of, our Common Stock and no future dividends are currently planned.

The following table of selected financial data should be read along with our consolidated financial statements and related notes thereto for 2002, 2001 and 2000 included in Item 8.


(1)	The operations of Matrix and MK Medical have been reclassified as discontinued operations for all periods presented since they met the criteria under SFAS No. 144 as assets held for sale at December 31, 2002. In accordance with SFAS No. 145, the extraordinary loss on the early extinguishment of debt of $2,717 in 1998 has been reclassified as asset impairments, workforce reductions and other unusual items, and its related tax benefit, in the amount of $1,057, has been reclassified as provision for (benefit from) income taxes.

(2)	Includes the operations of American Transitional Hospitals, Inc. through June 30, 1998.

(3)	Includes a $77,171 goodwill impairment charge relating to the 2002 adoption of SFAS No. 142 and a $4,415 charge in 1998 relating to the adoption of SOP 98-5 which changed the accounting for start-up costs.

(4)	Certain amounts will not add due to rounding.

(5)	Calculated by dividing actual patient days by available patient days. Available patient days are calculated by multiplying total calendar days by the number of beds that are operationally ready for use.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. The accounting policies discussed below are considered by management to be critical to an understanding of our financial statements because their application requires significant judgment and reliance on estimations of matters that are inherently uncertain. Specific risks related to these critical accounting policies are described in the following paragraphs.

Our revenues are derived primarily from providing long-term healthcare services. Approximately 80% of our current net operating revenues is derived from funds provided under federal and state medical assistance programs. As discussed more fully in Item 8 — Note 1, we record our revenues at standard charges when services are provided, adjusted to amounts estimated to be received under governmental programs or other third-party contractual arrangements. These revenues are subject to audit and retroactive adjustment by governmental and third-party agencies. Due to the complexity of the laws and regulations governing the federal and state medical assistance programs, there is at least a possibility that recorded estimates may change by a material amount in the near term. Consistent with health care industry accounting practices, changes to these third-party revenue estimates are recorded in the year the change or adjustment becomes known.

We record bad debt expense monthly using a percentage of revenue approach that reflects our historical experience. Each quarter we adjust the reserves for bad debts according to the aging of the receivables. These adjustments are based on our weighted average experience by payor type, and recognize the relative risk depending on the source of the payment. Private pay accounts usually represent our highest collectibility risk. In addition, specific accounts that are determined to be uncollectible (due to bankruptcy, insufficient documentation, lack of third party coverage or financial resources and the like) are fully reserved when such determinations are made. If circumstances change (including, but not limited to: economic downturn; higher than expected defaults or denials; reduced collections; and changes in our payor mix), our estimates of the recoverability of our receivables could be reduced by a material amount. Our provision for bad debts represented 2.3%, 1.7% and 2.9% of net operating revenues in 2002, 2001 and 2000, respectively. Our allowance for doubtful accounts represented 20% and 17% of patient accounts receivable at December 31, 2002 and 2001, respectively.

We have purchased insurance for property, casualty and other risks from numerous insurance companies. In many cases, the policies provide coverage for events occurring in specific time frames that may only be determined in later years. We exercise care in selecting companies from which we purchase insurance including review of published ratings by recognized rating agencies, advice from national brokers and consultants, and review of trade information sources. There exists a risk that any of these insurance companies may become insolvent and unable to fulfill its obligation to defend, pay or reimburse us when that obligation becomes due. Although we believe the companies we have purchased insurance from are solvent, in light of the dramatic changes occurring in the insurance industry in recent years, we cannot be assured that they will remain solvent and able to fulfill their obligations.

As described more fully in Item 8 — Note 1, we believe adequate provision has been made in the financial statements for liabilities that may arise out of patient care and other services. These provisions are made based primarily upon the results of independent actuarial valuations, prepared by actuaries with long-term care industry experience. This provision also includes accruals for insurance premiums for the coverage period and our estimate of any experience adjustments to premiums. The actuarial valuations are prepared twice a year using the most recent trends of claims, settlements and other relevant data.

The majority of our auto liability and workers’ compensation risks are insured through loss-sensitive insurance policies with affiliated and unaffiliated insurance companies. For our general and professional liabilities, we are responsible for the first dollar of each claim, up to a self-insurance limit determined by the individual policies, subject to aggregate limits in certain prior policy years. The Company’s retained liabilities are estimated by our independent actuaries. On an undiscounted basis, these liabilities totaled approximately $208.0 million at December 31, 2002. On our financial statements, these liabilities are discounted at 10% to their present value using expected loss payment timing patterns. The discount rate is based upon our best estimate of the incremental borrowing rate that would be required to fund these liabilities with uncollateralized debt. A reduction in the discount rate by one-half of a percentage point would have resulted in an additional pre-tax charge for 2002 of $1.4 million. Our independent actuaries estimate our range of discounted exposure for these liabilities to be $168.6 million to $185.2 million. Our recorded reserves for these liabilities totaled $174.0 million at December 31, 2002.

We have two off-balance sheet financing arrangements which totaled approximately $139.5 million at December 31, 2002, including:


	•	$70.0 million of Medium-Term Notes due March 2005 (the “Medium-Term Notes”); and

	•	$69.5 million under an off-balance sheet lease arrangement expiring in April 2004.

The Medium-Term Notes are obligations of a non-consolidated bankruptcy remote, qualifying special purpose entity, Beverly Funding Corporation (“BFC”). BFC’s sole purpose is to acquire, own, hold, and otherwise administer certain patient accounts receivable originated and sold to it by certain of the Company’s operating subsidiaries and to issue beneficial interests in those receivables. Under the terms of the arrangement, certain wholly owned operating subsidiaries of the Company (groups of nursing facilities within each state that the Company operates, referred to as the “Selling Subsidiaries”), which are separate legal entities, sell Medicaid and Veterans Administration patient accounts receivable at their net realizable value to Beverly Health and Rehabilitation Services, Inc. (“BHRS”), a wholly owned operating subsidiary of the Company. BFC then purchases these receivables under a revolving sales structure from BHRS at a discount of 1%. BFC receives its funding from: 1) the issuance of debt to third-party investors; and 2) investments made in BFC by Beverly Enterprises, Inc. (the parent company and a non-transferor). At December 31, 2002 and 2001, BFC had approximately $101.4 million and $101.9 million, respectively, of net receivables.

The Medium-Term Notes were issued in June and July 1999 to third-party investors. The proceeds were used to redeem $50.0 million of then outstanding medium-term notes issued by BFC in 1994 that were nearing maturity and to purchase additional eligible receivables from BHRS. Beverly Enterprises, Inc. also increased its investment in BFC allowing BFC to purchase additional eligible receivables to serve as excess collateral for the new Medium-Term Notes. Under the terms of the arrangement, BFC is required to maintain receivables in excess of the outstanding balance of the Medium-Term Notes based on a calculated formula included in the Master Sales and Servicing Agreement.

The Medium-Term Notes mature in 2005; however, according to the provisions of the notes, principal payments on these obligations, calculated based on quarterly collections of the underlying receivables, begin during the second quarter of 2004. Based on current collection trends, it is expected that these obligations will be paid off by the third quarter of 2004.

BHRS recognizes a loss at the time the receivables are sold to BFC equal to the 1% discount and this loss is included in “Other operating and administrative costs and expenses” and in “Net cash provided by

operating activities” in our consolidated financial statements. BHRS provides invoicing and collection services related to the purchased receivables for a market-based servicing fee. Neither the loss on sale of receivables nor the servicing fee revenue is material to the Company’s results of operations or cash flows.

Prior to June 1999, BFC’s assets, liabilities and operating results were consolidated with the Company. However, in June 1999 in connection with the redemption of previously issued medium-term notes, and issuance of the Medium-Term Notes in June and July 1999, the Master Sale and Servicing Agreement was amended so that BFC met the definition of a qualifying special purpose entity as defined in Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (“SFAS No. 125”). Specifically, BFC was no longer permitted to hold or purchase receivables that originated prior to January 1, 1997 (a condition that prevented it from becoming a qualifying special purpose entity prior to June 1999). The Company continually evaluates the organizational structure and operations of BFC to ensure that it remains legally isolated from the Company and each of its operating subsidiaries and that it maintains its status as a qualifying special purpose entity and, thereby, remains deconsolidated.

The Company’s investment in BFC has been recorded as a non-current asset in the accompanying consolidated balance sheets, which is subject to periodic collectibility review. The primary factor in the collectibility review is the determination of the net realizable value of the excess receivables serving as collateral for the Medium-Term Notes. The net realizable value is determined through a collectibility analysis of the receivables purchased and held by BFC. This collectibility analysis considers historical collection experience and is adjusted according to the aging of the receivables. Once the net realizable value of the excess receivables is determined, we compare it to the carrying value of the asset and adjust the asset downward when the analysis indicates that it will not be recovered.

At December 31, 2002 and 2001, the Company’s investment of approximately $31.0 million and $33.0 million, respectively, was included in “Other assets” on the consolidated balance sheets. At December 31, 2002 and 2001, BFC had excess receivables of approximately $31.0 million and $33.0 million, respectively. Our total investments in BFC have been adjusted from their initial value of $35.0 million due to cumulative credit losses incurred by BFC associated with the purchased receivables since June 1999. We believe our asset will be realized upon the maturity and repayment of the Medium-Term Notes and collection of the excess receivables and is expected to approximate the Company’s recorded asset.

At December 31, 2002, the Company leased five nursing facilities, one assisted living center and its corporate headquarters under an off-balance sheet lease arrangement. The special purpose entity lessor financed the construction of these properties and we lease the properties under a master operating lease agreement, which matures in April 2004. (See Item 8 — Note 8 for a discussion of the 2003 Amendments and their impact on this financing arrangement.) There is a third-party entity at risk under this arrangement for 3% of the original commitment. Of the remaining 97% original commitment, 17% is secured by first mortgages on the related properties and 83% (or approximately $56.0 million at December 31, 2002) is guaranteed by the Company and secured by second mortgages on the related properties.

We monitor these off-balance sheet obligations throughout the year and believe the obligations and any related assets should not be included in our consolidated financial statements under current generally accepted accounting principles. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), which is effective for us in the third quarter of 2003. Under this interpretation, we do not currently anticipate that our accounting for BFC will be affected. However, based on our initial evaluation of FIN 46, it is possible that the special purpose entity lessor in the lease arrangement may need to be consolidated with the Company beginning in the third quarter of 2003. We are continuing to evaluate the consolidation and transition rules under FIN 46, however, if the special purpose entity lessor needs to be consolidated, the leased assets will be consolidated at their depreciated cost and recorded as capital leased assets, with the difference between the historical and the depreciated cost on the date of consolidation being recorded as the cumulative effect of an accounting change. The remaining obligation as of July 1, 2003 ($69.5 million as of December 31, 2002 and expected to be $52.7 million as of July 1, 2003) would be recorded as a capital lease obligation on the Company’s

consolidated balance sheet. If consolidated under FIN 46, we will continue to make quarterly payments under the obligation, to be recorded as interest expense, and the capital leased assets will be depreciated, increasing our annual depreciation and amortization expense by approximately $2.3 million. Under the terms of the lease arrangement, we have the option to purchase the leased assets and prepay the obligation.

In addition, we have off-balance sheet debt guarantees of approximately $31.5 million that primarily arose from our sale of nursing facilities. We also guarantee certain third-party operating leases. Those guarantees arose from our dispositions of leased facilities and the underlying leases have approximately $13.3 million of minimum rental commitments remaining through the initial lease terms. In addition, we guarantee an officer’s bank loan of approximately $200,000, which is collateralized by shares of our common stock pledged by the officer. See Item 8 — Note 9 for a more complete description of each of these items. Each of these guarantees will be subject to FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees Including Indirect Guarantees of Indebtedness of Others (“FIN 45”), issued in November 2002. See New Accounting Standards below.

We recorded pre-tax asset impairment charges of $71.6 million, $171.1 million and $9.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. We also recorded additional impairments of goodwill of $77.2 million in 2002 as the cumulative effect of an accounting change. We evaluate our long-lived assets for impairment whenever indicators of impairment exist, in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”). These indicators of impairment can include, but are not limited to, the following:


	•	a history of operating losses, with expected future losses;

	•	changes in the regulatory environment affecting reimbursement;

	•	decrease in cash flows or cash flow deficiencies;

	•	changes in the way an asset is used in the business; and

	•	commitment to a plan to sell or otherwise dispose of an asset.

During 2002, changes in the regulatory environment affecting Medicare reimbursement led to a long-lived asset impairment analysis on our Nursing Facilities segment. During 2001, continuing operating losses in several of our lines of business, including certain Matrix clinics, our managed care contracting entity, certain Home Care businesses and a few of our nursing facilities, led to impairment analyses on these assets. During 2000, operating losses at certain Matrix clinics and management’s determination to dispose of, or terminate the leases on, six nursing facilities led to impairment analyses to be calculated on these assets.


	•	estimating the undiscounted cash flows to be generated by each clinic, unit, facility or property, primarily over the remaining life of the primary asset; and

	•	reducing the carrying value of the asset to the estimated fair value when the total estimated undiscounted cash flows was less than the current book value of the clinic, unit, facility or property.

In estimating the undiscounted cash flows for our nursing facilities, we primarily used our internally prepared budgets and forecast information, with certain probability adjustments, including, but not limited to, the following items: Medicare and Medicaid funding; overhead costs; capital expenditures; and patient care liability costs. In order to estimate the fair values of the nursing facilities, we used a discounted cash flow approach, supplemented by public resource information on valuations of nursing facility sales transactions, by region of the country. Where the estimated undiscounted cash flows were negative, we estimated the fair values based on discounted public resource information, sales values or estimated salvage value. For other lines of business that lack significant property investments, we discounted the next five years of expected cash flows. A substantial change in the estimated future cash flows for these facilities or businesses could materially change the estimated fair values of these assets, possibly resulting in an additional impairment.

In July 2001, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”) was issued, which established new rules on the accounting for goodwill and other intangible assets. In accordance with this standard, we performed the initial screening for potential impairments of our indefinite lived intangible assets by reporting unit as of January 1, 2002. We determined the estimated fair values of each reporting unit using discounted cash flow analyses, along with independent source data related to recent transactions. Based on this determination, we identified potential goodwill impairments at our Matrix segment and at Care Focus, a reporting unit within our Home Care segment. We engaged a qualified, independent valuation group to determine the estimated fair values of each of these reporting units. Their analysis was completed in the fourth quarter of 2002, and led to the recording of goodwill impairment charges as the cumulative effect of an accounting change of $77.2 million as of January 1, 2002, including $70.6 million for Matrix and $6.6 million for Care Focus. Based on our annual October 1, 2002 assessment of all reporting units, no additional impairment of goodwill was required.

During 2001, management initiated a formal plan to dispose of all of our nursing facility operations in Florida. Accordingly, these assets were written down to their estimated sales value less selling costs. We ultimately leased these assets to a third party in the fourth quarter of 2001, with the real estate transaction closing in January 2002. See Item 8 — Note 4 for a more detailed discussion of this transaction, including related exit and other costs, and other impairments we have recorded. Under accounting standards in effect in 2001, our Florida assets were not considered discontinued operations.

We reported a net loss from continuing operations for the year ended December 31, 2002 of $32.1 million, compared to a net loss from continuing operations of $237.4 million for the year ended December 31, 2001. The net loss from continuing operations for 2002 included pre-tax charges totaling approximately $98.6 million, including:


	•	$79.5 million for asset impairments, workforce reductions and other unusual items;

	•	$22.2 million for the Florida insurance reserve adjustment;

	•	$6.3 million for the California investigation settlement and related costs; and

	•	partially offset by a $9.4 million adjustment to reduce estimated reserves no longer needed, related to settlements of federal government investigations.

The $79.5 million for asset impairments, workforce reductions and other unusual items includes the following:


	•	$74.6 million write-down of property and equipment on certain nursing facilities whose book value exceeded fair value when tested for impairment as a result of the reduction in Medicare funding effective October 1, 2002. These assets were included in the total assets of the Nursing Facilities operating segment in 2002;

	•	$8.5 million of workforce reductions (see below); and

	•	$3.0 million adjustment to asset impairments and $600,000 reversal of workforce reduction charges recorded in 2001, which were no longer needed.

We recorded a pre-tax charge of $8.5 million during 2002 for workforce reductions which were primarily the result of a continuing operational reorganization required to support the implementation of our three year strategic plan. During 2002, we notified 133 associates that their positions would be eliminated. The charge included the following:


	•	$8.0 million of cash expenses, approximately $4.1 million of which was paid during the year ended December 31, 2002; and


	•	non-cash expenses of $500,000 related to the issuance of 124,212 shares under our Stock Grant Plan (as defined herein).

We estimate the annual cost savings of this operational reorganization to be approximately $11.2 million.

The following table summarizes activity in our estimated workforce reduction and exit costs for the years ended December 31 (in thousands):

Net loss from continuing operations for 2001 included pre-tax charges totaling approximately $197.4 million primarily for asset impairments, exit costs and workforce reductions. See “2001 Compared to 2000 — Results of Operations.”

We recorded a provision for income taxes of approximately $6.1 million for the year ended December 31, 2002, primarily related to state income taxes. We increased our valuation allowance on our deferred tax assets by $45.5 million during 2002 to $199.2 million as of December 31, 2002. This valuation allowance is required under the guidance of SFAS No. 109 due to our historical operating performance and our reported cumulative net losses. Our realization of the deferred tax benefits primarily associated with our net operating losses is dependent upon our achieving sufficient future pre-tax income. Under federal income tax regulations, we have up to 20 years to generate sufficient taxable income to realize the deferred benefits. However, given the size of our pre-tax losses in 2002 and 2001 and uncertainties created by Medicare reimbursement enhancements which expired on September 30, 2002, a valuation allowance is considered to be appropriate under the more stringent accounting standards for the realization of these deferred tax benefits, which is contingent upon future income.

At December 31, 2002, for income tax purposes, we had federal net operating loss carryforwards of $164.7 million which expire in years 2017 through 2022; general business tax credit carryforwards of $28.7 million which expire in years 2008 through 2022; and alternative minimum tax credit carryforwards of $19.1 million which do not expire. Future tax benefits associated with these carryforwards are not recorded in our 2002 and 2001 consolidated financial statements as a result of the valuation allowance recorded.

We reported net operating revenues of $2,419.9 million during the year ended December 31, 2002 compared to $2,600.0 million for the same period in 2001. Approximately 95% and 96% of our total net operating revenues for each of the years ended December 31, 2002 and 2001, respectively, were derived from services provided by our Nursing Facilities segment. The decrease in net operating revenues of approximately $180.1 million for the year ended December 31, 2002, as compared to the same period in 2001, is due to the following:


	•	a decrease of $319.8 million due to dispositions, primarily related to our Florida facilities;

	•	an increase of approximately $98.9 million from facilities we operated during each of the years ended December 31, 2002 and 2001 (“same facility operations”);


	•	an increase of $35.6 million from growth in AEGIS’ external therapy business; and

	•	an increase of $5.2 million due to a facility acquisition, and the opening of a newly constructed facility and four hospice centers.

The increase in net operating revenues of approximately $98.9 million from same facility operations for the year ended December 31, 2002, as compared to the same period in 2001, was primarily due to the following:


	•	$84.1 million due to an increase in Medicaid, Medicare and private payment rates;

	•	$17.6 million due to a positive shift in our patient mix;

	•	$14.8 million due to an increase in Medicare Part B revenues; and

	•	partially offset by a decrease of $23.7 million due to a decline in same facility census.

Effective October 1, 2002, certain Medicare add-on payments were eliminated when the federal government failed to pass legislation to restore the funding. These add-on payments included a 16.66% add-on to the nursing component of all 44 Resource Utilization Grouping (“RUG”) categories and a 4% overall increase in the adjusted rates for all 44 RUG categories. Our net operating revenues were reduced by approximately $14.0 million as a result of the elimination of these add-ons in the fourth quarter of 2002. (This reduction is netted above with the increases in payment rates from all sources of revenue for 2002 over 2001.) Assuming a similar volume and mix of Medicare patients in 2003, we anticipate our net operating revenues will decline an additional $42.0 million from 2002, for an annual impact of $56.0 million.

Additional Medicare add-on payments, currently approximating $38.6 million of our annual net operating revenues, are scheduled to expire when CMS releases refinements to the current RUG payment system. We cannot currently predict when this will happen, or the ultimate impact it will have on our operating results or cash flows. In addition, we currently anticipate that on July 1, 2003, Part B therapy caps will go into effect on a prospective basis. Based on the current volume of Part B therapy in our nursing homes, the decrease in our annual net operating revenues is anticipated to be approximately $16.0 million. Our AEGIS outside therapy contract business will likely be further impacted in terms of revenue and may be required to adjust therapy staffing levels to offset a portion of this revenue impact.

We reported operating and administrative expenses of $2,204.2 million during the year ended December 31, 2002 compared to $2,347.4 million for the same period in 2001. The decrease of approximately $143.2 million consists of the following:


	•	a decrease of $267.2 million due to dispositions, primarily related to our Florida facilities;

	•	an increase of $10.5 million due to a facility acquisition, and the opening of a newly constructed facility and four hospice centers; and

	•	an increase of approximately $113.5 million in same facility operations.

The increase in operating and administrative expenses of approximately $113.5 million from same facility operations for the year ended December 31, 2002, as compared to the same period in 2001, was due primarily to the following:


	•	$38.7 million of additional wages and related expenses primarily due to an increase in our weighted average wage rate and an increase in nursing hours per patient day;

	•	$27.9 million additional provision for reserves on accounts and notes receivable;

	•	$28.0 million due to an increase in contracted services, primarily due to outsourcing certain housekeeping, laundry and dietary services in our Nursing Facilities segment; and

	•	$23.9 million increase in our provision for insurance and related claims, as discussed below.

Our provision for insurance and related items increased approximately $23.9 million for the year ended December 31, 2002, as compared to the same period in 2001, primarily due to rising patient care liability costs. Based on the results of our mid-year actuarial study completed in mid-July, we recorded a pre-tax charge of $43.3 million to increase our reserves for prior policy-year patient care liability costs, including $22.2 million related to our previously operated Florida facilities, which have been sold, and $21.1 million related to same facility operations. We believe that adequate provision has been made in the financial statements for liabilities that may arise out of patient care services. These provisions are made based upon the results of independent actuarial valuations and other information available, including management’s best judgments and estimates. Our most recent actuarial study indicated our reserves were adequate. However, the provision and liability have been difficult to estimate and have been escalating in recent periods. There can be no assurance that the provision and the resulting reserves will not require material adjustment in future periods.

Interest income increased to $4.7 million for the year ended December 31, 2002, as compared to $3.0 million for the same period in 2001 primarily due to certain notes receivable accepted as partial consideration for the sale of the Florida facilities. Interest expense decreased to $66.8 million for the year ended December 31, 2002, as compared to $79.3 million for the same period in 2001. This was primarily due to the reduction of debt using the net proceeds from the sale of the Florida facilities.

Depreciation and amortization expense was $81.1 million for the year ended December 31, 2002, as compared to $81.2 million for the same period in 2001. Depreciation and amortization decreased approximately $6.2 million due to the elimination of amortization on goodwill and other indefinite lived intangibles with the implementation of SFAS No. 142, and the dispositions of, or lease terminations on, certain facilities. However, these decreases were substantially offset by increases of $6.1 million related to capital additions and improvements as well as acquisitions and openings.

In accordance with the provisions of SFAS No. 144, the results of operations of Matrix and MK Medical have been reclassified and reported, for all periods presented, as discontinued operations in the accompanying consolidated statements of operations. Following is a summary of the discontinued operations of Matrix and MK Medical for the years ended December 31 (in thousands):


(1)	Includes an adjustment of $18.0 million in 2002 for estimated overpayments to MK Medical by government payors. (See Item 8 — Note 9.)

(2)	Includes $1.0 million accrued for legal and related fees associated with the MK Medical estimated overpayment issue.

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, which established new rules on the accounting for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized; however, they are subject to annual impairment tests as prescribed by the Statement. Intangible assets with definite lives will continue to be amortized over their estimated useful lives. With respect to our goodwill and intangible assets, SFAS No. 142 was effective for us beginning January 1, 2002.

Following is a summary of adjusted operating results reflecting the effects of adopting SFAS No. 142, net of income taxes, for the periods ended December 31 (in thousands, except per share amounts):

We completed the impairment assessment of our indefinite lived intangible assets, other than goodwill, during the first quarter of 2002, with no impairment identified. SFAS No. 142 described a two-step process for testing goodwill for impairment. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. Upon completion of the first step of the goodwill impairment test for all reporting units of the Company, results indicated that goodwill appeared to be impaired for our Matrix and Home Care Services — Care Focus reporting units. We subjected the goodwill at these reporting units to step two under SFAS No. 142.

We engaged a qualified, independent third party to determine the estimated fair value of these two reporting units. Their valuation was completed during the fourth quarter of 2002, and the resulting impairment losses amounted to approximately $70.6 million for Matrix and $6.6 million for Home Care Services — Care Focus. As required by SFAS No. 142, these impairment losses have been recorded in the accompanying statement of operations as the cumulative effect of a change in accounting for goodwill as of January 1, 2002.

In accordance with SFAS No. 142, we completed our annual impairment assessment of all of our indefinite lived intangible assets, including goodwill, as of October 1, 2002 with no additional impairment required.

it is possible that the special purpose entity lessor in the lease arrangement may need to be consolidated with the Company beginning in the third quarter of 2003. We are continuing to evaluate the consolidation and transition rules under FIN 46, however if the special purpose entity lessor needs to be consolidated, the leased assets will be consolidated at their depreciated cost and recorded as capital leased assets, with the difference between the historical and the depreciated cost on the date of consolidation being recorded as the cumulative effect of an accounting change. The remaining obligation as of July 1, 2003 ($69.5 million as of December 31, 2002 and expected to be $52.7 million as of July 1, 2003) would be recorded as a capital lease obligation on the Company’s consolidated balance sheet. The assets would be depreciated and payments on the obligations would be recorded as interest expense until the obligations are satisfied. FIN 46 is not expected to impact our accounting treatment of BFC. (See Off-Balance Sheet Obligations herein.)

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 requires certain guarantees to be recorded at fair value when a transaction is consummated. This differs from current practice, which is generally to record a liability only when a loss is probable and reasonably estimable. FIN 45 applies to guarantee contracts having financial guarantees, performance guarantees, indemnification or indirect guarantees of the indebtedness of others. FIN 45 also requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. We have complied with the new disclosure requirements, which are effective for us as of December 31, 2002. The recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. We are continuing our review of the implications of FIN 45, which may impact our accounting for future dispositions.

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured at its fair value when the liability is incurred rather than when an entity commits to an exit plan. Depending on the terms of the exit or disposal, under SFAS No. 146, severance pay could be recognized over time or up front. Also, SFAS No. 146 requires that a liability be recognized, measured at its fair value, when an entity ceases operation at a location covered under a pre-existing contract, such as a lease. Fair value in this case would represent the present value of the future payment obligations net of assumed receipts, such as sublease income, at current market value. SFAS No. 146 is effective for all exit or disposal activities initiated after December 31, 2002. Many of the provisions of SFAS No. 146 affect only the timing of when a liability is recorded and not the amount of the liability. Therefore, we do not expect there will be a material effect on our consolidated financial position or results of operations as a result of adopting SFAS No. 146.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). This Statement eliminates extraordinary accounting treatment for reporting gains or losses on debt extinguishments, and amends certain other existing accounting pronouncements. The provisions of this Statement are effective for the Company beginning with the first quarter of 2003 with restatement of prior year debt extinguishment-related extraordinary items required.

We reported a net loss from continuing operations for the year ended December 31, 2001 of $237.4 million, compared to a net loss from continuing operations of $15.2 million for the year ended December 31, 2000. Net loss from continuing operations for 2001 included pre-tax charges totaling approximately $197.4 million, primarily including $171.1 million for asset impairments, exit and other costs and $24.2 million for workforce reductions and related costs. These pre-tax charges have been included in the


	•	$75.1 million write-down of Florida facilities and $55.1 million of Florida exit and other costs, as discussed below. These assets were included in the total assets of the Nursing Facilities segment as of December 31, 2001;

	•	write-down of goodwill of $15.4 million, property, equipment and other intangible assets of $1.0 million and recording of closing and other costs of $2.8 million on under-performing Home Care businesses. These assets were included in the total assets of the Home Care segment as of December 31, 2001;

	•	write-down of property and equipment of $10.0 million, and goodwill and other intangibles of $600,000 on certain under-performing nursing facilities. These assets were included in the total assets of the Nursing Facilities operating segment as of December 31, 2001;

	•	write-off of abandoned projects and investments totaling $7.8 million; and

	•	$3.3 million related to the termination of a lease in Indiana and the write-off of the net book value of the related assets.

During 2001, a formal plan was initiated by management to pursue the sale of our nursing home operations in Florida, which included 49 nursing facilities (6,129 beds) and four assisted living centers (315 units) (the “Florida facilities”). The plan included the pursuit of the sale of one additional nursing facility (56 beds) in Florida and certain other assets which would be sold in separate transactions. The decision to sell these properties was made primarily due to the excessive patient care liability costs that we had been incurring 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 held for sale. Management estimated the fair value less selling costs of such assets and took pre-tax charges in 2001 totaling $75.1 million to write-down the Florida assets. Effective December 1, 2001, we entered into a lease agreement on the Florida facilities with Florida Health Care Properties and we closed the real estate transaction on January 8, 2002.

In conjunction with the sale of the Florida facilities, we also recorded pre-tax charges totaling $55.1 million for certain exit and other costs. These costs related to severance agreements, termination payments on certain contracts and various other items. At December 31, 2001, the Florida assets held for sale totaled approximately $120.8 million and were classified as current assets in the consolidated balance sheet.

Annualized revenues for the Florida facilities were approximately $288.0 million. During the year ended December 31, 2001, our Florida nursing home operations recorded pre-tax income of approximately $600,000. This amount does not include certain costs which were recorded at the parent company level and were not fully allocated to the individual subsidiaries or facilities. We did not record depreciation and amortization expense on the Florida assets during the period these assets were held for sale, since these assets were adjusted to their estimated net realizable value. The amount of depreciation and amortization expense that we did not have to record during the year ended December 31, 2001 on the Florida assets was approximately $6.8 million.

During 2001, we recorded pre-tax charges totaling approximately $24.2 million for workforce reductions and related costs. Approximately $23.1 million of these pre-tax charges related to severance and other employment agreements for approximately 240 associates who were notified in 2001 that their positions would be eliminated, including:


	•	$18.0 million of cash expenses, approximately $4.9 million and $11.3 million of which was paid during the years ended December 31, 2002 and 2001, respectively;

	•	non-cash expenses of $4.5 million related to the issuance of shares under our Stock Grant Plan; and

	•	non-cash expenses of $600,000 related to other long-term incentive agreements.

We estimated the annual costs savings of this operational reorganization to be approximately $14.0 million. Much of this savings was realized in 2001, since the majority of the workforce reductions took place in

the first quarter. These estimated savings are net of the additional costs we incurred to increase the operations and clinical staff at the facility and district level. Approximately $600,000 of these workforce reduction charges in 2001 were reversed during 2002.

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. They will be issued under the Beverly Enterprises, Inc. Stock Grant Plan (the “Stock Grant Plan”) to holders of restricted stock who, by virtue of the terms of their employment contracts, severance agreements or other similar arrangements, are entitled to the immediate vesting of their restricted stock. 669,754 shares of Common Stock under the Stock Grant Plan have been issued in 2002 and 2001 to various officers in exchange for shares of restricted stock held by them, which have been cancelled.

On February 4, 2002, we made a settlement offer to the federal government to resolve open reimbursement issues under the former cost-reimbursement system for Medicare. For accounting purposes, this settlement offer was required to be recorded in our operating results for the year ended December 31, 2001 and resulted in a pre-tax charge of approximately $77.5 million which is included in the caption “Special charges and adjustments related to settlements with the federal government.” This charge included a $35.0 million cash settlement and the write-off of $81.5 million of related cost report receivables, offset by a $39.0 million reserve established in 1999 for related issues. This matter was settled with CMS in the fourth quarter of 2002, and required no increase in accruals previously recorded.

We recorded a provision for income taxes at 26% for the year ended December 31, 2001, even though we had a pre-tax loss, primarily due to the recording of a $153.7 million valuation allowance on our deferred tax assets. This valuation allowance was required under the guidance of SFAS No. 109 due to our historical operating performance and our reported cumulative net losses. Our annual effective tax rate for 2000 was 29%, which was different than the federal statutory rate primarily due to amortization of nondeductible goodwill and state income taxes, partially offset by the benefit of certain tax credits.

We reported net operating revenues of $2,600.0 million during the year ended December 31, 2001 compared to $2,523.3 million for the same period in 2000. Approximately 96% of our total net operating revenues for each of the years ended December 31, 2001 and 2000 were derived from services provided by our Nursing Facilities segment. The increase in net operating revenues of approximately $76.7 million for the year ended December 31, 2001, as compared to the same period in 2000, consists of the following:


	•	an increase of approximately $150.6 million from facilities we operated during each of the years ended December 31, 2001 and 2000 (“same facility operations”);

	•	an increase of $19.9 million due to acquisitions and openings of newly-constructed facilities;

	•	an increase of $13.7 million from growth in AEGIS’ external therapy business; and

	•	a decrease of $107.5 million due to dispositions.

The increase in net operating revenues of approximately $150.6 million from same facility operations for the year ended December 31, 2001, as compared to the same period in 2000, was primarily due to the following:


	•	$164.1 million due to an increase in Medicaid, Medicare and private payment rates;

	•	$8.9 million due to a positive shift in our patient mix;

	•	partially offset by a decrease of $16.5 million due to a decline in same facility census; and

	•	$5.5 million due to one less calendar day during the year ended December 31, 2001, as compared to the same period in 2000.

We reported operating and administrative expenses of $2,347.4 million during the year ended December 31, 2001 compared to $2,360.6 million for the same period in 2000. The decrease of approximately $13.2 million consists of the following:


	•	a decrease of $74.2 million due to dispositions;

	•	an increase of approximately $42.2 million in same facility operations; and

	•	an increase of $18.8 million due to acquisitions and openings of newly-constructed facilities.

The increase in operating and administrative expenses of approximately $42.2 million from same facility operations for the year ended December 31, 2001, as compared to the same period in 2000, was due primarily to the following:


	•	$90.1 million of additional wages and related expenses primarily due to an increase in our weighted average wage rate;

	•	$5.5 million due to an increase in other contracted services;

	•	partially offset by a $41.5 million decrease in bad debt expense primarily due to improved collections on our patient accounts receivable; and

	•	$19.5 million decrease in our provision for insurance and related items primarily due to an incremental pre-tax charge of approximately $44.4 million recorded in 2000 to increase reserves for patient care liability costs.

Excluding this $44.4 million pre-tax charge for 2000, our provision for insurance and related items increased approximately $24.9 million for the year ended December 31, 2001, as compared to the same period in 2000, primarily due to rising patient care liability costs.

Depreciation and amortization expense decreased approximately $6.6 million to $81.2 million for the year ended December 31, 2001, as compared to $87.8 million for the same period in 2000 primarily due to the discontinuation of depreciation and amortization of our Florida nursing home assets, as they were classified as held for sale at March 31, 2001.

At December 31, 2002, we had approximately $115.4 million in cash and cash equivalents. We anticipate $20.5 million of this cash balance at December 31, 2002, while not legally restricted, will be utilized primarily to fund certain general liability and worker’s compensation claims and expenses. At December 31, 2002, we had approximately $124.1 million of unused commitments under our $150.0 million credit facility, with utilization being for standby letters of credit primarily in support of certain insurance programs, security deposits, and debt or guaranteed debt obligations. At December 31, 2002, we had negative working capital of approximately $41.7 million reflected on our consolidated balance sheet.

Net cash provided by operating activities for the year ended December 31, 2002 was approximately $116.6 million compared to approximately $220.9 million for the same period in 2001. This decline was primarily related to reducing accounts payable and accrued liabilities by approximately $85.3 million, including $35.0 million paid to CMS in November 2002. Net cash provided by investing activities and net cash used in financing activities were approximately $62.3 million and $152.9 million, respectively, for the year ended December 31, 2002. We received net cash proceeds of approximately $169.5 million from the dispositions of facilities and other assets in 2002. These net proceeds, along with cash generated from

Effective December 31, 2002, we executed an amendment to our Credit Facility, as well as amendments with certain of our other lenders covering debt of approximately $88.8 million (collectively, the “2002 Amendments”), which modified certain financial covenant levels. The 2002 Amendments were required because recording the special charges, as discussed in Item 8 — Note 4, would have resulted in our noncompliance with a financial covenant ratio contained in those debt agreements.

In February 2003, we executed an additional amendment to our Credit Facility and our off-balance sheet lease arrangement (collectively, the “2003 Amendments”). The 2003 Amendments provide for, among other things:


	•	further modification of certain financial covenant levels;

	•	changes in the interest rates on our borrowings;

	•	the pledging of additional assets as collateral for certain of the lenders;

	•	use of a portion of the proceeds from the sales of assets to repay obligations or reduce available borrowings;

	•	reduced availability under the Credit Facility;

	•	accelerated maturity for the lease arrangement to the same date as our Credit Facility and various other items.

We conduct business with third parties and have accounts and notes receivable due from third parties who could be financially impacted by the expiration of the Medicare add-on payments. We currently believe that an adequate provision has been made for the possibility of these receivables becoming uncollectible and we continually monitor and adjust these allowances as necessary.

In 2002, we completed a full evaluation of our nursing home portfolio, which included the identification of facilities that account for a disproportionate share of projected patient care liability costs. As a result of this evaluation, we expect to divest a significant portion of our current nursing home capacity over the next two years. This process represents a significant acceleration of our strategy to strengthen the nursing home portfolio. Over the next three years, we also will be implementing initiatives to improve our fundamental business processes and plan to reduce costs by approximately $40.0 million throughout the organization. We can give no assurance that we will be able to execute the divestiture strategy in a timely manner at fair values or that we will be able to reduce costs to achieve our stated objective within the time period projected.

We currently anticipate that cash flows from operations and availability under our banking arrangements will be adequate to repay our debts due within one year of approximately $41.5 million, to make operating lease and other contractual payments of approximately $107.0 million, to make normal recurring capital additions and improvements of approximately $50.0 million, to make selective acquisitions and to meet working capital requirements for the year ending December 31, 2003. 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.

A summary of our long-term contractual obligations and commitments in future years as of December 31, 2002 is shown below (in thousands):

These obligations and commitments do not include $70.0 million of Medium-Term Notes due March 2005 which are off-balance sheet obligations of BFC. (See Item 8 — Note 1.)

We are exposed to market risk because we utilize financial instruments. The market risks inherent in these instruments are attributable to the potential loss from adverse changes in the general level of U.S. interest rates. We manage our interest rate risk exposure by maintaining a mix of fixed and variable rates for debt and notes receivable. The following table provides information regarding our market sensitive financial instruments and constitutes a forward-looking statement.

We have audited the accompanying consolidated balance sheets of Beverly Enterprises, Inc. as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Beverly Enterprises, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for goodwill.

References herein to the Company include Beverly Enterprises, Inc. and its wholly owned subsidiaries.

On December 31, 2002, we operated 452 nursing facilities, 29 assisted living centers, 151 outpatient clinics and 49 hospice and home care centers in 32 states and the District of Columbia. Our operations also include rehabilitation therapy services. Our consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

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 contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.

Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less.

Property and equipment is stated at the lower of carrying value or fair value, or where appropriate, the present value of the related capital lease obligations less accumulated amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets.

Goodwill ($87.9 million and $197.1 million at December 31, 2002 and 2001, respectively, net of accumulated amortization of $24.5 million and $52.2 million, respectively) and other indefinite lived intangible assets ($11.4 million and $11.1 million at December 31, 2002 and 2001 respectively, net of accumulated amortization of $5.4 million and $5.6 million, respectively) are stated at the lower of carrying value or fair value. In July 2001, Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(“SFAS No. 142”) was issued, which established new rules on the accounting for goodwill and other intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized; however, they are subject to annual impairment tests as prescribed by the Statement. Intangible assets with definite lives will continue to be amortized over their estimated useful lives. With respect to our goodwill and intangible assets, SFAS No. 142 was effective for us beginning January 1, 2002.

Following is a summary of adjusted operating results reflecting the effects of adopting SFAS No. 142, net of income taxes, for the periods ended December 31 (in thousands, except per share amounts):

In accordance with this standard, we performed the initial screening for potential impairments of our indefinite lived intangible assets by reporting unit as of January 1, 2002. We determined the estimated fair values of each reporting unit using discounted cash flow analyses, along with independent source data related to recent transactions. Based on this determination, we identified potential goodwill impairments at our Matrix and Home Care Services — Care Focus reporting units.

We engaged a qualified independent valuation group to determine the estimated fair values of each of these reporting units. Their valuation analysis was completed in the fourth quarter of 2002, and led to the recording of a cumulative effect of a change in accounting for goodwill of $77.2 million as of January 1, 2002, including $70.6 million for Matrix and $6.6 million for Care Focus. In accordance with SFAS No. 142, we test goodwill for impairment on an annual basis as of October 1 for each of our reporting units. We also test goodwill for impairment, between annual tests, if an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based on the October 1, 2002 analysis, no additional impairment of goodwill or other indefinite lived intangibles was identified.

Following is a summary of our finite lived intangible assets and related accumulated amortization, by major classification, which are included in “Other assets” at December 31 (in thousands):

The weighted-average amortization period for these intangibles is approximately 18 years, including 20 years for operating rights and licenses and 16 years for leasehold interests. Amortization expense related to

these intangibles for the years ended December 31, 2002, 2001 and 2000 was $300,000, $400,000 and $800,000, respectively. Our estimated aggregate annual amortization expense for these intangibles for each of the next five years is approximately $100,000.

On an ongoing basis, we review the carrying value of our finite lived intangibles in light of any events or circumstances that indicate they may be impaired or that the amortization period may need to be adjusted and make any necessary adjustments. As of December 31, 2002, we do not believe there are any indications that the carrying values, or the useful lives, of these assets need to be adjusted. We have no residual values assigned to our finite lived intangible assets.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), which addresses financial accounting and reporting for the impairment of long-lived assets (other than goodwill and indefinite lived intangibles) and for long-lived assets to be disposed of. SFAS No. 144 supersedes 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”) and Accounting Principles Board Opinion No. 30, Reporting the Results of Operations — Reporting the effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. We adopted the provisions of SFAS No. 144 in 2002. Similar to SFAS No. 121, SFAS No. 144 requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amounts. The impairment loss is measured by comparing the estimated fair value of the asset, usually based on discounted cash flows, to its carrying amount. In accordance with SFAS No. 144, we assess the need for an impairment write-down when such indicators of impairment are present. (See Note 4.)

SFAS No. 144 also addresses the accounting for and disclosure of long-lived assets to be disposed of by sale. Under SFAS No. 144, when a long-lived asset or group of assets (disposal group) meets certain criteria set forth in the Statement, including a commitment by the Company to a plan to sell the long-lived asset (disposal group) within one-year:


	•	the long-lived asset (disposal group) will be measured at the lower of its carrying value or fair value less costs to sell and classified as held for sale on the consolidated balance sheet; and

	•	the related operations of the long-lived asset (disposal group) will be reported as discontinued operations in the consolidated statement of operations, with all comparable periods restated.

At December 31, 2002, Matrix and MK Medical met the criteria set forth in SFAS No. 144 to be classified as held for sale. (See Note 5.)

The Company has an agreement to sell, on an ongoing basis, certain of its patient accounts receivable through a revolving sales structure and retains servicing responsibilities for the transferred receivables. The Company accounts for the transfers of receivables as sales in accordance with Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguish-

ments of Liabilities (“SFAS No. 140”). Accordingly, the related patient accounts receivable are not included in the consolidated balance sheets.

During 2002, 2001 and 2000 the Company, through its wholly owned subsidiary Beverly Health and Rehabilitation Services, Inc. (“BHRS”), sold on a revolving basis certain Medicaid and Veterans Administration (“VA”) patient accounts receivable to a non-consolidated bankruptcy remote, qualifying special purpose entity (“QSPE”), Beverly Funding Corporation (“BFC”) at a discount of 1%. These daily transactions constitute true sales of receivables for which BFC bears the risk of collection.

Activities related to the revolving sales structure with BFC were as follows for the years ended December 31 (in thousands):

BHRS provides invoicing and collection services related to the receivables for a market-based servicing fee. BHRS recognizes a loss for the 1% discount at the time of sale which is included in “Other operating and administrative costs and expenses” and in “Net cash provided by operating activities” in our consolidated financial statements. The loss on sale and the servicing fee revenue are not considered material to the Company’s operating results or cash flows.

At December 31, 2002 and 2001, the Company had an investment in BFC of approximately $31.0 million and $33.0 million, respectively, which approximated the excess level of receivables held by BFC to over collateralize $70.0 million of Medium-Term Notes (the “Medium-Term Notes”). The investment is included in “Other assets” in the consolidated balance sheet and is subject to periodic collectibility review. The primary factor in the collectibility review is the determination of the net realizable value of the excess collateral. The net realizable value is determined through a collectibility analysis of the receivables purchased and held by BFC. This collectibility analysis considers historical collection experience and is adjusted according to the aging of the receivables. The carrying value of the asset is adjusted downward when the analysis indicates that it will not be recovered.

BFC has $70.0 million of Medium-Term Notes, which are collateralized by outstanding Medicaid and VA patient accounts receivable purchased from BHRS. BFC is required to maintain receivables in excess of the outstanding balance of the Medium-Term Notes, based on a calculated formula in the Master Sale and Servicing Agreement. Based on ongoing reviews of BFC’s operations, the Company believes that BFC meets the criteria set forth in SFAS No. 140, and related interpretive guidance, to be a QSPE. Therefore, the assets and liabilities of BFC are not consolidated with Beverly Enterprises, Inc. At December 31, 2002, BFC had total assets of approximately $102.7 million, pledged as collateral for the Medium-Term Notes. The assets of BFC cannot be used to satisfy claims of the Company or any of its subsidiaries. The Medium-Term Notes currently mature in March 2005; however, according to the provisions of the notes, principal payments on these obligations, calculated based on quarterly collections of the underlying receivables, begin in the second quarter of 2004. Based on current collection trends, it is expected that these obligations will be paid off by the third quarter of 2004.

General and professional liability costs for the long-term care industry have become increasingly expensive and difficult to estimate. In addition, insurance coverage for patient care liability and certain other risks, for nursing facilities specifically and companies in general, has become increasingly difficult to obtain. When obtained, insurance carriers are often requiring companies to significantly increase their liability retention levels and/or pay substantially higher premiums for reduced coverage. There exists a risk that any of these insurance companies may become insolvent and unable to fulfill their obligation to defend, pay or reimburse us when that obligation becomes due. Although we believe the companies we have purchased insurance from are solvent, in light of the dramatic changes occurring in the insurance industry in recent years, we cannot be assured that they will remain solvent and able to fulfill their obligations.

We believe that adequate provision has been made in the financial statements for liabilities that may arise out of patient care and related services provided to date. These provisions are based primarily upon the results of independent actuarial valuations, prepared by actuaries with long-term care industry experience. These independent valuations are formally prepared twice a year using the most recent trends of claims, settlements and other relevant data. In addition to the actuarial estimate of claim payments, our provision for insurance includes accruals for insurance premiums for the coverage period and our estimate of any experience adjustments to premiums.

Based on the results of the mid-year actuarial study completed in mid-July of 2002, performed by our independent actuaries, we recorded a pre-tax charge of $43.3 million related to an increase in our reserves for prior policy year patient care liability costs, including $22.2 million attributable to our previously operated Florida facilities. We completed the sale of our Florida facilities in January 2002; however, we are liable for patient care liability claims and other costs for those facilities through the date of sale, subject to insurance.

We insure certain of our auto liability, general liability, professional liability and workers’ compensation risks through various types of loss sensitive insurance policies with affiliated and unaffiliated insurance companies, some of which are subject to reinsurance agreements between the insurer and Beverly Indemnity, Ltd., a wholly owned subsidiary of the Company. For our general and professional liabilities, we are typically responsible for the first dollar of each claim, up to a self-insurance limit determined by the individual policies, subject to aggregate limits for certain policy years. The liabilities for incurred losses retained by Beverly and not covered by insurance are estimated by the independent actuaries and are discounted on our financial statements at 10% to their present value using expected loss payment timing patterns. The discount rate is based upon our best estimate of the incremental borrowing rate that would be required to fund these liabilities with uncollateralized debt. A reduction in the discount rate by one-half of a percentage point would have resulted in an additional pre-tax charge of approximately $1.4 million for the year ended December 31, 2002. The discounted insurance liabilities are included in the consolidated balance sheet captions as follows at December 31 (in thousands):

On an undiscounted basis, the total retained liabilities as of December 31, 2002 and 2001 were approximately $208.0 million and $203.8 million, respectively. As of December 31, 2002, approximately

$2.8 million in funds (the “Beverly Indemnity funds”) are restricted for the payment of insured claims. In addition, we anticipate that approximately $20.5 million of our existing cash at December 31, 2002, while not legally restricted, will be utilized primarily to fund certain workers’ compensation, general and professional liability claims and expenses. We do not expect to use this cash for other purposes.

On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“SFAS No. 148”). SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”) to provide alternative methods of transition for an entity that changes to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board Opinion No. 28, Interim Financial Reporting (“APB 28”) to require expanded and more prominent disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements and allows companies to continue to use the intrinsic value method of APB 25. SFAS No. 148 is effective for us as of December 31, 2002.

We continue to use the intrinsic value method to account for our stock options. Accordingly, we do not recognize compensation expense for our stock option grants, which are issued at fair market value on the date of grant. However, we recognize compensation expense for our restricted stock grants at the fair market value of our Common Stock on the date of grant over the respective vesting periods on a straight-line basis. See Note 10 for the pro forma effects on our reported net loss and diluted net loss per share if we recognized compensation expense on all stock-based awards and other disclosures as required by SFAS No. 148.

Our revenues are derived primarily from providing long-term healthcare services. Approximately 80% of our net operating revenues is derived from federal and state medical assistance programs. Approximately 50% and 44% of our net patient accounts receivable at December 31, 2002 and 2001, respectively, are due from such programs. We record revenues when services are provided at standard charges adjusted to amounts estimated to be received under governmental programs and other third-party contractual arrangements based on contractual terms and historical experience. These revenues and receivables are reported at their estimated net realizable amounts and are subject to audit and retroactive adjustment.

Retroactive adjustments are estimated in the recording of revenues in the period the related services are rendered. These 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 possibility that recorded estimates will change by a material amount in the near term. See Note 3 for a discussion of a settlement with the federal government related to Medicare cost reimbursement issues and Note 9 for the estimated potential overpayment from government programs resulting from an internal investigation of our home medical equipment unit. Excluding these items, changes in estimates related to third party receivables resulted in an increase in net operating revenues of approximately $1.7 million and $8.1 million for the years ended December 31, 2002 and 2000, respectively, and a decrease in net operating revenues of approximately $2.0 million for the year ended December 31, 2001.

Compliance with laws and regulations governing the Medicare and Medicaid programs is subject to government review and interpretation, as well as significant regulatory action including fines, penalties, and

possible exclusion from the Medicare and Medicaid programs. In addition, under the Medicare program, if the federal government makes a formal demand for reimbursement, even related to contested items, payment must be made for those items before the provider is given an opportunity to appeal and resolve the issue.

We have significant accounts and notes receivable whose collectibility or realizability is dependent upon the performance of certain governmental programs, primarily Medicare and Medicaid. These receivables represent our only concentration of credit risk. We do not believe there are significant credit risks associated with these governmental programs. We believe that an adequate provision, based on historical experience, has been made for the possibility of a portion of these and other receivables becoming uncollectible and continually monitor and adjust these allowances as necessary. In establishing our estimate of uncollectible accounts and notes, we consider our historical collection experience, the aging of the account and the payor classification. Private pay accounts usually represent our highest collectibility risk. Certain interest-bearing notes receivable are placed on a nonaccrual basis when uncertainty arises as to the collectibility of principal or interest. Notes receivable of $9.5 million and $5.6 million at December 31, 2002 and 2001, respectively, were on a nonaccrual basis and specific collectibility allowances of $6.9 million and $4.3 million, respectively, have been recorded on these nonaccrual notes.

We follow the liability method in accounting for income taxes. The liability method requires deferred tax assets and liabilities to be recorded at currently enacted tax rates based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Due to the uncertainty of generating future income necessary to realize certain deferred tax benefits, primarily relating to net operating loss carryforwards, we have established a full valuation allowance on our net deferred tax assets. (See Note 11.)

Comprehensive income (loss) includes charges and credits to stockholders’ equity not included in net loss. Accumulated other comprehensive income, net of income taxes, primarily consists of net unrealized gains on available-for-sale securities of $512,000 and $2.0 million at December 31, 2002 and 2001, respectively.

During the year ended December 31, 2000, we transferred one of our securities from the available-for-sale category to the trading category. As a result of such transfer, we reversed $500,000 of unrealized gains, net of income taxes, and recognized a pre-tax gain of $1.5 million in 2000. During 2001, this security was sold and we recognized an additional pre-tax gain of $300,000. These gains were included in net operating revenues.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, (“FIN 46”). FIN 46 requires a variable interest entity (“VIE”), sometimes known as a special purpose entity, to be consolidated by a company when that company is subject to a majority of the risk of loss from the VIE’s activities or entitled to receive a majority of the VIE’s residual returns, or both. FIN 46 is effective on July 1, 2003 as it relates to VIEs created prior to February 1, 2003. Based on our initial evaluation of FIN 46, it is possible that the special purpose entity lessor in the lease arrangement may need to be consolidated with the Company beginning in the third quarter of 2003. We are continuing to evaluate the consolidation and transition rules under FIN 46, however if the special purpose entity lessor needs to be consolidated, the leased

assets will be consolidated at their depreciated cost and recorded as capital leased assets, with the difference between the historical and the depreciated cost on the date of consolidation being recorded as the cumulative effect of an accounting change. The remaining obligation as of July 1, 2003 ($69.5 million as of December 31, 2002 and expected to be $52.7 million as of July 1, 2003) would be recorded as a capital lease obligation on the Company’s consolidated balance sheet. The assets would be depreciated and payments on the obligations would be recorded as interest expense until the obligations are satisfied. FIN 46 is not expected to impact our accounting treatment of BFC. (See Transfers of Financial Assets, herein.)

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS No. 145”). This Statement eliminates extraordinary accounting treatment for reporting gains or losses on debt extinguishments, and amends certain other existing accounting pronouncements. The provisions of this Statement are effective for the Company beginning with the first quarter of 2003 and require restatement of prior year debt extinguishment-related extraordinary items.

Certain prior year amounts have been reclassified to conform with the 2002 financial statement presentation. Assets held for sale are reported based on their status as of the balance sheet date. Certain per share amounts will not add due to rounding.

On August 1, 2002, the Company and the State of California reached an agreement on the settlement of an investigation by the Attorney General’s office and the District Attorney of Santa Barbara County of patient care issues in several California nursing facilities. In accordance with the terms of the settlement agreement, Beverly Enterprises — California, Inc. entered a plea of nolo contendere to two felony charges under California’s Elder Abuse statute and paid a fine of $54,000 related to the plea. In addition, Beverly Enterprises — California, Inc. reimbursed the Attorney General and the Santa Barbara County District Attorney $533,000 for the costs of their investigations and will pay a $2.0 million civil penalty in four equal, quarterly installments of $500,000, which began in the third quarter of 2002.

A Permanent Injunction (“Permanent Injunction”) was entered requiring nursing facilities in California, operated by subsidiaries of the Company, to comply with all applicable laws and regulations and conduct certain training and education programs. The Company recorded a pre-tax charge against earnings of $6.3 million during the second quarter of 2002 to reflect the terms of the settlement and related costs, and we expect to incur additional annual costs for implementation of the Permanent Injunction.

Certain revisions were made to our Corporate Integrity Agreement (“CIA”) in conjunction with the Permanent Injunction requiring:


	•	additional training for clinical associates, contractors and agents who perform services in our California nursing facilities; and

	•	hiring an independent quality monitor to assess the effectiveness, reliability and thoroughness of our quality care systems and our response to quality of care issues in our nursing facilities in California, Arizona, Hawaii and Washington.

Effective October 15, 2002, we entered into a settlement agreement with CMS (the “Settlement Agreement”), which resolved certain reimbursement issues relating to: (1) costs of services provided to Medicare patients during 1996 through 1998 under the federal government’s former cost-reimbursement system; (2) co-payments due from Medicare beneficiaries, who were also eligible for Medicaid, for the years 1996 through 2000; and (3) all outstanding issues from the Allocation Investigations (see Note 9). Under the terms of the Settlement Agreement, we paid CMS $35.0 million in November 2002.

Because the issues related to this matter arose prior to December 31, 2001 and an offer to settle was made prior to releasing our 2001 consolidated financial statements, we reflected a pre-tax charge related to this matter of $77.5 million in our 2001 results of operations, including:


	•	$35.0 million related to an estimated cash payment to CMS, which was made in November 2002;

	•	$81.5 million related to the write-off of Medicare cost report receivables for 1996 through 1998 and co-payment issues for 1999 and 2000; and

	•	partially offset by $39.0 million in reserves established in conjunction with the 2000 investigation settlements as discussed below.

On February 3, 2000, we entered into a series of separate agreements with the U.S. Department of Justice and the Office of Inspector General of the Department of Health and Human Services. These agreements settled the Allocation Investigations. In anticipation of settlement, we recorded special pre-tax charges of approximately $202.4 million during the year ended December 31, 1999.


3.	Special Charges and Adjustment Related to Settlements with the Federal Government — (Continued)

In connection with the final settlement with CMS in 2002, we were able to revise the amount of legal fees and other costs we originally expected to incur in conjunction with these settlements. Accordingly, legal and related fees accrued for these matters in prior years were reduced by $9.4 million during 2002.

The remaining obligations and reserves related to these matters are included in the consolidated balance sheet captions as follows at December 31 (in thousands):

During 2002, we recorded pre-tax charges totaling approximately $79.5 million, including $71.6 million for asset impairments and $7.9 million for workforce reductions. The asset impairment charges of $71.6 million consist of the following:


	•	$74.6 million write-down of property and equipment on certain nursing facilities whose book value exceeded estimated fair value when tested for impairment. This impairment was determined in accordance with SFAS No. 144. These assets were included in the total assets of the Nursing Facilities segment as of December 31, 2002; and

	•	$3.0 million adjustment to asset impairment charges recorded in 2001, primarily resulting from the sale of previously impaired assets at prices above the carrying value.

The October 1, 2002 elimination of certain funding under the Medicare program affected the cash flows, and therefore the fair values, of each of our nursing facilities. This event led to an impairment assessment on each of our nursing facilities, including:


	•	estimating the undiscounted cash flows to be generated by each of the facilities over the remaining life of the primary asset; and

	•	reducing the carrying value of the asset to the estimated fair value when the total estimated undiscounted future cash flows was less than the current book value of the long-lived assets (excluding goodwill and other indefinite lived intangible assets).

In estimating the undiscounted cash flows for the 2002 impairment assessment, we primarily used our internally prepared budgets and forecast information, with certain probability adjustments, including, but not limited to, the following items: Medicare and Medicaid funding; overhead costs; capital expenditures; and patient care liability costs. In order to estimate the fair values of the nursing facilities, we used a discounted cash flow approach, supplemented by public resource information on valuations of nursing facility sales transactions, by region of the country. Where the estimated undiscounted cash flows were negative, we estimated the fair values based on discounted public resource information, sales values or estimated salvage value. A substantial change in the estimated future cash flows for these facilities could materially change the estimated fair values of these assets, possibly resulting in an additional impairment.

During 2002, we recorded pre-tax charges of $7.9 million for workforce reductions, including a charge of approximately $8.5 million for 133 associates who were notified in 2002 that their positions would be

eliminated, net of a $600,000 reversal of workforce reduction charges recorded in 2001 which were no longer needed. The $8.5 million pre-tax charges included the following:


	•	$8.0 million of cash expenses, approximately $4.1 million of which was paid during the year ended December 31, 2002; and

	•	non-cash expenses of $500,000 related to the issuance of 124,212 shares under our Stock Grant Plan.

The following table summarizes activity in our estimated workforce reduction and exit costs for the years ended December 31 (in thousands):

During 2001, we recorded pre-tax charges totaling approximately $197.4 million, primarily including $171.1 million for asset impairments and exit costs and $24.2 million for workforce reductions and related costs. The asset impairment and exit costs primarily related to:


	•	$75.1 million write-down of Florida facilities and $55.1 million of Florida exit and other costs, as discussed below. These assets were included in the total assets of the Nursing Facilities segment as of December 31, 2001;

	•	write-down of goodwill of $15.4 million, property, equipment and other intangible assets of $1.0 million and recording of closing and other costs of $2.8 million on under-performing Home Care businesses. These assets were included in the total assets of the Home Care operating segment as of December 31, 2001;

	•	write-down of property and equipment of $10.0 million, and goodwill and other intangibles of $600,000 on certain under-performing nursing facilities. These assets were included in the total assets of the Nursing Facilities operating segment as of December 31, 2001;

	•	write-off of abandoned projects and investments totaling $7.8 million; and

	•	$3.3 million related to the termination of a lease in Indiana, including the write-off of net book value of the related assets.

The asset impairment analyses on our under-performing units and facilities in 2001 included:


	•	estimating the undiscounted cash flows to be generated by each unit or facility, primarily over the weighted average remaining life of the assets; and

	•	reducing the carrying value of the assets to the estimated fair value when the total undiscounted cash flows was less than the current book value of the unit or facility.

In order to estimate the fair values of the unit, facility or property for the 2001 impairment assessment, we used a discounted cash flow approach. For the nursing facilities, we discounted the estimated future cash flows over the remaining life of the primary asset. For the Home Care businesses that lacked significant property investments, we discounted the next 10 years of expected cash flows. Cash flows for all lines of business were estimated using historical results, without an inflation factor, and adjusted for known trends. Those cash flows were discounted at our weighted average cost of capital. A one percent change in the discount rate would not have a material impact on the impairment calculations. Where the cash flows were negative, we estimated the fair values based on our knowledge of recent or pending sales of comparable businesses.

During 2001, a formal plan was initiated by management to pursue the sale of our nursing home operations in Florida, which included 49 nursing facilities and four assisted living centers (the “Florida facilities”). The plan included the pursuit of the sale of one additional nursing facility in Florida and certain other assets which would be sold in separate transactions. The decision to sell these properties was made primarily due to the excessive patient care liability costs that we had been incurring in the state of Florida. Accordingly, the property and equipment, identifiable intangibles and operating supplies of our Florida nursing home operations were considered assets held for sale. Management estimated the fair value less selling costs of such assets and took pre-tax charges in 2001 totaling $75.1 million to write-down the Florida assets. Effective December 1, 2001, we entered into a lease agreement on the Florida facilities with Florida Health Care Properties and we closed the real estate sale in January 2002 with no further gain or loss.

In conjunction with the sale of our Florida facilities, we also recorded pre-tax charges totaling $55.1 million for certain exit and other costs. These costs related to severance agreements, termination payments on certain contracts and various other items. At December 31, 2001, the Florida assets held for sale totaled approximately $120.8 million and were classified as current assets in the 2001 consolidated balance sheet.

Annualized revenues for the Florida facilities were approximately $288.0 million. During the year ended December 31, 2001, our Florida nursing home operations recorded pre-tax income of approximately $600,000. This amount did not include certain costs which were recorded at the parent company level and were not fully allocated to the individual subsidiaries or facilities. We did not record depreciation and amortization expense on the Florida assets during the period these assets were held for sale, since these assets were adjusted to their estimated net realizable value. The amount of depreciation and amortization expense that we did not have to record during the year ended December 31, 2001 on the Florida assets was approximately $6.8 million.

In January 2001, we implemented a new three-year strategic plan and operationally reorganized our business. As a result of this operational reorganization, we recorded pre-tax charges totaling approximately $24.2 million during 2001. Approximately $23.1 million of these pre-tax charges related to severance and other employment agreements for approximately 240 associates who were notified in 2001 that their positions would be eliminated, including:


	•	$18.0 million of cash expenses, approximately $4.9 million and $11.3 million of which was paid during the years ended December 31, 2002 and 2001, respectively;

	•	non-cash expenses of $4.5 million related to the issuance of shares under our Stock Grant Plan; and

	•	non-cash expenses of $600,000 related to other long-term incentive agreements.


4.	Asset Impairments, Workforce Reductions and Other Unusual Items — (Continued)

During 2000, we recorded pre-tax charges totaling approximately $17.2 million, primarily including $9.7 million for asset impairments and exit costs and $6.1 million for workforce reductions and related costs. The asset impairment charges and exit costs of $9.7 million primarily related to:


	•	write-down of property and equipment of $5.1 million and recording of closing and other costs of $3.0 million related to six nursing facilities with an aggregate carrying value of approximately $6.0 million. We closed or terminated the leases on five of these facilities during 2001 and one facility in 2002. These assets generated pre-tax losses of approximately $2.4 million during the year ended December 31, 2000 and were included in the total assets of the Nursing Facilities operating segment;

	•	write-off of abandoned projects totaling $2.1 million;

	•	write-off of an investment in a physician practice management company of $2.0 million; and

	•	reversal of $2.5 million of prior year exit costs.

The workforce reduction charges of $6.1 million primarily related to severance agreements associated with seven executives. Approximately $2.2 million was paid during 2000, and the remainder was paid during the first quarter of 2001. Four of the executives were notified in late 2000 that their positions would be eliminated as part of a reorganization of our operating and support group functions. This reorganization was formally announced in the first quarter of 2001.

During the fourth quarter of 2002, a formal plan was approved by our board of directors to pursue the sale of our Matrix segment and MK Medical business unit. The decision to sell these non-strategic assets was made primarily to allow us to further reduce our debt level and to reinvest in facilities, technology and other business opportunities consistent with our strategic objectives.

In accordance with SFAS No. 144, the assets and liabilities of Matrix and the assets of MK Medical have been reclassified to the corresponding “held for sale” asset and liability line items in the accompanying consolidated balance sheet. The related asset carrying values were adjusted, if appropriate, to reflect the estimated fair values less costs to sell. The results of operations of Matrix and MK Medical for all periods presented, as well as the write-downs to estimated fair values less costs to sell and related exit costs in 2002, have been reported as discontinued operations in the accompanying consolidated statements of operations. In addition, we have included certain non-operational nursing facilities in assets held for sale in the accompanying consolidated balance sheets, which we expect to dispose of in 2003.

A summary of the asset and liability line items from which the reclassifications have been made at December 31, 2002 (in thousands) is as follows:

During January 2003, we sold the outpatient rehabilitation clinic operations and the managed care network of Matrix for gross cash proceeds of $36.0 million. During February 2003, we sold one of the non-operational nursing facilities for $5.5 million, including cash and a $4.1 million note receivable. We expect to sell the remaining Matrix operations, MK Medical assets and the remaining non-operational nursing facilities during 2003.

A summary of the discontinued operations of Matrix and MK Medical for the years ended December 31 (in thousands) follows:


(1)	Includes an adjustment of $18.0 million in 2002 for estimated overpayments to MK Medical by government payors. (See Note 9.)

(2)	Includes $1.0 million accrued for legal and related fees associated with the MK Medical estimated overpayment issue.

During the year ended December 31, 2002, we sold, closed or terminated the leases on 69 nursing facilities (8,132 beds), four assisted living centers (315 units), four home care centers, 10 outpatient clinics and certain other assets for cash proceeds of approximately $170.9 million and notes receivable of approximately $21.7 million. In December 2001, we leased to another operator 49 of the nursing facilities (6,129 beds) and the four assisted living centers, all of which were located in Florida. Excluding the Florida properties, which had been written down to net realizable value in 2001, we recognized pre-tax gains of $6.0 million, which were included in net operating revenues, pre-tax losses of $4.1 million, which were included in other operating expenses and $100,000 of losses included in discontinued operations during the year ended December 31, 2002, as a result of these disposal activities. The majority of these disposed assets were classified as held for sale at December 31, 2001 and, therefore, did not meet the criteria for classification as discontinued operations.

During the year ended December 31, 2001, we acquired one nursing facility (185 beds), eight previously leased nursing facilities (903 beds) and certain other assets for cash of approximately $3.7 million, assumed debt of approximately $18.4 million, security deposits of $200,000 and incurred closing and other costs of approximately $300,000. These acquisitions were accounted for as purchases. Also during such period, we sold, closed or terminated the leases on 18 nursing facilities (1,768 beds), one assisted living center (12 units), three outpatient therapy clinics, one home care center and certain other assets for cash proceeds of

approximately $20.4 million and a note receivable of approximately $3.9 million. We did not operate three of the nursing facilities (355 beds) which had been leased to other nursing home operators. We recognized pre-tax gains of $4.8 million, which were included in net operating revenues, pre-tax losses of $4.0 million which were included in other operating expenses and $200,000 of losses included in discontinued operations during the year ended December 31, 2001, as a result of these dispositions. In addition, we terminated the lease on one nursing facility (223 beds) in Indiana and recorded a pre-tax charge of approximately $3.3 million which was included in the consolidated statement of operations caption “Asset impairments, workforce reductions and other unusual items.”

During the year ended December 31, 2000, we acquired seven nursing facilities (1,210 beds), one previously leased nursing facility (105 beds) and certain other assets for cash of approximately $3.0 million, closing and other costs of approximately $2.4 million. The acquisitions of these facilities and other assets were accounted for as purchases. Also during 2000, we sold, closed or terminated the leases on 39 nursing facilities (4,263 beds) and certain other assets for cash proceeds of approximately $24.2 million and notes receivable of approximately $100,000. We did not operate five of these nursing facilities (409 beds), which were leased to other nursing home operators in prior year transactions. We recognized pre-tax gains of $8.9 million, which were included in net operating revenues, pre-tax losses of $5.5 million, which were included in other operating expenses and $1.4 million of losses included in discontinued operations during the year ended December 31, 2000 as a result of these dispositions.

The operations of all of the facilities and other assets we acquired or disposed of in 2002, 2001 and 2000 were immaterial to our consolidated financial position and results of operations.

A summary of property and equipment and related accumulated depreciation and amortization, by major classification, at December 31 (in thousands) is as follows:

We record depreciation and amortization using the straight-line method over the following estimated useful lives: land improvements — 5 to 15 years; buildings — 35 to 40 years; building improvements — 5 to 20 years; leasehold improvements — 5 to 20 years; furniture and equipment — 5 to 15 years. Capital leased assets are amortized over the remaining initial terms of the leases.

Depreciation and amortization expense related to property and equipment, including the amortization of assets under capital lease obligations, for the years ended December 31, 2002, 2001 and 2000 was $77.7 million, $76.3 million and $83.3 million, respectively, including depreciation and amortization expense on discontinued operations of $5.4 million, $5.7 million and $6.3 million, respectively.

Capitalized software costs of $53.6 million and $64.3 million at December 31, 2002 and 2001, respectively, net of accumulated amortization of $30.8 million and $29.8 million, respectively, are included in the accompanying consolidated balance sheet caption “Other assets”. Amortization expense related to capitalized software costs for the years ended December 31, 2002, 2001 and 2000 was $10.3 million, $8.6 million and $7.1 million, respectively, including amortization expense on discontinued operations of $1.7 million, $1.2 million and $1.1 million, respectively.

During 2001, we entered into a new $150.0 million revolving credit facility (the “Credit Facility”) which matures in April 2004 and issued $200.0 million of 9 5/8% Senior Notes due 2009 (the “9 5/8% Senior Notes”) through a private placement. The net proceeds from issuance of the 9 5/8% Senior Notes were used to repay borrowings under our former $375.0 million credit facility and for general corporate purposes. We filed a registration statement in 2001 under Form S-4 with the Securities and Exchange Commission registering the 9 5/8% Senior Notes and exchanged (the “Exchange Offer”) all of the 9 5/8% Senior Notes issued through the

private placement for publicly registered 9 5/8% Senior Notes. We did not receive any proceeds as a result of the Exchange Offer.

We have $180.0 million of 9% Senior Notes due February 15, 2006 (the “9% Senior Notes”) which were sold through a public offering. The 9 5/8% Senior Notes and the 9% 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. Separate financial statements of the Subsidiary Guarantors are not considered to be material to holders of our Senior Notes since the guaranty of each of the Subsidiary Guarantors is joint and several and full and unconditional (except that liability thereunder is limited to an aggregate amount equal to the largest amount that would not render its obligations thereunder subject to avoidance under Section 548 of the Bankruptcy Code of 1978, as amended, or any comparable provisions of applicable state law), and Beverly Enterprises, Inc., the parent, has no operations or material assets separate from its investment in its subsidiaries.

The Credit Facility provides for a Revolver/ Letter of Credit Facility. Prior to the 2003 Amendments discussed below, revolver borrowings under the Credit Facility bore interest at adjusted LIBOR plus 2.375%; the Base Rate, as defined, plus 1.375%; or the adjusted CD rate, as defined, plus 2.50%, at our option. The interest rates could be adjusted quarterly based on a leverage ratio calculation. The Credit Facility was secured by property, equipment and other assets associated with eight nursing facilities with an aggregate net book value of approximately $12.4 million at December 31, 2002 and the stock of certain subsidiaries. In addition, it was guaranteed by the Subsidiary Guarantors and imposed on us certain financial tests and restrictive covenants. We had no revolver borrowings under the Credit Facility at December 31, 2002 or 2001.

Effective December 31, 2002 and 2001, we executed amendments to our Credit Facility, as well as amendments with certain of our other lenders covering debt of approximately $19.4 million and $20.1 million, respectively, and off-balance sheet lease financing of $69.5 million and $112.4 million, respectively (collectively, the “Amendments”), which modified certain financial covenant levels. These Amendments were required since recording the special charges, as discussed in Notes 3 and 4, would have resulted in our noncompliance with a financial covenant ratio contained in those debt agreements on each of these dates. As of December 31, 2002, we were in compliance with the Amendments.

In February 2003, we executed an amendment to our Credit Facility and our off-balance sheet lease arrangement (the “2003 Amendments”). The 2003 Amendments were required since our projected earnings for 2003, primarily due to the reduction in Medicare funding, were not anticipated to reach the level needed to meet the financial covenant requirements in these debt arrangements. The primary impacts of the 2003 Amendments include the following:


	•	revolver borrowings bear interest at adjusted LIBOR plus 3.50%; the Base Rate, as defined, plus 2.50%; or the adjusted CD rate, as defined, plus 3.625%, at our option. These rates may be adjusted quarterly based on a leverage ratio calculation;

	•	the Credit Facility will be secured by property, equipment and other assets having a market value, determined pursuant to the 2003 Amendments, of not less than $165.0 million;

	•	the Credit Facility will be frozen at a borrowing capacity of $100.0 million initially, and eventually adjusted to $85.0 million over its remaining term concurrent with receipt of proceeds from sales of facilities; and

	•	we will purchase three leased properties in the first quarter of 2003 for $16.8 million with a portion of the proceeds from the sale of our Matrix outpatient therapy clinics and managed care network, and


		apply a portion of the proceeds from anticipated divestitures in 2003 and 2004 to reduce the off-balance sheet lease arrangement further.

During 2002, we entered into a mortgage loan for $5.0 million for the construction of a nursing facility. This mortgage has terms and conditions similar to the Credit Facility. During 2001, we entered into notes and mortgages payable of approximately $21.3 million for the acquisitions of seven nursing facilities. These debt instruments have interest rates ranging from 7.00% to 10.25%, require monthly installments of principal and interest, and are secured by mortgage interests in the real property and security interests in the personal property of the nursing facilities.

Maturities and sinking fund requirements of long-term debt, including capital leases, for the years ended December 31 are estimated as follows (in thousands):

Most of our capital leases, as well as our operating leases, have original terms from ten to fifteen years and contain at least one renewal option (which could extend the terms of the leases by five to fifteen years), purchase options, escalation clauses and provisions for payments by us of real estate taxes, insurance and maintenance costs.

Our future minimum rental commitments required by all noncancelable operating leases with initial or remaining terms in excess of one year as of December 31, 2002, are estimated as follows (in thousands):

Our total future minimum rental commitments are net of approximately $2.1 million of minimum sublease rental income due in the future under noncancelable subleases. The following table summarizes

certain information relative to our operating leases, including operating leases for discontinued operations, for the years ended December 31 (in thousands):

At December 31, 2002, we leased five nursing facilities, one assisted living center and our corporate headquarters under an off-balance sheet lease arrangement. As of December 31, 2002, we had $69.5 million of outstanding commitments under this financing arrangement. The lessor financed the construction of these properties and we lease the properties under a master operating lease agreement, which matures in 2004. Under the original commitment, we could purchase the properties at original cost, or coordinate the sale of the properties to a third-party, when the master lease agreement matures. (See Note 8 for a discussion of the 2003 Amendments and their impact on this financing arrangement.) There is a third-party entity at risk under this arrangement for 3% of the original commitment. Of the remaining 97% original commitment, 17% is secured by first mortgages on the related properties and 83% (or approximately $56.0 million at December 31, 2002) is guaranteed by the Company and secured by second mortgages on the related properties.

We monitor these off-balance sheet obligations throughout the year and believe the obligations and any related assets should not be included in our consolidated financial statements under current generally accepted accounting principles. In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), which is effective for us in the third quarter of 2003. Based on our initial evaluation of FIN 46, it is possible that the special purpose entity lessor in the lease arrangement may need to be consolidated with the Company beginning in the third quarter of 2003. We are continuing to evaluate the consolidation and transition rules under FIN 46, however if the special purpose entity lessor needs to be consolidated, the leased assets will be consolidated at their depreciated cost and recorded as capital leased assets, with the difference between the historical and the depreciated cost on the date of consolidation being recorded as the cumulative effect of an accounting change. The remaining obligation as of July 1, 2003 ($69.5 million as of December 31, 2002 and expected to be $52.7 million as of July 1, 2003) would be recorded as a capital lease obligation on the Company’s consolidated balance sheet. We will continue to make quarterly payments under the obligation, to be recorded as interest expense, and the capital leased assets will be depreciated, increasing our annual depreciation and amortization expense by approximately $2.3 million.

Our management information systems data processing functions have been outsourced under an agreement which was renegotiated during 2002 and expires in 2007. Our future minimum commitments as of December 31, 2002 under this agreement are estimated as follows: 2003 — $2.2 million; 2004 — $2.2 million; 2005 — $2.2 million; 2006 — $2.2 million and 2007 — $700,000. We incurred approximately $2.9 million, $3.4 million and $5.2 million under this agreement during the years ended December 31, 2002, 2001 and 2000, respectively.

We are contingently liable for approximately $31.5 million of long-term debt maturing on various dates through 2019, as well as annual interest and letter of credit fees totaling approximately $3.1 million. These contingent liabilities principally arose from our sale of nursing facilities and retirement living centers. We operate the facilities related to approximately $3.0 million of the principal amount for which we are contingently liable, pursuant to long-term agreements accounted for as operating leases. We guarantee certain

third-party operating leases. These guarantees arose from our dispositions of leased facilities and the underlying leases have approximately $13.3 million of minimum rental commitments remaining through the initial lease terms. In addition, we guarantee an officer’s bank loan of approximately $200,000, which is collateralized by shares of our Common Stock pledged by the officer.

As previously disclosed, we notified federal and California healthcare regulatory authorities (CMS, OIG, the California Attorney General’s office and the California Department of Health) of our intent to conduct an internal investigation of past billing practices relating to MK Medical, our medical equipment business unit based in Fresno, California. An independent accounting firm has reviewed MK Medical’s government payor billings since October 1, 1998, the date we acquired the company. Deficiencies identified by the accounting firm primarily relate to inadequate documentation supporting Medicare and Medi-Cal claims for reimbursement for drugs, wheelchairs, and other durable medical equipment distributed by MK Medical. Specifically, the review identified instances of missing or incomplete certificates of medical necessity, treatment authorization requests, prescriptions, and other documentation MK Medical is required to maintain in order to be entitled to reimbursement from government payors. Based on the results of the accounting firm’s review, we have estimated our potential overpayment from government payors to be approximately $18.0 million for the period from October 1, 1998 to 2002. We have reduced MK Medical’s operating revenues, through discontinued operations on the 2002 consolidated statement of operations, and have established a reserve, included in “Other accrued liabilities” on the 2002 consolidated balance sheet, for this amount. We have advised regulatory authorities of the accounting firm’s results. Our liability with respect to this matter could exceed the reserved amount. We can give no assurance of the final outcome of this matter or its impact on our financial position, results of operations and cash flows.

On February 3, 2000, we entered into a series of separate 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”).


	•	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 $5.0 million during the first quarter of 2000.

Under the Civil Settlement Agreement, we paid the federal government $25.0 million during 2000 and are reimbursing the federal government an additional $145.0 million through withholdings from our biweekly Medicare periodic interim payments in equal installments through the first quarter of 2008. The present value of the remaining obligation included as liabilities on our consolidated balance sheet was $73.9 million at December 31, 2002 and $84.9 million at December 31, 2001. In addition, we agreed to resubmit certain Medicare filings to reflect reduced labor costs allocated to the Medicare program. The adjustments for these resubmitted filings were part of the Settlement Agreement with CMS. (See Note 3.)

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 or noncompliance of the agreement. We believe that we are generally in 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 the remaining three facilities during 2001.

On October 31, 2002, a shareholder derivative action entitled Paul Dunne and Helene Dunne, derivatively on behalf of nominal defendant Beverly Enterprises, Inc. v. Beryl F. Anthony, Jr., et al. was filed in the Circuit Court of Sebastian County, Arkansas, Fort Smith Division (No. CIV-2002-1241). This case is purportedly brought derivatively on behalf of the Company against various current and former officers and directors. We learned of this case when it was served on one defendant on January 22, 2003. The complaint alleges causes of action for breach of fiduciary duty against the defendants based on: (1) allegations that defendants failed to establish and maintain adequate accounting controls such that the Company failed to record adequate reserves for patient care liability costs; and (2) allegations that certain defendants sold Company stock while purportedly in possession of material non-public information. While this case is in its preliminary stages, we do not believe there is any merit to this lawsuit.

On August 16, 2002, August 26, 2002, and September 26, 2002, respectively, Ernest Baer v. Beverly Enterprises, Inc., et. al. (CIV. No. 02-2190) (the “Baer Case”), Stanley V. Kensic v. Beverly Enterprises, Inc., et.al. (CIV. No. 02-2193) (the “Kensic Case”) and Charles Krebs v. Beverly Enterprises, Inc., et. al. (CIV. No. 02-2222) (the “Krebs Case) were filed in the United States District Court, Western District of Arkansas, Fort Smith Division. The Baer Case, the Kensic Case and the Krebs Case were filed as purported securities fraud class actions under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

As previously reported, on October 2, 1998, a purported class action lawsuit was filed in the United States District Court for the Eastern District of Arkansas by Jack Kushner against the Company and certain of its officers (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 argument on this motion was held on April 6, 2000. By order and judgment dated October 17, 2001, defendants’ motion to dismiss was granted, and the complaint was dismissed with prejudice. Plaintiffs appealed this decision to the Eighth Circuit Court of Appeals (Case No. 01-3677). On January 23, 2003, the Eighth Circuit entered an

order affirming the district court’s order dismissing the case with prejudice. The plaintiffs appealed the order of the Eighth Circuit en banc, but, on February 27, 2003, the Eighth Circuit denied the petition. The Eighth Circuit is obligated to issue a mandate within seven days of the date of the order denying the petition, thereby ordering the district court to enforce its ruling and dismiss the case. If the plaintiffs decide to petition for a writ of certiorari to the United States Supreme Court within 90 days, plaintiffs may move to stay the mandate pending the filing of this petition.

In addition, since July 29, 1999, several derivative lawsuits have been filed in the state courts of Arkansas, California and Delaware, as well as the federal district court in Arkansas, assertedly on behalf of the Company (collectively, the “Derivative Actions”). 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 plaintiffs’ allegations that the defendants acted unlawfully are without merit and the defendants 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.

We are party to various legal matters relating to patient care, including claims that our services have resulted in injury or death to residents of our facilities. We have experienced an increasing trend in the number and severity of the claims asserted against us. We believe that there has been, and will continue to be, an increase in governmental investigations of long-term care providers. Adverse determinations in legal proceedings or governmental investigations, whether currently asserted or arising in the future, could have a material adverse effect on us.

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, results of operations or cash flows.

We have 300,000,000 shares of authorized $.10 par value common stock (“Common Stock”). We are subject to certain restrictions under our long-term debt agreements related to the payment of cash dividends on, and the repurchase of, our Common Stock. During 2002 and 2001, we did not pay any cash dividends on, or repurchase any of, our Common Stock. We have 25,000,000 shares of authorized $1 par value preferred stock, all of which remains unissued. The Board of Directors has authority, without further stockholder action, to set rights, privileges and preferences for any unissued shares of preferred stock.

In 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. They may be issued under the Beverly Enterprises, Inc. Stock Grant Plan (the “Stock Grant Plan”) to holders of restricted stock who, by virtue of the terms of their employment contracts, severance agreements or other similar arrangements, are entitled to the immediate vesting of their restricted stock. In conjunction with ongoing operational reorganizations (as discussed in Note 4), 669,754 shares of Common Stock under the Stock Grant Plan have been issued to various officers in exchange for shares of restricted stock held by them, which have been cancelled. Pre-tax workforce reduction charges of $500,000 and $4.5 million were recorded in 2002 and 2001, respectively, in connection with the issuance of these shares.

During 1997, the New Beverly 1997 Long-Term Incentive Plan was approved (the “1997 Long-Term Incentive Plan”). The plan became effective December 3, 1997 and remains in effect until December 31, 2006, subject to early termination by the Board of Directors. The Compensation Committee of the Board of Directors (the “Committee”) is responsible for administering the 1997 Long-Term Incentive Plan and has complete discretion in determining the number of shares or units to be granted, in setting performance goals and in applying other restrictions to awards, as needed, under the plan. The 1997 Long-Term Incentive Plan was originally authorized to issue 10,000,000 shares of Common Stock, subject to certain adjustments, in the form of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, bonus stock and other stock unit awards. In May 2001, the stockholders approved an amendment to this plan which authorized the issuance of an additional 5,000,000 shares.

In general, nonqualified and incentive stock options must be granted at a purchase price equal to the fair market value of our Common Stock on the date of grant. Options issued at fair market value do not require the recording of compensation expense upon issuance. Options shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine and expire no later than 10 years from the grant date. Stock appreciation rights may be granted alone, in tandem with an option or in addition to an option. Stock appreciation rights shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine and expire no later than 10 years from the grant date. Restricted stock awards are outright stock grants which have a minimum vesting period of one year for performance-based awards and three years for other awards. Performance awards, bonus stock and other stock unit awards may be granted based on the achievement of certain performance or other goals and will carry certain restrictions, as defined. The issuance of restricted stock and other stock awards usually require the recognition of compensation expense measured by the fair value of the stock on the date of grant.

During 1997, the New Beverly Non-Employee Directors Stock Option Plan was approved (the “Non-Employee Directors Stock Option Plan”). The plan became effective December 3, 1997 and remains in effect until December 31, 2007, subject to early termination by the Board of Directors. We have 450,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under the Non-Employee Directors Stock Option Plan. The Non-Employee Directors Stock Option Plan was amended by the Board of Directors on March 28, 2001 to provide that each non-employee director be granted an option to purchase 11,000 shares of our Common Stock on June 1 of each year until the plan is terminated, subject to the availability of shares. These options are granted at a purchase price equal to the fair market value of our Common Stock on the date of grant, become exercisable one year after the date of grant and expire 10 years after the date of grant.

During 2000, we offered all employees holding stock options granted prior to February 2000 the opportunity to exchange all or part of their stock options for shares of restricted stock. This resulted in the issuance of approximately 2.4 million shares of restricted stock, which vest four years after the grant date, in exchange for options to purchase approximately 4.8 million shares of our Common Stock.

We recognize compensation expense for our restricted stock grants at the fair market value of our Common Stock on the date of grant, amortized over their respective vesting periods on a straight-line basis. The total charges to our consolidated statements of operations for the years ended December 31, 2002, 2001 and 2000 related to these restricted stock grants were approximately $1.3 million, $1.7 million and $1.1 million, respectively.

The following table summarizes stock option and restricted stock data relative to our long-term incentive plans for the years ended December 31:

Exercise prices for options outstanding as of December 31, 2002 ranged from $2.33 to $14.38. The weighted-average remaining contractual life of these options is approximately eight years. The following table provides certain information with respect to stock options outstanding and exercisable at December 31, 2002:

SFAS No. 148, issued on December 31, 2002, provides companies alternative methods of transitioning to SFAS No. 123’s fair value method of accounting for stock-based employee compensation, and amends certain disclosure requirements. SFAS No. 148 does not mandate fair value accounting for stock-based employee

compensation, but does require all companies to meet the disclosure provisions. We currently do not recognize compensation expense for our stock option grants, which are issued at fair market value on the date of grant, and accounted for under the intrinsic value method. In order to adopt the recognition provisions of SFAS No. 148 on a prospective basis, we must make this election during the year ending December 31, 2003 and change to fair value accounting for stock options. We are continuing to evaluate the transition provisions of SFAS No. 148.

Pro forma information regarding net loss and diluted net loss per share has been determined as if we accounted for our stock option grants under the fair market value method described in SFAS No. 123. The fair market value of our stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 2002, 2001 and 2000, respectively:


	•	risk-free interest rates of 4.8%, 4.3% and 5.1%;

	•	volatility factors of the expected market price of our Common Stock of .74, .59 and .57; and

	•	expected option lives of five years.

We do not currently pay cash dividends on our Common Stock and no future dividends are currently planned. The weighted-average assumptions resulted in a weighted average estimated fair market value of options granted during 2002, 2001 and 2000 of $3.55 per share, $4.25 per share and $1.80 per share, respectively.

The Black-Scholes option valuation model was developed for use in estimating the fair market value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because our stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair market value estimates, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair market value of our stock options.

For purposes of pro forma disclosures, the estimated fair market value of stock options is amortized to expense over their respective vesting periods. The following table summarized our pro forma net loss and diluted net loss per share, assuming we accounted for our stock option grants in accordance with SFAS No. 123, for the years ended December 31 (in thousands, except per share amounts):

The pro forma amounts for 2000 reflect the impact of the cancellation of approximately 4.8 million stock options in exchange for approximately 2.4 million shares of restricted stock (as discussed above). The pro forma effects are not necessarily indicative of the effects on future years.

The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and restated) enables all full-time employees having completed one year of continuous service to purchase shares of our Common Stock at the current market price through payroll deductions. During 2002, 2001, and 2000 we matched 15%, 15% and 30%, respectively, of each participant’s contribution. Effective January 1, 2003, we eliminated our matching contributions to this plan. Each participant specifies the amount to be withheld from earnings per pay period, subject to certain limitations. The total charges to our consolidated statements of operations for the years ended December 31, 2002, 2001 and 2000 related to this plan were approximately $300,000, $500,000 and $1.2 million, respectively.

The provision for (benefit from) income taxes, including taxes (benefits) allocated to discontinued operations, consists of the following for the years ended December 31 (in thousands):

A reconciliation of our income tax provision (benefit), including taxes (benefits) allocated to discontinued operations, computed at the statutory federal income tax rate to our actual provision for (benefit from) income taxes is summarized as follows for the years ended December 31 (dollars in thousands):

Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of

temporary differences giving rise to our deferred tax assets and liabilities at December 31, 2002 and 2001 are as follows (in thousands):

At December 31, 2002, for federal income tax purposes, we had federal net operating loss carryforwards of $164.7 million that expire in years 2017 through 2022; general business tax credit carryforwards of $28.7 million that expire in years 2008 through 2022; and alternative minimum tax credit carryforwards of $19.1 million that do not expire. Under the guidance of SFAS No. 109 and based upon our operating results in recent years, our reported cumulative losses, and the inherent uncertainty associated with the realization of future income, we have provided a valuation allowance on our net deferred tax assets as of December 31, 2002 and 2001.

Financial Accounting Standards Statement No. 107, Disclosures about Fair Value of Financial Instruments, (“SFAS No. 107”) requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent our underlying value. We used the following methods and assumptions in estimating our fair value disclosures for financial instruments:

The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates its fair value.

For variable-rate notes that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed-rate notes are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

The carrying amount reported in the consolidated balance sheets for the Beverly Indemnity funds approximates its fair value and is included in the consolidated balance sheet caption “Prepaid expenses and other”.

The carrying amounts of our variable-rate borrowings approximate their fair values. The fair values of the remaining long-term debt are estimated using discounted cash flow analyses, based on our incremental borrowing rates for similar types of borrowing arrangements.

The carrying amount of our obligations to the federal government resulting from the settlements of the Allocation Investigations is included in the consolidated balance sheet captions “Federal government settlement obligations” and “Other liabilities and deferred items.” These obligations are non-interest bearing, and as such, were imputed at their approximate fair market rate of 9% for accounting purposes. The settlement offer made to the federal government in February 2002 included an anticipated cash payment of $35.0 million, which was included in the consolidated balance sheet caption “Federal government settlement obligations” at December 31, 2001. This payment was made during 2002. The carrying amounts of these obligations approximate their fair values.

The carrying amounts and estimated fair values of our financial instruments at December 31, 2002 and 2001 are as follows (in thousands):

At December 31, 2002 and 2001, we had outstanding defeased long-term debt with aggregate carrying values of $4.6 million and $4.9 million, respectively. The fair value of such defeased debt was approximately $4.6 million and $5.1 million at December 31, 2002 and 2001, respectively. The fair value was estimated using discounted cash flow analyses, based on our incremental borrowing rates for similar types of borrowing arrangements.

In order to consummate certain dispositions and other transactions, we have agreed to guarantee the debt assumed or acquired by the purchaser or the performance under a lease, by the lessee. It is not practicable to estimate the fair value of these off-balance sheet guarantees (see Note 9). We do not charge a fee for entering into such agreements and contracting with a financial institution to estimate such amounts could not be done without incurring excessive costs. In addition, unlike us, a financial institution would not be in a position to assume the underlying obligations and operate the nursing facilities collateralizing the obligations, which would significantly impact the calculation of the fair value of such off-balance sheet guarantees.

At December 31, 2002 and 2001, we guaranteed approximately $200,000 and $600,000, respectively, of loans to certain of our officers, which are collateralized by shares of our Common Stock pledged by the officers. The fair value of such loans was approximately $200,000 and $600,000 at December 31, 2002 and 2001, respectively. The fair value was estimated using discounted cash flow analyses, based on our incremental borrowing rates for similar types of borrowing arrangements.

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.

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 a continuing effort to effectively implement these strategies and operate our business units more effectively, in the first quarter of 2002, we reorganized our operations into four primary segments:


	•	Nursing facilities, which provide long-term healthcare through the operation of nursing homes and assisted living centers;

	•	AEGIS, which provides rehabilitation therapy services under contract to Beverly and non-Beverly facilities;

	•	Home Care, which provides home health, hospice and home medical equipment services. A portion of this segment, MK Medical, was held for sale as of December 31, 2002, and as such its operations are included in discontinued operations in the accompanying consolidated statements of operations; and

	•	Matrix, which operates outpatient therapy and other clinics and a managed care network. This segment was held for sale as of December 31, 2002, and as such its operations are included in discontinued operations in the accompanying consolidated statements of operations. We sold the outpatient rehabilitation therapy clinic operations and the managed care network in January 2003.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (see Note 1). We evaluate financial performance and allocate resources primarily based on income or loss from operations before income taxes, excluding any unusual items.

Our operating segments are strategic business units that offer different services within the healthcare continuum. Business in each operating segment is conducted by one or more corporations. The corporations comprising each operating segment also have separate boards of directors.

The following table summarizes certain information for each of our operating segments, based on our first quarter 2002 reorganization (in thousands):

(1)

Consists of the operations of our corporate headquarters and related overhead, as well as certain non-operating revenues and expenses. These amounts also include pre-tax charges totaling approximately $98.5 million, $274.9 million and $61.7 million for 2002, 2001 and 2000, respectively. These pre-tax charges primarily related to increasing reserves for patient care liability costs (in 2002 and 2000), asset impairments, workforce reductions and other unusual items and special charges and adjustments related to federal government settlements.


	(2)	In accordance with the provisions of SFAS No. 144, the results of operations of Matrix and MK Medical have been reclassified, for all periods presented, as discontinued operations. (See Note 5.) The assets and liabilities of Matrix have been reclassified as held for sale and the assets of MK Medical have been reclassified as held for sale at December 31, 2002.

The following is a summary of our quarterly results of operations for the years ended December 31, 2002 and 2001:

We recorded provisions for income taxes, including taxes (benefits) allocated to discontinued operations, at 4% and 26% for the years ended December 31, 2002 and 2001, respectively, even though we had pre-tax losses, primarily due to state income taxes in 2002 and the recording of a valuation allowance on our deferred tax assets in 2001. This valuation allowance was required under the guidance of SFAS No. 109 due to our recent historical operating results, our reported cumulative losses and uncertainties relating to future income.

The operations of Matrix and MK Medical have been reclassified as discontinued operations for all periods presented since they met the criteria under SFAS No. 144 as assets held for sale at December 31, 2002. In addition, we recorded a cumulative effect for the change in accounting for goodwill as of January 1, 2002.

Incorporated herein by reference from our definitive proxy statement for the Annual Stockholders Meeting to be held on May 22, 2003, to be filed pursuant to Regulation 14A.

The Company maintains “disclosure controls and procedures,” as such term is defined under Exchange Act Rule 13a-14 (c). Disclosure controls and procedures are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, the Company’s management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and the Company’s management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The Company has carried out an evaluation, within the 90 days prior to the date of filing of this report, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon their evaluation and subject to the foregoing, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective in ensuring that material information relating to the Company is made known to the Chief Executive Officer and Chief Financial Officer by others within the Company during the period in which this report was being prepared.

There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date the Company completed its evaluation.

The consolidated financial statements and consolidated financial statement schedule listed in the accompanying index to consolidated financial statements and financial statement schedules are filed as part of this annual report.

The exhibits listed in the accompanying index to exhibits are incorporated by reference herein or are filed as part of this annual report.

On November 14, 2002, the Company filed a report on Form 8-K, which included the transmittal letter and certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

On October 31, 2002, the Company filed a report on Form 8-K, which included a press release announcing its earnings for the 2002 third quarter and certain supplemental information.

See the accompanying index to exhibits referenced in Item 15(a)(3) above for a list of exhibits incorporated herein by reference or filed as part of this annual report.

See the accompanying index to consolidated financial statements and financial statement schedules referenced in Item 15(a)1 and 2, above.


*	Exhibits 10.1 through 10.47 are management contracts, compensatory plans, contracts and arrangements in which any director or named executive officer participates.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 28, 2003


	By:	/s/ WILLIAM R. FLOYD



	William R. Floyd
	Chairman of the Board, President,
	Chief Executive Officer and Director

Each person whose signature appears below constitutes and appoints Douglas J. Babb and John G. Arena, and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or either of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated:

I, William R. Floyd, Chairman of the Board, President and Chief Executive Officer of Beverly Enterprises, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Beverly Enterprises, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:


	(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):


	(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


	/s/ WILLIAM R. FLOYD

	William R. Floyd
	Chairman of the Board, President
	and Chief Executive Officer

I, Jeffrey P. Freimark, Executive Vice President and Chief Financial and Information Officer of Beverly Enterprises, Inc., certify that:

1. I have reviewed this annual report on Form 10-K of Beverly Enterprises, Inc.;


	(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	(c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


	/s/ JEFFREY P. FREIMARK

	Jeffrey P. Freimark
	Executive Vice President and Chief
	Financial and Information Officer


*	Exhibits 10.1 through 10.47 are management contracts, compensatory plans, contracts and arrangements in which any director or named executive officer participates.


†	Filed herewith.

EX-10.22 3 d03650exv10w22.txt EX-10.22 EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT 10.22 BEVERLY ENTERPRISES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN (Effective as of December 31, 2002) TABLE OF CONTENTS

BEVERLY ENTERPRISES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN ARTICLE 1 ESTABLISHMENT AND PURPOSE 1.1 Establishment. Effective as of December 31, 2002, the Company hereby establishes this deferred compensation plan for a select group of employees as described herein, which shall be known as the "Beverly Enterprises, Inc. Executive Deferred Compensation Plan" (the "Plan"). The Plan is intended to be an unfunded plan maintained primarily to provide deferred compensation benefits for a select group of "management or highly compensated employees" within the meaning of sections 201, 301, and 401 of ERISA, and therefore exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA. The Plan is intended to constitute a "nonqualified deferred compensation plan" for purposes of Code section 3121(v)(2) as well as 4 U.S.C. section 114. 1.2 Purpose. The primary purposes of the Plan are (i) to provide a select group of management or highly compensated employees with a capital accumulation opportunity by deferring compensation on a pre-tax basis; (ii) to provide the Company with a method of rewarding and retaining its highly compensated executives; and (iii) to provide a nonqualified retirement program with Company contributions to select individuals. ARTICLE 2 DEFINITIONS Whenever used herein, the following terms shall have the meanings set forth below, and, when the defined meaning is intended, the term is capitalized: (a) "Account" means the accounting entry made with respect to each Participant for the purpose of maintaining a record of each Participant's benefit under the Plan. (b) "Affiliate" means any business entity 80% or more directly or indirectly owned or controlled by the Company. (c) "Annual Incentive Plan" means the Company's annual performance bonus plan as constituted from time to time. (d) "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 Company, or any tender or exchange offer, merger or other business combination or sale of 1 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 or merge with any other person, entity or group of persons within the meaning of Section 3(a)(9) of the Securities Exchange Act of 1934 and as used in Sections 13(d) and 14(d) thereto, including a "group" as defined in Section 13(d) (collectively referred to as a "Person") and the Company shall not be the continuing or surviving corporation, (b) any Person shall consolidate 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 fifty percent (50%) or more of the assets or earning power of the Company and its subsidiaries (taken as a whole) to any Person or Persons. Notwithstanding anything to the contrary contained 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 or other owners of Controlled and immediately after the transaction(s) control more than 70% of the ownership and voting rights of Controlled. (e) "Code" means the Internal Revenue Code of 1986, as it has been and may be amended from time to time. (f) "Committee" means the Nominating and Compensation Committee of the board of directors of the Company as it may exist from time to time. (g) "Company" means Beverly Enterprises, Inc., a Delaware corporation. (h) "Compensation" means an Employee's Salary and Incentive Compensation paid by the Employer for the Plan Year. (i) "Discretionary Contributions" means those contributions credited to a Participant's Account, if any, pursuant to section 5.4. 2 (j) "Distribution Eligibility Requirement" means the completion of five (5) years of combined participation in this Plan and the SERP. (k) "Eligible Employee" means an Employee who is eligible to participate in the Plan pursuant to Section 4.1. (l) "Employee" means any person employed by the Employer whose wages are subject to withholding for purposes of the Federal Insurance Contribution Act. (m) "Employee Contributions" means those contributions credited to a Participant's Account in accordance with the Participant's deferral election pursuant to Section 5.1. (n) "Employer" means the Company and each Affiliate that adopts the Plan with the Company's permission. (o) "ERISA" means the Employee Retirement Income Security Act of 1974, as it has been and may be amended from time to time. (p) "Incentive Compensation" means such bonuses and other non periodic amounts payable to an Employee in addition to his Salary, which may be paid to the Employee in the current or a subsequent Plan Year as determined by the Employer in accordance with its general policies and procedures and its sole discretion. Whether a payment qualifies as "Incentive Compensation" shall be determined by the Committee in its sole discretion. (q) "Matching Contributions" means those contributions credited to a Participant's Account, if any, pursuant to Section 5.5. (r) "Participant" means an Eligible Employee who is participating in the Plan pursuant to Section 4.2. (s) "Plan" means the Beverly Enterprises, Inc. Executive Deferred Compensation Plan, as set forth herein, and as it may be amended from time to time. (t) "Plan Year" means January 1 to December 31 of each calendar year. The first Plan Year shall be a short plan year that begins and ends on December 31, 2002. (u) "Qualified Plan" means the Beverly Enterprises, Inc. 401(k) SavingsPlus Plan. (v) "Rabbi Trust" means the grantor trust that may be established pursuant to Article 8. (w) "Rabbi Trustee" means the trustee of the Rabbi Trust. (x) "Salary" means the base annual compensation payable to an Employee by the Employer for services rendered during a Plan Year, before reduction for amounts deferred pursuant to the Plan or to the Qualified Plan or any other deferred 3 compensation, 401(k), or cafeteria plan, which is payable in cash to the Employee for services to be rendered during the Plan Year provided that "Salary" shall exclude Incentive Compensation. (y) "SERP" means the Beverly Enterprises, Inc. Supplemental Executive Retirement Plan. (z) "SERP Contributions" means those contributions credited to a Participant's Account, if any, pursuant to Section 5.6. ARTICLE 3 ADMINISTRATION 3.1 Authority of the Committee. Subject to the provisions herein, the Committee or its designee shall have full power and discretion to select Employees for participation in the Plan; to determine the terms and conditions of each Employee's participation in the Plan; to construe and interpret the Plan and any agreement or instrument entered into under the Plan; to establish, amend, or waive rules and regulations for the Plan's administration; to amend (subject to the provisions of Articles 9 and 12 herein) the terms and conditions of the Plan and any agreement entered into under the Plan; to adjudicate all claims and appeals; and to make other determinations which may be necessary or advisable for the administration of the Plan. The Committee may designate persons other than members of the Committee to carry out the day-to-day ministerial administration of the Plan under such conditions and limitations as it may prescribe; provided, however, that the Committee shall not delegate its authority with regard to the determination of Eligible Employees or contributions pursuant to Article 5. 3.2 Decisions Binding. Subject to Section 3.4(b), all determinations and decisions of the Committee or its designee as to any disputed question arising under the Plan, including questions of construction and interpretation, shall be final, conclusive, and binding on all parties and shall be given the maximum possible deference allowed by law. 3.3 Claim Procedures. If a request for Plan benefits is denied in whole or in part, the Participant or his beneficiary ("claimant") will be notified in writing within 90 days after receipt of the claim. In some instances, the Committee may require an additional 90 days to consider the claim. When additional time is needed, the claimant will be notified within 90 days of receipt of the claim of the special circumstances requiring the extension and the date by which the Committee expects to render its benefit determination. The extension may not exceed a total of 180 days from the date the claim was originally filed. If a claimant's initial request for benefits is denied, the notice of the denial will include the specific reasons for denial and references to the relevant Plan provisions on which the denial was based, a description of any additional material or information necessary to perfect the claim and an explanation of why such information is necessary, if applicable, and a description of the Plan's review procedures and the time limits applicable thereto, including a statement of the claimant's rights under Section 502(a) of ERISA following an adverse benefits determination on review. 4 Within 60 days after receiving a denial, the claimant or his authorized representative may appeal the decision by requesting a review by writing the Committee. On appeal, the claimant may submit in writing any comments or issues with respect to the claim and/or any additional documents or information not considered during the initial review and, upon request and free of charge, the claimant will be provided access to and copies of all documents, records and other information relevant to the claim. A decision on appeal will normally be given within 60 days of the receipt of the appeal. If special circumstances warrant an extension, then the decision will be made no later than 120 days after receipt of the appeal. If an extension is required, the claimant will be provided a written notice of the extension that shall indicate the special circumstances requiring the extension and the date by which the Committee expects to render its final decision. Subject to Section 3.4, the Committee's decision on appeal shall be final and binding on all parties. If a claimant's appeal is denied in whole or in part, the notice of the decision on appeal shall include the specific reasons for the denial and reference to the relevant Plan provisions on which the denial was based, a statement that, upon request and free of charge, the claimant may review and copy all documents, records and other information relevant to the claim for benefits and a statement describing the Plan's binding arbitration procedures (or, on or after a Change in Control, other contest procedures) and the claimant's rights under Section 502(a) of ERISA. 3.4 Arbitration. (a) Pre Change in Control. The following provisions shall apply before a Change in Control. Any individual making a claim for benefits under this Plan may contest the Committee's decision to deny such claim or appeal therefrom only by submitting the matter to binding arbitration before a single arbitrator. Any arbitration shall be held in Fort Smith, Arkansas, unless otherwise agreed to by the Committee. The arbitration shall be conducted pursuant to the Commercial Arbitration Rules of the American Arbitration Association. The arbitrator's authority shall be limited to the affirmation or reversal of the Committee's denial of the claim or appeal, based solely on whether or not the Committee's decision was arbitrary or capricious, and the arbitrator shall have no power to alter, add to, or subtract from any provision of this Plan. Except as otherwise required by ERISA, the arbitrator's decision shall be final and binding on all parties, if warranted on the record and reasonably based on applicable law and the provisions of this Plan. The arbitrator shall have no power to award any punitive, exemplary, consequential, special, or extracontractual damages, and under no circumstances shall an award contain any amount that in any way reflects any of such types of damages. Each party shall bear its own attorney's fees. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. (b) Post Change in Control. On and after a Change in Control, the Committee's decisions shall be given no special deference, but rather shall be reviewed de novo, and a claimant may contest any Committee decision through arbitration or litigation, at the forum and the venue of his or her choice. The Company shall be liable for all court or arbitration costs and legal fees if the claimant makes such a challenge. 5 3.5 Indemnification. Each person who is or shall have been a member of the Committee or acts pursuant to the Committee's direction, shall be indemnified and held harmless by the Employer against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party, or in which he or she may be involved by reason of any action taken or failure to act under the Plan, and against and from any and all amounts paid by him in settlement thereof, with the Employer's approval, or paid by him in satisfaction of any judgment in any such action, suit or proceeding against him, provided he or she shall give the Employer an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Employer's Certificate of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Employer may have to indemnify them or hold them harmless. ARTICLE 4 ELIGIBILITY AND PARTICIPATION 4.1 Eligibility. The Committee shall determine, in its sole and absolute discretion, which such Employees shall be eligible to participate from time to time, and may modify such determinations at any time, provided that at all times the Plan shall continue to qualify as an unfunded plan maintained primarily to provide deferred compensation benefits to a select group of management or highly compensated employees, within the meaning of sections 201, 301, and 401 of ERISA. Currently, to be eligible for selection by the Committee, an Employee must (i) be in pay level D or above, (ii) have Salary scheduled to be at least $90,000, and (iii) have Total Compensation for the Plan Year scheduled to be at least $100,000. For purposes of this Section 4.1, the phrase "Total Compensation" shall mean a Participant's scheduled Salary and target bonus under the Company's Annual Incentive Plan for the Plan Year. 4.2 Participation. Each Eligible Employee shall become a Participant in the Plan upon contributions being made to his Account pursuant to Article 5, and the completion of all other applicable election and administrative forms required by the Company. In the event a Participant ceases to be eligible to participate in the Plan, such Participant shall become an inactive Participant, retaining all the rights described under the Plan, except the right to make any further deferrals, until such time that the Participant again becomes an active Participant. 4.3 Partial Year Eligibility. In the event that an Employee first becomes eligible to participate in the Plan after the beginning of a Plan Year, the Employer shall notify the Employee of his eligibility to participate, and the Employer shall provide each such Participant with a "Deferral Election Form," and any additional enrollment forms that must be completed by the Participant; provided, however, that such Participant must make his election within 30 days thereof and may elect only to defer that portion of his Compensation for such Plan Year which is to be earned after the filing of the deferral election. 6 4.4 Notice. The Company shall notify an Employee within a reasonable time of such Employee's gaining or losing eligibility for active participation in the Plan. ARTICLE 5 CONTRIBUTIONS TO PARTICIPANTS' ACCOUNTS 5.1 Compensation Deferrals. Effective as of January 1, 2003, and subject to Sections 5.2 and 5.3, an Eligible Employee may elect to defer and have credited to his Account for any Plan Year (i) up to one hundred percent (100%) of his Incentive Compensation, and (ii) up to seventy-five percent (75%) of his Salary; provided, however, that the amount of deferrals selected by the Participant shall not reduce his non-deferred Compensation below the amount that is required to be withheld for any state or federal payroll taxes (including FICA/Medicare tax on deferred amounts), income tax, payments to be withheld pursuant to the Qualified Plan or any other benefit plan of the Employer (other than this Plan), and any other required or elected withholding. Deferrals shall be credited to a Participant's Account on the business day the Compensation is withheld from the Participant's pay check. The minimum amount of Salary that may be deferred in any Plan Year is five percent (5%). The minimum amount of Incentive Compensation that may be deferred in any Plan Year is the greater of: (i) five percent (5%) of the Participant's Incentive Compensation for the Plan Year or (ii) $1,000. The minimum deferral amounts will be prorated if a Participant first becomes eligible to participate in the Plan after the beginning of the Plan Year. Eligible Employees shall not be permitted to defer any portion of their Compensation for the initial short Plan Year that begins and ends on December 31, 2002. At the discretion of the Committee, deferrals may also be permitted for awards under the Beverly Enterprises, Inc. Long-Term Incentive Plan or other equity compensation. 5.2 Deferral Election. Eligible Employees and Participants shall make their elections to defer all or a portion of their Salary for the Plan Year no later than December 15 prior to the beginning of the Plan Year in which the Salary is to be earned, or not later than thirty (30) calendar days following notification of eligibility to participate for a partial Plan Year (with respect to Salary not yet earned). Eligible Employees and Participants shall make their elections to defer all or a portion of their Incentive Compensation for the Plan Year before it is earned and substantially certain of payment, pursuant to rules established by the Committee from time to time. Any deferral election a Participant may have made under the Beverly Enterprises, Inc. Executive Deferred Compensation Plan, originally established as of January 1, 1997, and as amended and restated as of January 1, 2000, and August 18, 2000, shall not apply for purposes of this Plan. Notwithstanding the foregoing, if an Eligible Employee wishes to defer a portion of his Salary for the Plan Year beginning on January 1, 2003, such Eligible Employee must elect on or before December 9, 2002, to defer all or a portion of his Salary to be earned for the pay periods beginning on or after January 1, 2003. All Salary and Incentive Compensation deferral elections under this Plan must be made before the Compensation is earned and before the amount thereof is substantially certain of payment. 5.3 Length of Deferral and Modification of Elections. All deferral elections shall be irrevocable for the Plan Year in which they are in effect, and shall be made on a "Deferral Election Form," as described herein. Once made, a Participant's deferral election shall remain in effect for all subsequent Plan Years for which the Participant is an Eligible Employee unless and until the Participant increases, decreases, or terminates such election by submitting a new 7 Deferral Election Form to the Employer during the annual open enrollment period prior to a Plan Year. Deferral election changes must be submitted to the Employer no later than December 15 prior to the beginning of the Plan Year for which the change is to be effective. On the "Deferral Election Form" and related enrollment forms Participants shall elect (i) the percentage or flat dollar amount of each eligible component of Compensation to be deferred for the Plan Year; (ii) the deemed investment elections of the amounts to be deferred, in accordance with Section 7.2; and (iii) the time when a distribution of such deferrals and other contributions for the Plan Year shall begin. Except as provided herein, an election to receive Employee Contributions and deemed investment returns (or losses) thereon with respect to a Plan Year upon termination of employment is irrevocable and cannot be changed by the Participant. 5.4 Discretionary Contributions. The Committee may, within its sole discretion, direct the Employer to make contributions to a Participant's Account for the Plan Year based on the Participant's performance, the Company's performance, or any other criteria determined by the Employer within its sole discretion. Such contributions, if any, shall be referred to as "Discretionary Contributions." 5.5 Matching Contributions. The Committee may, within its sole discretion, direct the Employer to make contributions to a Participant's Account for the Plan Year equal to (i) the matching contributions that would have been contributed to the Qualified Plan on the Participant's behalf for the Plan Year if the limitations imposed by Code sections 401(a)(17) and 402(g) had not been in effect, less (ii) the total matching contributions made to the Qualified Plan on the Participant's behalf for the Plan Year. In addition to or in the alternative, the Employer may, within its sole discretion, make contributions to a Participant's Account for the Plan Year equal to the matching contributions that were not made on the Participant's behalf under the Qualified Plan for the Plan Year due to his participation in this Plan. Contributions made under this Section 5.5 shall be referred to as "Matching Contributions." 8 5.6 SERP Contributions. The Committee may, within its sole discretion, direct the Employer to make contributions on behalf of the former SERP participants whose names are set forth on Appendix A, in an amount determined in accordance with the chart set forth below, or as determined by the Committee in its sole discretion.

The Committee, within its sole discretion, may direct the Employer to make additional contributions to the former SERP participants who are age 65 or older, provided that they are still actively employed by the Employer and meet the eligibility requirements set forth in Section 4.1. In addition, for the initial Plan Year that begins and ends on December 31, 2002, the Employer shall make contributions to the Participant's Accounts whose names are set forth on Appendix B in an amount equal to the amount set forth in Appendix B, in lieu of such Participant's accrued benefit under the SERP. Contributions made pursuant to this Section 5.6 shall be referred to as "SERP Contributions." As a condition to having SERP Contributions credited to his Account pursuant to this Section 5.6, a Participant whose name is listed on Appendix A or B shall waive his right to any and all benefit he had or may have had under the SERP. ARTICLE 6 DISTRIBUTIONS 6.1 General. Each Plan Year's contributions (and earnings) may have a separate distribution schedule, commencing either at termination of employment or at a specified future date while still employed, and payable either in a lump sum or installments. The default election is a lump sum payable at termination. Once a Participant elects a distribution form for termination of employment, his election shall remain in effect for all subsequent Plan Years unless and until the Participant changes his election by submitting a new Deferral Election Form to the Employer. 9 6.2 Scheduled In-Service Distributions. A Participant may elect in the manner prescribed by the Committee to receive all or a portion of the vested portion of his Account while he is still employed by the Employer in either (i) a single lump sum payment, or (ii) annual installment payments over a period of two (2) to five (5) years; provided that the Participant has not previously elected to receive a distribution of such amounts upon termination of employment. If the amount the Participant elects to receive is less than $25,000 (for all years combined), payment shall be made in a single lump sum. If a Participant elects to receive installment payments under (ii) above, the amount of each installment payment shall be equal to the balance remaining in the portion of the Participant's Account that is subject to such installment election (as determined immediately prior to each such payment), multiplied by a fraction, the numerator of which is one (1), and the denominator of which is the total number of remaining installment payments. The installment amount shall be adjusted annually to reflect gains and losses, if any, allocated to such Participant's Account pursuant to Article 7. A Participant's election under this Section 6.2 must specify the future year in which the payment of the deferred amounts shall commence, provided that the year in which distributions are to commence must be at least two (2) years beyond the end of the Plan Year in which the compensation is deferred. Any desired in-service distribution must be separately elected for each year compensation is deferred. Thus, to elect a scheduled in-service withdrawal for future plan years' deferrals, a new distribution election form must be submitted during the applicable enrollment period. Once the applicable enrollment period has passed, a scheduled in-service distribution cannot be elected for that plan year's deferrals. Distributions under this Section 6.2 shall commence in February of the year specified in the Participant's election. A Participant may delay the commencement of in-service payments or amend his election as to the form of the distribution at any time provided that such amendment must be made in the manner specified by the Committee at least one (1) calendar year prior to the date the distribution is to commence. If the Participant elects to delay his distributions (as opposed to changing the form of distribution), the new distribution date must be either at least one (1) year after the prior distribution date or termination of employment. A maximum of two (2) changes are permitted with respect to the time of payment and a maximum of two changes are permitted with respect to the form of payment of contributions attributable to each Plan Year; provided, however, the Committee may, within its sole discretion, allow additional amendments. If a Participant terminates employment not on account of his death or long-term disability after meeting the Distribution Eligibility Requirement but prior to the commencement of a previously elected in-service distribution, the portion of the Participant's Account subject to the in-service election will instead be distributed at the time of such termination in the same form of distribution elected for termination. If a Participant terminates employment with the Employer not due to death or long-term disability after meeting the Distribution Eligibility Requirement and while receiving installment payments pursuant to this Section 6.2, the remaining installment payments will be made to the Participant when they become due pursuant to the in-service distribution election. If a Participant's employment terminates due to his death, long-term disability, or prior to the Participant meeting the Distribution Eligibility Requirement while receiving installment payments pursuant to this Section 6.2, the remaining installment payments will be paid in accordance with Section 6.4. 10 6.3 Distributions upon Meeting the Distribution Eligibility Requirement. If a Participant terminates employment with the Employer after meeting the Distribution Eligibility Requirement, the Participant may elect to receive the vested balance credited to his Account in (i) a single lump sum payment or, (ii) annual installment payments over a period of two (2) to fifteen (15) years. If a Participant fails to make a distribution election or if the vested balance credited to his Account to be distributed is less than $25,000, payment shall be made in a single lump sum. The amount of each installment payment under (ii) above shall be equal to the balance remaining in the portion of the Participant's Account that is subject to such installment election (as determined immediately prior to each such payment), multiplied by a fraction, the numerator of which is one (1), and the denominator of which is the total number of remaining installment payments. The installment amount shall be adjusted annually to reflect gains and losses, if any, allocated to such Participant's Account pursuant to Article 7. A Participant may amend his distribution election at any time to change the form of distribution provided that the amendment (a) be made in the manner specified by the Committee, and (b) be made at least one (1) year prior to termination of employment. A Participant may amend his election up to two times. Distributions under (ii) above shall begin in February of the year following the Participant's termination. Lump sum distributions under this Section 6.3 shall commence in the calendar quarter following the Participant's termination. 6.4 Termination of Employment Before Meeting the Distribution Eligibility Requirement, Death or Disability. In the event of a Participant's death, long-term disability (as determined by the Committee in its sole discretion) or if a Participant's employment with the Employer terminates for any reason prior to the date the Participant completes the Distribution Eligibility Requirement, the unpaid vested portion of such Participant's Account shall be paid to the Participant or (in the event of his death) the Participant's designated beneficiary in a single lump sum payment the calendar quarter following the Participant's termination of employment, death or long-term disability. At the request of a deceased Participant's beneficiary, the Committee may, within its sole discretion, change the form of distribution from a lump sum to installment payments. 6.5 Nonscheduled In-Service Withdrawals. Notwithstanding any provision of this Plan to the contrary, a Participant may at any time request a lump sum distribution of all or a portion of his vested Account. In the event a Participant requests a distribution under this Section 6.5, such Participant will receive a portion of his vested Account equal to 90% of the requested distribution, and the remaining 10% of the requested distribution will be forfeited, and (ii) such Participant will be ineligible to participate in the Plan for the remainder of the Plan Year in which the distribution is received and for the immediately following Plan Year. The minimum amount that can be withdrawn pursuant to this Section is the lesser of: (i) the Participant's vested Account balance, or (ii) $25,000. Participants who have terminated employment shall be eligible to request a withdrawal pursuant to this Section. If a Participant is eligible to receive a distribution under this Section 6.5, such distribution will be made within a reasonable time after the Participant's request. 6.6 Financial Hardship. The Committee shall have the authority to alter the timing or manner of payment of deferred amounts in the event that the Participant establishes, to the 11 satisfaction of the Committee, severe financial hardship. In such event, the Committee may, in its sole discretion, distribute all or a portion of such Participant's vested Account to the Participant without penalty. Participants who have terminated employment shall be eligible to request a withdrawal pursuant to this Section. For purposes of this Section 6.6, "severe financial hardship" shall mean any financial hardship resulting from extraordinary and unforeseeable circumstances arising as a result of one or more recent events beyond the control of the Participant, including, but not limited to the following: (a) the illness or injury of a Participant or dependent (the term dependent shall have the meaning set forth in Code section 152(a)), (b) the casualty loss of a Participant's real or personal property, or (c) other similar and unforeseeable circumstances caused by events beyond the Participant's control that the Committee, in its sole discretion, determines constitutes a severe financial hardship. In any event, payment under this Section 6.6 may not be made to the extent such emergency is or may be relieved: (i) through reimbursement or compensation by insurance or otherwise; (ii) by liquidation of the Participant's assets, to the extent the liquidation of such assets would not itself cause severe financial hardship; and (iii) by cessation of deferrals under the Plan. Withdrawals of amounts because of a severe financial hardship may only be permitted to the extent reasonably necessary to satisfy the hardship, plus to pay taxes on the withdrawal. Examples of what are not considered to be severe financial hardships include the need to send a Participant's child to college or the desire to purchase a home. The Participant's Account will be credited with earnings (or losses) in accordance with the Plan up to the date of distribution. A Participant requesting a hardship withdrawal is required to submit proof of his severe financial hardship and proof that it is not compensated by other means. The Committee shall judge the severity of the financial hardship based on the information submitted by the Participant. The Committee's decision with respect to the severity of financial hardship and the manner in which, if at all, the Participant's future deferral opportunities shall be ceased, and/or the manner in which, if at all, the payment of deferred amounts to the Participant shall be altered or modified, shall be final, conclusive, and not subject to appeal. 6.7 Incompetence of Distributee. In the event that it shall be found that a person entitled to receive payment under the Plan (including a designated beneficiary) is a minor or is physically or mentally incapable of personally receiving and giving a valid receipt for any payment due (unless prior claim therefore shall have been made by a duly qualified committee or other legal representative), such payment may be made to any person whom the Committee in its sole discretion determines is entitled to receive it, and any such payment shall fully discharge the Employer, the Company, the Committee, the Plan, the Rabbi Trust, and the Rabbi Trust Trustee from any further liability to the person otherwise entitled to payment hereunder, to the extent of such payment. ARTICLE 7 DEFERRED COMPENSATION ACCOUNTS 7.1 Participants' Accounts. The Company shall establish and maintain an individual bookkeeping Account for each Participant, and subaccounts for different contribution sources, as determined by the Committee. The Employee Contributions held in each Participant's Account shall be one hundred percent (100%) vested at all times. 12 A Participant's Account shall also be credited with (i) Discretionary Contributions, if any, made pursuant to Section 5.4, (ii) Matching Contributions, if any, made pursuant to Section 5.5, (iii) SERP Contributions, if any, made pursuant to Section 5.6, and (iv) any deemed earnings credit to such amounts pursuant to Section 7.2 below. A Participant shall vest in Discretionary Contributions and Matching Contributions in accordance with the schedule determined by the Committee at the time any such contributions are made. A Participant shall vest in SERP Contributions in accordance with the following schedule: Years of Participation % Vested ---------------------- -------- 0-4 0% 5 and more 100% For purposes of vesting in SERP Contributions, a Participant's years of participation shall be the combined total of his years of participation in this Plan and the SERP (without duplication of any years). The Committee, within its sole discretion, may accelerate the vesting of SERP Contributions upon a Participant's termination of employment. Notwithstanding anything in this Plan to the contrary, upon the occurrence of a Change in Control, Participants shall become fully vested in all amounts credited to their Accounts as of the date of the Change in Control. 7.2 Earnings on Contributions. A Participant's Account shall be credited with earnings (or losses) based on a deemed investment of the Participant's Account, as directed by each Participant, which deemed investment shall be in one or more benchmark funds among the investment options selected by the Company from time to time. Until a Participant's insurance application is processed and approved, his Account shall be credited with a money market rate of return. Deemed earnings (and losses) on a Participant's Account shall be based upon the daily unit valuation of the funds selected by such Participant, and shall be credited to a Participant's Account each business day. Deemed earnings (or losses) shall be paid out to a Participant at the same time as the rest of his Account, pursuant to Article 6. Any portion of a Participant's Account which is subject to distribution in installments shall continue to be credited with deemed earnings (or losses) until fully paid out to the Participant. The Company reserves the right to change the options available for deemed investments under the Plan from time to time, or to eliminate any such option at any time. A Participant may specify a separate investment allocation with respect to each Deferral Election Form or amended Deferral Election Form. Participants may modify their deemed investment instructions each business day with respect to any portion (whole percentages only) of their Account, provided they notify the Company or its designee within the time and in the manner specified by the Company. Changes will be effective at the closing price of the funds the business day following the business day the change is received by the Company's designee. Elections and amendments thereto pursuant to this Section 7.2 shall be made in the manner prescribed by the Company. 7.3 Designation of Beneficiary. Each Participant may designate a beneficiary or beneficiaries who, upon the Participant's death, or physical or mental incapacity will receive the 13 amounts that otherwise would have been paid to the Participant under the Plan. All designations shall be signed by the Participant, and shall be in such form as prescribed by the Committee. Each designation shall be effective as of the date delivered to the Committee or its designee by the Participant. Participants may change their beneficiary designations on such form as prescribed by the Committee. The payment of amounts deferred under the Plan shall be in accordance with the last unrevoked written beneficiary designation that has been signed by the Participant and delivered to the Committee or its designee prior to the Participant's death. In the event that all the beneficiaries named by a Participant pursuant to this Section 7.3 predecease the Participant, the deferred amounts that would have been paid to the Participant or the Participant's beneficiaries shall be paid to the Participant's estate. In the event a Participant does not designate a beneficiary, or for any reason such designation is ineffective, in whole or in part, the amounts that otherwise would have been paid to the Participant or the Participant's beneficiaries under the Plan shall be paid to the Participant's estate. ARTICLE 8 TRUST Nothing contained in this Plan shall create a trust of any kind or a fiduciary relationship between the Employer and any Participant. Nevertheless, the Employer may establish one or more trusts, with such trustee(s) as the Committee may approve, for the purpose of providing for the payment of deferred amounts and earnings thereon (collectively referred to hereinafter as the "Rabbi Trust"). Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Employer's general creditors upon the bankruptcy or insolvency of the Employer. ARTICLE 9 CHANGE IN CONTROL 9.1 Trust and Trustees. Upon the occurrence of a Change in Control, the Rabbi Trust shall become irrevocable and the Employer shall not thereafter be permitted to remove, terminate, or change the Rabbi Trustee without the prior written consent of the majority of the Participants, with weighted voting as measured by their account balances. 9.2 Advanced Funding. No later than 10 days after a Change in Control occurs, the Employer shall make a contribution to the Rabbi Trust to the extent required to fully fund all benefits that are or may become payable under the Plan, together with all expenses of administering the Plan and Rabbi Trust. No later than December 31 of each Plan Year thereafter, the Employer shall make such additional contributions to the Rabbi Trust to fully fund the additional benefits that may become payable to Participants or beneficiaries under the Plan and the additional administrative, legal, and other Plan expenses. 9.3 Amendment and Termination. After the occurrence of a Change in Control, neither the Employer nor the Committee may amend the Plan without the prior approval of a 14 majority of the Participants. After a Change in Control, the Employer may not terminate the Plan until either (i) all benefits have been paid in full, or (ii) the majority of the Participants approve the same. For purposes hereof, Participants' votes shall be weighted based on their relative Plan account balances. ARTICLE 10 RIGHTS OF PARTICIPANTS 10.1 Contractual Obligation. The Plan shall create an unfunded, unsecured contractual obligation on the part of the Employer to make payments from the Participants' Accounts when due. Payment of Account balances shall be made out of the general assets of the Employer or from the trust or trusts referred to in Article 8 above. 10.2 Unsecured Interest. No Participant or party claiming an interest in deferred amounts of a Participant shall have any interest whatsoever in any specific asset of the Employer. To the extent that any party acquires a right to receive payments under the Plan, such right shall be equivalent to that of an unsecured general creditor of the Employer. Each Participant, by participating hereunder, agrees to waive any priority creditor status for wage payments with respect to any amounts due hereunder. The Employer shall have no duty to set aside or invest any amounts credited to Participants' Accounts under this Plan. Accounts established hereunder are solely for bookkeeping purposes and the Employer shall not be required to segregate any funds based on such Accounts. 10.3 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Employer to terminate a Participant's employment at any time, or confer upon any Participant any right to continue in the employ of the Employer. ARTICLE 11 WITHHOLDING OF TAXES The Employer shall have the right to require Participants to remit to the Employer an amount sufficient to satisfy federal, state, and local withholding tax requirements, or to deduct from all payments made pursuant to the Plan (or from a Participant's other Compensation) amounts sufficient to satisfy withholding tax requirements. Employment taxes with respect to amounts deferred hereunder shall be payable in accordance with Code section 3121(v)(2) and may be withheld from a Participant's Compensation even if due prior to the time of a distribution hereunder. The Employer makes no representations, warranties, or assurances and assumes no responsibility as to the tax consequences of this Plan or participation herein. ARTICLE 12 AMENDMENT AND TERMINATION Except as provided herein, the Employer reserves the right to amend, modify, or terminate the Plan (in whole or in part) at any time by action of the Company or the Committee, with or without prior notice. Except as described below in this Article 12, no such amendment or termination shall in any material manner adversely affect any Participant's rights to any vested 15 amounts already deferred or credited hereunder or deemed earnings thereon, up to the point of amendment or termination, without the consent of the Participant. The Company may terminate the Plan and commence termination payout for all or certain Participants, or remove certain Employees as Participants, if it is determined by the United States Department of Labor or a court of competent jurisdiction that the Plan constitutes an employee pension benefit plan within the meaning of section 3(2) of ERISA that is not exempt from the provisions of Parts 2, 3, and 4 of Title I of ERISA, or if the IRS otherwise taxes or proposes to tax amounts deferred hereunder prior to their scheduled payment date. If payout is commenced pursuant to the operation of this Article 12, the payment of deferred amounts and earnings thereon shall be made in the manner selected by each Participant under Section 6.3 herein (other than the commencement date), as if the Participant had met the Distribution Eligibility Requirement. ARTICLE 13 MISCELLANEOUS 13.1 Notice. Any notice or filing required or permitted to be given to the Employer under the Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail to the Beverly Enterprises, Inc. Executive Deferred Compensation Plan Committee, and if mailed, shall be addressed to the principal executive offices of the Employer. Notice mailed to a Participant shall be at such address as is given in the records of the Employer. Notices to the Employer shall be deemed given as of the date of delivery. Notice to a Participant or beneficiary shall be deemed given as of the date of hand delivery, or if delivery is made by mail, three (3) days following the postmark date. 13.2 Nontransferability. Except as provided in Section 7.3 and this Section 13.2, Participants' rights to deferred amounts and earnings credited thereon under the Plan may not be sold, transferred, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, or pursuant to a domestic relations order, nor shall the Employer make any payment under the Plan to any assignee or creditor of a Participant. 13.3 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 13.4 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular, and the singular shall include the plural. 13.5 Costs of the Plan. All costs of implementing and administering the Plan shall be borne by the Employer. 13.6 Successors. All obligations of the Employer under the Plan shall be binding on any successor to the Employer, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Employer. 16 13.7 Applicable Law. Except to the extent preempted by applicable federal law, the Plan shall be governed by and construed in accordance with the laws of the state of Delaware. ARTICLE 14 ADMINISTRATIVE INFORMATION 14.1 Plan Sponsor and Administrator. The Plan described herein is sponsored by: Beverly Enterprises, Inc. One Thousand Beverly Way Fort Smith, Arkansas 72919 The Committee is the plan administrator and named fiduciary. Prior to a Change in Control, the Committee has been granted complete fiduciary discretion and authority to administer, operate, and interpret the Plan and make final decisions on such issues as eligibility, payment of benefits, claims, and claims appeals, unless such decisions have been delegated to another party. However, many day-to-day questions can be answered by the Benefits Department. The agent for the service of legal process for the Plan is the Company. 14.2 Plan Type and Plan Year. Documents and reports for the Plan are filed with the United States Internal Revenue Service and the Department of Labor under Employer Identification Number: 62-1691861. The official Plan name is the Beverly Enterprises, Inc. Executive Deferred Compensation Plan, which, for government purposes, is intended to be an unfunded pension plan maintained by an employer for a select group of management or highly compensated employees. Plan records are maintained on an annual basis and December 31 is the end of the plan year. 14.3 Plan Funding. The Plan is unfunded and unsecured and benefits are paid solely from the Employer's general assets. ARTICLE 15 ERISA RIGHTS Certain rights and protections are provided to Plan participants under the Employee Retirement Income Security Act of 1974 (ERISA). These ERISA rights include the following: (a) Any Plan participant may contact the Benefits Department to examine all Plan documents without charge. These may include the Plan descriptions and all other documents filed with the United States Department of Labor. (b) Copies of Plan documents and other information may be obtained by writing to the Committee. A reasonable charge may be assessed for these copies. 17 (c) Each Plan participant has the right to receive a written summary of the Plan's annual financial reports, if any. However, this type of plan is not required to have either an annual financial report or a summary annual report. (d) An employee may not be discharged or discriminated against to prevent his obtaining a benefit or exercising his ERISA rights. (e) If a claim for a benefit is denied, in whole or in part, you have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules. The named fiduciary for this Plan is the Committee. Under certain circumstances, outside assistance may be necessary to resolve disputes between a Participant and Plan officials. For instance, if you request a copy of plan documents or the latest annual report from the plan and do not receive them within 30 days, you may file suit in a Federal court. In such a case, the court may require the plan administrator to provide the materials and pay you up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the administrator. If a claim for benefits is denied or ignored, in whole or in part, after a final review, the claim may be submitted to binding arbitration (or, after a Change in Control, to either arbitration or a court, at the Participant's election). If you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a Federal court. The court will decide who should pay court costs and legal fees. If you are successful the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous. For further information about this Plan, contact the Benefits Department. Or, if you have any questions about this statement or about your rights under ERISA, you may contact the nearest area office of the Pension and Welfare Benefits Administration, United States Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquires, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Avenue N.W., Washington D.C. 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Pension and Welfare Benefits Administration. IN WITNESS WHEREOF, Beverly Enterprises, Inc. has caused this document to be executed by its duly authorized officer on ____________, 2002, effective as of the date set forth above. BEVERLY ENTERPRISES, INC. By: ------------------------------------ Its: ----------------------------------- 18 APPENDIX A PARTICIPANTS ELIGIBLE FOR SERP CONTRIBUTIONS 1. Partice Acosta 2. Douglas Babb 3. Linda Burch 4. Pamela Daniels 5. David Devereaux 6. Jeffrey Friemark 7. Blaise Mercadante 8. Chris Roussos 9. Richard Skelly 10. Cindy Susienka 11. Crystal Wright 19 APPENDIX B PARTICIPANTS SERP CONTRIBUTIONS ON 12/31/02 1. Douglas Babb = $40,998 2. Crystal Wright = $63,058 20 EX-10.32 4 d03650exv10w32.txt EX-10.32 EMPLOYMENT CONTRACT - WILLIAM R FLOYD EXHIBIT 10.32 EMPLOYMENT CONTRACT AGREEMENT made as of December 6, 2001 between BEVERLY ENTERPRISES, INC., a Delaware corporation (the "Company"), and WILLIAM R. FLOYD (the "Executive"). WHEREAS, Executive is employed by the Company or by one of its wholly-owned consolidated subsidiaries; and WHEREAS, the Company desires to assure itself of the management services of the Executive by directly engaging the Executive as the President and Chief Operating Officer of the Company; 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 not for Cause or a voluntary Termination of Employment for Good Reason within the Term of this Agreement; 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 agree 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. (b) The "Benefit Multiplier" shall be equal to 2.0 except that if Executive's Termination of Employment is pursuant to Paragraphs 6(b) or 6(c) 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, but in no event less than ten (10) days. (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 l3(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 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 the continuing or surviving corporation, (b) any Person shall consolidate with, or merge with the Company, and the 1 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 or earning power of the Company and its subsidiaries (taken as a whole) to any Person or Persons; provided, however, that notwithstanding anything to the contrary herein, a Change in Control shall not include either 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 or other owners of Controlled and immediately after the transaction(s) control more than 70% of the ownership and voting rights of Controlled. (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. (i) The Executive shall have "Good Reason" to terminate employment if: (i) the Executive is not elected, reelected, or otherwise continued in the office of the Company or any of its subsidiaries which he held immediately prior to the Change in Control Date, or he is removed as a member of the Board of Directors of the Company or any of its subsidiaries if the Executive was a director immediately prior to the Change in Control Date; (ii) the Executive's duties, responsibilities or authority as an employee are materially reduced or diminished from those in effect on the Change in Control Date without the Executive's consent; (iii) the Executive's duties, responsibilities, or authority as an employee are materially reduced or diminished from those in effect on the Effective Date without the Executive's consent; (iv) the Executive's compensation or benefits are reduced without the Executive's consent, unless all Executive-level officers have their compensation or benefits reduced in the same percentage amount; (v) the Company reduces the potential earnings of the Executive under any performance-based bonus or incentive plan of the Company in effect immediately prior to the Change in Control Date; (vi) the Company requires that the Executive's employment be based other than at its location on the Effective Date without his consent; (vii) any purchaser, assign, surviving corporation, or successor of the Company or its business or assets (whether by acquisition, merger, liquidation, consolidation, reorganization, sale or transfer of assets or business, or otherwise) fails or refuses to expressly assume in writing this Agreement and all of the duties and obligations of the Company hereunder pursuant to Section 16 hereof; (viii) a person, other than the Executive, replaces the current Chief Executive Officer; or (ix) the Company breaches any of the provisions of this Agreement. (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 2 "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 "Annual Incentive Plan." (l) "Termination of Employment" shall mean the termination of the Executive's employment by the Company other than such a termination 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 Good Reason. 2. Term. The initial term of this Agreement shall be for the period commencing on the Effective Date and ending on December 31, 2006. The 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 written notice of such to the Executive. (In such event, the Agreement shall thus terminate on the third anniversary of the effective date of such notice). 3. Position and Duties. During the Term, the Executive shall serve, as an employee, as the Chairman, President and Chief Executive Officer of the Company and shall have such duties, functions, responsibilities and authority as are consistent with the Executive's position as the senior executive officer in charge of the general management, business and affairs of the Company. 4. Compensation and Related Matters. (a) Annual Base Salary. The Executive shall receive a Base Salary at a rate of $835,000 per annum and thereafter at any such greater rate as is determined by the Committee, but in no event shall the Base Salary be reduced except as permitted in Section 1(i)(iv) above. (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 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 Savings Plus Plan, pursuant to its terms; (v) $835,000 of individual life insurance coverage under the Company's Executive Split Dollar Life Insurance Plan; (vi) $835,000 (or such greater amount as the Company may make available to its senior executives generally) of group term life insurance coverage; 3 (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, described below, (and therefore at the present time, there shall be no payroll deduction as a condition of coverage in the Medical Plan and Dental Plan); (ix) Participate in the Company's Executive Medical Reimbursement Plan (with a maximum benefit of $11,500 (or such greater 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; (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. (xiii) Be provided a Supplemental Executive Retirement Plan ("SERP") benefit through subsequent amendment to the SERP Plan as follows: i. 25% per year graduated vesting schedule retroactive to Executive's October 16, 2001 birthday; ii. 5% discount will be waived for each year until the age of 65; and iii. lump sum option will be made available. (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 Annual 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 Chairman and Chief Executive Officer of the Company. 4 5. Non-Solicitation. (a) Executive shall not at any time during the period of his employment with the Company, or during the one (1) 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. (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 Section 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. Eligibility for Severance Benefits. The Executive shall be eligible for the benefits described in Paragraph 7 (the "Severance Benefits") if: (a) during the Term, the Executive has a Termination of Employment initiated (i) by the Company without Cause, or (ii) by the Executive for Good Reason, and, in either case, subsections (b) or (c) do not apply, (b) during the Term there has been a Change in Control and during the 31 day period commencing on the first day of the 13th calendar month following the Change in Control Date (e.g. the period April 1, 1999 - May 1, 1999, inclusive, for a Change in Control which is effective in the month of March, 1998), the Executive has a Termination of Employment initiated by the Executive without Good Reason, or 5 (c) 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 Good Reason, or (ii) the Executive has a Termination of Employment initiated by the Company without Cause or by the Executive for Good 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 Change in Control Date wherever appropriate, including in the definition of "Good Reason" and in Paragraph 7 hereof). 7. Severance Benefit. Upon satisfaction of the requirements set forth in Paragraph 6, and subject to Paragraphs 8 and 11, the Executive shall be entitled to the following Severance Benefits: (a) Cash Payment. The Executive shall be entitled to receive an amount of cash equal to the Benefit Multiplier times the greater of: (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 (ii) 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. (b) Long-Term Incentive Award; Equity-Based Compensation. The Executive's interest under the Company's long-term incentive plans shall be fully vested. Any and all (i) options, phantom units, and other awards granted to Executive to purchase Company stock or which is measured by the current market value of Company stock and (ii) restricted stock of the Company, owned by the Executive shall be fully vested. (c) Continuation of Benefits. (i) For the Benefit Period, the Executive shall be treated as if he had continued to be an employee for all purposes under the Company's Medical Plan, Executive Medical Reimbursement Plan and Dental Plan. 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). 6 (ii) The Company shall maintain in force, at its own expense, for the remainder of the Executive's life, the vested 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. (d) Relocation Benefit. If, within the Benefit Period after the Executive's Termination of Employment, 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. (e) Executive Savings Plus Plan. For the year of the Executive's Termination of Employment, the Company will make the contribution to the Executive Savings Plus 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 Savings Plus Plan) and the percentage of such Compensation that the Executive is contributing to the Executive Savings Plus 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 Savings Plus 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. (f) 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. (g) 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 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. (h) 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. 7 8. 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 7 would cause the payment of one or more of such benefits to constitute an "excess parachute 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 the payments under Paragraph 7, (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 Section 7, 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 10, and if Paragraph 11 applies, any reference in this Paragraph and to Paragraph 7 shall also be deemed to include a reference to Paragraph 11 as well. 9. Waiver 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. 10. 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 appointed by the American Arbitration Association, 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. 11. 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 7 and/or 8 hereof, then the benefits under Paragraph 7(a) shall be increased and the benefits under Paragraphs 7(c), 7(d), and 7(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 8 shall be increased to take into account any increased benefits under this Paragraph. 12. 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. 8 13. 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. 14. Waiver of Rights. Executive hereby waives any rights against the Company, including without limitation any rights under any employment, change in control, or severance agreement; under any stock option or long-term incentive plan or any other compensation or employee benefit plan. 15. 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 subsection 15(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 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 or 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 9 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 subsection 15(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. 16. 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 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 inure 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 or 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 Section 16. 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, 10 or otherwise subject to anticipation, alienation, sale, encumbrance, charge, hypothecation, or set-off in respect of any claim, 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, voluntarily or involuntarily, to effect any action prohibited by this Paragraph shall be null, void, and of no effect. 17. 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 in 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, and a copy to Gary Jaffee, at the law firm of Jaffe Friedman, Suite 200, 7848 Old York Road, Elkins Park, PA 19027, or at any such other address as either party shall have specified by notice in writing to the other. 18. 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 Company. By an 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. 19. 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. 20. 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. 21. Indemnification. The Company shall indemnify, defend, and hold the Executive harmless from and against any liability, damages, costs, or expenses (including attorney's fees) in connection with any claim, cause of action, investigation, litigation, or proceeding involving him by reason of his having been an officer, director, employee, or agent of the Company, unless it is judicially determined, in a final, nonappealable order that the Executive was guilty of gross negligence or willful misconduct. The Company also agrees to maintain adequate directors and officers liability insurance for the benefit of Executive for the term of this Agreement and for at least three years, thereafter, to the extent such insurance is reasonably available and provided to all executives of the Company. 11 22. ERISA. This Agreement is pursuant to the Company's Severance Plan for Executives (the "Plan") which is unfunded and maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. The Plan constitutes an employee welfare benefit plan ("Welfare Plan") within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Any payments pursuant to this Agreement which could cause the Plan not to constitute a Welfare Plan shall be deemed instead to be made pursuant to a separate "employee pension benefit plan" within the meaning of Section 3(2) of ERISA as to which the applicable portions of the document constituting the Plan shall be deemed to be incorporated by reference. None of the benefits hereunder may be assigned in any way. 23. Governing Law. This Agreement shall be interpreted, administered and enforced in accordance with the law of the State of Arkansas, except to the extent pre-empted by Federal law. 12 The parties have duly executed this Agreement to be effective as of the date first written above. BEVERLY ENTERPRISES, INC. EXECUTIVE By: ----------------------------------- ----------------------------------- Marilyn Seymann, PhD William R. Floyd Chair, Nominating and Compensation Committee Board of Directors By: ----------------------------------- Douglas J. Babb Executive Vice President - Law and Government Relations and Secretary 13 EX-10.33 5 d03650exv10w33.txt EX-10.33 EMPLOYMENT/SEVERANCE AGREEMENT-DEVEREAUX EXHIBIT 10.33 EMPLOYMENT AND SEVERANCE AGREEMENT AGREEMENT made as of June 1, 2001 (the "Effective Date") between BEVERLY ENTERPRISES, INC., a Delaware corporation (the "Company"), and DAVID R. DEVEREAUX (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 right he may currently have under the Severance Agreement dated October 5, 2000 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" to terminate his employment 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 Severance Agreement dated October 5, 2000 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, it is also the intent of the parties that, in consideration for Executive's waiver of his rights under the Severance Agreement dated October 5, 2000 and the acceptance of benefits under this Agreement, Executive shall receive: (1) an increase in his base salary to $400,000 per year; (2) a new target bonus level of 50% of base salary; and (3) a retention bonus of 100,000 performance-based non-qualified stock options (NQ's) cliff vesting on December 31, 2004 and expiring on March 31, 2005; and WHEREAS, it is further the intent of the parties that if the Executive remains employed by the Company on or after the first anniversary of the Effective Date of this Agreement and then has a Termination of Employment without Cause, or has a "Change in Control" as described in paragraph 1(e), he shall receive the severance benefits under this Agreement upon the execution of a Severance Agreement and Release of Claims; and WHEREAS, the Company desires to assure itself of the management services of the Executive by directly engaging the Executive as the President and Chief Operating Officer of Beverly Health and Rehabilitation Services, Inc. ("BHRS") a/k/a Beverly Healthcare; 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 under paragraph 1(d) or due to a Change in Control under Paragraph 1(e). 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. (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, after the Effective Date: (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 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 or earning power of the Company and its subsidiaries (taken as a whole) to any Person or Persons; provided, however, that notwithstanding anything to the contrary 2 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. (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 Nominating and Compensation Committee of the Company's Board of Directors. (h) The "Competitive Businesses" shall mean any of the health care businesses or research and development activities in which the Company is engaged on the Effective Date. (i) "Effective Date" shall mean the date first shown 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 "Annual Incentive Plan." (l) "Termination of Employment" shall mean the termination of the Executive's employment by the Company other than such a termination in connection with an offer of immediate reemployment by a successor or assign of the Company or purchaser of the Company or its assets. 2. Term. The term of this Agreement shall be for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date. 3. Position and Duties. During the Term, the Executive shall serve as an employee of the Company in the position of President and Chief Operating Officer of BHRS, and shall have such duties, functions, responsibilities and authority as determined by the Chief Executive Officer of the Company. 4. Compensation and Related Matters. 3 (a) Annual Base Salary. The Executive shall receive a Base Salary at a rate of $400,000 per annum through December 31, 2001 and thereafter at any such greater rate as is determined by the Committee. (b) Retention Benefits. The Company wishes to retain Executive as a key employee whose contributions to the Company could be substantial. As an inducement for him to remain with the Company in his position as President and Chief Operating Officer of BHRS, Company grants the following retention benefits as of the date of this Agreement, unless previously implemented: (i) increase in base annual salary to $400,000 per year; (ii) increase target bonus to 50% of annual base salary; (iii) grant of 100,000 non-qualified stock options (NQ's) with a "cliff" vesting on December 31, 2004 subject to: (1) BHRS meeting or exceeding cumulative financial targets in 2004 which will be reviewed annually by Executive and William R. Floyd; and (2) the authorization by the Nominating and Compensation Committee of the Board of Directors. Price for such stock options will be determined by using the closing price of the Company's common stock on the NYSE on June 1, 2001. If the financial targets of BHRS are not met, the options will expire March 31, 2005. 5. Non-Solicitation. (a) Executive shall not at any time during the period of his employment with the Company, or during the one (1) 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, 4 subcontractor of the Company so as to affect adversely the goodwill or business of the Company. (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, or is readily accessible through public means, 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. 5 (b) Confidentiality and Surrender of Records. Executive shall not during the term of employment or at any time thereafter (irrespective of the 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 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 initiated by the Company without Cause under paragraph 1(d) and subsection (b) does not apply; or (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 (ii) the Executive has a Termination of Employment initiated by the Company without Cause 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 Change in Control Date wherever appropriate). 6 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. If the Executive's Termination of Employment arises 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. If the Executive's Termination of Employment arises 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) Continuation of Benefits. (i) For the Benefit Period, the Executive shall be treated as if he had continued to be an employee for all purposes under the Company's Medical Plan, Executive Medical Reimbursement Plan and Dental Plan. 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 maintain in force, at its own expense, for the remainder of the Executive's life, the vested life insurance in effect under the Company's Executive Split Dollar Life Insurance Plan (as described in 7 Paragraph 4(b)) as of the Change in Control Date or as of the date of Termination of Employment, whichever is greater. (d) Relocation Benefit. If, within one (1) year after the Employee's Termination Date, the Employee gives the Company written notice that he desires to relocate within the continental United States, the Company will reimburse the Employee for any reasonable relocation expenses (in accordance with the Company's general relocation policy for employees as then in effect, or, at the Employee's election, as in effect on the Termination Date) in connection with such relocation. (e) Executive Savings Plus Plan. For the year of the Executive's Termination of Employment, the Company will make the contribution to the Executive Savings Plus 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 Savings Plus Plan) and the percentage of such Compensation that the Executive is contributing to the Executive Savings Plus 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 Savings Plus 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. (f) 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. 9. 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. Except as otherwise provided herein, Executive waives and releases any claims Executive may have under the Severance Agreement dated October 5, 2000 for any severance benefits. 10. 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 8 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. 11. 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. 12. 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. 13. 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 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 Section 15. Without limiting the generality of the foregoing, the Executive's right to receive 9 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. 14. 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. 15. 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 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. 16. 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. 17. 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. 10 18. Indemnification. Executive has entered into an Indemnification Agreement dated February 3, 1999 which shall govern the rights and obligations of the parties with respect to indemnification. 19. 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. 20. Severance Agreement and Release. As a precondition to obtaining 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. 11 The parties have duly executed this Agreement as of the date first written above. BEVERLY ENTERPRISES, INC. EXECUTIVE By: --------------------------- ----------------------------- William R. Floyd David R. Devereaux Chairman, President and Chief Executive Officer By: ----------------------------------- Douglas J. Babb Executive Vice President - Law and Government Relations, and Secretary One Thousand Beverly Way Fort Smith, AR 72919 12 EX-10.34 6 d03650exv10w34.txt EX-10.34 SEVERANCE AGREEMENT - BOBBY W STEPHENS EXHIBIT 10.34 SEVERANCE AGREEMENT AND RELEASE OF CLAIMS This Severance Agreement and Release of Claims ("Release") is entered into between Beverly Enterprises, Inc., its officers, agents, directors, employees, successors, subsidiaries, insurers, parents and/or affiliated companies, and assigns (the "Company") and BOBBY W. STEPHENS (the "Employee"). WHEREAS, the Employee and the Company had entered into an Employment and Severance Agreement dated March 5, 2001 ("Agreement"), and it is the parties intent that all the terms of such Agreement shall be superceded on the Effective Date of this Release and the terms of this Release shall govern the rights and obligations of the parties after the Employee's termination of employment except as otherwise set forth in this Release; and WHEREAS, Employee will be retiring from the position of Executive Vice President on December 5, 2004 ("Retirement Date") and wishes to be placed on a paid leave of absence ("LOA") until his Retirement Date; and WHEREAS, Employee has discontinued his current responsibilities as of October 5 in order to permit him to begin his LOA; and WHEREAS, the change in Employee's responsibilities as of October 5 constitutes a "Termination of Employment for Specific Reason" under paragraph 1(m) of the March 1, 2001 Agreement triggering certain rights and benefits in favor of Employee; and WHEREAS, Employee and Company desire to enter into this Release to modify the terms of the March 5, 2001 Agreement to facilitate a transition. 1. TERMINATION OF EMPLOYMENT/LOA/RETIREMENT DATE. Beginning October 5, 2002, Employee will relinquish his existing duties as Executive Vice President - Procurement, Facilities Management and Joint Venture of Japan and Chile, and his officer status and begin his LOA. Employee will maintain his present office at the Company's headquarters until December 31, 2002 at which time he will no longer have an office at the Headquarters location or at Company expense. Employee will remain in his LOA period until his Retirement Date. Provided that Employee has complied and continues to comply with the terms of this Release, from the date of this Release until the Retirement Date, in other words during the LOA period, Employee will continue to receive his present salary of $348,989 and remain eligible to receive all benefits under the Company's plans applicable to other executives. In the event of Employee's death during the LOA, Employee's salary will continue to be paid to his spouse under the term so this Release and benefits will continue consistent with the terms of the plan documents. Employee will continue to be covered under the Executive Medical Plan (i.e., the Plan that reimburses up to $5,000 annually for medical and dental expenses). Employee will also remain eligible for an incentive compensation payment ("bonus") based on the Company's performance under applicable plans and associated goals subject to the discretion of the Chairman and the Company's Board of Directors to the same extent as other senior officers reporting to the Chairman. During the LOA period and after his Retirement Date, Employee will be eligible to receive the benefits described in paragraphs 2 and 3 below. a. Long-Term Incentive Award; Equity-Based Compensation. i. Employee's interest in any outstanding and unvested shares of Restricted Stock shall vest on August 18, 2004. Any unvested stock options shall be fully vested on the Retirement Date notwithstanding any provision in a stock option agreement to the contrary. No further awards, restricted stock, stock options or other equities will be granted to Employee beginning on the date of this Release. ii. From the Retirement Date until December 5, 2006 (the "Benefit Period"), Employee will be eligible to participate in those Company health and dental plans in existence and applying to him on December 5, 2004. Employee understands that during the Benefit Period plans existing on December 5, 2004 may be amended, changed, terminated or added to by the Company and its Board of Directors. Following the Benefit Period, Employee shall be entitled to receive continuation coverage under Part Six of Title 1 of ERISA ("COBRA Benefits") treating the end of the Benefit Period as a termination of his employment. iii. The Company shall fully vest and maintain in full force, at its own expense, the life insurance in effect under the Company's Split Dollar Life Insurance Plan as of Employee's Retirement Date or, if required by law or changes in Company policies, the Company may provide at its expense insurance of similar value to Employee which must be in place and provided to Employee no later than March 1, 2003. b. Relocation Benefit. If, within two (2) years after Employee's Retirement Date, he gives the Company written notice that he desires to relocate his primary residence in Fort Smith, Arkansas to a point within the continental United States, the Company will reimburse the Employee for any reasonable relocation expenses (in accordance with the Company's general relocation policy for executives as then in effect) in connection with such relocation. 2 c. Executive SavingsPlus Plan. For 2002, the Company will make the contribution to the SavingsPlus Plan on behalf of the Employee that it would have made if the Employee had not had a Termination of Employment for Specific Reason, but in no event less than the percentage contribution it made for the Employee in the immediately preceding year (and increased to take account of the additional year of Service), in each case taking account of the Employee's annualized rate of "Compensation" (as defined in the Executive SavingsPlus Plan) and the percentage of such Compensation that the Employee 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 great, 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 Employee immediately upon the Employee's Termination of Employment any additional contribution required shall be paid as soon as the amount is determined. d. Deferred Compensation Plan (the "Frozen DCP"). Existing balances will be paid out in the manner Employee elected and in accordance with the current plan. e. Repayment of Loan; Supplemental Executive Retirement Plan. Employee agrees to repay in full the outstanding amount of his loan from Regions Bank in Fort Smith, Arkansas (approximately $323,000 as of the date of this Release) prior to December 4, 2004. Provided that Employee has provided evidence that this loan has been repaid prior to December 4, 2004, Employee shall be deemed fully vested in the Company's Supplemental Executive Retirement Plan ("SERP") upon his attainment of age 60 on December 4, 2004. For purposes of determining Employee's benefits under the SERP, the Company will use the estimated amount of three hundred forty eight thousand nine hundred and eighty nine dollars ($348,989) as Employee's final average compensation. Employee shall receive retirement benefits under the SERP in the manner he elects and in accordance with the current plan. f. Extent of Benefit Eligibility. Employee will cease to be eligible to participate under any stock option, bonus, incentive compensation, commission, medical, dental, life insurance, retirement, and any other compensation or benefit plans of the Company or any affiliate following the Termination Date except to the extent described above 3 and except where the governing documents of those plans provide otherwise. Any payment from these plans will be in accordance with the election(s) previously made by Employee. In the event of any material breach by the Employee of the terms of this Release, the Employee's right to receive any further payments or benefits under the Release shall immediately end, and the Employee will forfeit and be required to return to the Company any payments or benefits received. Any such breach shall not relieve the Employee of any obligations under the Release, and the cessation of any benefits on account of a breach shall not limit the Company's right to any other relief it may have as a matter of law or equity. Notwithstanding the foregoing, any challenge as to the validity of the ADEA release contained in subsection 4(d) of this Release shall not be considered a material breach, to the extent such treatment is mandated by applicable law. 2. BENEFITS DURING LOA. Provided that the Employee has complied and continues to comply with the terms of this Release, while the Employee is on LOA, he will remain eligible for the health care, life and disability insurance benefits and other benefit programs applicable to other executives. Employee understands that during the LOA, the benefit plans in existence may be amended, changed, terminated or added to by the Company and its Board of Directors. 3. BENEFITS UPON AND AFTER RETIREMENT. Provided that the Employee has complied and continues to comply with the terms of this Release, the Company promises that he will receive the benefits set forth in this Section 3 on his Retirement Date subject to the terms of this Release and in lieu of all other termination benefits. Employee specifically waives any other rights to any and all benefits, except as otherwise provided herein, in his Employment and Severance Agreement dated March 5, 2001 and his Employment dated August 22, 1997. 4. CONSIDERATION OF RELEASE. Employee acknowledges that, before signing this Release, he was given at least 21 days in which to consider this Release. Employee waives any right he might have to additional time within which to consider this Release. Employee further acknowledges that: (1) he took advantage of the time he was given to consider this Release before signing it; (2) he carefully read this Release; (3) he fully understand it; (4) he is entering into it voluntarily; (5) he is receiving valuable consideration in exchange for his execution of this Release that he would not otherwise be entitled to receive; and (6) the Company, in writing, encouraged him to discuss this Release with his attorney (at his own expense) before signing it, and that he did so to the extent he deemed appropriate. 5. GENERAL RELEASE a. In General: Except for obligations established in this Release, Employee irrevocably and unconditionally releases all the Claims 4 described in this Section 4 that he may now have against the Released Parties listed in Section 5(b). Company irrevocably and unconditionally releases any and all claims it may have or could assert against Employee. b. Released Parties: The Released Parties are the Company, all current and former parents, subsidiaries, related companies, partnerships, or joint ventures, and, with respect to each of them, their predecessors and successors; and, with respect to each such entity, all of its past, present, and future employees, officers, directors, stockholders, owners, representatives, assigns, attorneys, agents, insurers, employee benefit programs (and the trustees, administrators, fiduciaries, and insurers of such programs), and any other persons acting by, through, under or in concert with any of the persons or entities listed in this subsection, and their successors. c. Claims Released: The Claims Employee is releasing under this Section 4 and the claims Company is releasing against Employee include all known and unknown claims, promises, causes of action, or similar rights of any type that Employee presently may have ("Claims") with respect to any Released Party listed in Section 5(b). Employee understands that the Claims Employee is releasing might arise under many different foreign, domestic, national, state, or local laws (including statutes, regulations, other administrative guidance, and common law doctrines), as set forth in this Section 4. d. Employee acknowledges that a portion of the amounts or benefits under this Release is being paid to induce him to release any claims that he may have under the Age Discrimination in Employment Act ("ADEA"). Employee acknowledges that he has adequate and legally sufficient time to review and seek legal guidance concerning this Release. Specifically, Employee acknowledges that this Release was provided to him on October 16, 2002, and that he has until November 6, 2002 to consider this Release. If Employee chooses to execute this Release prior to November 6, 2002, it is solely his choice. Employee may revoke the waiver of the ADEA claims in this Section of this Release (which Employee acknowledges constitutes an entirely separate release from the balance of this Release) within seven (7) days after signing of this Release, in which case Employee will not be paid that portion of the amounts or benefits that are being paid to Employee for his release of ADEA claims. Employee agrees that any revocation will be in writing and accompanied by all sums received pursuant to this Release and received by the Executive Vice President, General Counsel by the end of the seven (7) day period. Employee has 5 been advised to consult with an attorney or advisor concerning this Release. Employee understands the rights that have been waived by this Release, including rights under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 62 1, et seq., as amended. Employee further represents and warrants that he freely negotiated the terms of this Release, and enters into it and executes it voluntarily. He understands that this is a voluntary waiver of any claims under the laws and orders stated below, that relate in any way to his employment with, complaints about, compensation due, or separation from the Company. Anti-discrimination statutes, such as the Age Discrimination in Employment Act and Executive Order 11141, which prohibit age discrimination in employment; Title VII of the Civil Rights Act of 1964, Sections 1981 and 1983 of the Civil Rights Act of 1866, and Executive Order 11246, which prohibit discrimination based on race, color, national origin, religion, or sex; the Equal Pay Act, which prohibits paying men and women unequal pay for equal work; the Americans With Disabilities Act and Sections 503 and 504 of the Rehabilitation Act of 1973, which prohibit discrimination based on disability; and any other federal, state, or local laws prohibiting employment discrimination, such as the State of Arkansas. Federal employment statutes, such as the WARN Act, which requires that advance notice be given of certain work force reductions; the Employee Retirement Income Security Act of 1974, which, among other things, protects employee benefits; the Fair Labor Standards Act of 1938, which regulates wage and hour matters; the Family and Medical Leave Act of 1993, which requires employers to provide leaves of absence under certain circumstances; and any other federal laws relating to employment, such as veterans' reemployment rights laws. Other laws, such as any federal, state, or local laws providing workers' compensation benefits, mandating leaves of absence, restricting an employer's right to terminate employees, or otherwise regulating employment; any federal, state, or local law enforcing express or implied employment contracts or requiring an employer to deal with employees fairly or in good faith; any other federal, state, or local laws providing recourse for alleged wrongful discharge, tort, physical or personal injury, emotional distress, fraud, negligent misrepresentation, defamation, and similar or related claims, and any other law, such as the State of Arkansas. 6 Examples of released Claims include, but are not limited to the following (except to the extent explicitly preserved by Section 1 or 2(a) of this Release): (i) Claims that in any way relate to Employee's employment with the Company, or the termination of that employment, such as Claims for compensation, bonuses, commissions, lost wages, or unused accrued vacation or sick pay except as otherwise provided in paragraph 2(a); (ii) Claims that in any way relate to the design or administration of any employee benefit program; (iii) Claims that Employee has irrevocable or vested rights to severance or similar benefits or to post-employment health or group insurance benefits; (iv) any Claims to attorneys' fees or other indemnities (such as under the Civil Rights Attorneys' Fees Act), with respect to Claims Employee is releasing, or any Claims that Employee has under his Employment Contract. e. Employee represents and covenants that Employee, his heirs, representatives, executors, administrators, successors, and assigns have not and will not file any claims, charges, or complaints against the Company, with any Federal, State, or local agency or court arising out of his employment and/or separation from the Company. Employee further represents that if any such agency or court ever assumes jurisdiction of or otherwise pursues any such lawsuit, claim, charge, or complaint and/or purports to bring any legal proceeding, in whole or in part, on behalf of Employee, or Employee's heirs, representatives, executors, administrators, successors, and/or assigns, behalf against the Company, Employee, or Employee's heirs, representatives, executors, administrators, successors, and/or assigns, promptly, in writing, will request the agency or court to withdraw from and/or dismiss the lawsuit, claim, charge or complaint with prejudice and will take all available legal action to be removed from any such legal proceeding brought, in whole or in part, on behalf of Employee. This subsection shall not apply to challenges to the ADEA release in subsection 4(d) of this Release, to the extent, if any, prohibited by applicable law. f. Employee understands and agrees that his employment with the Company will terminate on his Retirement Date, and he will not apply for or otherwise seek re-employment with the Company, or its successors, at any time. The Company shall have the absolute right, without incurring liability of any kind, to refuse Employee's consideration for employment and Employee agrees that he shall not authorize any person or agency to pursue any claim for such refusal of employment. The Employee acknowledges that he has received no promise or assurance that his employment will resume at any point in 7 the future or that he will ever be rehired by the Company or its affiliates, parent, or subsidiaries. g. As further consideration for the covenants set forth herein, Employee hereby agrees to cooperate fully with the Company's Legal Department and/or any lawyer, law firm, or consultant that the Company designates with respect to any litigation, deposition, hearing, arbitration, or other proceeding (including, but not limited to, support of the Company's position in defending any employment-related lawsuits or claims concerning which Employee has knowledge or audits, investigations, lawsuits, complaints or proceedings by government entities of state or federal law compliance) where the Company's legal or financial interests are at issue. Employee further covenants that he will contact the Company's Legal Department in the event that there is any subpoena, notice or other instruction directing the Employee to appear in any legal proceeding involving the Company. h. To the maximum extent permitted by law, the Company shall indemnify Employee against all expenses (including reasonable attorneys' fees), judgments, fines and amounts paid in settlement actually incurred by himself in connection with any claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, to which Employee becomes a party or in which Employee becomes otherwise involved by reason of the fact that Employee was a director, officer, employee or agent of the Company or of any subsidiary or affiliate of the Company. In addition, the Company shall continue to include Employee among those individuals covered by the Company's director and officer liability insurance, as long as such insurance is available and the Company elects to maintain such insurance; provided, however, that the unavailability of such insurance coverage or the Company's discontinuance of such insurance shall in no way limit, reduce or otherwise affect Employee's rights to indemnification by the Company under the first sentence of this subsection. This subsection shall remain in full force and effect indefinitely with respect to any claims based upon events occurring on or prior to December 5, 2004. i. Employee also promises neither to contest the validity of this Release, nor sue the Company concerning any claim he may have relating to his employment with the Company or the termination of that employment. This subsection shall not apply to challenges to the ADEA release in subsection 5(d) of this Release, to the extent, if any, prohibited by applicable law. 8 6. TRANSFER OF DUTIES. During the LOA period and Benefit Period, the Employee will act at all times with complete loyalty and good faith in promoting the best interests of the Company. To this end, the Employee will: (a) fully inform the Company and the Employee's successor (if any) of all material activities performed by the Employee and of progress on assigned duties; and (b) transfer or otherwise make available to the Company and the Employee's successor (if any), to the extent reasonably possible, the Employee's knowledge and experience regarding his activities on behalf of the Company. Employee will also promote the goodwill, reputation, and ongoing business of the Company, and take all steps necessary to maintain, and in no way act to hinder, the foregoing interests. 7. COMPANY PROPERTY: By December 31, 2002, Employee will return to the Company all files, memoranda, documents, records, copies of the foregoing, credit cards, keys, and any other property of the Company or its affiliates in his possession, provided, however, that Employee and his Administrative Assistant may retain their existing office furniture and equipment. Company agrees to pay the reasonable and necessary expenses of moving this furniture and equipment to its first non-Company location. 8. OWNERSHIP OF CLAIMS: Employee has not assigned or transferred any Claim he is purporting to release, nor has he attempted to do so. 9. OTHER REPRESENTATIONS: In addition to Employee's other representations in this Release, Employee has made the following representations to the Company, on which he acknowledges it also has relied in entering into this Release with Employee: (a) Employee has not suffered any discrimination on account of his age, sex, race, national origin, marital status, sexual orientation, or any other protected status, and none of these ever has been an adverse factor used against Employee by any Released Party; (b) Employee has not suffered any job-related wrongs or injuries for which he might still be entitled to compensation or relief, such as an injury for which Employee might receive a workers' compensation award in the future; (c) Employee has no knowledge of any wrongdoing by the Company that would subject the Company to any harm, civil or criminal; and (d) Employee has provided no information, oral or in writing, to anyone - individual, corporation or any other organization, private, public or governmental - that involves any wrongdoing, civil or criminal, by the Company. 10. FALSE CLAIMS REPRESENTATIONS AND PROMISES: Employee has disclosed to the Company any information he has concerning any conduct involving the Company or any affiliate that he has any reason to believe may be unlawful or that involves any false claims to the United States. Employee promises to cooperate fully in any investigation the Company or any affiliate undertakes into matters occurring during Employee's employment with the 9 Company or any affiliate. Employee understands that nothing in this Release prevents him from cooperating with any U.S. government investigation. In addition, to the fullest extent permitted by law, Employee hereby irrevocably assigns to the U.S. government any right he might have to any proceeds or awards in connection with any false claims proceedings against the Company or any affiliate. 11. COOPERATION REQUIRED: Employee agrees that, as requested by the Company, he will fully cooperate with the Company or any affiliate in effecting a smooth transition of his responsibilities to others. 11. NON-SOLICITATION. Employee agrees to the following prohibitions on solicitation of the Company's employees, customers, and business interests, to wit: (a) Employee shall not at any time during the LOA period or the Benefit Period (the "Non-Solicitation Period"), without the prior written consent of the Company, on behalf of himself or any other person or entity, solicit for employment or employ any of the current officers or employees of the Company; provided, however, that nothing contained herein shall prohibit the Employee from hiring employees of the Company when such employment results from general solicitations for employment. (b) Employee 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 benefit, or for the benefit of any company or persons 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, or customers of the Company or the terms of any contracts of the Company which is not freely available to the public. (c) Employee covenants and agrees that a material breach of the foregoing subsections 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 Release, at law or otherwise, be entitled to an injunction to be issued by any court of competent jurisdiction enjoining and restraining the Employee from committing any violation of the foregoing subsections. 10 12. NON-DISCLOSURE, RETURN OF PROPRIETARY INFORMATION, AND INVENTIONS AND PATENTS. The Company and the Employee agree that during his employment with the Company, the Employee has received and become acquainted with confidential, proprietary, and trade secret information of the Company including, but not limited to, information regarding Company business programs, plans, and strategies; finances; customers and prospective customers; suppliers and vendors; marketing plans and results; personnel matters regarding Company employees, officers, directors, and owners; manners of operation and services provided; negotiating positions and strategies; legal arguments, theories, claims, and defenses; pending, threatened, or potential legal actions, claims, investigations, and audits; or information which could lead to the same; and similar sensitive information regarding the operation and business of the Company. The Employee acknowledges that such information has been developed or acquired by the Company through the expenditure of substantial time, effort, and money, that such information provides the Company with strategic and business advantages over others who do not know or use such information, and that the Company has implemented specific policies and practices to keep such information secret. Accordingly, the Employee agrees to abide by the prohibitions on use and disclosure of such information set forth hereinafter: (a) Proprietary Information. Employee shall not during the term of employment or at any time thereafter (irrespective of the circumstances under which Employee'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 11 agreed to hold in confidence; (g) any inventions, innovations or improvements covered by subsection (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 Employee or through authorized publication by Company to persons other than Company's employees. (b) Confidentiality and Surrender of Records. Employee shall not during the term of employment or at any time thereafter (irrespective of the circumstances under which Employee'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 or 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. Employee shall promptly return to Company all "confidential records" upon the termination of Employee'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 Employee's possession or under his control or accessible to him which contain any proprietary information as defined in subsection (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 Employee, either alone or jointly with others, during the term of employment belong to Company. Employee will promptly disclose in writing such inventions, innovations or improvements to Company and perform all actions 12 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 Employee 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 Employee can provide conclusive evidence to the contrary. 13. PUBLIC STATEMENTS. Employee also agrees that he will make no disparaging remarks to any third parties concerning the Company, its employees, agents, representatives, subsidiaries, parents, affiliates, and shareholders nor will Company make any disparaging remarks about Employee. Employee further agrees that he will not disparage the Company's business capabilities, products, plans, or management to any customer, potential customer, vendor, supplier, contractor or subcontractor of the Company so as to affect adversely the good will or business of the Company. 14. CONSEQUENCES OF VIOLATING PROMISES: (a) GENERAL CONSEQUENCES: In addition to any other remedies or relief that may be available, Employee agrees to pay the reasonable attorneys' fees as a result of his breaching a promise he made in this Release (such as by suing a Released Party over a released Claim) or if any representation he made in this Release was false when made. Employee further agrees that the Company would be irreparably harmed by any actual or threatened violation of Sections 11 and 12 that involves Release-related disclosures or disclosure or use of confidential information or trade secrets or solicitation of employees, customers, or suppliers, and that the Company will be entitled to an injunction prohibiting Employee from committing any such violation. (b) CHALLENGES TO VALIDITY: Should Employee attempt to challenge the enforceability of this Release, Employee agrees first: (1) to deliver a certified check to the Company for all amounts he has received because he signed this Release, plus 10 percent interest per annum; (2) to direct in writing that all future benefits or payments Employee is to receive because he signed this Release be suspended; and (3) to invite the Company to cancel this Release. If the Company accepts Employee's offer, this Release will be canceled. If it rejects Employee's offer, the Company will notify Employee and deposit the amount Employee repaid, plus all suspended future benefits and payments, in an interest-bearing 13 account pending a determination of the enforceability of this Release. If the Release is determined to be enforceable, the Company is to pay Employee the amount in the account, less any amounts Employee owes the Company. If the Release is determined to be unenforceable, the amount credited to the account shall be paid to the entities that paid the consideration for this Release in proportion to their payments, and the suspension of future benefits or payments shall become permanent. (c) ADEA CLAIMS: This section shall not apply to a challenge to the ADEA release in subsection 4(b) of this Release to the extent, if any, prohibited by applicable law. 15. NO ADMISSION OF LIABILITY. This Release shall not in any way be construed as an admission by the Company that it has acted wrongfully with respect to Employee or any other person, entity or agency, or that Employee has any rights whatsoever against the Company. The Company further specifically disclaims and denies any liability to or wrongful acts against Employee or any other person, entity or agency, on the part of itself, its employees and its agents. 16. SUCCESSORS AND ASSIGNS. This Release shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives, and assigns. However, neither this Release nor any right or interest hereunder shall be assignable by Employee, his beneficiaries, or legal representatives, except as provided by law or pursuant to referenced benefit plan documents. 17. SEVERABILITY AND REFORMATION. The provisions of this Release are severable. If any provision of this Release shall be determined to be invalid, illegal, or unenforceable, in whole or in part, neither the validity of the remaining parts of such provision nor the validity of any other provision of this Release shall in any way be affected thereby. In lieu of such invalid, illegal, or unenforceable provision, there shall be added automatically as part of this Release a provision as similar in terms to such invalid, illegal, or unenforceable provision as may be possible and be valid, legal, and enforceable. Each party also agrees that, without receiving further consideration, it will sign and deliver such documents and do anything else necessary in the future to make the provisions of this Release effective. 18. TAXES. Employee understands that he will be responsible for paying all taxes that may become due on any of the severance benefits provided herein. If he fails to pay these payments, or any taxing authority alleges that he has failed to do so or that the Company is responsible for the payment of these taxes, for any reason, Employee agrees to be fully responsible for any judgments or orders, fines and penalties, and that he will indemnify the Company including, but not limited 14 to, the satisfaction of judgments, orders, fines or penalties in the payment of the Company's defense by counsel of its choice in such proceedings. The taxability of the amounts contained herein shall not affect the validity of this Release. 19. GOVERNING LAW. This Release shall be governed by the law of the State of Arkansas. 20. ARBITRATION OF DISPUTES: (a) In the event the Company believes that Employee has breached this Release in any way, prior to seeking any remedy, including arbitration, the Company's General Counsel will first contact Employee and inform him of the claimed breach. Employee will then have seven (7) days within which to address the Company's claim before it may take any action under this Release. (b) ARBITRABLE DISPUTES: The Company and Employee agree to resolve any claims they may have with each other (except, if either Employee or the Company so elects, any dispute for which injunctive relief is a principal remedy) through final and binding arbitration in accordance with this section. Employee also agrees to resolve in accordance with this section any claim between him and any other Released Party who offers or agrees to arbitrate the claim in this manner. This arbitration requirement applies to, among other things, disputes about the validity, interpretation, or effect of this Release or alleged violations of it, claims of discrimination under federal or state law, or other statutory violation claims. (c) THE ARBITRATION: Except as otherwise provided in any other enforceable arbitration agreement between Employee and the Company (Another Arbitration Agreement), which the Company and Employee hereby reaffirm if one exists, the arbitration shall be in accordance with the then-current arbitration rules and procedures for employment disputes governing arbitrations administered by the Judicial Arbitration and Mediation Service (JAMS), except as provided in this section. Arbitration shall take place before a panel of three arbitrators experienced in employment law licensed to practice in the state of Arkansas selected in accordance with subsection (c). The arbitrators may not modify or change this Release in any way. Employee, the Company, and any Released Party who agrees to arbitrate an Arbitrable Dispute under this section agree to submit to personal jurisdiction in the state listed in the first Section of this Release for 15 such arbitration and in any jurisdiction necessary for the enforcement of any arbitration award. (d) SELECTION OF THE ARBITRATORS: The arbitrators shall be selected as follows: JAMS shall give each party a list of 11 arbitrators drawn from its panel of employment dispute arbitrators from the state of Arkansas. Each party may strike all names on the list it deems unacceptable. If only three common names remain on the lists of both parties, those individuals shall be designated as the Arbitrators. If more than three common names remain on the lists of both parties, the parties shall strike names alternately from the list of common names until only three remain. The party who did not initiate the claim shall strike first. If no common name exists on the lists of both parties, JAMS shall furnish an additional list and the process shall be repeated. If the arbitrators have been selected after two lists have been distributed, then the parties shall strike alternately from a third list, with the party initiating the claim striking first, until only three names remain. Those persons shall be designated as the arbitrators. Striking decisions must be made and communicated to the other party and JAMS within 10 calendar days after the date of the transmittal communication relaying the arbitrators remaining for selection. In the event a party does not make a timely strike, the other party may select the arbitrators from the names remaining. (e) EXCLUSIVE REMEDY: Arbitration in this manner shall be the exclusive remedy for any claim that must be arbitrated pursuant to this section. Should Employee or the Company attempt to resolve such a claim by any method other than arbitration pursuant to this section, the responding party will be entitled to recover from the initiating party all damages, expenses, and attorneys' fees incurred as a result of that breach. (f) FEES AND EXPENSES: Each party shall pay the fees of his or her attorneys, the expenses of his or his witnesses, and any other expenses that party incurs in connection with the arbitration, but all other costs of the arbitration, including the fees of the arbitrator, the cost of any record or transcript of the arbitration, administrative fees, and other fees and costs shall be paid in equal shares by the Employee and Company. Except as provided in Another Arbitration Agreement, the party losing the arbitration shall reimburse the party who prevailed for all attorneys' fees and expenses the prevailing party paid pursuant to the preceding sentence. 16 21. ENTIRE RELEASE. This Release constitutes the entire Release between the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto to the extent such agreements are inconsistent herewith, including but not limited to, any prior agreements with respect to severance benefits. This Release may be modified or amended only by an instrument in writing signed by both parties hereof. 17 READ THIS RELEASE, AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING IT: IT INCLUDES A RELEASE OF KNOWN AND UNKNOWN CLAIMS, AND ITS ARBITRATION-OF-CLAIMS REQUIREMENT WAIVES EMPLOYEE'S RIGHT TO A JURY TRIAL. IF EMPLOYEE WISHES, HE SHOULD TAKE ADVANTAGE OF THE FULL CONSIDERATION PERIOD AFFORDED BY SECTION 3 AND YOU SHOULD CONSULT AN ATTORNEY. Employee represents that as of the date of this Release, he has not filed, and during the LOA period and Benefit Period, he will not file any lawsuits, charges, complaints, or claims relating to his employment or any other matters that involve the Company. Employee agrees to cause the withdrawal or dismissal with prejudice of all of these matters unless otherwise stated by the Company, to the extent still pending within five (5) days after this Release becomes irrevocable, and until such withdrawal or dismissal is accepted or ordered, no amounts otherwise due Employee under this Release shall become payable. IN WITNESS WHEREOF, the Company and the Employee have executed this Release as of the day and year indicated below. Beverly Enterprises, Inc. Dated: By: --------------------------- ---------------------------------- William R. Floyd Chairman of the Board, President and Chief Executive Officer Employee Dated: ---------------------------- ------------------------------------- Bobby W. Stephens 18 EX-10.35 7 d03650exv10w35.txt EX-10.35 EMPLOYMENT CONTRACT - DOUGLAS J BABB EXHIBIT 10.35 EMPLOYMENT CONTRACT AGREEMENT made as of April 1, 2000 between BEVERLY ENTERPRISES, INC., a Delaware corporation (the "Company"), and DOUGLAS J. BABB (the "Executive"). WHEREAS, Executive is employed by the Company or by one of its wholly-owned consolidated subsidiaries; 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, General Counsel and Secretary of the Company; 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 not for Cause or a voluntary Termination of Employment for Good Reason within the Term of this Agreement; 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 agree 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. (b) The "Benefit Multiplier" shall be equal to 2.0 except that if Executive's Termination of Employment is pursuant to Paragraphs 6(b) or 6(c) 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 l3(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 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 the continuing or surviving corporation, (b) any Person shall consolidate with, or merge with the Company, and the 1 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 or earning power of the Company and its subsidiaries (taken as a whole) to any Person or Persons; provided, however, that notwithstanding anything to the contrary herein, a Change in Control shall not include either 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 or other owners of Controlled and immediately after the transaction(s) control more than 70% of the ownership and voting rights of Controlled. (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. (i) The Executive shall have "Good Reason" to terminate employment if: (i) the Executive is not elected, reelected, or otherwise continued in the office of the Company or any of its subsidiaries which he held immediately prior to the Change in Control Date, or he is removed as a member of the Board of Directors of the Company or any of its subsidiaries if the Executive was a director immediately prior to the Change in Control Date; (ii) the Executive's duties, responsibilities or authority as an employee are materially reduced or diminished from those in effect on the Change in Control Date without the Executive's consent; (iii) the Executive's duties, responsibilities, or authority as an employee are materially reduced or diminished from those in effect on the Effective Date without the Executive's consent; (iv) the Executive's compensation or benefits are reduced without the Executive's consent, unless all Executive-level officers have their compensation or benefits reduced in the same percentage amount; (v) the Company reduces the potential earnings of the Executive under any performance-based bonus or incentive plan of the Company in effect immediately prior to the Change in Control Date; (vi) the Company requires that the Executive's employment be based other than at its location on the Effective Date without his consent; (vii) any purchaser, assign, surviving corporation, or successor of the Company or its business or assets (whether by acquisition, merger, liquidation, consolidation, reorganization, sale or transfer of assets or business, or otherwise) fails or refuses to expressly assume in writing this Agreement and all of the duties and obligations of the Company hereunder pursuant to Section 16 hereof; or (viii) the Company breaches any of the provisions of this Agreement. (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). 2 (k) "Target Bonus" shall mean the target bonus (100% level) established for the Executive for the year in question under the Company's "Annual Incentive Plan." (l) "Termination of Employment" shall mean the termination of the Executive's employment by the Company other than such a termination 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 Good 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 thereof. The 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 written notice of such to the Executive. (In such event, the Agreement shall thus terminate on the third anniversary of the effective date of such notice). 3. Position and Duties. During the Term, the Executive shall serve, as an employee, as the Executive Vice President, General Counsel and Secretary of the Company and shall have such duties, functions, responsibilities and authority as are consistent with the Executive's position as the senior executive officer in charge of the Legal functions of the Company. 4. Compensation and Related Matters. (a) Annual Base Salary. The Executive shall receive a Base Salary at a rate of $325,000 per annum through March 1, 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 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 Savings Plus Plan, pursuant to its terms; (v) $325,000 of individual life insurance coverage under the Company's Executive Split Dollar Life Insurance Plan; (vi) $325,000 (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 3 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, described below, (and therefore at the present time, there shall be no payroll deduction as a condition of coverage in the Medical Plan and Dental Plan); (ix) Participate in the Company's Executive Medical Reimbursement Plan (with a maximum benefit of $11,500 (or such greater 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; (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 Annual 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 Chairman 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 one (1) 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 4 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. (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 Section 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. Eligibility for Severance Benefits. The Executive shall be eligible for the benefits described in Paragraph 7 (the "Severance Benefits") if: (a) during the Term, the Executive has a Termination of Employment initiated (i) by the Company without Cause, or (ii) by the Executive for Good Reason, and, in either case, subsections (b) or (c) do not apply, (b) during the Term there has been a Change in Control and during the 31 day period commencing on the first day of the 13th calendar month following the Change in Control Date (e.g. the period April 1, 1999 - May 1, 1999, inclusive, for a Change in Control which is effective in the month of March, 1998), the Executive has a Termination of Employment initiated by the Executive without Good Reason, or (c) 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 Good Reason, or (ii) the Executive has a Termination of Employment initiated by the Company without Cause or by the Executive for Good 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 Change in Control Date wherever appropriate, including in the definition of "Good Reason" and in Paragraph 7 hereof). 7. Severance Benefit. Upon satisfaction of the requirements set forth in Paragraph 6, and subject to Paragraphs 8 and 11, the Executive shall be entitled to the following Severance Benefits: (a) Cash Payment. The Executive shall be entitled to receive an amount of cash equal to the Benefit Multiplier times the greater of: 5 (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 (ii) 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. (b) Long-Term Incentive Award; Equity-Based Compensation. The Executive's interest under the Company's long-term incentive plans shall be fully vested. Any and all (i) options, phantom units, and other awards granted to Executive to purchase Company stock or which is measured by the current market value of Company stock and (ii) restricted stock of the Company, owned by the Executive shall be fully vested. (c) Continuation of Benefits. (i) For the Benefit Period, the Executive shall be treated as if he had continued to be an employee for all purposes under the Company's Medical Plan, Executive Medical Reimbursement Plan and Dental Plan. 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 maintain in force, at its own expense, for the remainder of the Executive's life, the vested 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. (d) Relocation Benefit. If, within the Benefit Period after the Executive's Termination of Employment, 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. 6 (e) Executive Savings Plus Plan. For the year of the Executive's Termination of Employment, the Company will make the contribution to the Executive Savings Plus 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 Savings Plus Plan) and the percentage of such Compensation that the Executive is contributing to the Executive Savings Plus 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 Savings Plus 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. (f) 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. (g) 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 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. (h) 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. 8. 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 7 would cause the payment of one or more of such benefits to constitute an "excess parachute 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 the payments under Paragraph 7, (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 Section 7, 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 7 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 10, and if Paragraph 11 applies, any reference in this Paragraph and to Paragraph 7 shall also be deemed to include a reference to Paragraph 11 as well. 9. Waiver 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. 10. 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. 11. 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 7 and/or 8 hereof, then the benefits under Paragraph 7(a) shall be increased and the benefits under Paragraphs 7(c), 7(d), and 7(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 8 shall be increased to take into account any increased benefits under this Paragraph. 12. 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. 13. 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. 14. Waiver of Rights. Executive hereby waives any rights against the Company, including without limitation any rights under any employment, change in control, or severance agreement; under any stock option or long-term incentive plan or any other compensation or employee benefit plan. 15. Non-disclosure of Proprietary Information, Surrender of Records; Inventions and Patents. 8 (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 subsection 15(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 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 or 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 subsection 15(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 9 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. 16. 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 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 inure 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 or 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 Section 16. 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 claim, 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, voluntarily or involuntarily, to effect any action prohibited by this Paragraph shall be null, void, and of no effect. 17. 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 in 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; 10 (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. 18. 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 Company. By an 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. 19. 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. 20. 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. 21. Indemnification. The Company shall indemnify, defend, and hold the Executive harmless from and against any liability, damages, costs, or expenses (including attorney's fees) in connection with any claim, cause of action, investigation, litigation, or proceeding involving him by reason of his having been an officer, director, employee, or agent of the Company, unless it is judicially determined, in a final, nonappealable order that the Executive was guilty of gross negligence or willful misconduct. The Company also agrees to maintain adequate directors and officers liability insurance for the benefit of Executive for the term of this Agreement and for at least three years, thereafter, to the extent such insurance is reasonably available and provided to all executives of the Company. 22. ERISA. This Agreement is pursuant to the Company's Severance Plan for Executives (the "Plan") which is unfunded and maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. The Plan constitutes an employee welfare benefit plan ("Welfare Plan") within the meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Any payments pursuant to this Agreement which could cause the Plan not to constitute a Welfare Plan shall be deemed instead to be made pursuant to a separate "employee pension benefit plan" within the meaning of Section 3(2) of ERISA as to which the applicable portions of the document constituting the Plan shall be deemed to be incorporated by reference. None of the benefits hereunder may be assigned in any way. 23. Governing Law. This Agreement shall be interpreted, administered and enforced in accordance with the law of the State of Arkansas, except to the extent pre-empted by Federal law. The parties have duly executed this Agreement to be effective as of the date first written above. 11 BEVERLY ENTERPRISES, INC. EXECUTIVE By: --------------------------------------- -------------------------------- David R. Banks Douglas J. Babb Chairman and Chief Executive Officer 503 St. James Court Southlake, TX 76092 By: -------------------------------------- John W. MacKenzie Vice President, Deputy General Counsel and Assistant Secretary 12 EX-10.36 8 d03650exv10w36.txt EX-10.36 SEVERANCE AGREEMENT - MICHAEL J MATHENY EXHIBIT 10.36 SEVERANCE AGREEMENT AND RELEASE OF CLAIMS This Severance Agreement and Release of Claims ("Release") is entered into between Beverly Enterprises, Inc., its officers, agents, directors, employees, successors, subsidiaries, insurers, parents and/or affiliated companies, and assigns (the "Company") and MICHAEL MATHENY (the "Employee"). WHEREAS, the Employee is employed by the Company in the capacity of Executive Vice President - Information Technology and Chief Information Officer; and WHEREAS, the Employee and the Company entered into an Employment Contract dated March 1, 2001, ("Employment Contract"), and it is the parties' intent that all the terms of such Agreement shall be superceded on the Effective Date of this Release and the terms of this Release shall govern the rights and obligations of the parties after the Employee's termination of employment except as otherwise set forth in this Release; and WHEREAS, Employee is resigning from the Company on October 11, 2002 as a result of a Termination of Employment without Cause under his Employment Contract; and WHEREAS, the Company and the Employee have made arrangements to promote an orderly transition of the Employee's responsibilities, and the Company had committed to Employee that he would receive certain benefits in the event his employment was terminated without Cause under his Employment Contract upon his execution of a liability release; and NOW, THEREFORE, in consideration of the mutual promises and other consideration described herein, the Company and the Employee agree as follows. 1. TERMINATION OF EMPLOYMENT. The Employee hereby tenders, and the Company hereby accepts, the Employee's resignation under the terms of his Employment Contract as an officer and employee of the Company effective October 11, 2002 (the "Termination Date"). The parties agree that, upon the Termination Date of this Release, the Employee shall have no further right or duty to render services to or on behalf of the Company. The "Effective Date" of this Release will be the eighth day following receipt by the Company of an original of this Release executed by the Employee, provided that there has been no revocation as specified in Section 4(d) by the Employee. 2. SEVERANCE PAYMENT. The Company promises that Employee will receive the amounts or benefits set forth in this Section 2, subject to the terms of this Release, and in lieu of all other severance benefits: (a) Severance Agreement. A single, lump-sum payment in the amount of nine hundred and forty five thousand dollars ($945,000) (subject to this Section 2 and less all legally required and authorized deductions and withholdings), representing two (2) times the Employee's current base salary and target bonus amounts (75% of base salary), and a payment representing earned, but unused 2002 vacation less all legally required and authorized deductions and withholdings, shall be paid to Employee on the Effective Date. (b) Continuation of Benefits. The Company will continue to provide the Employee with coverage as an executive employee under its Group Medical, Executive Medical Reimbursement Plan, Executive Medical and Dental Benefits Plan to the same extent as it would for active employees, for two (2) years following the Employee's Termination Date. These benefits shall be reduced to the extent comparable benefits are provided to Employee through any subsequent employers. (c) Relocation Benefit, If, within two (2) years after the Employee's Termination of Employment by the Company, Employee gives the Company written notice that he desires to relocate from Fort Smith, Arkansas to another state within the Continental United States, the Company will reimburse the Employee for any reasonable relocation expenses (in accordance with the Company's general relocation policy for executives then in effect which shall not be materially different or less beneficial than the Company's relocation policy in effect on the date of the Release) in connection with such relocation. (d) Executive Retirement Plan. For the year of the Employee's Termination of Employment, the Company will make the contribution to the Executive Retirement Plan on behalf of the Employee that it would have made if the Employee had not had a Termination of Employment, but in no event less than the percentage contribution it made for the Employee in the immediately preceding year (and increased to take account of the additional year of service), in each case taking account of the Employee's annualized rate of "Compensation" (as defined in the Executive Retirement Plan) and the percentage of such Compensation that the Employee is contributing to the Executive Retirement 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 2 contribution percentage shall be contributed to the Executive Retirement Plan on behalf of the Employee immediately upon the Employee's Termination Date and any additional contribution required shall be paid as soon as the amount is determined. (e) Executive Deferred Compensation Plan. For the year of the Employee'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 Employee had not had a Termination of Employment determined based on the Employee's deferral for such year. At Employee's election, the Company contribution shall be paid to the Employee immediately upon his Termination of Employment. (f) Long-Term Incentive Award; Equity-Based Compensation. Employee's stock-related rights are set forth in Attachment 1 to this Agreement. Employee will have ninety (90) days from his Termination Date in which to exercise vested stock options. (g) Extent of Benefit Eligibility. Employee will cease to be eligible to participate under any stock option, bonus, incentive compensation, commission, medical, dental, life insurance, retirement, and other compensation or benefit plans of the Company or any affiliate following the Termination Date except to the extent described above and except where the governing documents of those plans provide otherwise. Any payment from these plans will be in accordance with the election(s) previously made by the Employee. In the event of any material breach by the Employee of the terms of this Release, the Employee's right to receive any further payments or benefits under the Release shall immediately end, and the Employee will forfeit and be required to return to the Company any payments or benefits received. Any such breach shall not relieve the Employee of any obligations under the Release, and the cessation of any benefits on account of a breach shall not limit the Company's right to any other relief it may have as a matter of law or equity. Notwithstanding the foregoing, any challenge as to the validity of the ADEA release contained in subsection 4(d) of this Release shall not be considered a material breach, to the extent such treatment is mandated by applicable law. 3. CONSIDERATION OF RELEASE. Employee acknowledges that, before signing this Release, he was given at least 21 days in which to consider this Release. Employee waives any right he might have to additional time within which to consider this Release. Employee further acknowledges that: (1) he took advantage of the time he was given to consider this Release before signing it; (2) he carefully read this Release; (3) he fully understand it; (4) he is entering into it voluntarily; (5) he is receiving valuable consideration in exchange for his execution of this Release that he would not otherwise 3 be entitled to receive; and (6) the Company, in writing, encouraged him to discuss this Release with his attorney (at his own expense) before signing it, and that he did so to the extent he deemed appropriate. 4. GENERAL RELEASE (a) In General: Except for obligations established in this Release, Employee irrevocably and unconditionally releases all the Claims described in this Section 4 that he may now have against the Released Parties listed in Section 4(b). The Company and the Released Parties irrevocably and unconditionally release Employee from all the claims described in this Section 4 except for obligations established in this Release. (b) Released Parties: The Released Parties are the Company, all current and former parents, subsidiaries, related companies, partnerships, or joint ventures, and, with respect to each of them, their predecessors and successors; and, with respect to each such entity, all of its past, present, and future employees, officers, directors, stockholders, owners, representatives, assigns, attorneys, agents, insurers, employee benefit programs (and the trustees, administrators, fiduciaries, and insurers of such programs), and any other persons acting by, through, under or in concert with any of the persons or entities listed in this subsection, and their successors. (c) Claims Released: The Claims Employee is releasing under this Section 4 include all known and unknown claims, promises, causes of action, or similar rights of any type that Employee presently may have ("Claims") with respect to any Released Party listed in Section 4(b). Employee understands that the Claims Employee is releasing might arise under many different foreign, domestic, national, state, or local laws (including statutes, regulations, other administrative guidance, and common law doctrines), as set forth in this Section 4. (d) Employee acknowledges that a portion of the amounts or benefits under this Release is being paid to induce him to release any claims that he may have under the Age Discrimination in Employment Act ("ADEA"). Employee acknowledges that he has adequate and legally sufficient time to review and seek legal guidance concerning this Release. Specifically, Employee acknowledges that this Release was provided to him on October 11, 2002, and that he has until November 1, 2002 to consider this Release. If Employee chooses to execute this Release prior to 4 November 1, 2002, it is solely his choice. Employee may revoke the waiver of the ADEA claims in this Section of this Release (which Employee acknowledges constitutes an entirely separate release from the balance of this Release) within seven (7) days after signing of this Release, in which case Employee will not be paid that portion of the amounts or benefits that are being paid to Employee for his release of ADEA claims. Employee agrees that any revocation will be in writing and accompanied by all sums received pursuant to this Release and received by the Executive Vice President, General Counsel by the end of the seven (7) day period. Employee has been advised to consult with an attorney or advisor concerning this Release. Employee understands the rights that have been waived by this Release, including rights under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 62 1, et seq., as amended. Employee further represents and warrants that he freely negotiated the terms of this Release, and enters into it and executes it voluntarily. He understands that this is a voluntary waiver of any claims under the laws and orders stated below, that relate in any way to his employment with, complaints about, compensation due, or separation from the Company. Anti-discrimination statutes, such as the Age Discrimination in Employment Act and Executive Order 11141, which prohibit age discrimination in employment; Title VII of the Civil Rights Act of 1964, Sections 1981 and 1983 of the Civil Rights Act of 1866, and Executive Order 11246, which prohibit discrimination based on race, color, national origin, religion, or sex; the Equal Pay Act, which prohibits paying men and women unequal pay for equal work; the Americans With Disabilities Act and Sections 503 and 504 of the Rehabilitation Act of 1973, which prohibit discrimination based on disability; and any other federal, state, or local laws prohibiting employment discrimination, such as the State of Arkansas. Federal employment statutes, such as the WARN Act, which requires that advance notice be given of certain work force reductions; the Employee Retirement Income Security Act of 1974, which, among other things, protects employee benefits; the Fair Labor Standards Act of 1938, which regulates wage and hour matters; the Family and Medical Leave Act of 1993, which requires employers to provide leaves of absence under certain circumstances; and any other federal laws relating to employment, such as veterans' reemployment rights laws. 5 Other laws, such as any federal, state, or local laws providing workers' compensation benefits, mandating leaves of absence, restricting an employer's right to terminate employees, or otherwise regulating employment; any federal, state, or local law enforcing express or implied employment contracts or requiring an employer to deal with employees fairly or in good faith; any other federal, state, or local laws providing recourse for alleged wrongful discharge, tort, physical or personal injury, emotional distress, fraud, negligent misrepresentation, defamation, and similar or related claims, and any other law, such as the State of Arkansas. Examples of released Claims include, but are not limited to the following (except to the extent explicitly preserved by Section 1 or 2(a) of this Release): (i) Claims that in any way relate to Employee's employment with the Company, or the termination of that employment, such as Claims for compensation, bonuses, commissions, lost wages, or unused accrued vacation or sick pay except as otherwise provided in paragraph 2(a); (ii) Claims that in any way relate to the design or administration of any employee benefit program; (iii) Claims that Employee has irrevocable or vested rights to severance or similar benefits or to post-employment health or group insurance benefits; (iv) any Claims to attorneys' fees or other indemnities (such as under the Civil Rights Attorneys' Fees Act), with respect to Claims Employee is releasing, or any Claims that Employee has under his Employment and Severance Agreement. (e) Unknown Claims: Employee understands that he is releasing Claims that he may not know about. That is his knowing and voluntary intent even though he recognizes that someday he might regret having signed this Release. Nevertheless, Employee is assuming that risk and agrees that this Release shall remain effective in all respects in any such case. Employee expressly waives all rights he might have under any law that is intended to protect him from waiving unknown claims (such as California Civil Code Section 1542). Employee understands the significance of doing so. (f) Employee represents and covenants that Employee, his heirs, representatives, executors, administrators, successors, and assigns have not and will not file any claims, charges, or complaints against the Company, with any Federal, State, or local agency or court arising out of his employment and/or separation from the Company. Employee further represents that if any such agency or 6 court ever assumes jurisdiction of or otherwise pursues any such lawsuit, claim, charge, or complaint and/or purports to bring any legal proceeding, in whole or in part, on behalf of Employee, or Employee's heirs, representatives, executors, administrators, successors, and/or assigns, behalf against the Company, Employee, or Employee's heirs, representatives, executors, administrators, successors, and/or assigns, promptly, in writing, will request the agency or court to withdraw from and/or dismiss the lawsuit, claim, charge or complaint with prejudice and will take all available legal action to be removed from any such legal proceeding brought, in whole or in part, on behalf of Employee. This subsection shall not apply to challenges to the ADEA release in subsection 4(d) of this Release, to the extent, if any, prohibited by applicable law. (g) Employee understands and agrees that his employment with the Company has terminated effective October 11, 2002, and he will not apply for or otherwise seek re-employment with the Company, or its successors, at any time. The Company shall have the absolute right, without incurring liability of any kind, to refuse Employee's consideration for employment and Employee agrees that he shall not authorize any person or agency to pursue any claim for such refusal of employment. The Employee acknowledges that he has received no promise or assurance that his employment will resume at any point in the future or that he will ever be rehired by the Company or its affiliates, parent, or subsidiaries. (h) As further consideration for the covenants set forth herein, Employee hereby agrees to cooperate fully with the Company's Legal Department and/or any lawyer, law firm, or consultant that the Company designates with respect to any litigation, deposition, hearing, arbitration, or other proceeding (including, but not limited to, support of the Company's position in defending any employment-related lawsuits or claims concerning which Employee has knowledge or audits, investigations, lawsuits, complaints or proceedings by government entities of state or federal law compliance) where the Company's legal or financial interests are at issue. Employee agrees to provide up to a maximum of ten (10) hours of time in any given month to assist the Company under this paragraph without compensation. Any assistance Employee provides to Company under this paragraph in excess of ten (10) hours in any given month shall be compensated on an hourly basis as mutually agreed by Employee and Company. In 7 addition, Company agrees to compensate Employee on a mutually acceptable basis for any time incurred in assisting the Company under this paragraph after Employee has worked in excess of forty (40) hours of accumulated time. Company will reimburse Employee for reasonable and necessary business expenses incurred in providing assistance under this paragraph. Employee further covenants that he will contact the Company's Legal Department in the event that there is any subpoena, notice or other instruction directing the Employee to appear in any legal proceeding involving the Company. (i) To the maximum extent permitted by law, the Company shall indemnify Employee against all expenses (including reasonable attorneys' fees), judgments, fines and amounts paid in settlement actually incurred by himself in connection with any claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, to which Employee becomes a party or in which Employee becomes otherwise involved by reason of the fact that Employee was a director, officer, employee or agent of the Company or of any subsidiary or affiliate of the Company. In addition, the Company shall continue to include Employee among those individuals covered by the Company's director and officer liability insurance, as long as such insurance is available and the Company elects to maintain such insurance; provided, however, that the unavailability of such insurance coverage or the Company's discontinuance of such insurance shall in no way limit, reduce or otherwise affect Employee's rights to indemnification by the Company under the first sentence of this subsection. This subsection shall remain in full force and effect indefinitely with respect to any claims based upon events occurring on or prior to October 11, 2002. (j) Employee also promises neither to contest the validity of this Release, nor sue the Company concerning any claim he may have relating to his employment with the Company or the termination of that employment. This subsection shall not apply to challenges to the ADEA release in subsection 4(d) of this Release, to the extent, if any, prohibited by applicable law. 5. TRANSFER OF DUTIES. During the period preceding the Termination Date and for two (2) years thereafter, the Employee will act at all times with complete loyalty and good faith in promoting the best interests of the Company. To this end, the Employee will: (a) fully inform the Company and the Employee's successor (if any) of all material activities performed by the Employee and of progress on assigned duties; and 8 (b) transfer or otherwise make available to the Company and the Employee's successor (if any), to the extent reasonably possible, the Employee's knowledge and experience regarding his activities on behalf of the Company. Employee will also promote the goodwill, reputation, and ongoing business of the Company, and take all steps necessary to maintain, and in no way act to hinder, the foregoing interests. 6. COMPANY PROPERTY. By Employee's last day of work, Employee will return to the Company all files, memoranda, documents, records, copies of the foregoing, credit cards, keys, and any other property of the Company or its affiliates in his possession. 7. OWNERSHIP OF CLAIMS. Employee has not assigned or transferred any Claim he is purporting to release, nor has he attempted to do so. 8. OTHER REPRESENTATIONS. In addition to Employee's other representations in this Release, Employee has made the following representations to the Company, on which he acknowledges it also has relied in entering into this Release with Employee: (a) Employee has not suffered any discrimination on account of his age, sex, race, national origin, marital status, sexual orientation, or any other protected status, and none of these ever has been an adverse factor used against Employee by any Released Party; (b) Employee has not suffered any job-related wrongs or injuries for which he might still be entitled to compensation or relief, such as an injury for which Employee might receive a workers' compensation award in the future; (c) Employee has no knowledge of any wrongdoing by the Company that would subject the Company to any harm, civil or criminal; and (d) Employee has provided no information, oral or in writing, to anyone - individual, corporation or any other organization, private, public or governmental - that involves any wrongdoing, civil or criminal, by the Company. 9. FALSE CLAIMS REPRESENTATIONS AND PROMISES. Employee has disclosed to the Company any information he has concerning any conduct involving the Company or any affiliate that he has any reason to believe may be unlawful or that involves any false claims to the United States. Employee promises to cooperate fully in any investigation the Company or any affiliate undertakes into matters occurring during Employee's employment with the Company or any affiliate. Employee understands that nothing in this Release prevents him from cooperating with any U.S. government investigation. In addition, to the fullest extent permitted by law, Employee hereby irrevocably assign to the U.S. government any right he might have to any proceeds or awards in connection with any false claims proceedings against the Company or any affiliate. 10. COOPERATION REQUIRED. Employee agrees that, as requested by the Company, he will fully cooperate with the Company or any affiliate in effecting a smooth transition of his responsibilities to others. 9 11. NON-SOLICITATION. Employee agrees to the following prohibitions on solicitation of the Company's employees, customers, and business interests, to wit: (a) Employee shall not at any time during the period of his employment with the Company, or during the two (2) year period immediately following the effective date of his termination (the "Non-Solicitation Period"), without the prior written consent of the Company, on behalf of himself or any other person or entity, solicit for employment or employ any of the current officers or employees of the Company; provided, however, that nothing contained herein shall prohibit the Employee from hiring employees of the Company when such employment results from general solicitations for employment. (b) Employee 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 benefit, or for the benefit of any company or persons 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, or customers of the Company or the terms of any contracts of the Company which is not freely available to the public. (c) Employee covenants and agrees that a material breach of the foregoing subsections 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 Release, at law or otherwise, be entitled to an injunction to be issued by any court of competent jurisdiction enjoining and restraining the Employee from committing any violation of the foregoing subsections. 12. NON-DISCLOSURE, RETURN OF PROPRIETARY INFORMATION, AND INVENTIONS AND PATENTS. The Company and the Employee agree that during his employment with the Company, the Employee has received and become acquainted with confidential, proprietary, and trade secret information of the Company including, but not limited to, information regarding Company business programs, plans, and strategies; finances; customers and prospective customers; suppliers and vendors; marketing plans and results; personnel matters regarding Company employees, officers, directors, and owners; manners of operation and services provided; negotiating positions and strategies; legal arguments, theories, claims, and defenses; pending, threatened, or potential legal 10 actions, claims, investigations, and audits; or information which could lead to the same; and similar sensitive information regarding the operation and business of the Company. The Employee acknowledges that such information has been developed or acquired by the Company through the expenditure of substantial time, effort, and money, that such information provides the Company with strategic and business advantages over others who do not know or use such information, and that the Company has implemented specific policies and practices to keep such information secret. Accordingly, the Employee agrees as follows: (a) The Employee shall not during the term of employment or at any time thereafter directly or indirectly use for his own purpose or for the benefit of any person or entity other than the Company, or otherwise disclose or permit others to obtain access to, any proprietary of confidential information 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 provision, the Company's proprietary information shall include, but is not limited to, information and material identified in this section and that identified in Section 17 of Employee's March 1, 2002 Employment Contract. Information or material that is not novel or copyrighted or patented may nonetheless be proprietary information. Proprietary information shall not include, however, any information that is or becomes generally known to the industries in which the Company competes through sources independent of the Company or the Employee or through authorized publication by the Company to persons other than Company employees. (b) The Employee shall not during his employment or at any time thereafter, except as required by law, directly or indirectly give or disclose any records containing confidential information or material to, or permit any inspection or copying of such records by, any individual or entity other than in the authorized course and scope of such individual's or entity's employment or retention by the Company. In addition, the Employee shall promptly return to the Company all such records upon his resignation hereunder and shall not use or retain any such records thereafter. Records subject to this subsection shall include, but not be limited to, 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 that may be in the Employee's possession or under his control or accessible to his which contain or may be derived from proprietary or confidential 11 information covered by this section or by Section 17 of Employee's March 1, 2002 Employment Contract. All such records are and will remain the sole property of the Company. (c) Employee acknowledges his responsibilities with respect to inventions, patents, and copyrights as set forth in Section 17 of his March 1, 2002 Employment Contract. Employee acknowledges that there are no inventions, innovations or improvements that should be disclosed as required by Section 17(c). 13. CONFIDENTIALITY. The Employee agrees that he will keep confidential the existence and terms of this Release; provided, however, that nothing herein shall prevent the Employee from disclosing the fact and terms of this Release with his attorney, accountant, or financial advisor for the purposes of receiving professional advice from such individual in that capacity. The Employee will advise those individuals that the existence and terms of this Release shall be kept confidential. 14. PUBLIC STATEMENTS. Except as necessary to secure other employment or for other necessary reasons, Employee agrees that he will make no public statements concerning his employment or the termination thereof with the Company. Employee also agrees that he will make no disparaging remarks to any third parties concerning the Company, its employees, agents, representatives, subsidiaries, parents, affiliates, and shareholders and Company agrees to make same commitment with respect to Employee. Employee further agrees that he will not disparage the Company's business capabilities, products, plans, or management to any customer, potential customer, vendor, supplier, contractor or subcontractor of the Company so as to affect adversely the good will or business of the Company. 15. CONSEQUENCES OF VIOLATING PROMISES: (a) GENERAL CONSEQUENCES. In addition to any other remedies or relief that may be available, Employee agrees to pay the reasonable attorneys' fees and any damages Released Parties may incur as a result of his breaching a promise he made in this Release (such as by suing a Released Party over a released Claim) or if any representation he made in this Release was false when made. Employee further agrees that the Company would be irreparably harmed by any actual or threatened violation of Sections 11 and 12 that involves Release-related disclosures or disclosure or use of confidential information or trade secrets or solicitation of employees, customers, or suppliers, and that the Company will be entitled to an injunction prohibiting Employee from committing any such violation. 12 (b) CHALLENGES TO VALIDITY. Should Employee attempt to challenge the enforceability of this Release, Employee agrees first: (1) to deliver a certified check to the Company for all amounts he has received because he signed this Release, plus 10 percent interest per annum; (2) to direct in writing that all future benefits or payments Employee is to receive because he signed this Release be suspended; and (3) to invite the Company to cancel this Release. If the Company accepts Employee's offer, this Release will be canceled. If it rejects Employee's offer, the Company will notify Employee and deposit the amount Employee repaid, plus all suspended future benefits and payments, in an interest-bearing account pending a determination of the enforceability of this Release. If the Release is determined to be enforceable, the Company is to pay Employee the amount in the account, less any amounts Employee owes the Company. If the Release is determined to be unenforceable, the amount credited to the account shall be paid to the entities that paid the consideration for this Release in proportion to their payments, and the suspension of future benefits or payments shall become permanent. (c) ADEA CLAIMS. This section shall not apply to a challenge to the ADEA release in subsection 4(b) of this Release to the extent, if any, prohibited by applicable law. 16. NO ADMISSION OF LIABILITY. This Release shall not in any way be construed as an admission by the Company that it has acted wrongfully with respect to Employee or any other person, entity or agency, or that Employee has any rights whatsoever against the Company. The Company further specifically disclaims and denies any liability to or wrongful acts against Employee or any other person, entity or agency, on the part of itself, its employees and its agents. 17. SUCCESSORS AND ASSIGNS. This Release shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives, and assigns. However, neither this Release nor any right or interest hereunder shall be assignable by Employee, his beneficiaries, or legal representatives, except as provided by law or pursuant to referenced benefit plan documents. 18. SEVERABILITY AND REFORMATION. The provisions of this Release are severable. If any provision of this Release shall be determined to be invalid, illegal, or unenforceable, in whole or in part, neither the validity of the remaining parts of such provision nor the validity of any other provision of this Release shall in any way be affected thereby. In lieu of such invalid, illegal, or unenforceable provision, there shall be added automatically as part of this Release a provision as similar in terms to such invalid, illegal, or unenforceable provision as may be possible and be valid, legal, and 13 enforceable. Each party also agrees that, without receiving further consideration, it will sign and deliver such documents and do anything else necessary in the future to make the provisions of this Release effective. 19. TAXES. Employee understands that he will be responsible for paying all taxes that may become due on any of the severance benefits provided herein. If he fails to pay these payments, or any taxing authority alleges that he has failed to do so or that the Company is responsible for the payment of these taxes, for any reason, Employee agrees to be fully responsible for any judgments or orders, fines and penalties, and that he will indemnify the Company including, but not limited to, the satisfaction of judgments, orders, fines or penalties in the payment of the Company's defense by counsel of its choice in such proceedings. The taxability of the amounts contained herein shall not affect the validity of this Release. 20. GOVERNING LAW. This Release shall be governed by the law of the State of Arkansas. 21. ARBITRATION OF DISPUTES: (a) In the event the Company believes that Employee has breached this Release in any way, prior to seeking any remedy, including arbitration, the Company's General Counsel will first contact Employee and inform him of the claimed breach. Employee will then have seven (7) days within which to address the Company's claim before it may take any action under this Release. (b) ARBITRATION DISPUTES. The Company and Employee agree to resolve any claims they may have with each other (except, if either Employee or the Company so elects, any dispute for which injunctive relief is a principal remedy) through final and binding arbitration in accordance with this section. Employee also agrees to resolve in accordance with this section any claim between him and any other Released Party who offers or agrees to arbitrate the claim in this manner. This arbitration requirement applies to, among other things, disputes about the validity, interpretation, or effect of this Release or alleged violations of it, claims of discrimination under federal or state law, or other statutory violation claims. (c) ARBITRATION. Except as otherwise provided in any other enforceable arbitration agreement between Employee and the Company (Another Arbitration Agreement), which the Company and Employee hereby reaffirm if one exists, the arbitration shall be in accordance with the then-current arbitration rules and procedures for employment disputes governing arbitrations 14 administered by the Judicial Arbitration and Mediation Service (JAMS), except as provided in this section. Arbitration shall take place before a panel of three arbitrators experienced in employment law licensed to practice in the state of Arkansas selected in accordance with subsection (c). The arbitrators may not modify or change this Release in any way. Employee, the Company, and any Released Party who agrees to arbitrate an Arbitrable Dispute under this section agree to submit to personal jurisdiction in the state listed in the first Section of this Release for such arbitration and in any jurisdiction necessary for the enforcement of any arbitration award. (d) SELECTION OF THE ARBITRATORS. The arbitrators shall be selected as follows: JAMS shall give each party a list of 11 arbitrators drawn from its panel of employment dispute arbitrators from the state of Arkansas. Each party may strike all names on the list it deems unacceptable. If only three common names remain on the lists of both parties, those individuals shall be designated as the Arbitrators. If more than three common names remain on the lists of both parties, the parties shall strike names alternately from the list of common names until only three remain. The party who did not initiate the claim shall strike first. If no common name exists on the lists of both parties, JAMS shall furnish an additional list and the process shall be repeated. If the arbitrators have been selected after two lists have been distributed, then the parties shall strike alternately from a third list, with the party initiating the claim striking first, until only three names remain. Those persons shall be designated as the arbitrators. Striking decisions must be made and communicated to the other party and JAMS within 10 calendar days after the date of the transmittal communication relaying the arbitrators remaining for selection. In the event a party does not make a timely strike, the other party may select the arbitrators from the names remaining. (e) EXCLUSIVE REMEDY. Arbitration in this manner shall be the exclusive remedy for any claim that must be arbitrated pursuant to this section. Should Employee or the Company attempt to resolve such a claim by any method other than arbitration pursuant to this section, the responding party will be entitled to recover from the initiating party all damages, expenses, and attorneys' fees incurred as a result of that breach. (f) FEES AND EXPENSES. Each party shall pay the fees of his or her attorneys, the expenses of his or his witnesses, and any other 15 expenses that party incurs in connection with the arbitration, but all other costs of the arbitration, including the fees of the arbitrator, the cost of any record or transcript of the arbitration, administrative fees, and other fees and costs shall be paid in equal shares by the Employee and Company. Except as provided in Another Arbitration Agreement, the party losing the arbitration shall reimburse the party who prevailed for all attorneys' fees and expenses the prevailing party paid pursuant to the preceding sentence. 22. ENTIRE RELEASE. This Release constitutes the entire Release between the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto to the extent such agreements are inconsistent herewith, including but not limited to, any prior agreements with respect to severance benefits. This Release may be modified or amended only by an instrument in writing signed by both parties hereof. READ THIS RELEASE, AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING IT: IT INCLUDES A RELEASE OF KNOWN AND UNKNOWN CLAIMS, AND ITS ARBITRATION-OF-CLAIMS REQUIREMENT WAIVES EMPLOYEE'S RIGHT TO A JURY TRIAL. IF EMPLOYEE WISHES, HE SHOULD TAKE ADVANTAGE OF THE FULL CONSIDERATION PERIOD AFFORDED BY SECTION 3 AND YOU SHOULD CONSULT AN ATTORNEY. Employee represents that as of October 11, 2002, he has not filed any lawsuits, charges, complaints, or claims relating to his employment or any other matters that involve the Company. Employee agrees to cause the withdrawal or dismissal with prejudice of all of these matters unless otherwise stated by the Company, to the extent still pending within five (5) days after this Release becomes irrevocable, and until such withdrawal or dismissal is accepted or ordered, no amounts otherwise due Employee under this Release shall become payable. IN WITNESS WHEREOF, the Company and the Employee have executed this Release as of the day and year indicated below. 16 Beverly Enterprises, Inc. Dated: By: ---------------------------- ------------------------------------ William R. Floyd President and Chief Executive Officer Employee Dated: ----------------------------- --------------------------------------- Mike Matheny 17 EX-10.37 9 d03650exv10w37.txt EX-10.37 SEVERANCE AGREEMENT - T JERALD MOORE EXHIBIT 10.37 SEVERANCE AGREEMENT AND RELEASE OF CLAIMS This Severance Agreement and Release of Claims ("Release") is entered into between Beverly Enterprises, Inc., its officers, agents, directors, employees, successors, subsidiaries, insurers, parents and/or affiliated companies, and assigns (the "Company") and T. JERALD MOORE (the "Employee"). WHEREAS, the Employee was employed by the Company in the capacity of Executive Vice President; and WHEREAS, the Employee and the Company had entered into a Employment Contract dated August 22, 1997, and it is the parties intent that all the terms of such Agreement shall be superceded on the Effective Date of this Release and the terms of this Release shall govern the rights and obligations of the parties after the Employee's termination of employment except as otherwise set forth in this Release; and WHEREAS, Employee retired from the Company on December 31, 2001; and WHEREAS, the Company and the Employee made special arrangements to promote an orderly transition of the Employee's responsibilities, and the Company had committed to Employee that he would receive certain benefits upon his retirement in consideration of his years of service to the Company and his decision to remain with the Company after a "Change of Control" had been triggered under his Employment Contract; NOW, THEREFORE, in consideration of the mutual promises and other consideration described herein, the Company and the Employee agree as follows. 1. TERMINATION OF EMPLOYMENT. The Employee hereby tenders, and the Company hereby accepts, the Employee's resignation, through retirement, under the terms of his Employment Contract as an officer and employee of the Company effective December 31, 2001 (the "Termination Date"). The parties agree that, upon the Termination Date of this Release, the Employee shall have no further right or duty to render services to or on behalf of the Company. The "Effective Date" of this Release will be the eighth day following receipt by the Company of an original of this Release executed by the Employee, provided that there has been no revocation as specified in Section 4(d) by the Employee. 2. SEVERANCE PAYMENT. The Company promises that on the Effective Date unless otherwise stated below, Employee will receive the amounts or benefits set forth in this Section 2, subject to the terms of this Release, and in lieu of all other severance benefits: (a) Severance Agreement. A single, lump-sum payment in the amount of one million two hundred thirty one thousand two hundred thirty dollars ($1,231,230) (subject to this Section 2 and less all legally required and authorized deductions and withholdings), representing two (2) times the Employee's current base salary and target bonus amounts, a relocation package lump sum of one hundred fifty thousand dollars ($150,000), and an additional payment of one hundred thousand dollars ($100,000) for performance meeting management's expectations, shall be paid to Employee on the Effective Date. Employee shall be eligible for a bonus for 2001 to the extent he met his 2001 performance goals as determined by Bill Floyd and to the extent authorized by the Company's Board of Directors. (b) Continuation of Benefits. (i) For the period of two (2) years from the Termination Date, the Employee shall be treated as if he had continued to be an employee for all purposes under the Company's Medical Plan, Executive Medical Reimbursement Plan and Dental Plan. Following this period, the Employee 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 Employee's employment. (ii) The Company shall maintain in force, at its own expense, for the remainder of the Employee's life, the vested life insurance in effect under the Company's Executive Split Dollar Life Insurance Plan as of the Termination Date. (c) Executive Retirement Plan. For the year of the Employee's Termination of Employment, the Company will make the contribution to the Executive Retirement Plan on behalf of the Employee that it would have made if the Employee had not had a Termination of Employment, but in no event less than the percentage contribution it made for the Employee in the immediately preceding year (and increased to take account of the additional year of service), in each case taking account of the Employee's annualized rate of "Compensation" (as defined in the Executive Retirement Plan) and the percentage of such Compensation that the Employee is contributing to the Executive Retirement 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 2 matching contribution which is based on the preceding year's contribution percentage shall be contributed to the Executive Retirement Plan on behalf of the Employee immediately upon the Employee's Termination Date and any additional contribution required shall be paid as soon as the amount is determined. (d) Executive Deferred Compensation Plan. For the year of the Employee'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 Employee had not had a Termination of Employment determined based on the Employee's deferral for such year. At Employee's election, the Company contribution shall be paid to the Employee immediately upon his Termination of Employment. (e) 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 2 are not paid or payable or otherwise provided to the Employee 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. (f) Long-Term Incentive Award; Equity-Based Compensation. Employee'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 Employee, shall either be fully vested, or, stock of equivalent value shall be substituted therefore in the event that early vesting is not permitted under the applicable Company plan. Employee's stock-related rights are set forth in Attachment 1 to this Agreement. (g) Extent of Benefit Eligibility. Employee will cease to be eligible to participate under any stock option, bonus, incentive compensation, commission, medical, dental, life insurance, retirement, and other compensation or benefit plans of the Company or any affiliate following the Termination Date except to the extent described above and except where the governing documents of those plans provide otherwise. Any payment from these plans will be in accordance with the election(s) previously made by the Employee. 3 In the event of any material breach by the Employee of the terms of this Release, the Employee's right to receive any further payments or benefits under the Release shall immediately end, and the Employee will forfeit and be required to return to the Company any payments or benefits received. Any such breach shall not relieve the Employee of any obligations under the Release, and the cessation of any benefits on account of a breach shall not limit the Company's right to any other relief it may have as a matter of law or equity. Notwithstanding the foregoing, any challenge as to the validity of the ADEA release contained in subsection 4(d) of this Release shall not be considered a material breach, to the extent such treatment is mandated by applicable law. 3. CONSIDERATION OF RELEASE. Employee acknowledges that, before signing this Release, he was given at least 21 days in which to consider this Release. Employee waives any right he might have to additional time within which to consider this Release. Employee further acknowledges that: (1) he took advantage of the time he was given to consider this Release before signing it; (2) he carefully read this Release; (3) he fully understand it; (4) he is entering into it voluntarily; (5) he is receiving valuable consideration in exchange for his execution of this Release that he would not otherwise be entitled to receive; and (6) the Company, in writing, encouraged him to discuss this Release with his attorney (at his own expense) before signing it, and that he did so to the extent he deemed appropriate. 4. GENERAL RELEASE (a) In General: Except for obligations established in this Release, Employee irrevocably and unconditionally releases all the Claims described in this Section 4 that he may now have against the Released Parties listed in Section 4(b). (b) Released Parties: The Released Parties are the Company, all current and former parents, subsidiaries, related companies, partnerships, or joint ventures, and, with respect to each of them, their predecessors and successors; and, with respect to each such entity, all of its past, present, and future employees, officers, directors, stockholders, owners, representatives, assigns, attorneys, agents, insurers, employee benefit programs (and the trustees, administrators, fiduciaries, and insurers of such programs), and any other persons acting by, through, under or in concert with any of the persons or entities listed in this subsection, and their successors. (c) Claims Released: The Claims Employee is releasing under this Section 4 include all known and unknown claims, promises, causes of action, or similar rights of any type that Employee presently may have ("Claims") with respect to any Released Party listed in Section 4(b). Employee understands that the Claims Employee is 4 releasing might arise under many different foreign, domestic, national, state, or local laws (including statutes, regulations, other administrative guidance, and common law doctrines), as set forth in this Section 4. (d) Employee acknowledges that a portion of the amounts or benefits under this Release is being paid to induce him to release any claims that he may have under the Age Discrimination in Employment Act ("ADEA"). Employee acknowledges that he has adequate and legally sufficient time to review and seek legal guidance concerning this Release. Specifically, Employee acknowledges that this Release was provided to him on January 22, 2002, and that he has until February 12, 2002 to consider this Release. If Employee chooses to execute this Release prior to February 12, 2002, it is solely his choice. Employee may revoke the waiver of the ADEA claims in this Section of this Release (which Employee acknowledges constitutes an entirely separate release from the balance of this Release) within seven (7) days after signing of this Release, in which case Employee will not be paid that portion of the amounts or benefits that are being paid to Employee for his release of ADEA claims. Employee agrees that any revocation will be in writing and accompanied by all sums received pursuant to this Release and received by the Executive Vice President, General Counsel by the end of the seven (7) day period. Employee has been advised to consult with an attorney or advisor concerning this Release. Employee understands the rights that have been waived by this Release, including rights under the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 62 1, et seq., as amended. Employee further represents and warrants that he -- --- freely negotiated the terms of this Release, and enters into it and executes it voluntarily. He understands that this is a voluntary waiver of any claims under the laws and orders stated below, that relate in any way to his employment with, complaints about, compensation due, or separation from the Company. Anti-discrimination statutes, such as the Age Discrimination in Employment Act and Executive Order 11141, which prohibit age discrimination in employment; Title VII of the Civil Rights Act of 1964, Sections 1981 and 1983 of the Civil Rights Act of 1866, and Executive Order 11246, which prohibit discrimination based on race, color, national origin, religion, or sex; the Equal Pay Act, which prohibits paying men and women unequal pay for equal work; the Americans With Disabilities Act and Sections 503 and 504 of the Rehabilitation Act of 1973, which prohibit 5 discrimination based on disability; and any other federal, state, or local laws prohibiting employment discrimination, such as the State of Arkansas. Federal employment statutes, such as the WARN Act, which requires that advance notice be given of certain work force reductions; the Employee Retirement Income Security Act of 1974, which, among other things, protects employee benefits; the Fair Labor Standards Act of 1938, which regulates wage and hour matters; the Family and Medical Leave Act of 1993, which requires employers to provide leaves of absence under certain circumstances; and any other federal laws relating to employment, such as veterans' reemployment rights laws. Other laws, such as any federal, state, or local laws providing workers' compensation benefits, mandating leaves of absence, restricting an employer's right to terminate employees, or otherwise regulating employment; any federal, state, or local law enforcing express or implied employment contracts or requiring an employer to deal with employees fairly or in good faith; any other federal, state, or local laws providing recourse for alleged wrongful discharge, tort, physical or personal injury, emotional distress, fraud, negligent misrepresentation, defamation, and similar or related claims, and any other law, such as the State of Arkansas. Examples of released Claims include, but are not limited to the following (except to the extent explicitly preserved by Section 1 or 2(a) of this Release): (i) Claims that in any way relate to Employee's employment with the Company, or the termination of that employment, such as Claims for compensation, bonuses, commissions, lost wages, or unused accrued vacation or sick pay except as otherwise provided in paragraph 2(a); (ii) Claims that in any way relate to the design or administration of any employee benefit program; (iii) Claims that Employee has irrevocable or vested rights to severance or similar benefits or to post-employment health or group insurance benefits; (iv) any Claims to attorneys' fees or other indemnities (such as under the Civil Rights Attorneys' Fees Act), with respect to Claims Employee is releasing, or any Claims that Employee has under his Employment and Severance Agreement. (e) Unknown Claims: Employee understands that he is releasing Claims that he may not know about. That is his knowing and voluntary intent even though he recognizes that someday he might 6 regret having signed this Release. Nevertheless, Employee is assuming that risk and agrees that this Release shall remain effective in all respects in any such case. Employee expressly waives all rights he might have under any law that is intended to protect him from waiving unknown claims (such as California Civil Code Section 1542). Employee understands the significance of doing so. (f) Employee represents and covenants that Employee, his heirs, representatives, executors, administrators, successors, and assigns have not and will not file any claims, charges, or complaints against the Company, with any Federal, State, or local agency or court arising out of his employment and/or separation from the Company. Employee further represents that if any such agency or court ever assumes jurisdiction of or otherwise pursues any such lawsuit, claim, charge, or complaint and/or purports to bring any legal proceeding, in whole or in part, on behalf of Employee, or Employee's heirs, representatives, executors, administrators, successors, and/or assigns, behalf against the Company, Employee, or Employee's heirs, representatives, executors, administrators, successors, and/or assigns, promptly, in writing, will request the agency or court to withdraw from and/or dismiss the lawsuit, claim, charge or complaint with prejudice and will take all available legal action to be removed from any such legal proceeding brought, in whole or in part, on behalf of Employee. This subsection shall not apply to challenges to the ADEA release in subsection 4(d) of this Release, to the extent, if any, prohibited by applicable law. (g) Employee understands and agrees that his employment with the Company has terminated effective December 31, 2001, and he will not apply for or otherwise seek re-employment with the Company, or its successors, at any time. The Company shall have the absolute right, without incurring liability of any kind, to refuse Employee's consideration for employment and Employee agrees that he shall not authorize any person or agency to pursue any claim for such refusal of employment. The Employee acknowledges that he has received no promise or assurance that his employment will resume at any point in the future or that he will ever be rehired by the Company or its affiliates, parent, or subsidiaries. (h) As further consideration for the covenants set forth herein, Employee hereby agrees to cooperate fully with the Company's 7 Legal Department and/or any lawyer, law firm, or consultant that the Company designates with respect to any litigation, deposition, hearing, arbitration, or other proceeding (including, but not limited to, support of the Company's position in defending any employment-related lawsuits or claims concerning which Employee has knowledge or audits, investigations, lawsuits, complaints or proceedings by government entities of state or federal law compliance) where the Company's legal or financial interests are at issue. Employee further covenants that he will contact the Company's Legal Department in the event that there is any subpoena, notice or other instruction directing the Employee to appear in any legal proceeding involving the Company. (i) To the maximum extent permitted by law, the Company shall indemnify Employee against all expenses (including reasonable attorneys' fees), judgments, fines and amounts paid in settlement actually incurred by himself in connection with any claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, to which Employee becomes a party or in which Employee becomes otherwise involved by reason of the fact that Employee was a director, officer, employee or agent of the Company or of any subsidiary or affiliate of the Company. In addition, the Company shall continue to include Employee among those individuals covered by the Company's director and officer liability insurance, as long as such insurance is available and the Company elects to maintain such insurance; provided, however, that the unavailability of such insurance coverage or the Company's discontinuance of such insurance shall in no way limit, reduce or otherwise affect Employee's rights to indemnification by the Company under the first sentence of this subsection. This subsection shall remain in full force and effect indefinitely with respect to any claims based upon events occurring on or prior to December 31, 2001. (j) Employee also promises neither to contest the validity of this Release, nor sue the Company concerning any claim he may have relating to his employment with the Company or the termination of that employment. This subsection shall not apply to challenges to the ADEA release in subsection 4(d) of this Release, to the extent, if any, prohibited by applicable law. 5. TRANSFER OF DUTIES. During the period preceding the Termination Date and for two (2) years thereafter, the Employee will act at all times with complete loyalty and good faith in promoting the best interests of the Company. To this end, the 8 Employee will: (a) fully inform the Company and the Employee's successor (if any) of all material activities performed by the Employee and of progress on assigned duties; and (b) transfer or otherwise make available to the Company and the Employee's successor (if any), to the extent reasonably possible, the Employee's knowledge and experience regarding his activities on behalf of the Company. Employee will also promote the goodwill, reputation, and ongoing business of the Company, and take all steps necessary to maintain, and in no way act to hinder, the foregoing interests. 6. COMPANY PROPERTY: By Employee's last day of work, Employee will return to the Company all files, memoranda, documents, records, copies of the foregoing, credit cards, keys, and any other property of the Company or its affiliates in his possession. 7. OWNERSHIP OF CLAIMS: Employee has not assigned or transferred any Claim he is purporting to release, nor has he attempted to do so. 8. OTHER REPRESENTATIONS: In addition to Employee's other representations in this Release, Employee has made the following representations to the Company, on which he acknowledges it also has relied in entering into this Release with Employee: (a) Employee has not suffered any discrimination on account of his age, sex, race, national origin, marital status, sexual orientation, or any other protected status, and none of these ever has been an adverse factor used against Employee by any Released Party; (b) Employee has not suffered any job-related wrongs or injuries for which he might still be entitled to compensation or relief, such as an injury for which Employee might receive a workers' compensation award in the future; (c) Employee has no knowledge of any wrongdoing by the Company that would subject the Company to any harm, civil or criminal; and (d) Employee has provided no information, oral or in writing, to anyone - individual, corporation or any other organization, private, public or governmental - that involves any wrongdoing, civil or criminal, by the Company. 9. FALSE CLAIMS REPRESENTATIONS AND PROMISES: Employee has disclosed to the Company any information he has concerning any conduct involving the Company or any affiliate that he has any reason to believe may be unlawful or that involves any false claims to the United States. Employee promises to cooperate fully in any investigation the Company or any affiliate undertakes into matters occurring during Employee's employment with the Company or any affiliate. Employee understands that nothing in this Release prevents him from cooperating with any U.S. government investigation. In addition, to the fullest extent permitted by law, Employee hereby irrevocably assign to the U.S. government any right he might have to any proceeds or awards in connection with any false claims proceedings against the Company or any affiliate. 10. COOPERATION REQUIRED: Employee agrees that, as requested by the Company, he will fully cooperate with the Company or any affiliate in effecting a smooth transition of his responsibilities to others. 9 11. NON-SOLICITATION. Employee agrees to the following prohibitions on solicitation of the Company's employees, customers, and business interests, to wit: (a) Employee shall not at any time during the period of his employment with the Company, or during the two (2) year period immediately following the effective date of his termination (the "Non-Solicitation Period"), without the prior written consent of the Company, on behalf of himself or any other person or entity, solicit for employment or employ any of the current officers or employees of the Company; provided, however, that nothing contained herein shall prohibit the Employee from hiring employees of the Company when such employment results from general solicitations for employment. (b) Employee 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 benefit, or for the benefit of any company or persons 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, or customers of the Company or the terms of any contracts of the Company which is not freely available to the public. (c) Employee covenants and agrees that a material breach of the foregoing subsections 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 Release, at law or otherwise, be entitled to an injunction to be issued by any court of competent jurisdiction enjoining and restraining the Employee from committing any violation of the foregoing subsections. 12. NON-DISCLOSURE, RETURN OF PROPRIETARY INFORMATION, AND INVENTIONS AND PATENTS. The Company and the Employee agree that during his employment with the Company, the Employee has received and become acquainted with confidential, proprietary, and trade secret information of the Company including, but not limited to, information regarding Company business programs, plans, and strategies; finances; customers and prospective customers; suppliers and vendors; marketing plans and results; personnel matters regarding Company employees, officers, directors, and owners; manners of operation and services provided; negotiating positions and strategies; legal arguments, theories, claims, and defenses; pending, threatened, or potential legal 10 actions, claims, investigations, and audits; or information which could lead to the same; and similar sensitive information regarding the operation and business of the Company. The Employee acknowledges that such information has been developed or acquired by the Company through the expenditure of substantial time, effort, and money, that such information provides the Company with strategic and business advantages over others who do not know or use such information, and that the Company has implemented specific policies and practices to keep such information secret. Accordingly, the Employee agrees as follows: (a) The Employee shall not during the term of employment or at any time thereafter directly or indirectly use for his own purpose or for the benefit of any person or entity other than the Company, or otherwise disclose or permit others to obtain access to, any proprietary of confidential information 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 provision, the Company's proprietary information shall include, but is not limited to, information and material identified in this section and that identified in Section 17 of Employee's August 22, 1997 Employment Contract. Information or material that is not novel or copyrighted or patented may nonetheless be proprietary information. Proprietary information shall not include, however, any information that is or becomes generally known to the industries in which the Company competes through sources independent of the Company or the Employee or through authorized publication by the Company to persons other than Company employees. (b) The Employee shall not during his employment or at any time thereafter, except as required by law, directly or indirectly give or disclose any records containing confidential information or material to, or permit any inspection or copying of such records by, any individual or entity other than in the authorized course and scope of such individual's or entity's employment or retention by the Company. In addition, the Employee shall promptly return to the Company all such records upon his resignation hereunder and shall not use or retain any such records thereafter. Records subject to this subsection shall include, but not be limited to, 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 that may be in the Employee's possession or under his control or accessible to his which contain or may be derived from proprietary or confidential 11 information covered by this section or by Section 17 of Employee's August 22, 1997 Employment Contract. All such records are and will remain the sole property of the Company. (c) Employee acknowledges his responsibilities with respect to inventions, patents, and copyrights as set forth in Section 17 of his August 22, 1997 Employment Contract. Employee acknowledges that there are no inventions, innovations or improvements that should be disclosed as required by Section 17(c). 13. CONFIDENTIALITY. The Employee agrees that he will keep confidential the existence and terms of this Release; provided, however, that nothing herein shall prevent the Employee from disclosing the fact and terms of this Release with his attorney, accountant, or financial advisor for the purposes of receiving professional advice from such individual in that capacity. The Employee will advise those individuals that the existence and terms of this Release shall be kept confidential. 14. PUBLIC STATEMENTS. Except as necessary to secure other employment or for other necessary reasons, Employee agrees that he will make no public statements concerning his employment or the termination thereof with the Company. Employee also agrees that he will make no disparaging remarks to any third parties concerning the Company, its employees, agents, representatives, subsidiaries, parents, affiliates, and shareholders. Employee further agrees that he will not disparage the Company's business capabilities, products, plans, or management to any customer, potential customer, vendor, supplier, contractor or subcontractor of the Company so as to affect adversely the good will or business of the Company. 15. CONSEQUENCES OF VIOLATING PROMISES: (a) GENERAL CONSEQUENCES: In addition to any other remedies or relief that may be available, Employee agrees to pay the reasonable attorneys' fees and any damages Released Parties may incur as a result of his breaching a promise he made in this Release (such as by suing a Released Party over a released Claim) or if any representation he made in this Release was false when made. Employee further agrees that the Company would be irreparably harmed by any actual or threatened violation of Sections 11 and 12 that involves Release-related disclosures or disclosure or use of confidential information or trade secrets or solicitation of employees, customers, or suppliers, and that the Company will be entitled to an injunction prohibiting Employee from committing any such violation. (b) CHALLENGES TO VALIDITY: Should Employee attempt to challenge the enforceability of this Release, Employee agrees first: (1) to deliver 12 a certified check to the Company for all amounts he has received because he signed this Release, plus 10 percent interest per annum; (2) to direct in writing that all future benefits or payments Employee is to receive because he signed this Release be suspended; and (3) to invite the Company to cancel this Release. If the Company accepts Employee's offer, this Release will be canceled. If it rejects Employee's offer, the Company will notify Employee and deposit the amount Employee repaid, plus all suspended future benefits and payments, in an interest-bearing account pending a determination of the enforceability of this Release. If the Release is determined to be enforceable, the Company is to pay Employee the amount in the account, less any amounts Employee owes the Company. If the Release is determined to be unenforceable, the amount credited to the account shall be paid to the entities that paid the consideration for this Release in proportion to their payments, and the suspension of future benefits or payments shall become permanent. (c) ADEA CLAIMS: This section shall not apply to a challenge to the ADEA release in subsection 4(b) of this Release to the extent, if any, prohibited by applicable law. 16. NO ADMISSION OF LIABILITY. This Release shall not in any way be construed as an admission by the Company that it has acted wrongfully with respect to Employee or any other person, entity or agency, or that Employee has any rights whatsoever against the Company. The Company further specifically disclaims and denies any liability to or wrongful acts against Employee or any other person, entity or agency, on the part of itself, its employees and its agents. 17. SUCCESSORS AND ASSIGNS. This Release shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, legal representatives, and assigns. However, neither this Release nor any right or interest hereunder shall be assignable by Employee, his beneficiaries, or legal representatives, except as provided by law or pursuant to referenced benefit plan documents. 18. SEVERABILITY AND REFORMATION. The provisions of this Release are severable. If any provision of this Release shall be determined to be invalid, illegal, or unenforceable, in whole or in part, neither the validity of the remaining parts of such provision nor the validity of any other provision of this Release shall in any way be affected thereby. In lieu of such invalid, illegal, or unenforceable provision, there shall be added automatically as part of this Release a provision as similar in terms to such invalid, illegal, or unenforceable provision as may be possible and be valid, legal, and enforceable. Each party also agrees that, without receiving further consideration, it will 13 sign and deliver such documents and do anything else necessary in the future to make the provisions of this Release effective. 19. TAXES. Employee understands that he will be responsible for paying all taxes that may become due on any of the severance benefits provided herein. If he fails to pay these payments, or any taxing authority alleges that he has failed to do so or that the Company is responsible for the payment of these taxes, for any reason, Employee agrees to be fully responsible for any judgments or orders, fines and penalties, and that he will indemnify the Company including, but not limited to, the satisfaction of judgments, orders, fines or penalties in the payment of the Company's defense by counsel of its choice in such proceedings. The taxability of the amounts contained herein shall not affect the validity of this Release. 20. GOVERNING LAW. This Release shall be governed by the law of the State of Arkansas. 21. ARBITRATION OF DISPUTES: (a) In the event the Company believes that Employee has breached this Release in any way, prior to seeking any remedy, including arbitration, the Company's General Counsel will first contact Employee and inform him of the claimed breach. Employee will then have seven (7) days within which to address the Company's claim before it may take any action under this Release. (b) ARBITRABLE DISPUTES: The Company and Employee agree to resolve any claims they may have with each other (except, if either Employee or the Company so elects, any dispute for which injunctive relief is a principal remedy) through final and binding arbitration in accordance with this section. Employee also agrees to resolve in accordance with this section any claim between him and any other Released Party who offers or agrees to arbitrate the claim in this manner. This arbitration requirement applies to, among other things, disputes about the validity, interpretation, or effect of this Release or alleged violations of it, claims of discrimination under federal or state law, or other statutory violation claims. (c) THE ARBITRATION: Except as otherwise provided in any other enforceable arbitration agreement between Employee and the Company (Another Arbitration Agreement), which the Company and Employee hereby reaffirm if one exists, the arbitration shall be in accordance with the then-current arbitration rules and procedures for employment disputes governing arbitrations administered by the Judicial Arbitration and Mediation Service 14 (JAMS), except as provided in this section. Arbitration shall take place before a panel of three arbitrators experienced in employment law licensed to practice in the state of Arkansas selected in accordance with subsection (c). The arbitrators may not modify or change this Release in any way. Employee, the Company, and any Released Party who agrees to arbitrate an Arbitrable Dispute under this section agree to submit to personal jurisdiction in the state listed in the first Section of this Release for such arbitration and in any jurisdiction necessary for the enforcement of any arbitration award. (d) SELECTION OF THE ARBITRATORS: The arbitrators shall be selected as follows: JAMS shall give each party a list of 11 arbitrators drawn from its panel of employment dispute arbitrators from the state of Arkansas. Each party may strike all names on the list it deems unacceptable. If only three common names remain on the lists of both parties, those individuals shall be designated as the Arbitrators. If more than three common names remain on the lists of both parties, the parties shall strike names alternately from the list of common names until only three remain. The party who did not initiate the claim shall strike first. If no common name exists on the lists of both parties, JAMS shall furnish an additional list and the process shall be repeated. If the arbitrators have been selected after two lists have been distributed, then the parties shall strike alternately from a third list, with the party initiating the claim striking first, until only three names remain. Those persons shall be designated as the arbitrators. Striking decisions must be made and communicated to the other party and JAMS within 10 calendar days after the date of the transmittal communication relaying the arbitrators remaining for selection. In the event a party does not make a timely strike, the other party may select the arbitrators from the names remaining. (e) EXCLUSIVE REMEDY: Arbitration in this manner shall be the exclusive remedy for any claim that must be arbitrated pursuant to this section. Should Employee or the Company attempt to resolve such a claim by any method other than arbitration pursuant to this section, the responding party will be entitled to recover from the initiating party all damages, expenses, and attorneys' fees incurred as a result of that breach. (f) FEES AND EXPENSES: Each party shall pay the fees of his or her attorneys, the expenses of his or his witnesses, and any other expenses that party incurs in connection with the arbitration, but all 15 other costs of the arbitration, including the fees of the arbitrator, the cost of any record or transcript of the arbitration, administrative fees, and other fees and costs shall be paid in equal shares by the Employee and Company. Except as provided in Another Arbitration Agreement, the party losing the arbitration shall reimburse the party who prevailed for all attorneys' fees and expenses the prevailing party paid pursuant to the preceding sentence. 22. ENTIRE RELEASE. This Release constitutes the entire Release between the parties with respect to the subject matter hereof and supersedes all prior agreements, oral and written, between the parties hereto to the extent such agreements are inconsistent herewith, including but not limited to, any prior agreements with respect to severance benefits. This Release may be modified or amended only by an instrument in writing signed by both parties hereof. READ THIS RELEASE, AND CAREFULLY CONSIDER ALL OF ITS PROVISIONS BEFORE SIGNING IT: IT INCLUDES A RELEASE OF KNOWN AND UNKNOWN CLAIMS, AND ITS ARBITRATION-OF-CLAIMS REQUIREMENT WAIVES EMPLOYEE'S RIGHT TO A JURY TRIAL. IF EMPLOYEE WISHES, HE SHOULD TAKE ADVANTAGE OF THE FULL CONSIDERATION PERIOD AFFORDED BY SECTION 3 AND YOU SHOULD CONSULT AN ATTORNEY. Employee represents that as of December 31, 2001, he has not filed any lawsuits, charges, complaints, or claims relating to his employment or any other matters that involve the Company. Employee agrees to cause the withdrawal or dismissal with prejudice of all of these matters unless otherwise stated by the Company, to the extent still pending within five (5) days after this Release becomes irrevocable, and until such withdrawal or dismissal is accepted or ordered, no amounts otherwise due Employee under this Release shall become payable. 16 IN WITNESS WHEREOF, the Company and the Employee have executed this Release as of the day and year indicated below. Beverly Enterprises, Inc. Dated: By: ------------------------------- ------------------------------- William R. Floyd Chairman, President and Chief Executive Officer Employee Dated: -------------------------------- ---------------------------------- T. Jerald Moore 17 EX-10.59 10 d03650exv10w59.txt EX-10.59 AMENDMENT NO.5 TO PARTICIPATION AGREEMENT EXHIBIT 10.59 AMENDMENT NO. 5 TO AMENDED AND RESTATED PARTICIPATION AGREEMENT This AMENDMENT NO. 5 TO AMENDED AND RESTATED PARTICIPATION AGREEMENT (this "Amendment"), is entered into as of December 20, 2002, among BEVERLY ENTERPRISES, INC., a Delaware corporation ("BEI"), as the Representative, Construction Agent, Parent Guarantor and a Lessee (in its capacity as Representative, the "Representative"); in its capacity as Construction Agent, the "Construction Agent"; in its capacity as Parent Guarantor, the "Parent Guarantor" and together with the Guarantors listed on the signature page to the Guaranty (each a "Guarantor") and the Structural Guarantors, collectively, the "Guarantors"; and, in its capacity as Lessee, a "Lessee"); certain subsidiaries of BEI that are signatories hereto, as Lessees; BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC. (formerly known as BMO LEASING (U.S.), INC.), a Delaware corporation, as a Lessor (together with any permitted successors and assigns thereto, each a "Lessor" and collectively the "Lessors") and as Agent Lessor for the Lessors (in such capacity, the "Agent Lessor"); the various financial institutions as are or may from time to time become lenders (the "Lenders") under the Loan Agreement; BANK OF MONTREAL, a Canadian banking organization ("BMO"), as Administrative Agent (in such capacity, the "Administrative Agent") for the Lenders, as Arranger and Syndication Agent (all of the parties of this preamble, collectively, the "Parties"). RECITALS: The Parties entered into an Amended and Restated Participation Agreement dated as of August 28, 1998 (the "Original Participation Agreement" and as amended by the Prior Amendments and this Amendment, the "Participation Agreement " ), amending and restating the Participation Agreement dated as of March 21, 1997. The Parties entered into a Master Amendment No. 1 to Amended and Restated Participation Agreement and Amended and Restated Master Lease and Open-End Mortgage, dated as of September 30, 1999 (the "First Amendment"), which amended the Original Participation Agreement. The Parties entered into an Amendment No. 2 to Amended and Restated Participation Agreement, dated as of November 1, 1999 (the "Second Amendment"), which amended the Original Participation Agreement as amended by the First Amendment. The Parties entered into a Master Amendment No. 3 to Amended and Restated Participation Agreement, dated as of April 25, 2001 (the "Third Amendment"), which amended the Original Participation Agreement as amended by the First Amendment and the Second Amendment. The Parties entered into an Amendment No. 4 to Amended and Restated Participation Agreement, dated as of December 31, 2001 (the "Fourth Amendment" and together with the First Amendment, Second Amendment and Third Amendments, collectively the "Prior Amendments"), which amended the Original Participation Agreement as amended by the First Amendment, the Second Amendment and the Third Amendment. The Parties wish to further amend certain provisions of the Original Participation Agreement, as amended by the Prior Amendments, as set forth herein. AGREEMENT: NOW, THEREFORE, in consideration of the premises made hereunder, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, intending to be legally bound, hereby agree as follows: 1. Defined Terms; References. Unless otherwise expressly defined herein, all capitalized terms used herein and defined in Appendix A to the Participation Agreement shall be used herein as so defined. Unless otherwise expressly stated herein, all Section and Article references herein shall refer to Sections and Articles of the Participation Agreement. 2. Defined Terms. (a) The definition of "Consolidated EBITDA" contained in Appendix A to the Participation Agreement is hereby amended by deleting such definition in its entirety and replacing the same with the following: "Consolidated EBITDA" means, for any period, Consolidated Net Income of the Representative and its Consolidated Subsidiaries for such period plus, without duplication, any amounts deducted in determining such Consolidated Net Income in respect of (a) Consolidated Interest Charges for such period, (b) Consolidated Tax Charges for such period, (c) expenses for such period of the types classified as "depreciation and amortization" on the consolidated statement of operations included in the Base Financials, (d) non-cash charges for such period under the FASB Statement No. 142, Goodwill and Other Intangible Assets, (e) non-cash expenses for such period arising from the grant of stock options to officers, directors and employees of the Representative and its Consolidated Subsidiaries and (f) non-cash charges in the fiscal quarter ending December 31, 2002 arising from the Representative's change in its methodology for establishing patient liability reserves from a discounted to a non-discounted basis. 3. Negative Covenants of the Representative. Section 10.2(a) of the Participation Agreement is hereby amended by deleting such section in its entirety and replacing the same with the following: (a) Minimum Consolidated Net Worth. Permit Consolidated Net Worth of the Representative to be less than: 2 (i) on any date prior to December 31, 2002, an amount equal to 85% of Consolidated Net Worth at December 31, 2001 plus (a) 50% of the aggregate positive Consolidated Net Income (excluding any consolidated net loss) of the Representative and its Consolidated Subsidiaries for each fiscal quarter ending after December 31, 2001 plus (b) 50% of the aggregate net proceeds, including the fair market value of property other than cash (as determined in good faith by the Representative's board of directors), received by the Representative from the issuance and sale after December 31, 2001 of any capital stock of the Representative (other than the proceeds of any issuance and sale of any capital stock (x) to a Subsidiary or (y) which is required to be redeemed, or is redeemable at the option of the holder, if certain events or conditions occur or exist or otherwise) or in connection with the conversion or exchange of any Indebtedness of the Representative into capital stock of the Representative after December 31, 2001 plus (c) the excess (if any) of the aggregate amount of Specified 2001 Charges (exclusive of charges against reserves established on or prior to September 30, 2001) over $290,000,000; and (ii) on any date on or after December 31, 2002, an amount equal to (a) the greater of (x) 85% of Consolidated Net Worth at December 31, 2002 and (y) $135,000,000 plus (b) 50% of the aggregate positive Consolidated Net Income (excluding any consolidated net loss) of the Representative and its Consolidated Subsidiaries for each fiscal quarter ending after December 31, 2002 plus (c) 50% of the aggregate net proceeds, including the fair market value of property other than cash (as determined in good faith by the Representative's board of directors), received by the Representative from the issuance and sale after December 31, 2002 of any capital stock of the Representative (other than the proceeds of any issuance and sale of any capital stock (x) to a Subsidiary or (y) which is required to be redeemed, or is redeemable at the option of the holder, if certain events or conditions occur or exist or otherwise) or in connection with the conversion or exchange of any Indebtedness of the Representative into capital stock of the Representative after December 31, 2002. 3 4. Representations and Warranties. To induce the Administrative Agent, the Agent Lessor and the Participants to execute and deliver this Amendment, each of the Beverly Entities that is a party hereto represents and warrants (which representations and warranties shall survive the execution and delivery of this Amendment) to each of the Administrative Agent, the Agent Lessor and the Participants that: (a) this Amendment has been duly authorized, executed and delivered by it and this Amendment constitutes the legal, valid and binding obligation, contract and agreement of such Beverly Entity enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Original Participation Agreement, as amended by the Prior Ame ndments and this Amendment, constitutes the legal, valid and binding obligation, contract and agreement of such Beverly Entity enforceable against it in accordance with their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (c) the execution, delivery and performance by such Beverly Entity of this Amendment (i) has been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) does not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (l) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, or (3) any provision of any material indenture, agreement or other instrument to which it is a party or by which its properties or assets are or may be bound, including, without limitation, the Morgan Credit Agreement (as the same has been amended or modified), or (B) result in a breach or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (iii)(A)(3) of this subsection (c); (d) as of the date hereof and after giving effect to this Amendment on its effective date pursuant to Section 5, no Default or Event of Default has occurred which is continuing; and (e) all the representations and warranties contained in Section 8.2 of the Participation Agreement (after giving effect to this Amendment) are true and correct in all material respects with the same force and effect 4 as if made by such Beverly Entity on and as of the date hereof and on the effective date of this Amendment pursuant to Section 5. 5. Conditions to Effectiveness of this Amendment. This Amendment shall not become effective until, and shall become effective when, each and every one of the following conditions shall have been satisfied to the satisfaction of the Agent Lessor, the Administrative Agent and each Required Participant (the conditions precedent are for the benefit of the Agent Lessor, the Administrative Agent and each Participant only): (a) The Agent Lessor, the Administrative Agent and the Required Participants shall have received executed counterparts of this Amendment, duly executed by the Beverly Entities party hereto; (b) The Agent Lessor, the Administrative Agent and the Participants shall have received evidence satisfactory to them that the Morgan Credit Agreement has been amended as of December 20, 2002 in form and substance satisfactory to the Agent Lessor, the Administrative Agent and the Participants; and (c) The representations and warranties of the Beverly Entities set forth in Section 4 hereof are true and correct. (d) Unless all of the Lenders shall have consented to this Amendment, the modifications in this Amendment shall not apply for the purposes of the definition of Pricing Ratio contained in Schedule IV to the Participation Agreement. 6. Payment of Fees and Expenses. The Representative agrees to pay upon or prior to the effectiveness of this Amendment, the reasonable fees and expenses of Mayer, Brown, Roe, & Maw, counsel to the Lessors, in connection with the negotiation, preparation, approval, execution and delivery of this Amendment and all reasonable fees and expenses attendant to any filing, registration, recording or perfection of any Lien contemplated hereby. 7. Counterparts. This Amendment may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. 8. Governing Law. This Amendment shall be governed by and construed in accordance with the la ws of the State of New York. 9. Successors and Assigns. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. THERE IS NO FURTHER TEXT ON THIS PAGE 5 IN WITNESS WHEREOF, the Parties have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. BEVERLY ENTERPRISES, INC., a Representative, Construction Agent, Parent Guarantor and Lessee By: ---------------------------------- Name: Title: BANK OF MONTREAL, as Arranger, Administrative Agent and as a Lender By: /s/ EDWARD P. MCGUIRE ---------------------------------- Name: Edward P. McGuire Title: Vice President BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC. as Agent Lessor and as a Lessor By: /s/ THOMAS A. BATTERHAM ---------------------------------- Name: Thomas A. Batterham Title: Vice President GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By: /s/ WILLIAM E. MAGEE ---------------------------------- Name: William E. Magee Title: Duly Authorized Signatory TORONTO-DOMINION (TEXAS), INC., as a Lender By: ---------------------------------- Name: Title: BANK OF AMERICA, NATIONAL ASSOCIATION, as a Lender By: /s/ LARRY GORDON ---------------------------------- Name: Larry Gordon Title: Principal VANTAGE HEALTHCARE CORPORATION, as Lessee and Structural Guarantor By: ---------------------------------- Name: Title: PETERSEN HEALTH CARE, INC., as Lessee and Structural Guarantor By: ---------------------------------- Name: Title: BEVERLY SAVANA CAY MANOR, INC., as Lessee and Structural Guarantor By: ---------------------------------- Name: Title: BEVERLY ENTERPRISES- GEORGIA, INC., as Lessee and Structural Guarantor By: ---------------------------------- Name: Title: BEVERLY ENTERPRISES- CALIFORNIA, INC., as Lessee and Structural Guarantor By: ---------------------------------- Name: Title: BEVERLY ENTERPRISES - ARKANSAS, INC., as Lessee and Structural Guarantor By: ---------------------------------- Name: Title: BEVERLY ENTERPRISES - FLORIDA, INC., as Lessee and Structural Guarantor By: ---------------------------------- Name: Title: BEVERLY HEALTH AND REHABILITATION SERVICES, INC., as Lessee and Structural Guarantor By: ---------------------------------- Name: Title: BEVERLY ENTERPRISES - WASHINGTON, INC., as Lessee and Structural Guarantor By: ---------------------------------- Name: Title: EX-10.60 11 d03650exv10w60.txt EX-10.60 AMENDMENT NO.6 TO PARTICIPATION AGREEMENT EXHIBIT 10.60 CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. AMENDMENT NO. 6 TO AMENDED AND RESTATED PARTICIPATION AGREEMENT This AMENDMENT NO. 6 TO AMENDED AND RESTATED PARTICIPATION AGREEMENT (this "Amendment"), is entered into as of February 28, 2003, among BEVERLY ENTERPRISES, INC., a Delaware corporation ("BEI"), as the Representative, Construction Agent, Parent Guarantor and a Lessee (in its capacity as Representative, the "Representative"; in its capacity as Construction Agent, the "Construction Agent"; in its capacity as Parent Guarantor, the "Parent Guarantor" and together with the Guarantors listed on the signature page to the Guaranty (each a "Guarantor") and the Structural Guarantors, collectively, the "Guarantors"; and, in its capacity as Lessee, a "Lessee"); certain subsidiaries of BEI that are signatories hereto, as Lessees; BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC. (formerly known as BMO LEASING (U.S.), INC.), a Delaware corporation, as a Lessor (together with any permitted successors and assigns thereto, each a "Lessor" and collectively the "Lessors") and as Agent Lessor for the Lessors (in such capacity, the "Agent Lessor"); the various financial institutions as are or may from time to time become lenders (the "Lenders") under the Loan Agreement; and BANK OF MONTREAL, a Canadian banking organization ("BMO"), as Administrative Agent (in such capacity, the "Administrative Agent") for the Lenders, and as Arranger and Syndication Agent (all of the parties of this preamble, collectively, the "Parties"). The effective date of this Amendment shall be the date of effectiveness of Credit Amendment No. 4 (the "Amendment No. 6 Effective Date"). RECITALS: The Parties entered into an Amended and Restated Participation Agreement dated as of August 28, 1998 (the "Original Participation Agreement" and as amended by the Prior Amendments and this Amendment, the "Participation Agreement"), amending and restating the Participation Agreement dated as of March 21, 1997. The Parties entered into a Master Amendment No. 1 to Amended and Restated Participation Agreement and Amended and Restated Master Lease and Open-End Mortgage, dated as of September 30, 1999 (the "First Amendment"), which amended the Original Participation Agreement. The Parties entered into an Amendment No. 2 to Amended and Restated Participation Agreement, dated as of November 1, 1999 (the "Second Amendment"), which amended the Original Participation Agreement as amended by the First Amendment. The Parties entered into a Master Amendment No. 3 to Amended and Restated Participation Agreement, dated as of April 25, 2001 (the "Third Amendment"), which amended the Original Participation Agreement as amended by the First Amendment and the Second Amendment. The Parties entered into an Amendment No. 4 to Amended and Restated Participation Agreement, dated as of December 31, 2001 (the "Fourth Amendment"), which amended the Original Participation Agreement as amended by the First Amendment, the Second Amendment and the Third Amendment. The Parties entered into an Amendment No. 5 to the Amended and Restated Participation Agreement, dated as of December 20, 2002 (the "Fifth Amendment" and, together with the First Amendment, Second Amendment, Third Amendment and Fourth Amendment collectively the "Prior Amendments"), which amended the Original Participation Agreement as amended by the First Amendment, the Second Amendment, the Third Amendment and the Fourth Amendment. The Parties wish to further amend certain provisions of the Original Participation Agreement, as amended by the Prior Amendments, as set forth herein. AGREEMENT: NOW, THEREFORE, in consideration of the premises made hereunder, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto, intending to be legally bound, hereby agree as follows: 1. Defined Terms; References. Unless otherwise expressly defined herein, all capitalized terms used herein and defined in Appendix A to the Participation Agreement shall be used herein as so defined. Unless otherwise expressly stated herein, all Section and Article references herein shall refer to Sections and Articles of the Participation Agreement. 2. Added Defined Terms. (a) Effective as of the Amendment No. 6 Effective Date, the following defined terms shall be added to Appendix A of the Participation Agreement. "Additional Mortgages" means mortgages or deeds of trust from the owner of each property on which a Lien is required to be granted pursuant to Section 10.1(m), as mortgagor, securing the Obligations (and, if the Representative so elects, the obligations of such owner under the Financing Documents), in each case in form and substance reasonably satisfactory to the Administrative Agent and as the same may be amended from time to time." "Adjusted Leverage Ratio" means, (a) for any day prior to September 30, 2003, the ratio of Adjusted Consolidated Debt on such day to Annualized Consolidated EBITDAR for the fiscal quarter most recently ended on or prior to such day and (b) for any day on or after September 30, 2003, the ratio of Adjusted Consolidated Debt on such day to -2- Consolidated EBITDAR for the period of four consecutive fiscal quarters most recently ended on or prior to such day. "Amended Mortgage Condition" means the satisfaction by the Representative and its Subsidiaries of all of their obligations under Section 10.1(1). "Amended Mortgage Deadline" means the sixtieth day after the Amendment No. 6 Effective Date. "Amended Mortgage Property" means the property described in Schedule VII hereto. "Amended Mortgages" means amended mortgages or deeds of trust from each of Beverly Enterprises-Georgia, Inc. and Beverly Enterprises-Arkansas, Inc. (collectively, the "Designated Mortgagors") of each respective Amended Mortgage Property, as mortgagor, to the Administrative Agent, as mortgagee, in respect of the Amended Mortgage Properties, in each case amended in form and substance reasonably satisfactory to the Administrative Agent and as the same may be amended from time to time. "Amendment No. 6" means Amendment No. 6 to Amended and Restated Participation Agreement entered into as of February 28, 2003 among Beverly Enterprises, Inc., as the Representative, Construction Agent, Parent Guarantor and a Lessee, Bank of Montreal Global Capital Solutions, Inc., as the Agent Lessor and as a Lessor, the Lenders, Bank of Montreal, as Arranger, the Administrative Agent and as a Lender and the Guarantors. "Amendment No. 6 Effective Date" means the date on which Amendment No. 6 becomes effective in accordance with its terms. "AmSouth Mortgage Facility" means the Amended and Restated Term Loan Agreement, dated December 31, 1998, between Beverly Enterprises-Mississippi, Inc. and AmSouth Bank (successor by merger to First American National Bank), as amended by the First Amendment to Amended and Restated Term Loan Agreement and Promissory Notes, dated September 30, 1999, and as further amended, restated, supplemented or otherwise modified from time to time. "Annualized Consolidated EBITDAR" means (a) for the fiscal quarter ended December 31, 2002, Consolidated EBITDAR for such fiscal quarter multiplied by 4, (b) for the fiscal quarter ended March 31, 2003, Consolidated EBITDAR for the period of two fiscal quarters ended March 31, 2003 multiplied by 2 and (c) for the fiscal quarter ended June 30, 2003, Consolidated EBITDAR for the period of three fiscal quarters ended June 30, 2003 multiplied by 4/3. "Annualized Mortgage EBITDA" means (i) for the fiscal quarter ended December 31, 2002, EBITDA for Mortgaged Facilities for such fiscal quarter multiplied by 4, (ii) for the fiscal quarter ended March 31, 2003, EBITDA for Mortgaged Facilities for the period -3- of two fiscal quarters ended March 31, 2003 multiplied by 2, (iii) for the fiscal quarter ended June 30, 2003, EBITDA for Mortgaged Facilities for the period of three fiscal quarters ended June 30, 2003 multiplied by 4/3 and (iv) for any fiscal quarter thereafter, EBITDA for Mortgaged Facilities for the period of four consecutive fiscal quarters ended on the last day of such fiscal quarter. "Asset Sale" means any sale, lease, transfer or other disposition of any assets or property other than (i) sales of assets or property (other than assisted living and skilled nursing facilities, separate business units, businesses and divisions and stock of Subsidiaries of the Representative) in the ordinary course of business, and (ii) sales, transfers, leases and other dispositions by the Representative or any of its Subsidiaries to the Representative or any of the Subsidiaries. "Care Focus" means, as of the Amendment No. 4 Effective Date (as defined in Credit Amendment No. 4), the personal care business, located in North Carolina, operated by Community Care, Inc. and Compassion and Personal Care Services, Inc. "Consolidated Cash Balance" means on any day the cash and Temporary Cash Investments held by the Representative and its Consolidated Subsidiaries on such day. "Coverage Limitation" means, for any day, an amount equal to (i) the product of 5 multiplied by the Annualized Mortgage EBITDA, as determined on such day, for the most recent fiscal quarter for which financial statements have been, or are required to have been, delivered pursuant to Section 10.1(d)(i) and (ii), divided by (ii) 1.5; provided that if, on or prior to such day, the Representative has prepaid any New Senior Notes or Senior Notes pursuant to Section 5.21(iii)(B) of the Morgan Credit Agreement, the "Coverage Limitation" for such day shall be an amount equal to the amount set forth in clause (i) as determined for such day, divided by 2. "Credit Amendment No. 4" means Amendment No. 4 to Amended and Restated Credit Agreement and Amendment No. 2 to Amended and Restated Pledge Agreement dated as of February 28, 2003 among BEI, the Existing Banks and JPMorgan Chase Bank. "Disposition Program" means, the sale, transfer or other disposition by the Representative and its Subsidiaries, in one or more transactions and pursuant to sales of facilities and related assets, sales of stock of Subsidiaries or a combination thereof, of assisted living and skilled nursing facilities of the Representative and its Subsidiaries, all in substantial conformity with the plan of disposition described in the Strategic Review. "DUCC Business Line" means the management of occupational therapy and medicine clinics operated by Matrix Occupational Health, Inc. in North Carolina. -4- "EBITDA for Mortgaged Facilities" means, for any period, Net Income for Mortgaged Facilities for such period plus, without duplication, any amounts deducted in determining such Net Income for Mortgaged Facilities in respect of (a) Consolidated Interest Charges for such period, (b) Consolidated Tax Charges for such period and (c) expenses for such period of the types classified as "depreciation and amortization" on the consolidated statement of operations included in the Base Financials. "Existing Mortgages" means mortgages and deeds of trust described in Schedule I to Amendment No. 6, in each case as the same has been or may be amended from time to time. "Extended Amended Mortgage Deadline" has the meaning set forth in Section 10.1(1). "Federal Way Facility" means the skilled nursing facility operated by Beverly Enterprises-Washington, Inc., located at 135 South 336 Street, Federal Way, Washington, 98003. "Initial Specified Portion" means, with respect to any prepayment required under clause (b)(ii)(A) of Section 7.11, (a) with respect to the Obligations, 80% and (b) with respect to the Mortgage Facility Obligations, 20%; provided that if at the time that any such repayment would otherwise be required, (i) the Obligations have been repaid in full or would be repaid in full by the application of less than all of the applicable Initial Specified Portion of the applicable amount or (ii) the Mortgage Facility Obligations have been repaid in full or would be repaid in full by the application of less than all of the applicable Initial Specified Portion of the applicable amount, the Initial Specified Portion (or the portion of such Initial Specified Portion in excess of the amount necessary to repay such Obligations or Mortgage Facility Obligations) that would otherwise have been applied to repay such Obligations or Mortgage Facility Obligations shall be included in the Initial Specified Portion of Obligations or Mortgage Facility Obligations remaining outstanding. "Investments Side Letter" means the side letter dated February 28, 2003 delivered by the Representative and acknowledged by the Administrative Agent under the Morgan Credit Agreement. "MK Medical" means, as of the Amendment No. 6 Effective Date, collectively, the business divisions of HomeCare Preferred Choice, Inc. which operate a respiratory therapy business, durable medical equipment business and rehabilitation business, in each case in Nevada and California. "Mortgage Credit Facilities" means, collectively, the AmSouth Mortgage Facility and the Washington Mutual Mortgage Facilities. -5- "Mortgaged Facility Obligations" means all amounts now or hereafter payable by the Representative or its Subsidiaries pursuant to the Mortgage Credit Facilities. "Net Cash Proceeds" means, with respect to any Asset Sale, (a) the cash proceeds received by the Representative or any of its Subsidiaries in respect of such Asset Sale, including any cash received in respect of any non-cash proceeds, but only as and when received, net of (b) the sum of (i) all reasonable fees and out-of-pocket expenses paid by the Representative and its Subsidiaries to third parties (other than Affiliates) in connection with such Asset Sale, (ii) the amount of all (x) payments required to be made by the Representative and its Subsidiaries as a result of such Asset Sale to repay Indebtedness (other than prepayments of Mortgage Facility Obligations or Obligations required under clauses (a), (b)(ii), (b)(iii) and (c) of Section 7.11 and prepayments of Loans (as defined in the Morgan Credit Agreement) required under Section 2.05(d) of the Morgan Credit Agreement in connection with the reductions of the Commitments (as defined in the Morgan Credit Agreement) pursuant to clauses (i), (ii)(B), (ii)(C) and (iii) of Section 2.11(b) of the Morgan Credit Agreement) secured by such asset or otherwise subject to mandatory prepayment as a result of such Asset Sale and (y) reductions in the Commitments (as defined in the Morgan Credit Agreement) pursuant to Section 2.11(b)(ii)(A) of the Morgan Credit Agreement, (iii) the amount of all taxes paid (or reasonably estimated to be payable) by the Representative and its Subsidiaries during the year that such Asset Sale occurred or the next succeeding year and that are directly attributable to such Asset Sale (as determined reasonably and in good faith by the chief financial officer of the Representative) and (iv) the amount of all payments required to be made by the Representative and its Subsidiaries to pay severance, salary for accrued and unused vacation days and other employee termination expenses during the year that such Asset Sale occurred or the next succeeding year and that are directly attributable to such Asset Sale. "Net Income for Mortgaged Facilities" means, for any period and as determined on any date, the net income (loss) (calculated exclusive of the effect of any extraordinary or other material non-recurring gain or loss outside the ordinary course of business) for such period for all assisted living and skilled nursing facilities subject to (x) an Existing Mortgage or (y) an Amended Mortgage as to which all the conditions set forth in Section 10.1(1) have been satisfied, and, in each case, which has not theretofore been released. "New Senior Note Agreement" means that certain Indenture, dated as of April 25, 2001, between the Representative, the guarantors party thereto and The Bank of New York, as trustee, as amended, modified or supplemented. "Security Documents" means the Pledge Agreement, the Mortgages and the Additional Mortgages, together with all related filings, assignments, instruments, mortgages and other papers. -6- "Senior Note Agreement" has the meaning set forth in the Morgan Credit Agreement. "Senior Notes" means the senior unsecured notes of the Representative due 2006 issued pursuant to the Senior Note Agreement. "Specified Portion" means, with respect to any repayment required under clause (b)(ii)(B), (b)(iii) or (c) of Section 7.11 or any Commitment (as defined in the Morgan Credit Agreement) reduction pursuant to clause (ii)(B)(2), (ii)(C) or (iii) of Section 2.11(b) of the Morgan Credit Agreement, (a) with respect to the Commitments, 50%, (b) with respect to the Obligations, 40% and (c) with respect to the Mortgage Facility Obligations, 10%; provided that if at the time that any such Commitment (as defined in the Morgan Credit Agreement) reduction or repayment would otherwise be required, (i) the aggregate Commitments (as defined in the Morgan Credit Agreement) of all Existing Banks have been reduced to $85,000,000 or would be reduced to $85,000,000 by the application of less than the applicable Specified Portion of the applicable amount, (ii) the Obligations have been repaid in full or would be repaid in full by the application of less than all of the applicable Specified Portion of the applicable amount or (iii) the Mortgage Facility Obligations have been repaid in full or would be repaid in full by the application of less than all of the applicable Specified Portion of the applicable amount, the Specified Portion (or the portion of such Specified Portion in excess of the amount necessary to reduce such aggregate Commitments (as defined in the Morgan Credit Agreement) to $85,000,000 or to repay such Obligations or Mortgage Facility Obligations in full) that would otherwise have been applied to reduce such Commitments (as defined in the Morgan Credit Agreement) or repay such Obligations or Mortgage Facility Obligations shall be included in the Specified Portions applicable to the outstanding Commitments (as defined in the Morgan Credit Agreement) in excess, in the aggregate for all Existing Banks, of $85,000,000 and the Obligations and Mortgage Facility Obligations remaining outstanding in proportion to the relative Specified Portions set forth in clauses (a), (b) and (c) above. "Strategic Review" means the "Strategic Discussion and Review" dated January 10, 2003 provided by the Representative. "Survey" shall mean a survey of the real property (and all improvements thereon) (i) prepared by a surveyor or engineer licensed to perform surveys in the state, commonwealth or applicable jurisdiction where such real property is located, (ii) dated (or redated) not earlier than six months prior to the date of delivery thereof unless there shall have occurred within six months prior to such date of delivery any exterior construction on the site of such real property, in which event such survey shall be dated (or redated) after the completion of such construction or if such construction shall not have been completed as of such date of delivery, not earlier than twenty days prior to such date of delivery, (iii) certified by the surveyor (in a manner reasonably acceptable to the Administrative Agent) to the Administrative Agent and the TIC, (iv) complying in all -7- respects with the minimum detail requirements of the American Land Title Association as such requirements are in effect on the date of preparation of such survey and (v) sufficient for the TIC to remove all standard survey exceptions from the title policy relating to such real property and issue title endorsements of the type reasonably required by the Administrative Agent. "TIC" has the meaning set forth in Section 10.1(l)(iv). "Washington Mutual Mortgage Facilities" means, collectively, (1) the Loan Agreement, dated October 15, 1996, between Beverly Enterprises - Arkansas, Inc. and Washington Mutual Bank FA (successor by merger to Bank United) ("Washington Mutual"), (2) the Loan Agreement, dated October 15, 1996, between Beverly Enterprises - Alabama, Inc. and Washington Mutual, (3) the Loan Agreement, dated October 15, 1996, between Beverly Enterprises - Washington, Inc. and Washington Mutual and (4) the Loan Agreement, dated October 15, 1996, between Beverly Enterprises - Wisconsin, Inc. and Washington Mutual, each as amended from time to time. 3. Amended Defined Terms. (a) The definition of "Operative Documents" set forth in Appendix A to the Participation Agreement is hereby amended by (i) deleting the word "and" at the end of clause (s) therein, (ii) deleting the period at the end of clause (t) and replacing the same with "; and", and (iii) adding "(u) the Amended Mortgages." at the end thereof. (b) The following defined terms in Appendix A to the Participation Agreement are hereby amended by deleting such definitions in their entirety and inserting the following in lieu thereof: "Adjusted Consolidated Debt" means, at any date, the sum, without duplication, of (i) all liabilities of the Representative and its Subsidiaries at such date of the types classified as "current liabilities: short-term borrowings", "current liabilities: current portion of long-term obligations", "long-term obligations" and, to the extent arising out of claims made by governmental authorities relating to reimbursement obligations or settlements thereof, "other liabilities and deferred items" on the consolidated balance sheet included in the Base Financials, (ii) all guarantees at such date of obligations of other issuers (other than (x) guarantees outstanding on the Amendment No. 6 Effective Date of obligations outstanding on the Amendment No. 6 Effective Date, in amounts not in excess of $57,191,572 and reported in the Base Financials and (y) obligations, or guarantees of obligations, with respect to facilities or Subsidiaries disposed of, which obligations or guarantees existed prior to such dispositions and are initially recorded as liabilities or obligations on the consolidated balance sheet of the Representative and its Consolidated Subsidiaries pursuant to FASB Interpretation 45 after the Closing Date, so long as (A) no event of the type referred to in Section 6.01(h) or (i) of the Morgan Credit Agreement (without regard to whether a period of 60 days shall have passed as contemplated in -8- CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. Section 6.01(i) of the Morgan Credit Agreement) shall have occurred with respect to the Person that is primarily liable in respect of such obligations, or who has agreed with the Representative or any of its Subsidiaries to be responsible for such obligations, and (B) the obligee of such obligation, or the beneficiary of such guarantee, shall not have made a demand for payment in respect of such obligation or guarantee) and (iii) an amount equal to the product of eight multiplied by the Consolidated Rental Expense for the four fiscal quarters of the Representative most recently completed on or prior to such date; provided that for purposes of this clause (iii), Consolidated Rental Expense for any such period of four fiscal quarters shall be calculated after giving pro forma effect (including, in the case of any acquisition, but only to the extent permitted under Regulation S-X promulgated by the Securities and Exchange Commission) to any acquisition or disposition by the Representative or any of its Subsidiaries of any business, nursing home or other facility or any Subsidiary consummated after the first day of such period and on or prior to the date on which such determination is to be made, as if such acquisition or disposition had been consummated on the first day of such period, if, but only if, the Consolidated EBITDAR attributable to all such businesses, nursing homes and other facilities and all such Subsidiaries, in any transaction or series of related transactions, for such period, in the aggregate, equals or exceeds $10,000,000. "Consolidated Net Income" means, for any period, the net income (loss) (calculated (a) before preferred and common stock dividends and (b) exclusive of the effect of (i) any extraordinary or other material non-recurring gain or loss outside the ordinary course of business, (ii) Specified Restructuring Charges in an aggregate amount, on a pretax basis, during the period from October 1, 2000 through March 31, 2001 not exceeding $105,000,000, (iii) the charges or losses, in an aggregate amount, on a pretax basis, not exceeding $130,000,000, incurred by the Representative and its Consolidated Subsidiaries on or prior to January 8, 2002 in connection with the Florida Disposition, (iv) charges and losses incurred by the Representative and its Consolidated Subsidiaries on or after the Amendment No. 6 Effective Date as a result of (x) Asset Sales outside the ordinary course of business and dispositions made pursuant to the Disposition Program and (y) payments relating to the past billing practices of MK Medical in an aggregate amount not exceeding ***********, (v) non-cash charges and losses incurred by the Representative and its Consolidated Subsidiaries on or after the Amendment No. 6 Effective Date as a result of (x) closures of assisted living and skilled nursing facilities of the Representative and its Subsidiaries and (y) any change in GAAP that requires the Obligations and the assets subject to the Transactions to be included on the balance sheet of the Representative and its Consolidated Subsidiaries and (vi) transaction fees and expenses of the Representative and its Subsidiaries incurred in connection with Amendment No. 6 and any related amendments to the Operative Documents, the Morgan Credit Agreement and the Mortgage Credit Facilities) for the Representative and its Consolidated Subsidiaries, determined on a consolidated basis for such period. -9- CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. "Consolidated Net Worth" means, at any date, the consolidated stockholders' equity of the Representative and its Consolidated Subsidiaries at such date, without giving effect to (a) charges and losses incurred by the Representative and its Consolidated Subsidiaries on or after the Amendment No. 6 Effective Date as a result of (i) Asset Sales outside the ordinary course of business and dispositions made pursuant to the Disposition Program, (ii) payments relating to the past billing practices of MK Medical in an aggregate amount not exceeding ***********, (b) non-cash charges and losses incurred by the Representative and its Consolidated Subsidiaries on or after the Amendment No. 6 Effective Date as a result of (i) closures of assisted living and skilled nursing facilities of the Representative and its Subsidiaries and (ii) any change in GAAP that requires the Obligations and the assets subject to the Transactions to be included on the balance sheet of the Representative and its Consolidated Subsidiaries and (c) transaction fees and expenses of the Representative and its Subsidiaries in connection with Amendment No. 6 and any related amendments to the Operative Documents and the Mortgage Credit Facilities. "Fixed Charge Coverage Ratio" means, on any date, the ratio of (i) Consolidated EBITDAR for the four consecutive fiscal quarters most recently ended on or prior to such date to (ii) the sum of Consolidated Interest Charges and Consolidated Rental Expense for such fiscal quarters. "Maturity Date" means April 25, 2004, unless such Maturity Date is extended pursuant to Section 2.7 of the Loan Agreement and Section 11.1 of the Participation Agreement. "Morgan Credit Agreement" means the Amended and Restated Credit Agreement dated as of April 25, 2001 amending and restating the Amended and Restated Credit Agreement dated as of April 30, 1998 among the Representative, the Banks listed on the signature pages thereof, Morgan Guaranty Trust Company of New York, as Issuing Bank, and Morgan Guaranty Trust Company of New York, as Agent, as the same has been or may be modified, amended or supplemented. "Mortgages" means the Existing Mortgages and the Amended Mortgages. "Refinanced Debt" is defined in Section 10.2(i)(v) of the Participation Agreement. "Refinancing Debt" is defined in Section 10.2(i)(v) of the Participation Agreement. 4. Distributions. Effective as of the Amendment No. 6 Effective Date, Article VII of the Participation Agreement is hereby amended by adding, at the end thereof, a new Section 7.11 to read in full as follows: "Section 7.11 Prepayment of Obligations and Mortgage Facility Obligations. The Representative shall prepay, or cause its Subsidiaries to prepay -10- CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. (or, in the case of the Obligations, deposit funds with the Administrative Agent that are committed to the repayment of), the Obligations and the Mortgage Facility Obligations, (a) on the Amendment No. 6 Effective Date, in the case of the Obligations, in the amount of $20,000,000; $16,800,000 of which shall be paid in consideration for the sale to the Representative of certain properties subject to an Existing Mortgage in favor of the Administrative Agent (which properties shall continue to be subject to a Lien in favor of the Administrative Agent pursuant to Amended Mortgages) and $3,200,000 of which shall be deposited into a cash collateral account maintained by the Administrative Agent, (b) upon the consummation of any Asset Sale, by an amount equal to: (i) if any Asset Sale includes assets that were subject to a Lien securing the Obligations or the Mortgage Facility Obligations, (A) in the case of the Obligations, the amount set forth on Schedule VIII hereto with respect to such assets and (B) in the case of the Mortgage Facility Obligations, the amount required to be repaid pursuant to the AmSouth Mortgage Facility or the Washington Mutual Mortgage Facilities, as applicable; and (ii) if any Net Cash Proceeds result from any Asset Sale, (A) until the Obligations have been prepaid by $15,000,000 in the aggregate and the Mortgage Facility Obligations have been prepaid by $3,750,000 in the aggregate, in each case pursuant to this clause (A) (or, in either case, repaid in full), the Initial Specified Portion of the Net Cash Proceeds in respect of such Asset Sale; provided that if, prior to the earlier of (x) *********** ******************************************** and (y) ********************************* ******************, the Representative shall have reached a final agreement related to past billing practices of MK Medical, which agreement requires the Representative and its Subsidiaries to make cash payments in an aggregate amount greater than *********** but less than ***********, no prepayment shall be required in respect of the Net Cash Proceeds received on or after the date that such agreement becomes final in an amount equal to the -11- CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. excess of the aggregate amount of such payments over ***********; provided further that the provisions of this clause (A) shall remain in effect thereafter until the Obligations have been prepaid by $15,000,000 in the aggregate and the Mortgage Facility Obligations have been prepaid by $3,750,000 in the aggregate, in each case pursuant to this clause (A), (B) after the Obligations have been prepaid by $15,000,000 in the aggregate and the Mortgage Facility Obligations have been prepaid by $3,750,000 in the aggregate, in each case pursuant to clause (ii)(A) of this Section 7.11 (or, in either case, repaid in full), the Specified Portion of 65% of the Net Cash Proceeds of such Asset Sales; and (iii) if, in the absence of any additional Commitment (as defined in the Morgan Credit Agreement) reductions and/or repayments of Mortgage Facility Obligations and/or the Obligations, the Representative would be required to make a Senior Asset Sale Offer (as defined in the Senior Note Agreement or the New Senior Note Agreement) under the Senior Note Agreement or the New Senior Note Agreement, the applicable Specified Portion of the amount of Net Cash Proceeds that must be applied to repay Senior Debt (as defined in the Senior Note Agreement or the New Senior Note Agreement) in order for the Representative to avoid the making of a Senior Asset Sale Offer under the Senior Note Agreement or the New Senior Note Agreement; and (c) on any Business Day, by the applicable Specified Portion of the amount by which the average of the Consolidated Cash Balances at the close of business on the three consecutive Business Days immediately preceding such day (in each case after giving effect to any Commitment (as defined in the Morgan Credit Agreement) reductions required pursuant to clause (ii) of Section 2.11(b) of the Morgan Credit Agreement and related prepayments pursuant to Section 2.05(d) of the Morgan Credit Agreement and any prepayments required pursuant to clause (b) of this Section 7.11, in each case to be made on any such Business Day) exceeds $125,000,000; provided that (x) if the Mortgage Facility Obligations remain outstanding, the Representative may elect to apply 100% of any prepayment that would -12- otherwise be applied under this Section 7.11 to prepay the Mortgage Facility Obligations, to prepay the Obligations and reduce the Commitments (as defined in the Morgan Credit Agreement) in the same manner as if the Mortgage Facility Obligations had theretofore been repaid in full pursuant to this Section 7.11, (y) if the Mortgage Facility Obligations have been prepaid in full (other than pursuant to this Section 7.11), the Representative may retain any amount that would otherwise have been applied under this Section 7.11 to prepay the Mortgage Facility Obligations to the extent that the aggregate of such retained amounts does not exceed the amount of Mortgage Facility Obligations so prepaid on or after the Amendment No. 6 Effective Date less $5,000,000 and (z) any proceeds resulting from the sale of assets that were not subject to a Lien securing the Obligations and received by the Representative or such Subsidiary prior to July 1, 2003 pursuant to clause (b)(ii)(A) or (B) of this Section 7.11 and which are to be applied to the repayment of the Obligations, may, in the Representative's sole discretion, either (I) be promptly (but in any event, within one Business Day following receipt by the Representative of such proceeds) deposited into a cash collateral account maintained by the Administrative Agent and applied upon the earlier of (A) July 1, 2003 or (B) upon the occurrence of an Event of Default to the repayment of the Obligations as otherwise set forth in this Section 7.11 or (II) be paid in accordance with clause (b)(ii)(A) or (B) of this Section 7.11, as applicable." 5. Affirmative Covenants of the Representative. Effective as of the Amendment No. 6 Effective Date, Section 10.1 of the Participation Agreement is hereby amended as follows: (a) Section 10.1(d)(iii) is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "(iii) together with each delivery of financial statements of the Representative and its Subsidiaries pursuant to Sections 10.1(d)(i) and 10.1(d)(ii) above, (A) a certificate of a Financial Officer (x) stating that the signer thereof has reviewed the terms of this Participation Agreement and the Master Lease and has made, or caused to be made under his supervision, a review in reasonable detail of the transactions and condition of the Representative and its Subsidiaries (including the other Beverly Entities) during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signer does not have knowledge of the existence as at the date of such certificate, of any condition or event which constitutes a Lease Event of Default or Lease -13- Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Representative has taken, is taking and proposes to take with respect thereto, (y) setting forth in reasonable detail calculations of the Pricing Ratio as of the date of the Balance Sheet contained therein and for the period of four fiscal quarters ending on such date and (z) in the case of each such certificate delivered after the Amended Mortgage Deadline, setting forth in reasonable detail the Coverage Limitation as of the date of the balance sheet contained therein; and (B) a Compliance Certificate demonstrating in reasonable detail compliance during and at the end of such accounting periods with the restrictions contained in Section 10.2(a), Section 10.2(b), Section 10.2(c), Section 10.2(e)(v), Section 10.2(f), Section 10.2(g), Section 10.2(i), Section 10.2(l) and Section 10.2(m)." (b) Section 10.1(1) is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "(1) Mortgages. On or prior to the Amended Mortgage Deadline or such other date or dates (each, an "Extended Amended Mortgage Deadline") as the Representative, the Administrative Agent and the Agent Lessor shall agree: (i) the Designated Mortgagors shall have each delivered to the Administrative Agent and the Agent Lessor duly executed counterparts of an Amended Mortgage in respect of each Amended Mortgage Property owned by it, and simultaneously therewith or immediately thereafter (A) the Designated Mortgagors shall be released solely from their obligation to make scheduled installments of Basic Rent solely with respect to each Amended Mortgage Property, but shall not be released from the obligations to pay any other amounts or from any other obligations under any Operative Document, it being agreed that the liability of the Designated Mortgagors with respect to all other Obligations under the Operative Documents, including without limitation, the Lease Balance, shall remain in full force and effect and (B) the Agent Lessor shall transfer to the Designated Mortgagors or their designees the Agent Lessor's record title (but specifically excluding rights under the Amended Mortgages) in and to the Amended Mortgage Properties without representations or warranties, except that such Amended Mortgage Property is free from Lessor's Liens; (ii) the Representative shall deliver, or cause to be delivered, to the Administrative Agent and the Agent Lessor legal opinions of local counsel reasonably satisfactory to the Administrative Agent and the Agent Lessor with respect of each of the Amended Mortgages, which legal -14- opinion shall be in form and substance reasonably satisfactory to the Administrative Agent and the Agent Lessor; (iii) the Representative shall deliver, or cause to be delivered, to the Administrative Agent and the Agent Lessor evidence satisfactory to the Administrative Agent and the Agent Lessor that such action (including, without limitation, the filing of appropriately completed Uniform Commercial Code financing statements and the recording of Mortgages) as may be necessary or as the Administrative Agent and the Agent Lessor shall have reasonably requested to perfect the Liens created pursuant to the Amended Mortgages shall have been taken, or that arrangements therefor satisfactory to the Administrative Agent and the Agent Lessor shall have been made; (iv) the Representative shall deliver, or cause to be delivered, to the Administrative Agent and the Agent Lessor policies of title insurance (or commitments therefor with all conditions marked satisfied), in form and substance satisfactory to the Administrative Agent and the Agent Lessor and issued by an insurance company or companies as are acceptable to the Administrative Agent and the Agent Lessor (the "TIC"), insuring the perfection, enforceability and priority of the Liens on the Amended Mortgage Property created under the Amended Mortgages in amounts as are satisfactory to the Administrative Agent and the Agent Lessor, subject only to such exceptions as are reasonably satisfactory to the Administrative Agent and the Agent Lessor, containing such endorsements (other than endorsements that would require a new survey) and affirmative assurances as have been previously agreed to by, or are otherwise satisfactory to, the Administrative Agent and the Agent Lessor, and reinsured in amounts and under reinsurance agreements in form and substance satisfactory to the Administrative Agent and the Agent Lessor, and the Representative shall have paid or made arrangements satisfactory to the Administrative Agent and the Agent Lessor to pay to the TIC all expenses and premiums of the TIC in connection with the issuance of such policies and in addition shall have paid or made arrangements satisfactory to the Administrative Agent and the Agent Lessor to pay to the TIC an amount equal to the recording and stamp taxes payable in connection with recording the Amended Mortgages in the appropriate county land offices; (v) the Representative shall deliver, or cause to be delivered, to the Administrative Agent and the Agent Lessor copies of file search reports from the Uniform Commercial Code filing office in each jurisdiction (i) in which is located any Amended Mortgage Property subject to an Amended Mortgage, (ii) in which is located the chief executive office of any -15- Subsidiary of the Representative that owns or holds any right, title or interest in any Amended Mortgage Property subject to an Amended Mortgage or (iii) in which any such Subsidiary is located (within the meaning of Section 9-307 of the UCC), setting forth the results of Uniform Commercial Code file searches conducted in the name of the Representative or such Subsidiary, as the case may be; (vi) the Representative shall deliver, or cause to be delivered, to the Administrative Agent and the Agent Lessor all documents the Administrative Agent and the Agent Lessor may reasonably request relating to the existence of each Subsidiary of the Representative party to any Amended Mortgage, the corporate authority for and the validity of the Amended Mortgages, and any other matters relevant thereto, all in form and substance satisfactory to the Administrative Agent and the Agent Lessor; (vii) the Representative shall have paid all other costs, fees and expenses (including, without limitation, mortgage recording, intangibles or documentary stamp on similar taxes, reasonable legal fees and expenses) payable to the Administrative Agent and the Agent Lessor with respect to the Amended Mortgages, in each case invoiced prior to the Amended Mortgage Deadline; and (viii) the Representative shall deliver a Survey with respect to each Amended Mortgage." (c) Section 10.1 is hereby amended by adding, at the end thereof, a new clause (m) to read in full as follows: "(m) Additional Collateral. In the event that the Representative or any of its Subsidiaries grants to the agent or the lenders under the Morgan Credit Agreement in respect of the obligations under the Financing Documents, at any time after the Amendment No. 6 Effective Date, a Lien on any of its property or assets (other than any Lien on (i) the New Mortgage Property (as defined in the Morgan Credit Agreement) or (ii) any Substituted Assets on which a Lien is permitted under Section 10.2(g)(xvi)) the Representative shall, or shall cause its Subsidiary to, as the case may be, simultaneously grant to the Administrative Agent and/or the Agent Lessor for the benefit of all the Lenders, a security interest in such property or assets on an equal and ratable basis with the grant of the security interest to the agent or the lenders under the Morgan Credit Agreement. If all amounts now or hereafter payable by the Representative and its Subsidiaries under the AmSouth Mortgage Facility or the Washington Mutual Mortgage Facilities shall have been repaid in full, then, to the extent permitted -16- under the Senior Note Agreement and the New Senior Note Agreement, the Representative shall, or shall cause its applicable Subsidiary to, grant to the Administrative Agent and/or the Agent Lessor for the benefit of all the Lenders Liens on the property or assets theretofore securing such Mortgage Facility Obligations to secure the Obligations (which Liens may equally and ratably secure the obligations of the Representative and the Subsidiary Guarantors (as defined under the Morgan Credit Agreement) under the Financing Documents)." 6. Negative Covenants of the Representative. Effective as of the Amendment No. 6 Effective Date, Section 10.2 of the Participation Agreement is hereby amended as follows: (a) Section 10.2(b) of the Participation Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "(b) Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio at any date shall not be less than 1.10 to 1.00." (b) Section 10.2(c) of the Participation Agreement is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "(c) Adjusted Consolidated Debt Ratio. The ratio at any date during any period set forth below of (a) Adjusted Consolidated Debt to (b) Consolidated EBITDAR for the period of four consecutive fiscal quarters most recently ended on or prior to such date shall not be more than the ratio set forth below opposite such period:

(c) (i) Section 10.2(e)(ix) is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "(ix)(a) promissory notes (and, in the case of facilities or stock sold other than as part of the Disposition Program or the sale of certain assets specified in the Investments Side Letter, or stock of Subsidiaries holding solely such specified assets, other Investments) received as consideration for facilities or stock of Subsidiaries sold (other than in -17- connection with, or as part of, the Florida Disposition), provided that (x) the aggregate net book value of all outstanding Investments permitted by this subclause (ix)(a) shall not exceed at any time (1) in the case of promissory notes received in connection with the sale of facilities and stock of Subsidiaries pursuant to the Disposition Program, 10% of the gross proceeds received by the Representative and its Subsidiaries at or prior to such time in connection with all sales of facilities and stock of Subsidiaries pursuant to the Disposition Program, (2) in the case of promissory notes received in connection with the sale of certain assets specified in the Investments Side Letter, or the stock of Subsidiaries holding solely such specified assets, the percentages set forth in the Investments Side Letter of the gross proceeds received by the Representative and its Subsidiaries in connection with such sale and (3) in the case of all other promissory notes and Investments so received, $25,000,000 and (y) in the case of promissory notes referred to in subclauses (1) and (2) of clause (x) above, (A) if the obligations of the Representative and the Guarantors under the Financing Documents, the Mortgage Credit Facilities or the Operative Documents were secured by a Lien on the facilities sold, or the facilities owned by the Subsidiary whose stock was sold, and such obligations remain outstanding, then the promissory notes received in connection with the sale of such facilities or stock shall be pledged to the Person or Persons that held such Lien and (B) if none of the obligations of the Representative and the Guarantors under the Financing Documents, the Mortgage Credit Facilities or the Operative Documents was secured by a Lien on the facilities sold, or the facilities owned by the Subsidiary whose stock was sold, then, to the extent permitted under the Senior Note Agreement and the New Senior Note Agreement, the promissory notes received in connection with the sale of such facilities or stock shall be pledged to secure, equally and ratably, the obligations of the Representative and the Guarantors under the Financing Documents, the Mortgage Credit Facilities and the Operative Documents and (b) promissory notes received as partial consideration for the Florida Disposition, provided that the aggregate principal amount of all such promissory notes permitted by this subclause (ix)(b) shall not, at any time, exceed $20,000,000." (ii) Section 10.2(e) is hereby amended by adding, at the end thereof, the following: "In addition, neither the Representative nor any of its Subsidiaries will, during any period on or after the Amendment No. 6 Effective Date during which the Adjusted Leverage Ratio exceeds 5.00 to 1.00 make or acquire any Investments of the types referred to in clauses (ii), (iv), (v), or (xv) of -18- this Section 10.2(e), acquire any health care facilities (including, without limitation, any acquisition of such a facility pursuant to a Lease Conversion) or make any Lease Conversion other than (i) Lease Conversions with respect to the Transactions and (ii) Investments, Lease Conversions and acquisitions of facilities in an aggregate amount not exceeding $15,000,000." (d) Section 10.2(f)(v) is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "(v) the Representative may make any such payment or distribution if, after giving effect thereto, the aggregate amount of all such payments or distributions made after the Amendment No. 6 Effective Date (including, without limitation, any such payments or distributions permitted under subclause (ii)(A) or clause (iv) above) does not exceed (A) on any date on which no Event of Default shall have occurred and be continuing or shall result from such payment and the Adjusted Leverage Ratio as at the last day of the most recently ended fiscal quarter is (I) less than 5.00 to 1.00 but not less than 4.75 to 1.00, $25,000,000, (II) less than 4.75 to 1.00 but not less than 4.50 to 1.00, $30,000,000, and (III) less than 4.50 to 1.00, $40,000,000 and (B) on any other date, $10,000,000; provided that no payment or distribution otherwise permitted under this clause (v) shall be made by the Representative on any day on or after the Amendment No. 6 Effective Date on which the Adjusted Leverage Ratio is greater than 5.00 to 1.00." (e) Section 10.2(g)(a)(iv) is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "(iv) any Lien on any asset securing Indebtedness or lease obligations incurred or assumed for the purpose of financing all or any part of the cost of acquiring or constructing such asset or reconstructing substantially all of such asset, provided that (x) such Lien attached or attaches to such asset concurrently with or within one year (or in the case of any such Lien on the Federal Way Facility that attached prior to the Amendment No. 6 Effective Date, 385 days) after such acquisition, construction or reconstruction and (y) on any day on or after the Amendment No. 6 Effective Date on which the Adjusted Leverage Ratio is greater than 5.00 to 1.00, Liens may be created or assumed under this clause (iv) only to secure Indebtedness referred to in clause (iv) of the definition of Indebtedness. -19- CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. (f) Section 10.2(g) is hereby amended by deleting the word "and" at the end of clause (xiv) thereof, adding the word "and" at the end of clause (xv) thereof and by adding, at the end thereof, the following new clauses (xvi) and (xvii): "(xvi) With respect to each property covered by a Mortgage (as defined in the Morgan Credit Agreement), the Permitted Property Liens (as defined in the Morgan Credit Agreement); provided that the assets subject to any such Mortgage shall be limited to (i) the assets subject to any Existing Mortgage (as defined in the Morgan Credit Agreement as in existence on the Amendment No. 4 Effective Date), (ii) any New Mortgage Property (as defined in the Morgan Credit Agreement as in existence on the Amendment No. 4 Effective Date) and (iii) any assets ("Substituted Assets") substituted for assets ("Original Assets") referred to in clause (i) or (ii) above so long as the value of such Substitute Assets is not greater than (other than by a de minimus amount) the value of the Original Assets for which they are substituted; and (xvii) Liens in respect of Additional Mortgages." (g) Section 10.2(h) is hereby amended by deleting said section in its entirety and inserting the following in lieu thereof: "(h) Consolidations, Mergers and Sales of Assets. Neither the Representative nor any of its Subsidiaries will: (i) consolidate or merge with or into any other Person, unless the Representative, or, except in the case of a merger or consolidation to which the Representative is a party, a Wholly-Owned Subsidiary of the Representative is the surviving corporation or (ii) sell, lease or otherwise transfer (A) if the Adjusted Leverage Ratio as of the day of such sale, lease or other transfer is less than or equal to 5.00 to 1.00, all or any substantial part of the assets of the Representative and its Subsidiaries, taken as a whole, to any other Person and (B) if the Adjusted Leverage Ratio as of the day of such sale, lease or other transfer is greater than 5.00 to 1.00, any assets or property; provided (i) that this Section 10.2(h) shall not apply to (A) mergers, dissolutions, reorganizations or liquidations of Subsidiaries of the Representative that have disposed of all or substantially all of their assets, (B) sales, leases or other transfers by the Representative or any of its Subsidiaries to the Representative or any Guarantor and (C) sales, transfers or other dispositions of MK Medical, **********, ********************** and ********************************** -20- CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. *************************** or made pursuant to the Disposition Program and (ii) Section 10.2(h)(ii)(B) does not apply to sales, leases or other transfers of (A) assets or property made in respect of Sale and Leaseback Transactions permitted under Section 10.2(m), (B) assets or property (other than assisted living and skilled nursing facilities, separate business units, businesses or divisions or stock of Subsidiaries) not covered by clause (A) above and (1) disposed of in the ordinary course of business or (2) to the extent not disposed of in the ordinary course of business, so long as the aggregate gross proceeds of sales, transfers and other dispositions made pursuant to this clause (2) does not exceed $2,000,000 and (C) any transfer of assets or property pursuant to condemnations or in lieu of condemnations; and provided further that the Representative and its Subsidiaries may assign or grant security interests in their Medicare, Medicaid or other patient accounts receivable to a Special Purpose Receivables Financing Subsidiary to secure Permitted Receivables Financing Securities (provided that the net amount at any time of all uncollected accounts receivable owing to the Representative or any of its Subsidiaries that are so assigned or in which a security interest is so granted shall not exceed 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding)." (h) Section 10.2(i) is hereby amended by adding, at the end thereof, a new clause (c) to read in full as follows: "(c) If at any time on or after the Amendment No. 6 Effective Date the Adjusted Leverage Ratio exceeds 5.00 to 1.00, the Representative will not, and will not permit any of its Subsidiaries to, incur or assume any Indebtedness, except: (i) Indebtedness incurred in connection with Lease Cancellation Payments; (ii) Indebtedness of the type referred to in clause (iv) of the definition of Indebtedness secured by a Lien permitted pursuant to clause (iv) of Section 10.2(g)(a); (iii) Indebtedness of any corporation that became or becomes a Consolidated Subsidiary of the Representative that existed or exists at the time such corporation became or becomes such a Consolidated Subsidiary and (other than in a Workout Transaction) not created in contemplation thereof; -21- (iv) Refinancing Debt incurred to refinance Indebtedness permitted under clauses (i) through (iii) above, provided that (A) the principal amount of such Refinancing Debt shall not exceed the principal amount of such Refinanced Debt and (B) such Refinancing Debt shall have a weighted average life of not less than the remaining weighted average life of such Refinanced Debt or such Refinancing Debt shall not have any required payments of principal prior to the first anniversary of the Termination Date; (v) to the extent it refinances Indebtedness permitted to have been incurred, and in fact incurred, prior to the Amendment No. 6 Effective Date or when the Adjusted Leverage Ratio did not exceed 5.00 to 1.00, Refinancing Debt permitted under clause (v) of Section 10.2(i)(a) (treating such Section 10.2(i)(a) solely for purposes of this clause (v) as if it applied to the Representative as well as its Subsidiaries); (vi) Permitted Receivables Financing Securities, provided that the aggregate principal and redemption amount of all Permitted Receivables Financing Securities outstanding at any time shall not exceed $100,000,000; (vii) Indebtedness incurred under the Financing Documents; (viii) Guarantees by the Representative or any of its Subsidiaries of any obligation of the Representative or any of its Subsidiaries that the Representative or such guaranteeing Subsidiary would have been permitted to incur hereunder as a primary obligation; (ix) Indebtedness consisting of advances from the Representative or any of its Subsidiaries in connection with the normal operation of the business of the Representative and its Subsidiaries; (x) Indebtedness incurred in connection with and as part of a Workout Transaction; (xi) Indebtedness incurred or assumed for the purpose of financing the cost of acquiring, constructing or improving an asset of the Representative or any of its Subsidiaries; (xii) Indebtedness not otherwise permitted under clauses (i) through (xi) of this Section 10.2(i)(c); provided that the aggregate principal amount of Indebtedness permitted under clauses (i), (ii), (iv) (to the extent that the Indebtedness incurred -22- under such clause (iv) refinances Indebtedness incurred under clause (i) or (ii) of this Section 10.2(i)(c)), (xi) and (xii) of this Section 10.2(i)(c) shall not exceed $10,000,000 at any time outstanding." (i) Section 10.2(j) shall be amended by (a) deleting "and" at the end of clause (i) thereof, (b) inserting the expression "; and" at the end of clause (ii) thereof and (iii) adding, at the end thereof, the following as a new clause (iii): "(iii) if such Lease Conversion is made on any day on or after the Amendment No. 6 Effective Date on which the Adjusted Leverage Ratio is greater than 5.00 to 1.00, such Lease Conversion is permitted under the last sentence of Section 10.2(e)." (j) Section 10.2(l) shall be amended by deleting said section in its entirety and inserting the following in lieu thereof: "(l) Consolidated Gross Capital Expenditures. Consolidated Gross Capital Expenditures will not, for any fiscal year ending on or after December 31, 2002 exceed (A) if the Adjusted Leverage Ratio on the first day of such fiscal year is greater than 5.00 to 1.00, $55,000,000 and (B) if the Adjusted Leverage Ratio on the first day of such fiscal year is less than or equal to 5.00 to 1.00, the amount indicated below opposite such fiscal year:

To the extent that Consolidated Gross Capital Expenditures for any fiscal year referred to in clause (B) of this Section 10.2(l) are less than the applicable amount specified pursuant to this Section 10.2(l), the difference may be carried forward to the next fiscal year unless the Adjusted Leverage Ratio is greater than 5.00 to 1.00 on the first day of such next fiscal year (and, for this purpose, Consolidated Gross Capital Expenditures in any subsequent fiscal year shall be applied, first, to any such carry-forward amount and, second, to the specified amount for such year)." (k) Section 10.2(m) shall be amended by deleting said section in its entirety and inserting the following in lieu thereof: "(m) Sale and Leaseback Transactions. -23- (i) The Representative will not, and will not permit any of its Subsidiaries to, enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, which property has been owned and operated by the Representative and its Subsidiaries for more than 180 days, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred (each, a "Sale and Leaseback Transaction"), except for Sale and Leaseback Transactions the aggregate amount of Attributable Debt in respect of which does not exceed $20,000,000. (ii) On any day on or after the Amendment No. 6 Effective Date on which the Adjusted Leverage Ratio is greater than 5.00 to 1.00, the Representative will not and will not permit any of its Subsidiaries to enter into any Sale and Leaseback Transaction other than Sale and Leaseback Transactions with respect to specified equipment previously identified to the Administrative Agent for which the Attributable Debt, together with all other Attributable Debt arising on or after the Amendment No. 6 Effective Date from Sale and Leaseback Transactions in respect of all other specified equipment previously identified to the Administrative Agent and entered into on a day on which the Adjusted Leverage Ratio was greater than 5.00 to 1.00, does not exceed $2,000,000." (l) Section 10.2 of the Participation Agreement is hereby amended by adding, at the end thereof, a new clause (n) to read in full as follows: "(n) Prepayment of Notes. The Representative will not, and will not permit any of its Subsidiaries to, prepay the New Senior Notes or the Senior Notes; provided that the Representative may prepay or redeem New Senior Notes or Senior Notes on any day with the amount, if any, by which the average of the Consolidated Cash Balances at the close of business on the three consecutive Business Days immediately preceding such day (exclusive of any amount escrowed pursuant to clause (iii)(B)(II) below), exceeds $125,000,000 if on such day (i) there shall be no Loans (as defined in the Morgan Credit Agreement) outstanding; (ii) the Obligations and the Mortgage Facility Obligations have been repaid in full; and (iii) either (A) (I) the Adjusted Leverage Ratio does not and did not exceed 5.00 to 1.00 on (x) such day, both prior to and after giving effect to such -24- prepayment, and (y) the last day of each of the two fiscal quarters most recently ended prior to such day and (II) the aggregate Commitments (as defined in the Morgan Credit Agreement) of all Existing Banks do not exceed $85,000,000 or (B) all of (I) the aggregate Commitments (as defined in the Morgan Credit Agreement) of all Existing Banks do not exceed $65,000,000, (II) the Representative shall have delivered to the Administrative Agent cash in an amount equal to the aggregate Letter of Credit Exposures (as defined in the Morgan Credit Agreement) of all Existing Banks then outstanding, to be held in escrow by the Administrative Agent to the extent that such Letter of Credit Exposures (as defined in the Morgan Credit Agreement) remain outstanding, (III) the Representative shall have entered into a binding agreement not thereafter to request or borrow any Loans (as defined in the Morgan Credit Agreement) under the Morgan Credit Agreement and (IV) the product of 5 multiplied by Annualized Mortgage EBITDA determined as of the date of such prepayment for the most recent fiscal quarter for which financial statements have been, or are required to have been, delivered pursuant to Section 10.1(d)(i) or (ii), shall equal or exceed the product of 2 multiplied by the aggregate Commitments (as defined in the Morgan Credit Agreement) of all Existing Banks then outstanding. 7. Effective as of the Amendment No. 6 Effective Date, Schedule IV of the Participation Agreement are hereby amended by deleting said schedule in its entirety and replacing said schedule with Schedule IV attached hereto and made a part hereof. 8. Effective as of the Amendment No. 6 Effective Date, Schedule VII and Schedule VIII hereto are hereby added as Schedule VII and Schedule VIII, respectively, to the Participation Agreement. 9. Representations and Warranties. To induce the Administrative Agent, the Agent Lessor and the Participants to execute and deliver this Amendment, each of the Beverly Entities that is a party hereto represents and warrants (which representations and warranties shall survive the execution and delivery of this Amendment) to each of the Administrative Agent, the Agent Lessor and the Participants that: (a) this Amendment has been duly authorized, executed and delivered by it and this Amendment constitutes the legal, valid and binding obligation, contract and agreement of such Beverly Entity enforceable against it in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Original Participation Agreement, as amended by the Prior Amendments and this Amendment, constitutes the legal, valid and binding obligation, contract and agreement of such Beverly Entity enforceable against it in accordance with -25- their respective terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (c) the execution, delivery and performance by such Beverly Entity of this Amendment (i) has been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) does not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (l) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, or (3) any provision of any material indenture, agreement or other instrument to which it is a party or by which its properties or assets are or may be bound, including, without limitation, the Morgan Credit Agreement (as the same has been amended or modified), or (B) constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (iii)(A)(3) of this subsection (c); (d) as of the date hereof and after giving effect to this Amendment, no Default or Event of Default has occurred which is continuing; and (e) all the representations and warranties contained in Section 8.2 of the Participation Agreement (after giving effect to this Amendment) are true and correct in all material respects with the same force and effect as if made by such Beverly Entity on and as of the date hereof. 10. Conditions to Effectiveness of this Amendment. This Amendment shall not become effective until, and shall become effective when, each and every one of the following conditions shall have been satisfied to the satisfaction of the Agent Lessor, the Administrative Agent and each Participant (the conditions precedent are for the benefit of the Agent Lessor, the Administrative Agent and each Participant only): (a) The Agent Lessor, the Administrative Agent and the Participants shall have received executed counterparts of this Amendment, duly executed by the Beverly Entities party hereto; (b) The Agent Lessor, the Administrative Agent and the Participants shall have received evidence satisfactory to them that the Morgan Credit Agreement has been amended as of February 28, 2003 in form and substance reasonably satisfactory to the Administrative Agent, the Agent Lessor and the Participants; (c) The representations and warranties of the Beverly Entities set forth in Section 9 hereof are true and correct on and as of the date hereof; -26- (d) (A) Each of the Lenders that has executed and delivered to the Administrative Agent a counterpart of this Amendment on or prior to the date hereof shall have received, ratably in proportion to its Commitment Percentage, an amendment fee equal to 0.375% of the Commitment of such Lender as in effect immediately after giving effect to the $16,800,000 payment contemplated by Section 7.11(a) of the Participation Agreement, as amended by this Amendment (but, for the avoidance of doubt, no other payment contemplated by this Amendment) and (B) each of the Lenders that executed and delivered to the Administrative Agent a counterpart of the Fifth Amendment on or prior to December 20, 2002, shall have received, ratably in proportion to its Commitment Percentage, an amendment fee equal to 0.125% of the Commitment of such Lender as of December 20, 2002; (e) The Administrative Agent shall have received from the Representative a counterpart of the Investments Side Letter signed by the Representative or facsimile or other written confirmation (in form satisfactory to the Administrative Agent) that the Representative has signed a counterpart thereof; (f) Receipt by the Administrative Agent of evidence satisfactory to it that the Representative shall have prepaid (or deposited funds that are committed to the prepayment of) the Obligations in an aggregate principal amount of $20,000,000; and (g) Receipt by the Administrative Agent of payment of all out-of-pocket expenses due and payable to it pursuant to Section 9.1(b) of the Participation Agreement (including, to the extent invoiced, all fees and expenses of Mayer, Brown, Rowe & Maw, special counsel to the Lessors, pursuant to Section 11 hereof). Upon receipt of all of the foregoing, this Amendment shall become effective. 11. Payment of Fees and Expenses. The Representative agrees to pay upon or prior to the effectiveness of this Amendment, the reasonable fees and expenses of Mayer, Brown, Rowe & Maw, counsel to the Lessors, in connection with the negotiation, preparation, approval, execution and delivery of this Amendment and all reasonable fees and expenses attendant to any filing, registration, recording or perfection of any Lien contemplated hereby. 12. Application of Certain Payments. The Administrative Agent shall apply the proceeds received pursuant to (a) Section 7.11(a) of the Participation Agreement in the amount of $3,200,000 and (b) Section 7.11(b)(ii) of the Participation Agreement to the prepayment of the Participant Balance. 13. Counterparts. This Amendment may be executed in counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. -27- 14. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. 15. Successors and Assigns. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 16. General Release. In consideration of the amendments provided for herein, the Representative and the Guarantors, on behalf of themselves and their respective Subsidiaries and their respective Subsidiaries' successors and assigns (collectively, "Releasors"), hereby forever waive, release and discharge to the fullest extend permitted by law any and all claims (including, without limitation, crossclaims, counterclaims, rights of set-off and recoupment), causes of action, demands, suits, costs, expenses and damages (collectively, the "Claims"), that any Releasor now has or hereafter may have, or whatsoever nature and kind, whether known or unknown, whether now existing or hereafter arising, whether arising at law or in equity, against any or all of the Administrative Agent and any Lender and their respective affiliates, shareholders and "controlling persons" (within the meaning of the federal securities laws), and their respective successors and assigns and each and all of the officers, directors, employees, agents, attorneys and other representatives of each of the foregoing (collectively, the "Releasees"), based in whole or in part on facts, whether or not now known, existing on or before the execution of this Amendment, except for Claims solely arising out of the gross negligence or willful misconduct of any Releasees (the "Excluded Claims"). In entering into this Amendment, the Representative has consulted with and been represented by counsel and expressly disclaims any reliance on any representations, acts or omissions by any of the Releasees and hereby agrees and acknowledges that the validity and effectiveness of the release set forth above do not depend in any way on any such representations, acts and/or omissions or the accuracy, completeness or validity thereof. The provisions of this Section shall survive the termination of the Participation Agreement and the other Operative Documents and payment in full of all amounts owing thereunder. -28- IN WITNESS WHEREOF, the Parties have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first above written. BEVERLY ENTERPRISES, INC., as Representative, Construction Agent, Parent Guarantor and a Lessee By --------------------------------------- Name: Title: BANK OF MONTREAL, as Arranger, Administrative Agent and as a Lender By --------------------------------------- Name: Title: BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC., as Agent Lessor and as a Lessor By --------------------------------------- Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By --------------------------------------- Name: Title: S-1 TORONTO-DOMINION (TEXAS), INC., as a Lender By --------------------------------------- Name: Title: BANK OF AMERICA, NATIONAL ASSOCIATION, as a Lender By --------------------------------------- Name: Title: VANTAGE HEALTHCARE CORPORATION, as Lessee and Structural Guarantor By --------------------------------------- Name: Title: PETERSEN HEALTH CARE, INC., as Lessee and Structural Guarantor By --------------------------------------- Name: Title: S-2 BEVERLY SAVANA CAY MANOR, INC., as Lessee and Structural Guarantor By --------------------------------------- Name: Title: BEVERLY ENTERPRISES - GEORGIA, INC., as Lessee and Structural Guarantor By --------------------------------------- Name: Title: BEVERLY ENTERPRISES - CALIFORNIA, INC., as Lessee and Structural Guarantor By --------------------------------------- Name: Title: BEVERLY ENTERPRISES - ARKANSAS, INC., as Lessee and Structural Guarantor By --------------------------------------- Name: Title: S-3 BEVERLY ENTERPRISES - FLORIDA, INC., as Lessee and Structural Guarantor By --------------------------------------- Name: Title: BEVERLY HEALTH AND REHABILITATION SERVICES, INC., as Lessee and Structural Guarantor By --------------------------------------- Name: Title: BEVERLY ENTERPRISES - WASHINGTON, INC., as Lessee and Structural Guarantor By --------------------------------------- Name: Title: S-4 SCHEDULE I EXISTING MORTGAGES 1. That certain Lease Supplement No. 2 (And Memorandum of Lease Supplement, Memorandum of Master Lease and Memorandum of Option to Purchase) and Deed to Secure Debt and Security Agreement, dated as of May 30, 1997, between Beverly Enterprises-Georgia, Inc., as the Lessee and as grantor and BMO Leasing (U.S.), Inc., as the Agent Lessor and as grantee for the benefit of the Participants and Beverly Enterprises, Inc., as the Representative, such instrument having been recorded with the Cobb County Superior Court Clerk on June 2, 1997, in Deed Book 10396, Page 1 and also recorded on June 2, 1997 in Deed Book 10396, Page 161. 2. That certain Master Lease and Open-End Mortgage and Lease Supplement No. 12, dated as of March 21, 1997 and April 30, 1998, by and between BMO Leasing (U.S.), Inc., as the Agent Lessor for the Lessors, Beverly Enterprises-Arkansas, Inc., as the Lessee, and Beverly Enterprises, Inc., as the Representative, such instrument having been recorded on May 1, 1998 as Instrument #983572 of the Public Records of Union County, Arkansas. 3. That certain Master Lease and Open-End Mortgage and Lease Supplement No. 16, dated as of March 21, 1997 and May 29, 1998, by and between BMO Leasing (U.S.), Inc., as Agent Lessor for the Lessors, Beverly Enterprises-Arkansas, Inc., as the Lessee, and Beverly Enterprises, Inc., as the Representative, such instrument having been recorded on June 1, 1998 as Document #98-40781 of the Public Records of Pulaski County, Arkansas. SCHEDULE IV TO PARTICIPATION AGREEMENT PRICING SCHEDULE For purposes of this Pricing Schedule, the following terms have the following meanings: "LESSOR MARGIN" means, with respect to the Lessor Amounts on any day, the percentage set forth below opposite the Pricing Category in effect for such date for the applicable type of Lessor Amount (or, in the case of any day on or after the Amendment No. 6 Effective Date and prior to the date upon which financial statements for the second full fiscal quarter occurring after the Amendment No. 6 Effective Date shall have been delivered pursuant to Section 10.1(d)(i), the greater of (i) the applicable rate so determined for such day and (ii) (y) in the case of the LIBO Margin, 4.500% and (z) in the case of the Base Rate Margin, 3.500%):

"LOAN MARGIN" means, with respect to the Loans on any day, the percentage set forth below opposite the Pricing Category in effect for such day for the applicable type of Loan (or, in the case of any day on or after the Amendment No. 6 Effective Date and prior to the date upon which financial statements for the second full fiscal quarter occurring after the Amendment No. 6 Effective Date shall have been delivered pursuant to Section 10.1(d)(i), the greater of (i) the applicable rate so determined for such day and (ii) (y) in the case of the LIBO Margin, 4.000% and (z) in the case of the Base Rate Margin, 3.000%):

"PRICING RATIO" means, on any day, the ratio of Adjusted Consolidated Indebtedness on such day to Consolidated EBITDAR for the four consecutive fiscal quarters most recently ended on or prior to such day. "CATEGORY I PRICING" applies on any day if, as of the last day of the fiscal quarter of the Representative most recently ended on or prior to such day and as to which the Representative shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 10.1(d)(iii), the Pricing Ratio is less than 5.0 to 1.0. "CATEGORY II PRICING" applies on any day if, as of the last day of the fiscal quarter of the Representative most recently ended on or prior to such day and as to which the Representative shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 10.1(d)(iii), (i) the Pricing Ratio is less than 5.5 to 1.0 and (ii) Category I Pricing does not apply. "CATEGORY III PRICING" applies on any day if, as of the last day of the fiscal quarter of the Representative most recently ended on or prior to such day and as to which the Representative shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 10.1(d)(iii), (i) the Pricing Ratio is less than 6.0 to 1.0 and (ii) Category II Pricing does not apply. "CATEGORY IV PRICING" applies on any day if, as of the last day of the fiscal quarter of the Representative most recently ended on or prior to such day and as to which the Representative shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 10.1(d)(iii), (i) the Pricing Ratio is less than 6.5 to 1.0 and (ii) Category III Pricing does not apply. "CATEGORY V PRICING" applies on any day if, on such day, no other Pricing Category applies. "PRICING CATEGORY" means any one of the five pricing levels dominated Category I Pricing, Category II Pricing, Category III Pricing, Category IV Pricing or Category V Pricing. -2- SCHEDULE VII TO PARTICIPATION AGREEMENT AMENDED MORTGAGE PROPERTY

SCHEDULE VIII TO PARTICIPATION AGREEMENT

EX-10.62 12 d03650exv10w62.txt EX-10.62 AMENDMENT NO.5 TO SERVICES AGREEMENT EXHIBIT 10.62 FIFTH AMENDMENT TO MASTER SERVICES AGREEMENT This Fifth Amendment to Master Services Agreement ("Fifth Amendment") is effective as of the first day of January, 2003 ("Fifth Amendment Effective Date"). This Fifth Amendment amends and supplements that certain Master Services Agreement effective as of the 18th day of September 1997 ("Agreement") by and between BEVERLY ENTERPRISES, INC. ("Customer") and ALLTEL INFORMATION SERVICES, INC. ("ALLTEL"). WITNESSETH: WHEREAS, Client and ALLTEL desire to extend the Term of the Agreement; and WHEREAS, Client and ALLTEL desire to make certain other changes to the Agreement, NOW, THEREFORE, in consideration of the mutual promises and covenants herein, the parties agree as follows: 1. Section 1.1(e) shall be deleted in its entirety and replaced with the following: "Expiration Date" shall mean the earliest of (i) the later to occur of December 31, 2007 or the date to which this Agreement is extended in accordance with Section 4, or (ii) the date this Agreement is terminated in accordance with Section 20. 2. Section 20.7 of the Agreement (Termination for Convenience) is deleted in its entirety and replaced with the following: "20.7 Termination for Convenience. Client may terminate this Agreement for convenience and without cause, such termination becoming effective as of any date after the 48th month after the Fifth Amendment Effective Date provided Client is not in default of any of its obligations under this Agreement by doing each of the following: (i) giving ALLTEL at least six (6) months prior written notice designating the termination date (the "Early Termination Date") and (ii) paying ALLTEL, upon the date of delivery of notice of termination (the "Early Termination Notice Date") an amount equal to the "Early Termination Fee" (as described below) and (iii) paying an additional amount equal to the reasonable costs actually incurred by ALLTEL in terminating this Agreement, including without limitation, relocation, expenses consistent with ALLTEL's then-existing policies, travel and severance expenses, incentive payments (stay bonuses) to provide for continued services of ALLTEL through the Early Termination Date; an amount equal to any remaining book value of any equipment and unamortized software used to provide the Services; expenses incurred in canceling leases, licenses subcontractor or similar agreements ("Shutdown Expenses") ALLTEL shall use reasonable efforts to minimize Shutdown Expenses. The Early Termination Fee shall be determined according to the following formula: -1- (AMFx3x.40) for the first three (3) month period between the Early Termination Date and the Expiration Date*, plus (AMFx3x.35) for the second three (3) month period between the Early Termination Date and the Expiration Date*, plus (AMFx3x.30) for the third three (3) month period between the Early Termination Date and the Expiration Date*, plus (AMFx3x.20) for the fourth three (3) month period between the Early Termination Date and the Expiration Date*, plus AMF shall mean the average of Monthly Fees for the six months prior to the Early Termination Notice Date. * As prorated if fewer than three (3) months remain until the Expiration Date." 3. Exhibit E shall be deleted in its entirety and replaced with the attached Exhibit E. 4. All capitalized terms in this Fifth Amendment shall have the same meaning as set forth in the Agreement, unless defined herein. 5. All terms and conditions of the Agreement not amended by this Fifth Amendment remain in full force and effect. In the event of a conflict or inconsistency between the terms of the Agreement and the terms of this Fifth Amendment, the latter shall supercede and govern. 6. Except as herein expressly amended, the Agreement is ratified, confirmed and remains unchanged in all respects and shall remain in full force and effect in accordance with its respective terms. 7. This Fifth Amendment may be executed in counterparts, each of which shall be an original, but such counterparts shall together constitute one and the same document. 8. This Fifth Amendment shall be governed by and shall be construed in accordance with the laws of the State of Arkansas. -2- IN WITNESS WHEREOF, the parties have executed this Fifth Amendment as of the Fifth Amendment Effective Date by their duly authorized representatives. ALLTEL INFORMATION SERVICES, INC. BEVERLY ENTERPRISES, INC. By: /s/ HAROLD FACKLER By: /s/ JEFFREY P. FREIMARK ------------------------------- --------------------------------- Name: Harold Fackler Name: Jeffrey P. Freimark ----------------------------- ------------------------------- Title: Sr. V.P. Title: EVP-CFO ---------------------------- ------------------------------ Date: 1/1/03 Date: 1/30/03 ----------------------------- ------------------------------- EXHIBIT E FEES 1. Monthly Fees. (a) Prior to Fifth Amendment Effective Date. The Monthly Fees for the Services provided under the Agreement prior to the Fifth Amendment Effective Date shall be those set forth in Exhibit E prior to the Fifth Amendment Effective Date. (b) As Of the Fifth Amendment Effective Date. In addition to other amounts set forth herein, Client agrees to pay to ALLTEL for sixty (60) months commencing with the Fifth Amendment Effective Date the Monthly Fees set forth in the Fee Schedule for the Services to be provided by ALLTEL to Client pursuant to this Agreement 2. CPI-U Adjustment. During the Term of the Agreement (and any renewal thereof), the fees and charges reflected in this Agreement will be adjusted in direct proportion to changes in the Consumer Price Index for All Urban Consumers - Other Goads and Services (the "CPI-U") as published by the U.S. Department of Labor, Bureau of Labor Statistics. Effective the thirteenth (13th) month from the Fifth Amendment Effective Date, such fees shall be adjusted by the percentage change in the CPI-U over the one-year period ending with the thirteenth (13th) month. Annually thereafter, such fees and charges shall be further adjusted by the percentage change in the CPI-U for the corresponding one year period throughout the term of the Agreement. In no case shall the CPI-U adjustment be less than 3% nor more than 6.5%. 3. Pass-Through Expenses. Client shall pay, in addition to the Monthly Fees, Pass-Through Expenses. initials /s/ HJF --- /s/ JPF E-1-1 RESOURCE CAPACITY 1. DEFINITIONS. 1.1. Resource Fees. Client shall pay fees according to their defined resource levels as defined herein. Any increase in Client defined resources shall result in an increase in fees paid. 1.2. Client Specific Fees. In each case where the Client specific business requirements dictate the use of resources that are not shared with other ALLTEL Client's, such dedicated resources shall be referred to as "client specific." In this Agreement the client specific resources are; network circuits, network equipment, and Client's nonstandard third party software. 2. RESOURCE CAPACITY. 2.1. DASD Capacity. The amount of DASD in use as of the effective date of this Agreement will be the initial resource level. 2.2. Network Capacity. The level of network capacity is determined during the annual planning cycle with review of trend reports on usage over the past twelve (12) months and planned changes in their business or workload by the Client, and with agreement of the ALLTEL Account Relationship Executive. The level of network capacity is derived from the following two main components: (1) Number of FEP ports needed for connectivity between ALLTEL and the Client and, (2) Number of LAN ports needed for connectivity between the ALLTEL and Client's LAN. The inventory of FEP and LAN ports will be reported to Client on a monthly basis. Client may request an adjustment to the level of network capacity as described in Section 3, "Capacity Adjustments". 3. CAPACITY ADJUSTMENTS. The following information pertains to resource increases or decreases that are planned as part of the normal business planning cycle for Client. 3.1. Planning Cycle The Mutual Planning Committee will provide at minimum on an annual basis information on Client's business plans and its impact on ALLTEL resource requirements. initials /s/ HJF --- /s/ JPF E-2-1 3.2. Resource Increases Planned increases to any unit of resource will be allowed four (4) times a year with notice in writing to the ALLTEL Account Relationship Executive. All resource increases requested are subject to a minimum timeframe to execute as described in the ALLTEL's Service Delivery Schedule and/or Capacity Adjustments Schedule set forth in Section 3.4 of Exhibit E-2. If resources are available and do not require ALLTEL to upgrade or replace any equipment, then the request by Client will be handled within a minimum of thirty (30) days from time of the request. 3.3. Resource Decreases Decreases will be allowed four (4) times a year with notice in writing to the ALLTEL Account Relationship Executive. ALLTEL will make reasonable effort to re-deploy the resources earlier than the minimum timeframe defined in the table in Section 3.4, and if ALLTEL is able to, will do so. 3.4. Unit Quantities and Timeframes

4. UNPLANNED RESOURCE INCREASES. 4.1. Occurrence Cycle The Fees set forth in this Exhibit E include certain Network and Systems personnel as defined in Exhibit F as "Base Staff". These are specifically dedicated to or functioning on behalf of Client. The Base Staff will perform the Systems Support and Network Support Services as outlined in Exhibit F as Base Staff (Network Systems) and Base Staff (Systems Support). Should the volume of Client Systems & Network Services requests exceed that which can reasonably be performed by the Base Staff Client shall increase the level of Base Staff in accordance with the provisions of Section 3 (Increases in Base Staff) of the Base Staff provisions of Exhibit F. The ALLTEL Account Relationship Executive will notify Client of requests that are outside the scope of the Monthly Fee and that will result in additional, incremental charges to Client. ALLTEL shall utilize commercially reasonable efforts to manage the dedicated resources in such a manner as to minimize such incremental additional fees. Client acknowledges that it can also help minimize such additional charges through advanced scheduling and notification to ALLTEL of such work requests and through initials /s/ HJF --- /s/ JPF E-2-2 effective use of the Mutual Planning Committee process described in section 10.5 of the Agreement. 5. CLIENT'S CURRENT NETWORK (Effective 05/01/01) (1) DS1 Circuit for VSAT connection from Hughes' facility in Minneapolis, Minnesota to LRTC (1) DS1 Circuit for Beverly Corp. headquarters location to LRTC (1) SDLC FEP Port on shared 3745 for BCBS of California Raised floor space for Beverly owned equipment. (4) Dial-out FEP Port on shared 3745 for subsidiary 36 / non VSAT traffic and (1) dial-in for production support 6. DEFINITION OF BACKBONE. The circuit(s) between the Technology Center's telephone carrier and the remote Client, called the "backbone" circuit(s), while considered Client specific in terms of charges, is engineered and provisioned by the Technology Center to provide maximum availability on behalf of Client. The portion of the circuit between the Technology Center and the local telephone company in Little Rock rides on dedicated fiber circuits that are survivable, meaning that if any failure occurs in the ring in one direction, the data are routed automatically in the reverse direction with no loss of data. 7. SERVICES FOR BASE NETWORK Services for Base Network shall Include the ALLTEL Technology Center host attachments, the communications equipment, cables and multiplexing required to bring a communication line to the ALLTEL Technology Center from the telephone carrier as well as the circuits between the ALLTEL Technology Center and the local telephone company in Little Rock. Also included are the remote cabling and communications equipment required to terminate the port. Maintenance contracts cover the components and those costs are included in the network fee. Disaster recovery fees shall be in addition to the network fees. 8. ANALOG NETWORK SERVICES Analog network equipment located at ALLTEL used for file transmissions and other production-related activities (detailed in Exhibit D) will be owned (ownership transferred at no cost to ALLTEL at Client's request under the Agreement), monitored, operated and managed by ALLTEL However, this equipment is expected to be displaced during the term of the Agreement, and, by Client's request, is not currently or will be placed under initials /s/ HJF --- /s/ JPF E-2-3 any manufacturers maintenance contract during the Agreement. Thus, any necessary repairs, replacement or problem resolution will be initiated by ALLTEL and all associated costs (i.e. Labor and Materials) of such repair/replacement will be billed to Client as Pass-Through Expense. ALLTEL will make every reasonable effort to minimize such expense and will notify Client in advance of any such expenditures to the extent practical. initials /s/ HJF --- /s/ JPF E-2-4 SERVICE FEES 1. ALLTEL HOURLY/MONTHLY/YEARLY RATES. 1.1 Hourly Rates. The following hourly rates are in effect as of the Fifth Amendment Effective Date. The ALLTEL hourly rates may be changed by ALLTEL upon written notice to Client not more often than once during each twelve (12) month period following the Start Date. In the event that Client desires ALLTEL to provide additional services, such additional services shall be charged to Client at the corresponding rates set forth in the table below. ALLTEL shall charge Client overtime rates only in those instance where such overtime services are approved by Client in advance. In addition, Client agrees to reimburse ALLTEL for the actual expense of reasonable travel and lodging expense, if any, related to hourly rate based services requested by Client. ALLTEL will inform Client, in advance, if overtime or travel and lodging expense is anticipated to be incurred.

1.2 Monthly/Annual Rates. In the event that Client desires monthly or annual rates for the Resources as set forth in the table above, the rates agree to negotiate in good faith to reach a mutually agreeable monthly/annual rate. 1.3 Travel and Expenses. Client will pay all reasonable travel and subsistence costs incurred by ALLTEL employees in performance of any such additional services in accordance with Client's reasonable travel policy but in no event shall such policy differ materially from normally accepted industry standards. 1.4 Qualifications of Personnel. The ALLTEL personnel provided pursuant to the monthly or hourly rates under this section will be individuals with at least such experience, qualifications and technical skills suitable to, and generally required in connection with, the duties attendant to their respective positions. initials /s/ HJF --- /s/ JPF E-3-1 FEE SCHEDULE Monthly Fees The following Monthly Fees shall be applicable effective as of the Fifth Amendment Effective Date for the time periods set forth in the following table and will be invoiced to Client in accordance with Section 3.2 of the Agreement:

ALLTEL will calculate CPU seconds in the following manner: (1) ALLTEL will extract the total number of CPU-seconds by "user" workloads for each calendar month as captured by Tivoli Decision Support for OS/390 from the Beverly OS/390 RMF records. As of the Fifth Amendment Effective Date, the following OS/390 workload manager workloads are considered to be SYSTEM workloads: SYSTEM, SYSSTC, SYSOTHER, and STCHIGH. All other workloads are considered to be "user" workloads. (2) ALLTEL will Normalize the CPU-seconds using an IBM 9672-R56 engine speed of 109 mips as the standard. As of the Fifth Amendment Effective Date, Client is initials /s/ HJF --- /s/ JPF E-4-l running on an IBM 9672-R65 with an engine speed of 50.8 mips and the normalization factor is 0.466. A change in the normalization factor due to a change of engine speed will be effective as of the change date. ALLTEL will calculate production jobs in the following manner: (1) ALLTEL will extract the total number of Production Job records for the calendar month, as captured by Tivoli Decision Support for OS/390, from the Beverly OS/390 SMF records by selecting all records that contain in column 26 of the Job Card a "P" for production or if RACFUSER is (SYMBOL) CBEVP000, ZEKE, SARVTAM, PANAPT, RMOSTC, and MAILBOX. ALLTEL shall be responsible for providing the following: o Provide Level II and Level III support for Troubleshooting back-bone circuit problems from the ALLTEL Technology Center to the Client's Ft. Smith corporate headquarters and Hughes Facility in Minneapolis, Minnesota. o Responsibility for management and monitoring of the backbone network from ALLTEL Technology Center to Client's Ft. Smith corporate headquarters and Hughes Facility in Minneapolis, Minnesota. o Maintain documentation of network connectivity between ALLTEL Technology Center and Client's Ft. Smith corporate headquarters. o Responsibility for engineering and re-engineering of ALLTEL Technology Center networks. o Own vendor management for all networks at the ALLTEL Technology Center. Client shall be responsible for the following: o Responsibility for all associated cost for all non-standard software maintenance and cost i.e. SYNCSORT, SAS, etc. (See Exhibit C-2). o Responsibility for all cost for printers, including consumables and maintenance, attached to the host system and located at Client's facilities initials /S/ HJF --- /S/ JPF E-4-2 CREDITS AND INCENTIVES Within ninety (90) days after the Fifth Amendment Effective Date, ALLTEL and Client shall negotiate in good faith to reach mutually agreeable performance incentives and credits related to batch processing windows. Client agrees to provide the necessary assistance to ALLTEL during such ninety (90) day period to determine reasonable performance standards and the associated incentives and credits. Services Levels - The following categories will be used to determine the priority of each service level outage that is to be measured monthly: o Priority 1. Total major service outage to online user(s) or component(s) failure. o Priority 2. Limited user(s) or component(s) failed or degraded. o Priority 3. Minor impact to non-critical user(s) or component fails or degraded. The purpose of the categorization is to keep Client and ALLTEL focused on the most critical service components. In the event of a failure to meet the service level as defined in Exhibit A-2, and if ALLTEL fails to correct the service level problem as defined in Exhibit A-2, then Client can request payment of the credit as outlined below. o In the event of failures in Priority 1 or 2 which ALLTEL fails to correct within ____, Client may assess to ALLTEL a credit of __% of that Month's Fees, in no event may any such credit exceed __% of that estimated annual fees payable to ALLTEL. In the event that ALLTEL exceeds expectations in these categories for a period of ____, ALLTEL shall accumulate credit(s) at __% of that Month's Fees in the aggregate not to exceed __% of __ Fees paid by Client to ALLTEL for the _ time period. o In the event of failures in Priority 3 not corrected by ALLTEL within ____, ALLTEL will be assessed a credits of ___% of that Month's Fees, in no event may any such credits exceed ____% of that estimated annual fees payable to ALLTEL. In the event that ALLTEL exceeds expectations in these categories, ALLTEL shall accumulate credit(s) at ___% of that Month's Fees in the aggregate not to exceed __% of Fees paid by Client to ALLTEL for the __ time period. At the end of each year measured from each anniversary of the Fifth Amendment Effective Date, the dollar difference between credits and incentives for the specific months of that one (1) year period will be calculated. If credits are greater than incentives, the difference will be credited to the next monthly invoice to the Client. If incentives are equal to or greater than credits for a given one year period only the amount initials /s/ HJF --- /s/ JPF E-4-3 equal to the total credits for that period will be used by ALLTEL to offset credits for that period. The credits set forth in the Exhibit E are Client's sole and exclusive remedy for ALLTEL's failure to meet the Service levels defined in the Agreement including Exhibit A. All credits are subject to the limitations set forth in Exhibit A.2. Performance Metrics - Service Levels - (as determined in Exhibit A) o CICS Availability o Priority 1 o Network Availability o Priority 1 o Machine Availability o Priority 1 o TSO Availability o Priority 2 o Batch Availability o (see Exhibit E) o CICS Response Time o Priority 1 o TSO Response Time o Priority 2 initials /s/ HJF --- /s/ JPF E-4-4 EX-10.65 13 d03650exv10w65.txt EX-10.65 AMENDMENT NO.3 TO CREDIT AGREEMENT EXHIBIT 10.65 EXECUTION COPY AMENDMENT NO. 3 TO AMENDED AND RESTATED CREDIT AGREEMENT AMENDMENT dated as of December 20, 2002 to the Amended and Restated Credit Agreement dated as of April 25, 2001 (as amended prior to the date hereof, the "CREDIT AGREEMENT") among BEVERLY ENTERPRISES, INC. (with its successors, the "BORROWER"), the BANKS listed on the signature pages thereof, JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank, successor by merger to Morgan Guaranty Trust Company of New York), as Issuing Bank (with its successors in such capacity, the"ISSUING BANK"), and JPMORGAN CHASE BANK, as Administrative Agent (the "ADMINISTRATIVE AGENT"). WITNESSETH: WHEREAS, the parties hereto desire to amend the Credit Agreement as set forth herein; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement has the meaning assigned to such term in the Credit Agreement. Each reference to "hereof", "hereunder", "herein"and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement shall, after this Amendment becomes effective, refer to the Credit Agreement as amended hereby. SECTION 2. Definition of Amendment No. 3. Section 1.01 of the Credit Agreement is hereby amended by adding, in appropriate alphabetical order, the following definition of "Amendment No. 3": "AMENDMENT NO. 3" means Amendment No. 3 to Amended and Restated Credit Agreement dated as of December 20, 2002 among the Borrower, the Banks, the Issuing Bank and the Administrative Agent. SECTION 3. Definition of Consolidated EBITDA. The definition of "Consolidated EBITDA" in Section 1.01 of the Credit Agreement is amended to read in full as follows: "CONSOLIDATED EBITDA" means, for any period, Consolidated Net Income of the Borrower and its Consolidated Subsidiaries for such period plus, without duplication, any amounts deducted in determining such Consolidated Net Income in respect of (a) Consolidated Interest Charges for such period, (b) Consolidated Tax Charges for such period, (c) expenses for such period of the types classified as "depreciation and amortization" on the consolidated statement of operations included in the Base Financials, (d) non-cash charges for such period under FASB Statement No. 142, Goodwill and Other Intangible Assets, (e) non-cash expenses for such period arising from the grant of stock options to officers, directors and employees of the Borrower and its Consolidated Subsidiaries and (f) non-cash charges in the fiscal quarter ending December 31, 2002 arising from the Borrower's change in its methodology for establishing patient liability reserves from a discounted to a non-discounted basis; provided that, unless all of the Banks shall have consented to Amendment No. 3, for purposes of the definition of Pricing Ratio contained in the Pricing Schedule (and the definition of Consolidated EBITDAR contained therein), Consolidated EBITDA shall be calculated without regard to clauses (d), (e) and (f) above. SECTION 4. Amendment of Minimum Consolidated Net Worth Covenant. Section 5.05 of the Credit Agreement is amended to read in full as follows: SECTION 5.05. Minimum Consolidated Net Worth. Consolidated Net Worth shall not be less than: (a) on any date prior to December 31, 2002, an amount equal to 85% of Consolidated Net Worth at December 31, 2001 plus (i) 50% of the aggregate positive Consolidated Net Income (excluding any consolidated net loss) of the Borrower and its Consolidated Subsidiaries for each fiscal quarter ending after December 31, 2001 plus (ii) 50% of the aggregate net proceeds, including the fair market value of property other than cash (as determined in good faith by the Borrower's board of directors), received by the Borrower from the issuance and sale after December 31, 2001 of any capital stock of the Borrower (other than the proceeds of any issuance and sale of any capital stock (x) to a Subsidiary or (y) which is required to be redeemed, or is redeemable at the option of the holder, if certain events or conditions occur or exist or otherwise) or in connection with the conversion or exchange of any Debt of the Borrower into capital stock of the Borrower after 2 December 31, 2001 plus (iii) the excess (if any) of the aggregate amount of Specified 2001 Charges (exclusive of charges against reserves established on or prior to September 30, 2001) over $290,000,000; and (b) on any date on or after December 31, 2002, an amount equal to (i) the greater of (x) 85% of Consolidated Net Worth at December 31, 2002 and (y) $135,000,000 plus (ii) 50% of the aggregate positive Consolidated Net Income (excluding any consolidated net loss) of the Borrower and its Consolidated Subsidiaries for each fiscal quarter ending after December 31, 2002 plus (iii) 50% of the aggregate net proceeds, including the fair market value of property other than cash (as determined in good faith by the Borrower's board of directors), received by the Borrower from the issuance and sale after December 31, 2002 of any capital stock of the Borrower (other than the proceeds of any issuance and sale of any capital stock (x) to a Subsidiary or (y) which is required to be redeemed, or is redeemable at the option of the holder, if certain events or conditions occur or exist or otherwise) or in connection with the conversion or exchange of any Debt of the Borrower into capital stock of the Borrower after December 31, 2002. SECTION 5. Consent to Amendment of Pledge Agreement and Subsidiary Guaranty. The Banks party hereto hereby consent to (i) the amendment of the Pledge Agreement set forth in Amendment No. 2 to Amended and Restated Pledge Agreement dated as of December 20, 2002 among the Borrower, Beverly Health, Beverly Enterprises - Pennsylvania, Inc. and the Administrative Agent and (ii) the amendment of the Subsidiary Guaranty set forth in Amendment No. 2 to Amended and Restated Subsidiary Guaranty dated as of December 20, 2002. SECTION 6. Representations. (a) The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article 4 of the Credit Agreement will be true on and as of the Amendment No. 3 Effective Date and (ii) no Default will have occurred and be continuing on such date. (b) Each Subsidiary Guarantor represents and warrants that the representations and warranties set forth in Article 3 of the Amended and Restated Subsidiary Guaranty dated as of April 25, 2001 (as amended through to the Amendment No. 3 Effective Date) among the Borrower and the Subsidiaries of the Borrower party thereto will be true on and as of the Amendment No. 3 Effective Date. 3 SECTION 7. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 8. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 9. Effectiveness. . This Amendment shall become effective as of the date hereof on the date when the following conditions are met (the "AMENDMENT NO. 3 EFFECTIVE DATE"): (a) the Administrative Agent shall have received from each of the Borrower, the Subsidiary Guarantors, and the Required Banks a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Administrative Agent) that such party has signed a counterpart hereof; (b) the Administrative Agent shall have received (i) from each of the Borrower, Beverly Health and Beverly Enterprises-Pennsylvania, Inc. a counterpart of Amendment No. 2 to Amended and Restated Pledge Agreement dated as of December 20, 2002 signed by such party and (ii) from each of the Borrower and the Subsidiary Guarantors a counterpart of Amendment No. 2 to Amended and Restated Subsidiary Guaranty dated as of December 20, 2002 signed by such party (or, in either case, facsimile or other written confirmation (in form satisfactory to the Administrative Agent) that such party has signed a counterpart thereof); (c) The Administrative Agent shall have received a favorable written opinion of each of (i) John Arena, General Counsel - Corporate of the Borrower, and (ii) Weil, Gotshal & Manges LLP, in each case covering such matters as the Required Banks shall reasonably request (including, without limitation, non-contravention of principal debt agreements), and in each case in form and substance satisfactory to the Administrative Agent; 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. BEVERLY ENTERPRISES, INC. By: ----------------------------- Title: SUBSIDIARY GUARANTORS: 4F FUNDING, INC. (f/k/a Beverly Enterprises - Oklahoma, Inc.) AEDON STAFFING, LLC AEDON HOMECARE, LLC AEGIS THERAPIES, INC. (f/k/a Beverly Rehabilitation, Inc.) AEGIS THERAPIES-FLORIDA, INC. (f/k/a AEGIS-Florida, Inc.) AGI-CAMELOT, INC. ARBORLAND MANAGEMENT COMPANY, INC. BEVERLY - ALTOONA HOLDINGS, LLC BEVERLY- BELLA VISTA HOLDING, INC. BEVERLY- CAMP HILL HOLDINGS, LLC BEVERLY - CLARION HOLDINGS, LLC BEVERLY - FITCHBURG HOLDINGS, LLC BEVERLY - MELROSE HOLDINGS, LLC BEVERLY - MERCED HOLDINGS, LLC BEVERLY - INDIANAPOLIS, LLC BEVERLY - MISSOURI VALLEY HOLDING, INC. BEVERLY - NEWMAN HOLDINGS, LLC BEVERLY - RAPID CITY HOLDING, INC. BEVERLY - WARREN HOLDINGS, LLC BEVERLY - CLINICAL, INC. BEVERLY ENTERPRISES INTERNATIONAL LIMITED BEVERLY ENTERPRISES - ALABAMA, INC. BEVERLY ENTERPRISES - ARIZONA, INC. 5 BEVERLY ENTERPRISES - ARKANSAS, INC. BEVERLY ENTERPRISES - CALIFORNIA, INC. BEVERLY ENTERPRISES - COLORADO, INC. BEVERLY ENTERPRISES - CONNECTICUT, INC. BEVERLY ENTERPRISES - DELAWARE, INC. BEVERLY ENTERPRISES - DISTRIBUTION SERVICES, INC. BEVERLY ENTERPRISES - DISTRICT OF COLUMBIA, INC. BEVERLY ENTERPRISES - FLORIDA, INC. BEVERLY ENTERPRISES - GARDEN TERRACE, INC. BEVERLY ENTERPRISES - GEORGIA, INC. BEVERLY ENTERPRISES - HAWAII, INC. BEVERLY ENTERPRISES - IDAHO, INC. BEVERLY ENTERPRISES - ILLINOIS, INC. BEVERLY ENTERPRISES - INDIANA, INC. BEVERLY ENTERPRISES - IOWA, INC. BEVERLY ENTERPRISES - KANSAS, LLC (successor to Beverly Enterprises - Kansas, Inc.) BEVERLY ENTERPRISES - KENTUCKY, INC. BEVERLY ENTERPRISES - LOUISIANA, INC. BEVERLY ENTERPRISES - MAINE, INC. BEVERLY ENTERPRISES - MARYLAND, INC. BEVERLY ENTERPRISES - MASSACHUSETTS, INC. BEVERLY ENTERPRISES - MICHIGAN, INC. BEVERLY ENTERPRISES - MINNESOTA, LLC (successor to Beverly Enterprises - Minnesota, Inc.) 6 BEVERLY ENTERPRISES - MISSISSIPPI, INC. BEVERLY ENTERPRISES - MISSOURI, INC. BEVERLY ENTERPRISES - MONTANA, INC. BEVERLY ENTERPRISES - NEBRASKA, INC. BEVERLY ENTERPRISES - NEVADA, INC. BEVERLY ENTERPRISES - NEW HAMPSHIRE, INC. BEVERLY ENTERPRISES - NEW JERSEY, INC. BEVERLY ENTERPRISES - NEW MEXICO, INC. BEVERLY ENTERPRISES - NORTH CAROLINA, INC. BEVERLY ENTERPRISES - NORTH DAKOTA, INC. BEVERLY ENTERPRISES - OHIO, INC. BEVERLY ENTERPRISES - OREGON, INC. BEVERLY ENTERPRISES - PENNSYLVANIA, INC. BEVERLY ENTERPRISES - RHODE ISLAND, INC. BEVERLY ENTERPRISES - SOUTH CAROLINA, INC. BEVERLY ENTERPRISES - TENNESSEE, INC. BEVERLY ENTERPRISES - TEXAS, INC. BEVERLY ENTERPRISES - UTAH, INC. BEVERLY ENTERPRISES - VERMONT, INC. BEVERLY ENTERPRISES - VIRGINIA, INC. BEVERLY ENTERPRISES - WASHINGTON, INC. BEVERLY ENTERPRISES - WEST VIRGINIA, INC. BEVERLY ENTERPRISES - WISCONSIN, INC. BEVERLY ENTERPRISES - WYOMING, INC. BEVERLY HEALTH AND 7 REHABILITATION SERVICES, INC. BEVERLY HEALTHCARE, LLC BEVERLY HEALTHCARE - CALIFORNIA, INC. BEVERLY HOLDINGS I, INC. BEVERLY INDEMNITY, LTD. BEVERLY MANOR INC. OF HAWAII BEVERLY REAL ESTATE HOLDINGS, INC. BEVERLY SAVANA CAY MANOR, INC. BEVRD, LLC CARROLLTON PHYSICAL THERAPY CLINIC, INC. CERES OXYGEN SERVICES, LLC CERES STRATEGIES, INC. (f/k/a/ Beverly Healthcare Acquisition, Inc.) COMMERCIAL MANAGEMENT, INC. COMMUNITY CARE, INC. COMPASSION AND PERSONAL CARE SERVICES, INC. EASTERN HOME HEALTH SUPPLY & EQUIPMENT CO., INC. GREENVILLE REHABILITATION SERVICES, INC. HALLMARK CONVALESCENT HOMES, INC. HOMECARE PREFERRED CHOICE, INC. HOME HEALTH AND REHABILITATION SERVICES, INC. HOSPICE OF EASTERN CAROLINA, INC. HOSPICE PREFERRED CHOICE, INC. LARES CARE RESOURCE, LLC LAS COLINAS PHYSICAL THERAPY CENTER, INC. LIBERTY NURSING HOMES, INCORPORATED MATRIX HEALTHCARE SERVICES, LLC MATRIX OCCUPATIONAL HEALTH, INC. MATRIX REHABILITATION, INC. MATRIX WELLNESS, LLC MATRIX REHABILITATION - DELAWARE, INC. MATRIX REHABILITATION - GEORGIA, INC. MATRIX REHABILITATION - 8 MARYLAND, INC. MATRIX REHABILITATION - OHIO, INC. MATRIX REHABILITATION - SOUTH CAROLINA, INC. MATRIX REHABILITATION - TEXAS, INC. MEDICAL ARTS HEALTH FACILITY OF LAWRENCEVILLE, INC. MODERNCARE OF LUMBERTON, INC. NEBRASKA CITY S-C-H, INC. NORTH DALLAS PHYSICAL THERAPY ASSOCIATES, INC. NURSING HOME OPERATORS, INC. PETERSEN HEALTH CARE, INC. SOUTH ALABAMA NURSING HOME, INC. SOUTH DAKOTA - BEVERLY ENTERPRISES, INC. SPECTRA HEALTHCARE ALLIANCE, INC. TAR HEEL INFUSION COMPANY, INC. THE PARKS PHYSICAL THERAPY AND WORK HARDENING CENTER, INC. THERAPHYSICS CORP THERAPHYSICS PARTNERS OF COLORADO, INC. THERAPHYSICS PARTNERS OF TEXAS, INC. THERAPHYSICS PARTNERS OF WESTERN PENNSYLVANIA, INC. TMD DISPOSITION COMPANY VANTAGE HEALTHCARE CORPORATION All by: ----------------------------- Title: 9 JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank successor by merger to Morgan Guaranty Trust Company of New York) By: ---------------------------------- Title: BANK OF AMERICA, N.A. By: ---------------------------------- Title: THE BANK OF NEW YORK By: ---------------------------------- Title: BANK OF MONTREAL By: ---------------------------------- Title: GENERAL ELECTRIC CAPITAL CORPORATION By: ---------------------------------- Title: 10 EX-10.66 14 d03650exv10w66.txt EX-10.66 AMENDMENT NO.4 TO CREDIT AGREEMENT EXHIBIT 10.66 CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. AMENDMENT NO. 4 TO AMENDED AND RESTATED CREDIT AGREEMENT AND AMENDMENT NO. 2 TO AMENDED AND RESTATED PLEDGE AGREEMENT AMENDMENT dated as of February 28, 2003 to (i) the Amended and Restated Credit Agreement dated as of April 25, 2001 (as amended prior to the date hereof, the "Credit Agreement") among BEVERLY ENTERPRISES, INC. (with its successors, the "Borrower"), the BANKS listed on the signature pages thereof, JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank, successor by merger to Morgan Guaranty Trust Company of New York), as Issuing Bank (with its successors in such capacity, the "Issuing Bank"), and JPMORGAN CHASE BANK, as Administrative Agent (the "Administrative Agent") and (ii) the Amended and Restated Pledge Agreement dated as of April 25, 2001 (as amended prior to the date hereof, the "Pledge Agreement") among the Borrower, Beverly Health and Rehabilitation Services, Inc. and the Administrative Agent. WITNESSETH: WHEREAS, the parties hereto desire to amend the Credit Agreement as set forth herein; NOW, THEREFORE, the parties hereto agree as follows: SECTION 1. Defined Terms; References. Unless otherwise specifically defined herein, each term used herein which is defined in the Credit Agreement or the Pledge Agreement has the meaning assigned to such term in the Credit Agreement or the Pledge Agreement, as the context requires. Each reference to "hereof", "hereunder", "herein" and "hereby" and each other similar reference and each reference to "this Agreement" and each other similar reference contained in the Credit Agreement or any other Financing Document shall, after this Amendment becomes effective, refer to the Credit Agreement or the Pledge Agreement, as the case may be, as amended hereby. SECTION 2. New Definitions. Section 1.01 of the Credit Agreement is hereby amended by adding, in appropriate alphabetical order, the following definitions: "ADDITIONAL MORTGAGES" means mortgages or deeds of trust from the owner of each property on which a Lien is required to be granted pursuant to Section 5.23, as mortgagor, securing the obligations of such owner under the Financing Documents (and, if the Borrower so elects, the Bank of Montreal Synthetic Lease Obligations), in each case in form and substance reasonably satisfactory to the Administrative Agent and as the same may be amended from time to time. "ADJUSTED LEVERAGE RATIO" means, (a) for any day prior to September 30, 2003, the ratio of Adjusted Consolidated Debt on such day to Annualized Consolidated EBITDAR for the fiscal quarter most recently ended on or prior to such day and (b) for any day on or after September 30, 2003, the ratio of Adjusted Consolidated Debt on such day to Consolidated EBITDAR for the period of four consecutive fiscal quarters most recently ended on or prior to such day. "AMENDMENT NO. 4" means Amendment No. 4 to Amended and Restated Credit Agreement and Amendment No. 2 to Amended and Restated Pledge Agreement dated as of February 28, 2003 among the Borrower, the Banks party thereto and the Administrative Agent. "AMENDMENT NO. 4 EFFECTIVE DATE" means the date on which Amendment No. 4 becomes effective in accordance with its terms. "AMSOUTH MORTGAGE FACILITY" means the Amended and Restated Term Loan Agreement, dated December 31, 1998, between Beverly Enterprises-Mississippi, Inc. and AmSouth Bank (successor by merger to First American National Bank), as amended by the First Amendment to Amended and Restated Term Loan Agreement and Promissory Notes, dated September 30, 1999, and as further amended, restated, supplemented or otherwise modified from time to time. "ANNUALIZED CONSOLIDATED EBITDAR" means (a) for the fiscal quarter ended December 31, 2002, Consolidated EBITDAR for such fiscal quarter multiplied by 4, (b) for the fiscal quarter ended March 31, 2003, Consolidated EBITDAR for the period of two fiscal quarters ended March 31, 2003 multiplied by 2 and (c) for the fiscal quarter ended June 30, 2003, Consolidated EBITDAR for the period of three fiscal quarters ended June 30, 2003 multiplied by the 4/3. "ANNUALIZED MORTGAGE EBITDA" means (i) for the fiscal quarter ended December 31, 2002, EBITDA for Mortgaged Facilities for such fiscal quarter multiplied by 4, (ii) for the fiscal quarter ended March 31, 2 2003, EBITDA for Mortgaged Facilities for the period of two fiscal quarters ended March 31, 2003 multiplied by 2, (iii) for the fiscal quarter ended June 30, 2003, EBITDA for Mortgaged Facilities for the period of three fiscal quarters ended June 30, 2003 multiplied by the 4/3 and (iv) for any fiscal quarter thereafter, EBITDA for Mortgaged Facilities for the period of four consecutive fiscal quarters ended on the last day of such fiscal quarter. "ASSET SALE" means any sale, lease, transfer or other disposition of any assets or property other than (i) sales of assets or property (other than assisted living and skilled nursing facilities, separate business units, businesses and divisions and stock of Subsidiaries of the Borrower) in the ordinary course of business, and (ii) sales, transfers, leases and other dispositions by the Borrower or any of its Subsidiaries to the Borrower or any of the Subsidiaries. "AVAILABLE AMOUNT" means (i) for any day prior to the satisfaction of the New Mortgage Condition, the lesser of (x) the Specified Amount for such day and (y) $75,000,000 and (ii) for any day on or after the satisfaction of the New Mortgage Condition, the Specified Amount for such day. "AVAILABLE COMMITMENT" means, for each Bank on any day, an amount equal to the product of (i) the Available Amount for such day multiplied by (ii) such Bank's Ratable Share for such day. "BANK OF MONTREAL SYNTHETIC LEASE OBLIGATIONS" means all amounts now or hereafter payable by the Borrower and its Subsidiaries pursuant to the Bank of Montreal Synthetic Lease. "CARE FOCUS" means, as of the Amendment No. 4 Effective Date, the personal care business, located in North Carolina, operated by Community Care, Inc. and Compassion and Personal Care Services, Inc. "CONSOLIDATED CASH BALANCE" means on any day the cash and Temporary Cash Investments held by the Borrower and its Consolidated Subsidiaries on such day. "COVERAGE LIMITATION" means, for any day, an amount equal to (i) the product of 5 multiplied by the Annualized Mortgage EBITDA, as determined on such day, for the most recent fiscal quarter for which financial statements have been, or are required to have been, delivered pursuant to Sections 5.01(a) and (b), divided by (ii) 1.5; provided that if, 3 on or prior to such day, the Borrower has prepaid any New Senior Notes or Senior Notes pursuant to Section 5.21(iii)(B), the "Coverage Limitation" for such day shall be an amount equal to the amount set forth in clause (i), as determined for such day, divided by 2.0. "CURABLE ENCUMBRANCES" means an encumbrance on New Mortgage Property in existence as of the New Mortgage Deadline (or, in the case of a New Mortgage Property as to which the Agent shall have consented to an Extended New Mortgage Deadline, as of the Extended New Mortgage Deadline in respect of such New Mortgage Property) and set forth in an executed letter accepted by the Administrative Agent pursuant to Section 5.20(d). "CURE DATE" means the date specified in an executed letter accepted by the Administrative Agent pursuant to Section 5.20(d) as the date by which the Curable Encumbrances set forth in such letter are to be cured by the owner of the New Mortgage Property on which such encumbrances exist; provided that if no date is specified in the applicable letter for the cure of any Curable Encumbrance set forth therein, the Cure Date in respect of such Curable Encumbrance shall be the 90th day following the delivery of the relevant New Mortgage to the Administrative Agent pursuant to Section 5.20(a). "DISPOSITION PROGRAM" means, the sale, transfer or other disposition by the Borrower and its Subsidiaries, in one or more transactions and pursuant to sales of facilities and related assets, sales of stock of Subsidiaries or a combination thereof, of assisted living and skilled nursing facilities of the Borrower and its Subsidiaries, all in substantial conformity with the plan of disposition described in the Strategic Review. "DUCC BUSINESS LINE" means the management of occupational therapy and medicine clinics operated by Matrix Occupational Health, Inc. in North Carolina. "EBITDA FOR MORTGAGED FACILITIES" means, for any period, Net Income for Mortgaged Facilities for such period plus, without duplication, any amounts deducted in determining such Net Income for Mortgaged Facilities in respect of (a) Consolidated Interest Charges for such period, (b) Consolidated Tax Charges for such period and (c) expenses for such period of the types classified as "depreciation and amortization" on the consolidated statement of operations included in the Base Financials. 4 "EXISTING MORTGAGES" means mortgages and deeds of trust described in Schedule V hereto, in each case as the same has been or may be amended from time to time. "EXTENDED NEW MORTGAGE DEADLINE" has the meaning set forth in Section 5.20. "FEDERAL WAY FACILITY" means the skilled nursing facility operated by Beverly Enterprises-Washington, Inc., located at 135 South 336 Street, Federal Way, Washington, 98003. "INITIAL SPECIFIED PORTION" means, with respect to any prepayment required under clause (ii)(B)(1) of Section 5.22, (a) with respect to the Bank of Montreal Synthetic Lease Obligations, 80% and (b) with respect to the Mortgage Facility Obligations, 20%; provided that if at the time that any such repayment would otherwise be required, (i) the Bank of Montreal Synthetic Lease Obligations have been repaid in full or would be repaid in full by the application of less than all of the applicable Initial Specified Portion of the applicable amount or (ii) the Mortgage Facility Obligations have been repaid in full or would be repaid in full by the application of less than all of the applicable Initial Specified Portion of the applicable amount, the Initial Specified Portion (or the portion of such Initial Specified Portion in excess of the amount necessary to repay such Bank of Montreal Synthetic Lease Obligations or Mortgage Facility Obligations) that would otherwise have been applied to repay such Bank of Montreal Synthetic Lease Obligations or Mortgage Facility Obligations shall be included in the Initial Specified Portion of Bank of Montreal Synthetic Lease Obligations or Mortgage Facility Obligations remaining outstanding. "INVESTMENTS SIDE LETTER" means the side letter dated February 28, 2003 delivered by the Borrower and acknowledged by the Administrative Agent. "MATRIX ENTITIES" means AnMed/VBS Rehabilitative Services, MATRIX Rehabilitation, Inc., MATRIX Healthcare Services, LLC, MATRIX Rehabilitation - Delaware, Inc., MATRIX Rehabilitation -Georgia, Inc., MATRIX Rehabilitation - Maryland, Inc., MATRIX Rehabilitation - Ohio, Inc., MATRIX Rehabilitation - Texas, Inc., MATRIX Rehabilitation - South Carolina, Inc., Theraphysics Corp., Theraphysics Partners of Colorado, Inc., Theraphysics Partners of Western Pennsylvania, Inc., Theraphysics Partners of Texas, Inc., Carrollton Physical Therapy Clinic, Inc., Las Colinas Physical Therapy Center, Inc., 5 Greenville Rehabilitation Services, Inc., Home Health and Rehabilitation Services, Inc., North Dallas Physical Therapy Associates, Inc. and The Parks Physical Therapy and Work Hardening Center, Inc. "MK MEDICAL" means, as of the Amendment No. 4 Effective Date, collectively, the business divisions of HomeCare Preferred Choice, Inc. which operate a respiratory therapy business, durable medical equipment business and rehabilitation business, in each case in Nevada and California. "MORTGAGE CREDIT FACILITIES" means, collectively, the AmSouth Mortgage Facility and the Washington Mutual Mortgage Facilities. "MORTGAGE FACILITY OBLIGATIONS" means all amounts now or hereafter payable by the Borrower or its Subsidiaries pursuant to the Mortgage Credit Facilities. "NET CASH PROCEEDS" means, with respect to any Asset Sale, (a) the cash proceeds received by the Borrower or any of its Subsidiaries in respect of such Asset Sale, including any cash received in respect of any non-cash proceeds, but only as and when received, net of (b) the sum of (i) all reasonable fees and out-of-pocket expenses paid by the Borrower and its Subsidiaries to third parties (other than Affiliates) in connection with such Asset Sale, (ii) the amount of all (x) payments required to be made by the Borrower and its Subsidiaries as a result of such Asset Sale to repay Debt (other than prepayments of Mortgage Facility Obligations or Bank of Montreal Synthetic Lease Obligations required under clauses (i), (ii)(B), (ii)(C) and (iii) of Section 5.22 and prepayments of Loans required under Section 2.05(d) in connection with the reductions of the Commitments pursuant to clauses (i), (ii)(B), (ii)(C) and (iii) of Section 2.11(b)) secured by such asset or otherwise subject to mandatory prepayment as a result of such Asset Sale and (y) reductions in the Commitments pursuant to Section 2.11(b)(ii)(A), (iii) the amount of all taxes paid (or reasonably estimated to be payable) by the Borrower and its Subsidiaries during the year that such Asset Sale occurred or the next succeeding year and that are directly attributable to such Asset Sale (as determined reasonably and in good faith by the chief financial officer of the Borrower) and (iv) the amount of all payments required to be made by the Borrower and its Subsidiaries to pay severance, salary for accrued and unused vacation days and other employee termination expenses during the year that such Asset Sale occurred or the next succeeding year and that are directly attributable to such Asset Sale. 6 "NET INCOME FOR MORTGAGED FACILITIES" means, for any period and as determined on any date, the net income (loss) (calculated exclusive of the effect of any extraordinary or other material non-recurring gain or loss outside the ordinary course of business) for such period for all assisted living and skilled nursing facilities subject to (x) an Existing Mortgage or (y) a New Mortgage as to which all the conditions set forth in Section 5.20 have been satisfied, and, in each case, which has not theretofore been released. "NEW MORTGAGE CONDITION" means the satisfaction by the Borrower and its Subsidiaries of all of their obligations under Section 5.20 (including the cure of all Curable Encumbrances). "NEW MORTGAGE DEADLINE" means the sixtieth day after the Amendment No. 4 Effective Date. "NEW MORTGAGE PROPERTY" means the property described in Schedule VI hereto; provided that the Borrower may, with the written consent of the Administrative Agent, which may be granted or withheld in its reasonable discretion, substitute for one or more properties listed on such Schedule VI one or more new properties not listed thereon so long as (i) such new property or properties are of equal or greater value than the property or properties for which they are to be substituted based on the "2003 Budget EBITDA with Cliff" assigned to such properties in the Strategic Review and (ii) at the time of such substitution the Borrower (x) represents in a writing to the Administrative Agent that after giving effect to such substitution, the aggregate "2003 Budget EBITDA with Cliff" assigned to all New Mortgage Properties in the Strategic Review shall be at least $33,000,000 and (y) provides an amended Schedule VI reflecting such substitution and any prior substitutions. Upon any such substitution, Schedule VI shall be deemed automatically to be amended to reflect such substitution. "NEW MORTGAGES" means mortgages or deeds of trust from the owner of each New Mortgage Property, as mortgagor, to the Administrative Agent, as mortgagee, in respect of the New Mortgage Properties, in each case in form and substance reasonably satisfactory to the Administrative Agent and as the same may be amended from time to time. "NEW SENIOR NOTE AGREEMENT" means that certain Indenture, dated as of April 25, 2001, between the Borrower, the guarantors party. 7 thereto and The Bank of New York, as trustee, as amended, modified or supplemented. "PERMITTED PROPERTY LIENS", with respect to any property covered by an Existing Mortgage, a New Mortgage or an Additional Mortgage, has the meaning set forth in the related Existing Mortgage, New Mortgage or Additional Mortgage, respectively. "RATABLE SHARE" means, with respect to any Bank on any day, a fraction, the numerator of which is such Bank's Commitment on such day and the denominator of which is the aggregate Commitments of all Banks on such day. "RESTRICTED PERIOD" means any period that is not an Unrestricted Period. "SENIOR NOTES" means the senior unsecured notes of the Borrower due 2006 issued pursuant to the Senior Note Agreement. "SPECIFIED AMOUNT" means (a) for any day during a Restricted Period (i) if such day occurs prior to the New Mortgage Deadline, the lesser of (x) the aggregate Commitments of all Banks on such day and (y) $100,000,000 and (ii) if such day occurs on or after the New Mortgage Deadline, the least of (x) the aggregate Commitments of all Banks on such day, (y) the Coverage Limitation for such day and (z) $100,000,000 and (b) for any day during an Unrestricted Period, (i) if such day occurs prior to the New Mortgage Deadline, the aggregate Commitments of all Banks on such day and (ii) if such day occurs on or after the New Mortgage Deadline, the lesser of (x) the aggregate Commitments of all Banks on such day and (y) the Coverage Limitation for such day. "SPECIFIED PORTION" means, with respect to any repayment required under clause (ii)(B)(2), (ii)(C) or (iii) of Section 5.22 or any Commitment reduction pursuant to clause (ii)(B)(2), (ii)(C) or (iii) of Section 2.11(b), (a) with respect to the Commitments, 50%, (b) with respect to the Bank of Montreal Synthetic Lease Obligations, 40% and (c) with respect to the Mortgage Facility Obligations, 10%; provided that if at the time that any such Commitment reduction or repayment would otherwise be required, (i) the aggregate Commitments of all Banks have been reduced to $85,000,000 or would be reduced to $85,000,000 by the application of less than the applicable Specified Portion of the applicable amount, (ii) the Bank of Montreal Synthetic Lease Obligations have been repaid in full or would be repaid in full by the application of less than all of the applicable Specified Portion of the applicable amount or (iii) the 8 Mortgage Facility Obligations have been repaid in full or would be repaid in full by the application of less than all of the applicable Specified Portion of the applicable amount, the Specified Portion (or the portion of such Specified Portion in excess of the amount necessary to reduce such aggregate Commitments to $85,000,000 or to repay such Bank of Montreal Synthetic Lease Obligations or Mortgage Facility Obligations in full) that would otherwise have been applied to reduce such Commitments or repay such Bank of Montreal Synthetic Lease Obligations or Mortgage Facility Obligations shall be included in the Specified Portions applicable to the outstanding Commitments in excess, in the aggregate for all Banks, of $85,000,000 and the Bank of Montreal Synthetic Lease Obligations and Mortgage Facility Obligations remaining outstanding in proportion to the relative Specified Portions set forth in clauses (a), (b) and (c) above. "STRATEGIC REVIEW" means the "Strategic Discussion and Review" dated January 10, 2003 provided by the Borrower to the Banks. "UNRESTRICTED PERIOD" means any period of one or more days in which both (i) the aggregate gross cash proceeds received by the Borrower and its Subsidiaries from all Asset Sales made by the Borrower and its Subsidiaries on or after the Amendment No. 4 Effective Date and on or prior to such day (excluding all proceeds received from Assets Sales of the facilities and related assets, stock or any combination thereof pertaining to the Matrix Entities) equals or exceeds $175,000,000 and (ii) the Adjusted Leverage Ratio as of the last day of the two most recent fiscal quarters for which financial statements have been, or are required to have been, delivered pursuant to Sections 5.01(a) and (b) did not exceed 5.0 to 1.0. "WASHINGTON MUTUAL MORTGAGE FACILITIES" means, collectively, (1) the Loan Agreement, dated October 15, 1996, between Beverly Enterprises - Arkansas, Inc. and Washington Mutual Bank FA (successor by merger to Bank United) ("WASHINGTON MUTUAL"), (2) the Loan Agreement, dated October 15, 1996, between Beverly Enterprises - Alabama, Inc. and Washington Mutual, (3) the Loan Agreement, dated October 15, 1996, between Beverly Enterprises - Washington, Inc. and Washington Mutual and (4) the Loan Agreement, dated October 15, 1996, between Beverly Enterprises - Wisconsin, Inc. and Washington Mutual, each as amended from time to time. SECTION 3. Amendment of Definitions. (a) The definition of "Permitted Encumbrances" set forth in Section 1.01 of the Credit Agreement is hereby deleted in its entirety. 9 (b) The definitions of "Adjusted Consolidated Debt", "Consolidated Net Income", "Consolidated Net Worth", "Financing Documents", "Fixed Charge Coverage Ratio", "Letter of Credit Commitment", "Mortgages" and "Security Documents", set forth in Section 1.01 of the Credit Agreement, are hereby amended to read in full as follows: "ADJUSTED CONSOLIDATED DEBT" means, at any date, the sum, without duplication, of (i) all liabilities of the Borrower and its Subsidiaries at such date of the types classified as "current liabilities: short-term borrowings", "current liabilities: current portion of long-term obligations," "long-term obligations" and, to the extent arising out of claims made by governmental authorities relating to reimbursement obligations or settlements thereof, "other liabilities and deferred items" on the consolidated balance sheet included in the Base Financials, (ii) all guarantees at such date of obligations of other issuers (other than (x) guarantees outstanding on the Effective Date of obligations outstanding on the Effective Date, in amounts not in excess of $57,191,572 and reported in the Base Financials and (y) obligations, or guarantees of obligations, with respect to facilities or Subsidiaries disposed of, which obligations or guarantees existed prior to such dispositions and are initially recorded as liabilities or obligations on the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries pursuant to FASB Interpretation 45 after the Closing Date, so long as (A) no event of the type referred to in Section 6.01(h) or (i) (without regard to whether a period of 60 days shall have passed as contemplated in Section 6.01(i)) shall have occurred with respect to the Person that is primarily liable in respect of such obligations, or who has agreed with the Borrower or any of its Subsidiaries to be responsible for such obligations, and (B) the obligee of such obligation, or the beneficiary of such guarantee, shall not have made a demand for payment in respect of such obligation or guarantee) and (iii) an amount equal to the product of eight multiplied by the Consolidated Rental Expense for the four fiscal quarters of the Borrower most recently completed on or prior to such date; provided that for purposes of this clause (iii), Consolidated Rental Expense for any such period of four fiscal quarters shall be calculated after giving pro forma effect (including, in the case of any acquisition, as to any cost savings and the like resulting from such acquisition, but only to the extent permitted under Regulation S-X promulgated by the Securities and Exchange Commission) to any acquisition or disposition by the Borrower or any of its Subsidiaries of any business, nursing home or other facility or any Subsidiary consummated after the first day of such period and on or prior to the date on which such determination is to be made, as if such acquisition or disposition had been consummated on the first day of such period, if, but only if, the 10 CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. Consolidated EBITDAR attributable to all such businesses, nursing homes and other facilities and all such Subsidiaries, in any transaction or series of related transactions, for such period, in the aggregate, equals or exceeds $10,000,000. "CONSOLIDATED NET INCOME" means, for any period, the net income (loss) (calculated (a) before preferred and common stock dividends and (b) exclusive of the effect of (i) any extraordinary or other material non-recurring gain or loss outside the ordinary course of business, (ii) Specified Restructuring Charges in an aggregate amount, on a pretax basis, during the period from October 1, 2000 through March 31, 2001 not exceeding $105,000,000, (iii) the charges or losses, in an aggregate amount, on a pretax basis, not exceeding $130,000,000, incurred by the Borrower and its Consolidated Subsidiaries on or prior to January 8, 2002 in connection with the Florida Disposition, (iv) charges and losses incurred by the Borrower and its Consolidated Subsidiaries on or after the Amendment No. 4 Effective Date as a result of (x) Asset Sales outside the ordinary course of business and dispositions made pursuant to the Disposition Program and (y) payments relating to the past billing practices of MK Medical in an aggregate amount not exceeding ************, (v) non-cash charges and losses incurred by the Borrower and its Consolidated Subsidiaries on or after the Amendment No. 4 Effective Date as a result of (x) closures of assisted living and skilled nursing facilities of the Borrower and its Subsidiaries and (y) any change in GAAP that requires the Bank of Montreal Synthetic Lease Obligations and the assets subject to the Bank of Montreal Synthetic Lease to be included on the balance sheet of the Borrower and its Consolidated Subsidiaries and (vi) transaction fees and expenses of the Borrower and its Subsidiaries incurred in connection with Amendment No. 4 and any related amendments to the Bank of Montreal Synthetic Lease and the Mortgage Credit Facilities) for the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "CONSOLIDATED NET WORTH" means, at any date, the consolidated stockholders' equity of the Borrower and its Consolidated Subsidiaries at such date, without giving effect to (a) charges and losses incurred by the Borrower and its Consolidated Subsidiaries on or after the Amendment No. 4 Effective Date as a result of (i) Asset Sales outside the ordinary course of business and dispositions made pursuant to the Disposition Program, (ii) payments relating to the past billing practices of MK Medical in an aggregate amount not exceeding ************ (b) non-cash charges and losses incurred by the Borrower and its Consolidated Subsidiaries on or after the Amendment No. 4 Effective Date as a result of (i) closures of 11 assisted living and skilled nursing facilities of the Borrower and its Subsidiaries and (ii) any change in GAAP that requires the Bank of Montreal Synthetic Lease Obligations and the assets subject to the Bank of Montreal Synthetic Lease to be included on the balance sheet of the Borrower and its Consolidated Subsidiaries and (c) transaction fees and expenses of the Borrower and its Subsidiaries in connection with Amendment No. 4 and any related amendments to the Bank of Montreal Synthetic Lease and the Mortgage Credit Facilities. "FINANCING DOCUMENTS" means this Agreement, the Notes, the Subsidiary Guaranty and the Security Documents. "FIXED CHARGE COVERAGE RATIO" means, on any date, the ratio of (i) Consolidated EBITDAR for the four consecutive fiscal quarters most recently ended on or prior to such date to (ii) the sum of Consolidated Interest Charges and Consolidated Rental Expense for such fiscal quarters. "LETTER OF CREDIT COMMITMENT" means, with respect to any Bank at any time, an amount equal to the lesser of (i) such Bank's Available Commitment at such time and (ii) the product of $75,000,000 multiplied by such Bank's Ratable Share at such time. "MORTGAGES" means the Existing Mortgages and the New Mortgages. "SECURITY DOCUMENTS" means the Pledge Agreement, the Mortgages and any Additional Mortgage (excluding, on any day prior to the execution and delivery of any New Mortgage or Additional Mortgage, such New Mortgage or Additional Mortgage), together with all related filings, assignments, instruments, mortgages and other papers. SECTION 4. Loans on and after the Effective Date. Clause (b) of Section 2.01 of the Credit Agreement is amended to read in full as follows: "(b) Loans on and after the Effective Date. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section 2.01(b) from time to time from and including the Effective Date to but excluding the Termination Date in amounts such that such Bank's Exposure shall not exceed such Bank's Available Commitment. Each Borrowing under this Section 2.01(b) shall be in an aggregate principal amount of $1,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available under Section 3.02(b)) and shall be made 12 from each Bank in the amount of its Ratable Share of such Borrowing. Within the foregoing limits, the Borrower may borrow under this Section 2.01(b), prepay loans to the extent permitted by Section 2.13, and reborrow pursuant to this Section 2.01(b)." SECTION 5. Maturity of Loans; Mandatory Prepayments. Section 2.05 of the Credit Agreement is amended to read in full as follows: "SECTION 2.05. Maturity of Loans; Mandatory Prepayments. (a) Each Loan shall mature, and the principal amount thereof shall be due and payable in full, on the Termination Date. (b) The Loans shall be prepaid on the first Business Day of each calendar month in an aggregate amount equal to the amount (if any) by which the Consolidated Cash Balance on last Business Day of the immediately preceding calendar month (after giving effect to any prepayment of the Bank of Montreal Synthetic Lease Obligations and/or the Mortgage Facility Obligations pursuant to Section 5.22 or the Loans pursuant to clause (d) of this Section 2.05, in each case to be made on such Business Day and net of the aggregate amount of checks issued by the Borrower and its Consolidated Subsidiaries on or prior to such Business Day that have not cleared at the close of business on such Business Day), exceeds $50,000,000. (c) If, on any day, the aggregate Exposure of all Banks shall exceed the Available Amount for such day, the Borrower shall prepay Loans (and, to the extent that such amount exceeds the aggregate principal amount of all Loans then outstanding, cash collateralize Letters of Credit) in an aggregate principal amount equal to such excess. (d) If, on any day on which the Commitments are reduced pursuant to Section 2.11(b), there shall be any Loans outstanding, the Borrower shall prepay Loans in an aggregate principal amount equal to the lesser of (x) the aggregate principal amount of all Loans then outstanding and (y) the amount of such Commitment reduction. (e) Each prepayment of all or part of a Group of Loans pursuant to this Section 2.05 shall be applied to prepay ratably the Loans of the several Banks included in such Group." SECTION 6. Fees. (a) Clause (a) of Section 2.08 of the Credit Agreement is amended to read in full as follows: 13 "(a) The Borrower shall pay to the Administrative Agent for the account of the Banks, ratably in proportion to their Commitments, a commitment fee at a rate per annum (the "COMMITMENT FEE RATE") determined for each day in accordance with the Pricing Schedule, on the amount by which the aggregate amount of the Commitments on such day exceeds the aggregate Exposure on such day; provided that for any day during a Restricted Period, the Commitment Fee Rate applicable to any portion of the unused Commitments that represents aggregate Commitments in excess of $100,000,000 shall be 0.50% per annum. Such fees shall accrue from and including the Effective Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety)." SECTION 7. No Increase of Commitments. Section 2.09 of the Credit Agreement is amended to read in full as follows: "SECTION 2.09. [INTENTIONALLY OMITTED]." SECTION 8. Mandatory Termination or Reduction of Commitments. Section 2.11 of the Credit Agreement is amended to read in full as follows: "SECTION 2.11. Mandatory Termination or Reduction of Commitments. (a) All Commitments shall terminate in their entirety on the Termination Date. (b) The Commitments shall automatically be reduced (i) on the Amendment No. 4 Effective Date, by $25,000,000, (ii) upon the receipt by the Borrower or any of its Subsidiaries of any proceeds of any Asset Sale, by an amount equal to (A) if the assets subject to such Asset Sale constituted Collateral immediately prior to such Asset Sale, the product of 5 multiplied by the Annualized Mortgage EBITDA for the assets subject to such Asset Sale, as determined based on the most recent fiscal quarter for which financial statements have been delivered pursuant to Sections 5.01(a) and (b); 14 CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. (B) if any Net Cash Proceeds result from such Asset Sale, (1) until the Commitments have been reduced by $18,750,000 in the aggregate pursuant to this clause (1), 100% of the Net Cash Proceeds in respect of such Asset Sale; provided that if, prior to the earlier of (x) ************************************* ***************** and (y) *************** *******************************************, the Borrower shall have reached a final agreement related to past billing practices of MK Medical, which agreement requires the Borrower and its Subsidiaries to make cash payments in an aggregate amount greater than ************ but less than *************, no Commitment reduction shall be required in respect of the Net Cash Proceeds received on or after the date that such agreement becomes final in an amount equal to the excess of the aggregate amount of such payments over ***********; provided further that the provisions of this clause (1) shall remain in effect thereafter until the Commitments have been reduced by $18,750,000 in the aggregate pursuant to this clause (1), (2) after the Commitments have been reduced by $18,750,000 in the aggregate pursuant to clause (ii)(B)(1) of this Section 2.11(b), the Specified Portion in respect of the Commitments of 65% of the Net Cash Proceeds of such Asset Sales and (C) if, in the absence of any additional Commitment reductions and/or repayments of Mortgage Facility Obligations and/or Bank of Montreal Synthetic Lease Obligations, the Borrower would be required to make a Senior Asset Sale Offer (as defined in the Senior Note Agreement or the New Senior Note Agreement) under the Senior Note Agreement or the New Senior Note Agreement, by an amount equal to the Specified Portion in respect of the Commitments of the amount of Net Cash Proceeds that must be applied to repay Senior Debt (as defined in the Senior Note Agreement or the New Senior 15 Note Agreement) in order for the Borrower to avoid the making of a Senior Asset Sale Offer under the Senior Note Agreement or the New Senior Note Agreement; and (iii) on any Business Day, by the Specified Portion in respect of the Commitments of the amount by which the average of the Consolidated Cash Balances at the close of business on the three consecutive Business Days immediately preceding such day (in each case after giving effect to any Commitment reductions required pursuant to clause (ii) of this Section 2.11(b) and related prepayments pursuant to Section 2.05(d) and any prepayments required under clause (ii) of Section 5.22, in each case to be made on any such Business Day) exceeds $125,000,000; provided that in no event (other than pursuant to clause (ii)(C) above) shall the aggregate Commitments be reduced to less than $85,000,000 pursuant to this Section 2.11(b). (c) Each reduction of the Commitments pursuant to this Section 2.11 shall be applied ratably to the respective Commitments of all Banks." SECTION 9. Conditions to Each Borrowing and Letter of Credit Issuance. Clause (b) of Section 3.02 is amended to read in full as follows: "(b) in the case of any Borrowing or the issuance of any Letter of Credit, the fact that, immediately after such Borrowing or the issuance of such Letter of Credit, as the case may be, the aggregate Exposures of all Banks does not exceed the Available Amount;" SECTION 10. Subsidiaries. The last sentence of Section 4.01 of the Credit Agreement is amended by replacing the expression "Effective Date" with "Amendment No. 4 Effective Date". SECTION 11. Binding Effect; Liens. Clause (b) of Section 4.03 of the Credit Agreement is amended to read in full as follows: "(b) The Security Documents create valid security interests in and mortgage liens on the Collateral purported to be covered thereby, which security interests and mortgage liens are and will remain perfected security interests and mortgage liens, prior to all Liens other than Permitted Property Liens and, at any time prior to the applicable Cure Date, applicable Curable Encumbrances, and as to which, in the case of the Pledged Stock, the Administrative Agent has control (within the meaning 16 of Sections 8-106 and 9-106 of the UCC), subject, in the case of the Pledged Stock, to the Administrative Agent's maintaining possession thereof, and, in the case of the Mortgages, to the recording of the Mortgages in the county recording offices set forth on Schedules 1 thereto and the filing of Uniform Commercial Code financing statements in the Uniform Commercial Code filing offices and county recording offices set forth or Schedules 2 thereto." SECTION 12. Compliance Certificate. Clause (d) of Section 5.01 of the Credit Agreement is amended to read in full as follows: "(d) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of an Authorized Financial Officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.05, 5.06, 5.07, 5.09, 5.10, 5.11, 5.13, 5.18, 5.19, 5.21 and 5.22 hereof and Section 5(C) of the Pledge Agreement on the date of such financial statements, and, if such compliance is being determined on a pro forma basis in accordance with the proviso to the definition of Consolidated EBITDAR or Adjusted Consolidated Debt, setting forth in reasonable detail the nature and amount of each pro forma adjustment included in such calculations, (ii) setting forth in reasonable detail calculations of the Pricing Ratio as at the date of the balance sheet contained therein and for the period of four fiscal quarters ending on such date, (iii) in the case of each such certificate delivered after the New Mortgage Deadline, setting forth in reasonable detail the Coverage Limitation as of the date of the balance sheet contained therein and (iv) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto;" SECTION 13. Fixed Charge Coverage Ratio. Section 5.06 of the Credit Agreement is amended to read in full as follows: "SECTION 5.06. Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio at any date shall not be less than 1.1 to 1.0." SECTION 14. Leverage Ratio. Section 5.07 of the Credit Agreement is amended to read in full as follows: "SECTION 5.07. Leverage Ratio. The ratio at any date during any period set forth below of (a) Adjusted Consolidated Debt to (b) 17 Consolidated EBITDAR for the period of four consecutive fiscal quarters most recently ended on or prior to such date shall not be more than the ratio set forth below opposite such period:

SECTION 15. Investments. (a) Clause (i) of Section 5.09 of the Credit Agreement is amended to read in full as follows: "(i) (i) promissory notes (and, in the case of facilities or stock sold other than as part of the Disposition Program or the sale of certain assets specified in the Investments Side Letter, or stock of Subsidiaries holding solely such specified assets, other Investments) received as consideration for facilities or stock of Subsidiaries sold (other than in connection with, or as part of, the Florida Disposition), provided that (x) the aggregate net book value of all outstanding Investments permitted by this subclause (i)(i) shall not exceed at any time (1) in the case of promissory notes received in connection with the sale of facilities and stock of Subsidiaries pursuant to the Disposition Program, 10% of the gross proceeds received by the Borrower and its Subsidiaries at or prior to such time in connection with all sales of facilities and stock of Subsidiaries pursuant to the Disposition Program, (2) in the case of promissory notes received in connection with the sale of certain assets specified in the Investments Side Letter, or the stock of Subsidiaries holding solely such specified assets, the percentages set forth in the Investments Side Letter of the gross proceeds received by the Borrower and its Subsidiaries in connection with such sale and (3) in the case of all other promissory notes and Investments so received, $25,000,000 and (y) in the case of promissory notes referred to in subclauses (1) and (2) of clause (x) above, (A) if the obligations of the Borrower and the Subsidiary Guarantors under the Financing Documents, the Mortgage Credit Facilities or the Bank of Montreal Synthetic Lease were secured by a Lien on the facilities sold, or the facilities owned by the Subsidiary whose stock was sold, and such obligations remain 18 outstanding, then the promissory notes received in connection with the sale of such facilities or stock shall be pledged to the Person or Persons that held such Lien and (B) if none of the obligations of the Borrower and the Subsidiary Guarantors under the Financing Documents, the Mortgage Credit Facilities or the Bank of Montreal Synthetic Lease was secured by a Lien on the facilities sold, or the facilities owned by the Subsidiary whose stock was sold, then, to the extent permitted under the Senior Note Agreement and the New Senior Note Agreement, the promissory notes received in connection with the sale of such facilities or stock shall be pledged to secure, equally and ratably, the obligations of the Borrower and the Subsidiary Guarantors under the Financing Documents, the Mortgage Credit Facilities and the Bank of Montreal Synthetic Lease and (ii) promissory notes received as partial consideration for the Florida Disposition, provided that the aggregate principal amount of all such promissory notes permitted by this subclause (i)(ii) shall not, at any time, exceed $20,000,000;" (b) Section 5.09 of the Credit Agreement is amended by adding, at the end thereof, the following: "In addition, neither the Borrower nor any of its Subsidiaries will, during any period on or after the Amendment No. 4 Effective Date during which the Adjusted Leverage Ratio exceeds 5.0 to 1.0 make or acquire any Investments of the types referred to in clauses (b), (d), (e) or (o) of this Section 5.09, acquire any health care facilities (including, without limitation, any acquisition of such a facility pursuant to a Lease Conversion) or make any Lease Conversion other than (i) Lease Conversions with respect to the Bank of Montreal Synthetic Lease and (ii) Investments, Lease Conversions and acquisitions of facilities in an aggregate amount not exceeding $15,000,000." SECTION 16. Restricted Payments on Stock. Clause (v) of Section 5.10 of the Credit Agreement is amended to read in full as follows: "(v) the Borrower may make any such payment or distribution if, after giving effect thereto, the aggregate amount of all such payments or distributions made after the Effective Date (including, without limitation, any such payments or distributions permitted under subclause (ii)(A) or clause (iv) above) does not exceed (A) on any date on which no Event of Default shall have occurred and be continuing or shall result from such payment and the Adjusted Leverage Ratio as at the last day of the most recently ended fiscal quarter is (I) less than 5.00 to 1.00 but not less than 4.75 to 1.00, $25,000,000, (II) less than 4.75 to 1.00 but not less than 4.50 19 to 1.00, $30,000,000, and (III) less than 4.50 to 1.00, $40,000,000 and (B) on any other date, $10,000,000; provided that no payment or distribution otherwise permitted under this clause (v) shall be made by the Borrower on any day on or after the Amendment No. 4 Effective Date on which the Adjusted Leverage Ratio is greater than 5.00 to 1.00." SECTION 17. Negative Pledge. Clause (a) of Section 5.11 of the Credit Agreement is amended by: (a) amending clause (iv) thereof to read in full as follows: "(iv) any Lien on any asset securing Debt or lease obligations incurred or assumed for the purpose of financing all or any part of the cost of acquiring or constructing such asset or reconstructing substantially all of such asset, provided that (x) such Lien attached or attaches to such asset concurrently with or within one year (or, in the case of any such Lien on the Federal Way Facility that attached prior to the Amendment No. 4 Effective Date, 385 days) after such acquisition, construction or reconstruction and (y) on any day on or after the Amendment No. 4 Effective Date on which the Adjusted Leverage Ratio is greater than 5.00 to 1.00, Liens may be created or assumed under this clause (iv) only to secure Debt referred to in clause (iv) of the definition of Debt in Section 1.01;" and (b) (i) deleting the expression "and" at the end of clause (xiv) thereof, (ii) replacing the period at the end of clause (xv) thereof with the expression"; and" and (iii) inserting at the end thereof the following: "(xvi) with respect to each property covered by a Mortgage or an Additional Mortgage, the Permitted Property Liens (as defined in the Mortgage or Additional Mortgage covering such property)." SECTION 18. Consolidations, Mergers and Sales of Assets. Section 5.12 of the Credit Agreement is amended to read in full as follows: "SECTION 5.12. Consolidations, Mergers and Sales of Assets. Neither the Borrower nor any of its Subsidiaries will: (a) consolidate or merge with or into any other Person, unless the Borrower or, except in the case of a merger or consolidation to which the Borrower is a party, a Wholly-Owned Subsidiary of the Borrower is the surviving corporation or 20 CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. (b) sell, lease or otherwise transfer (i) if the Adjusted Leverage Ratio as of the day of such sale, lease or other transfer is less than or equal to 5.00 to 1.00, all or any substantial part of the assets of the Borrower and its Subsidiaries, taken as a whole, to any other Person and (ii) if the Adjusted Leverage Ratio as of the day of such sale, lease or other transfer is greater than 5.00 to 1.00, any assets or property; provided that (i) this Section 5.12 shall not apply to (A) mergers, dissolutions, reorganizations or liquidations of Subsidiaries of the Borrower that have disposed of all or substantially all of their assets, (B) sales, leases or other transfers by the Borrower or any of its Subsidiaries to the Borrower or any Subsidiary Guarantor and (C) sales, transfers or other dispositions of MK Medical, **************** ********************************************************************** **************************** or made pursuant to the Disposition Program and (ii) Section 5.12(b)(ii) does not apply to sales, leases or other transfers of (A) assets or property made in respect of Sale and Leaseback Transactions permitted under Section 5.19, (B) assets or property (other than assisted living and skilled nursing facilities, separate business units, businesses or divisions or stock of Subsidiaries) not covered by clause (ii)(A) above and (1) disposed of in the ordinary course of business or (2) to the extent not disposed of in the ordinary course of business, so long as the aggregate gross proceeds of sales, transfers and other dispositions made pursuant to this clause (2) does not exceed $2,000,000 and (C) assets or property pursuant to condemnations or in lieu of condemnations; and provided further that the Borrower and its Subsidiaries may assign or grant security interests in their Medicare, Medicaid or other patient accounts receivable to a Special Purpose Receivables Financing Subsidiary to secure Permitted Receivables Financing Securities (provided that the net amount at any time of all uncollected accounts receivable owing to the Borrower or any of its Subsidiaries that are so assigned or in which a security interest is so granted shall not exceed 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding)." SECTION 19. Incurrence of Debt. Section 5.13 of the Credit Agreement is amended by adding, at the end thereof, a new clause (c) to read in full as follows: "(c) At any time on or after the Amendment No. 4 Effective Date at which the Adjusted Leverage Ratio exceeds 5.00 to 1.00, the Borrower will not, and will not permit any of its Subsidiaries to, incur or assume any Debt, except: 21 (i) Debt incurred in connection with Lease Cancellation Payments; (ii) Debt of the type referred to in clause (iv) of the definition of "Debt" secured by a Lien permitted pursuant to clause (iv) of subsection 5.11(a); (iii) Debt of any corporation that became or becomes a Consolidated Subsidiary of the Borrower that existed or exists at the time such corporation became or becomes such a Consolidated Subsidiary and (other than in a Workout Transaction) not created in contemplation thereof; (iv) Refinancing Debt incurred to refinance Debt permitted under clauses (i) through (iii) above, provided that (A) the principal amount of such Refinancing Debt shall not exceed the principal amount of such Refinanced Debt and (B) such Refinancing Debt shall have a weighted average life of not less than the remaining weighted average life of such Refinanced Debt or such Refinancing Debt shall not have any required payments of principal prior to the first anniversary of the Termination Date; (v) to the extent it refinances Debt permitted to have been incurred, and in fact incurred, prior to the Amendment No. 4 Effective Date or when the Adjusted Leverage Ratio did not exceed 5.00 to 1.00, Refinancing Debt permitted under clause (v) of Section 5.13(a) (treating such Section 5.13(a) solely for purposes of this clause (v) as if it applied to the Borrower as well as its Subsidiaries); (vi) Permitted Receivables Financing Securities, provided that the aggregate principal and redemption amount of all Permitted Receivables Financing Securities outstanding at any time shall not exceed $100,000,000; (vii) Debt incurred under the Financing Documents; (viii) Guarantees by the Borrower or any of its Subsidiaries of any obligation of the Borrower or any of its Subsidiaries that the Borrower or such guaranteeing Subsidiary would have been permitted to incur hereunder as a primary obligation; 22 (ix) Debt consisting of advances from the Borrower or any of its Subsidiaries in connection with the normal operation of the business of the Borrower and its Subsidiaries; (x) Debt incurred in connection with and as part of a Workout Transaction; (xi) Debt incurred or assumed for the purpose of financing the cost of acquiring, constructing or improving an asset of the Borrower or any of its Subsidiaries; (xii) Debt not otherwise permitted under clauses (i) through (xi) of this Section; provided that the aggregate principal amount of Debt permitted under clauses (i), (ii), (iv) (to the extent that the Debt incurred under such clause (iv) refinances Debt incurred under clause (i) or (ii) of this Section 5.13(c)), (xi) and (xii) of this Section 5.13(c) shall not exceed $10,000,000 at any time outstanding." SECTION 20. Use of Proceeds and Letters of Credit. Section 5.14 of the Credit Agreement is amended to read in full as follows: "SECTION 5.14. Use of Proceeds and Letters of Credit. The Letters of Credit issued (or deemed issued), and the proceeds of the Loans made, under this Agreement will be used for general corporate purposes; provided that none of such Letters of Credit or proceeds of Loans will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of (a) buying or carrying any "margin stock" within the meaning of Regulation U or (b) prepaying any Debt of the Borrower or its Subsidiaries." SECTION 21. Lease Conversions. Section 5.16 of the Credit Agreement is amended by (i) deleting "and" at the end of clause (i) thereof, (ii) inserting the expression"; and" at the end of clause (ii) thereof and (iii) adding the following at the end thereof: "(iii) if such Lease Conversion is made on any day on or after the Amendment No. 4 Effective Date on which the Adjusted Leverage Ratio is greater than 5.00 to 1.00, such Lease Conversion is permitted under the last sentence of Section 5.09." 23 SECTION 22. Consolidated Gross Capital Expenditures. Section 5.18 of the Credit Agreement is amended to read in full as follows: "SECTION 5.18. Consolidated Gross Capital Expenditures. Consolidated Gross Capital Expenditures will not, for any fiscal year ending on or after December 31, 2002 exceed (A) if the Adjusted Leverage Ratio on the first day of such fiscal year is greater than 5.00 to 1.00, $55,000,000 and (B) if the Adjusted Leverage Ratio on the first day of such fiscal year is less than or equal to 5.00 to 1.00, the amount indicated below opposite such fiscal year:

To the extent that Consolidated Gross Capital Expenditures for any fiscal year referred to in clause (B) of this Section 5.18 are less than the applicable amount specified pursuant to this Section 5.18, the difference may be carried forward to the next fiscal year unless the Adjusted Leverage Ratio is greater than 5.00 to 1.00 on the first day of such next fiscal year (and for this purpose, Consolidated Gross Capital Expenditures in any subsequent fiscal year shall be applied, first, to any such carry-forward amount and, second, to the specified amount for such year)." SECTION 23. Sale and Leaseback Transactions. Section 5.19 of the Credit Agreement is amended to read in full as follows: "SECTION 5.19. Sale and Leaseback Transactions. (a) The Borrower will not, and will not permit any of its Subsidiaries to, enter into any arrangement, directly or indirectly, whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, which property has been owned and operated by the Borrower and its Subsidiaries for more than 180 days, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred (each, a "SALE AND LEASEBACK TRANSACTION"), except for Sale and Leaseback Transactions the aggregate amount of Attributable Debt in respect of which does not exceed $20,000,000. (b) On any day on or after the Amendment No. 4 Effective Date on which the Adjusted Leverage Ratio is greater than 5.00 to 1.00, the 24 Borrower will not and will not permit any of its Subsidiaries to enter into any Sale and Leaseback Transaction other than Sale and Leaseback Transactions with respect to specified equipment previously identified to the Administrative Agent for which the Attributable Debt, together with all other Attributable Debt arising on or after the Amendment No. 4 Effective Date from Sale and Leaseback Transactions in respect of all other specified equipment previously identified to the Administrative Agent and entered into on a day on which the Adjusted Leverage Ratio was greater than 5.00 to 1.00, does not exceed $2,000,000. SECTION 24. Mortgages. Article 5 of the Credit Agreement is hereby amended by adding, immediately after Section 5.19, new Sections 5.20, 5.21, 5.22 and 5.23 to read in their entirety as follows: "SECTION 5.20. Mortgages. On or prior to the New Mortgage Deadline or, if requested by the Borrower and agreed to by the Agent in its reasonable discretion with respect to one or more New Mortgage Properties that do not exceed in value (as determined on the basis of the "2003 Budget EBITDA with Cliff" assigned to each New Mortgage Property in the Strategic Review) 40% of the aggregate value (so determined) of all New Mortgage Properties, such other date or dates (which shall not, except in the case of New Mortgage Properties that do not exceed in value (so determined) 15% of the aggregate value (so determined) of all New Mortgage Properties, be later than the ninetieth day after the Amendment No. 4 Effective Date) (each, an "EXTENDED NEW MORTGAGE DEADLINE") as the Borrower and the Agent shall agree: (a) the owner of each New Mortgage Property shall have delivered to the Agent duly executed counterparts of a New Mortgage in respect of each New Mortgage Property owned by it; (b) the Borrower shall deliver, or cause to be delivered, to the Agent legal opinions of local counsel reasonably satisfactory to the Agent with respect to each of the New Mortgages, which legal opinion shall be in form and substance reasonably satisfactory to the Agent; (c) the Borrower shall deliver, or cause to be delivered, to the Agent evidence satisfactory to the Agent that such action (including, without limitation, the filing of appropriately completed Uniform Commercial Code financing statements and the recording of Mortgages) as may be necessary or as the Agent shall have reasonably requested to perfect the Liens created pursuant to the 25 New Mortgages shall have been taken, or that arrangements therefor satisfactory to the Agent shall have been made; (d) the Borrower shall deliver, or cause to be delivered, to the Agent policies of title insurance (or commitments therefor with all conditions marked satisfied), in form and substance satisfactory to the Agent and issued by an insurance company or companies as are acceptable to the Agent (the "TIC"), insuring the perfection, enforceability and priority of the Liens on the New Mortgage Property created under the New Mortgages in amounts not less than 110% of the product of 5 multiplied by the "2003 Budget EBITDA with Cliff" assigned to such New Mortgage Property in the Strategic Review, subject only to such exceptions as are reasonably satisfactory to the Agent, containing such endorsements (other than endorsements that would require a new survey or survey update) and affirmative assurances as have been previously agreed to by, or are otherwise satisfactory to, the Agent, and reinsured in amounts and under reinsurance agreements in form and substance satisfactory to the Agent; and the Borrower shall have paid or made arrangements satisfactory to the Agent to pay to the TIC all expenses and premiums of the TIC in connection with the issuance of such policies and in addition shall have paid or made arrangements satisfactory to the Agent to pay to the TIC an amount equal to the recording and stamp taxes payable in connection with recording the New Mortgages in the appropriate county land offices; provided that, if with respect to any New Mortgage Property there are encumbrances of record, as of the New Mortgage Deadline (or, in the case of a New Mortgage Property as to which the Agent shall have consented to an Extended New Mortgage Deadline, as of the Extended New Mortgage Deadline in respect of such New Mortgage Property) that are not reasonably acceptable to the Administrative Agent, then unless the Administrative Agent, in its reasonable discretion, enters into a letter agreement with the Borrower, the owner of the New Mortgaged Property and the TIC setting forth such encumbrances and providing for the removal of such encumbrances and the execution and delivery of documentation evidencing such removal by the applicable Cure Date, the Administrative Agent shall accept a New Mortgage on a substitute property as described in the proviso to the definition of New Mortgage Property set forth in Section 1.01 hereof (and title insurance complying with the provisions of this clause (d)) in lieu of such New Mortgage Property; 26 (e) the Borrower shall deliver, or cause to be delivered, to the Agent copies of file search reports from the Uniform Commercial Code filing office in each jurisdiction (i) in which is located any Collateral (other than Pledged Stock) subject to a New Mortgage, (ii) in which is located the chief executive office of any Subsidiary of the Borrower that owns or holds any right, title or interest in any property that constitutes Collateral (other than the Pledged Stock) subject to a New Mortgage or (iii) in which any such Subsidiary is located (within the meaning of Section 9-307 of the UCC), setting forth the results of Uniform Commercial Code file searches conducted in the name of the Borrower or such Subsidiary, as the case may be; (f) the Borrower shall deliver, or cause to be delivered, to the Agent all documents the Agent may reasonably request relating to the existence of each Subsidiary of the Borrower party to any New Mortgage, the corporate authority for and the validity of the New Mortgages, and any other matters relevant thereto, all in form and substance satisfactory to the Agent; and (g) the Borrower shall have paid all other costs, fees and expenses (including, without limitation, mortgage recording, intangibles or documentary stamp on similar taxes, reasonable legal fees and expenses) payable to the Agent with respect to the New Mortgages, in each case invoiced prior to the New Mortgage Deadline or the Extended New Mortgage Deadline, as applicable. SECTION 5.21. Prepayment of Notes. The Borrower will not, and will not permit any of its Subsidiaries to, prepay the New Senior Notes or the Senior Notes; provided that the Borrower may prepay or redeem New Senior Notes or Senior Notes on any day with the amount, if any, by which the average of the Consolidated Cash Balances at the close of business on the three consecutive Business Days immediately preceding such day (exclusive of any amount escrowed pursuant to clause (iii)(B)(II) below), exceeds $125,000,000 if on such day (i) there shall be no Loans outstanding; (ii) the Bank of Montreal Synthetic Lease Obligations and the Mortgage Facility Obligations have been repaid in full; and (iii) either (A) (I) the Adjusted Leverage Ratio does not and did not exceed 5.00 to 1.00 on (x) such day, both prior to and after 27 giving effect to such prepayment, and (y) the last day of each of the two fiscal quarters most recently ended prior to such day and (II) the aggregate Commitments of all Banks do not exceed $85,000,000 or (B) all of (I) the aggregate Commitments of all Banks do not exceed $65,000,000, (II) the Borrower shall have delivered to the Agent cash in an amount equal to the aggregate Letter of Credit Exposures of all Banks then outstanding, to be held in escrow by the Agent to the extent that such Letter of Credit Exposures remain outstanding, (III) the Borrower shall have entered into a binding agreement not thereafter to request or borrow any Loans under this Agreement and (IV) the product of 5 multiplied by Annualized Mortgage EBITDA determined as of the date of such prepayment for the most recent fiscal quarter for which financial statements have been, or are required to have been, delivered pursuant to Section 5.01(a) or (b), shall equal or exceed the product of 2 multiplied by the aggregate Commitments of all Banks then outstanding. SECTION 5.22. Prepayment of Bank of Montreal Synthetic Lease Obligations and Mortgage Facility Obligations. The Borrower shall prepay, or cause its Subsidiaries to prepay (or, in the case of the Bank of Montreal Synthetic Lease Obligations, deposit funds that are committed to the repayment of), the Bank of Montreal Synthetic Lease Obligations and the Mortgage Facility Obligations, (i) on the Amendment No. 4 Effective Date, in the case of the Bank of Montreal Synthetic Lease Obligations, in the amount of $20,000,000, (ii) upon the receipt by the Borrower or any of its Subsidiaries of any proceeds of any Asset Sale, by an amount equal to (A) if such Asset Sale includes assets that were subject to a Lien securing the Bank of Montreal Synthetic Lease Obligations or the Mortgage Facility Obligations, solely to the obligations secured by such assets, (1) in the case of the Bank of Montreal Synthetic Lease Obligations, in the amount set forth on Schedule VII hereto with respect to such assets and (2) in the case of the Mortgage Facility Obligations, in the amount required to be repaid pursuant to the AmSouth Mortgage Facility or the Washington Mutual Mortgage Facilities, as applicable; 28 CONFIDENTIAL TREATMENT REQUESTED The asterisked portions of this document have been omitted and are filed separately with the Securities and Exchange Commission. (B) if any Net Cash Proceeds result from such Asset Sale, (1) until the Bank of Montreal Synthetic Lease Obligations have been prepaid by $15,000,000 in the aggregate and the Mortgage Facility Obligations have been prepaid by $3,750,000 in the aggregate, in each case pursuant to this clause (1) (or, in either case, repaid in full), the Initial Specified Portion of the Net Cash Proceeds in respect of such Asset Sale; provided that if, prior to the earlier of (x) ************ ******************************************** *********** and (y) ************************ ******************************, the Borrower shall have reached a final agreement related to past billing practices of MK Medical, which agreement requires the Borrower and its Subsidiaries to make cash payments in an aggregate amount greater than *********** but less than ***********, no prepayment shall be required in respect of the Net Cash Proceeds received on or after the date that such agreement becomes final in an amount equal to the excess of the aggregate amount of such payments over ***********; provided further that the provisions of this clause (1) shall remain in effect thereafter until the Bank of Montreal Synthetic Lease Obligations have been prepaid by $15,000,000 in the aggregate and the Mortgage Facility Obligations have been prepaid by $3,750,000 in the aggregate, in each case pursuant to this clause (1), (2) after the Bank of Montreal Synthetic Lease Obligations have been prepaid by $15,000,000 in the aggregate and the Mortgage Facility Obligations have been prepaid by $3,750,000 in the aggregate, in each case pursuant to clause (B)(1) of this Section 5.22(ii) (or, in either case, repaid in full), the Specified Portion of 65% of the Net Cash Proceeds of such Asset Sales, and (C) if, in the absence of any additional Commitment reductions and/or repayments of Mortgage Facility 29 Obligations and/or Bank of Montreal Synthetic Lease Obligations, the Borrower would be required to make a Senior Asset Sale Offer (as defined in the Senior Note Agreement or the New Senior Note Agreement) under the Senior Note Agreement or the New Senior Note Agreement, in an amount equal to the applicable Specified Portion of the amount of Net Cash Proceeds that must be applied to repay Senior Debt (as defined in the Senior Note Agreement or the New Senior Note Agreement) in order for the Borrower to avoid the making of a Senior Asset Sale Offer under the Senior Note Agreement or the New Senior Note Agreement; and (iii) on any Business Day, by the applicable Specified Portion of the amount by which the average of the Consolidated Cash Balances at the close of business on the three consecutive Business Days immediately preceding such day (in each case after giving effect to any Commitment reductions required pursuant to clause (ii) of Section 2.11(b) and related prepayments pursuant to Section 2.05(d) and any prepayments required pursuant to clause (ii) of this Section 5.22, in each case to be made on any such Business Day) exceeds $125,000,000; provided that (x) if the Mortgage Facility Obligations remain outstanding, the Borrower may elect to apply 100% of any prepayment that would otherwise be applied under this Section 5.22 to prepay the Mortgage Facility Obligations to prepay the Bank of Montreal Synthetic Lease Obligations and reduce the Commitments in the same manner as if the Mortgage Facility Obligations had theretofore been repaid in full pursuant to this Section 5.22 and (y) if the Mortgage Facility Obligations have been prepaid in full (other than pursuant to this Section 5.22), the Borrower may retain any amount that would otherwise have been applied under this Section 5.22 to prepay the Mortgage Facility Obligations to the extent that the aggregate of such retained amounts does not exceed the amount of Mortgage Facility Obligations so prepaid on or after the Amendment No. 4 Effective Date less $5,000,000. SECTION 5.23. Additional Collateral. (a) In the event that the Borrower or any of its Subsidiaries grants to the agent or the lenders under Bank of Montreal Synthetic Lease in respect of the Bank of Montreal Synthetic Lease Obligations, at any time after the Amendment No. 4 30 Effective Date, a Lien on any of its property or assets (other than a Lien on (i) Amended Mortgage Property (as defined in the Bank of Montreal Synthetic Lease) or (ii) any property (the "SUBSTITUTE PROPERTY") substituted for property (the "ORIGINAL PROPERTY") referred to in clause (i) above so long as the value of such Substitute Property is not greater than (other than by a de minimus amount) the value of the Original Property for which it is substituted), the Borrower shall, or shall cause its Subsidiary to, as the case may be, simultaneously grant to the Agent for the benefit of the Secured Parties, a security interest in such property or assets on an equal and ratable basis with the grant of the security interest to the agent or the lenders under the Bank of Montreal Synthetic Lease. (b) If all amounts now or hereafter payable by the Borrower and its Subsidiaries under (a) the AmSouth Mortgage Facility or (b) the Washington Mutual Mortgage Facilities shall have been repaid in full, then, to the extent permitted under the Senior Note Agreement and the New Senior Note Agreement, the Borrower shall, or shall cause its applicable Subsidiary to, grant Liens on the assets theretofore securing such Mortgage Facility Obligations to secure the obligations of the Borrower and the Subsidiary Guarantors under the Financing Documents (which Liens may equally and ratably secure the Bank of Montreal Synthetic Lease Obligations)." SECTION 25. Events of Default. (a) Section 6.01 of the Credit Agreement is amended by: (i) replacing the word "or" on the second line of clause (b) thereof with a comma; and (ii) adding, following the expression "5.19" on the second line of clause (b) thereof, the expression", 5.20, 5.21, 5.22 or 5.23". (b) Clause (n) of Section 6.01 of the Credit Agreement is amended to read in full as follows: "(n) the Security Documents shall at any time on or after the Amendment No. 4 Effective Date (or, in the case of any New Mortgage to be delivered pursuant to Section 5.20 or any Additional Mortgage to be delivered pursuant to Section 5.23, the date upon which such New Mortgage or Additional Mortgage is recorded in accordance with Section 5.20 or 5.23), for any reason (other than solely due to actions taken by the Agent or any Bank) fail to create perfected Liens in favor of the Secured Parties on the Collateral, securing all of the Secured Obligations purported 31 to be secured thereby, and as to which, in the case of Pledged Stock, the Agent has control (within the meaning of Sections 8-106 and 9-106 of the UCC), subject to no other Liens other than, in the case of Collateral covered by any Mortgage or Additional Mortgage, Permitted Property Liens and, at any time prior to the applicable Cure Date, applicable Curable Encumbrances, or, in the case of any Collateral other than Pledged Stock, Liens permitted under Section 5.11(a)(x) as to which the Liens created under the Security Documents have priority;" SECTION 26. Amendment to Schedules. Schedule I and Schedule IV of the Credit Agreement are hereby replaced in their entirety by Schedule I and Schedule IV hereto, respectively. SECTION 27. Additional Schedules. Schedules VI and VII hereto are hereby added as Schedules VI and VII, respectively, to the Credit Agreement. SECTION 28. Pledge Agreement Amendments. (a) Section 5(C) of the Pledge Agreement is hereby amended by adding, at the beginning of clause (ii) thereof, the following expression: "if the New Mortgage Condition is not satisfied on or prior to the New Mortgage Deadline or, to the extent that the Agent shall have agreed to an Extended New Mortgage Deadline with respect to any New Mortgage Property, in respect of such New Mortgage Property only, such Extended New Mortgage Deadline (it being understood that the Borrower will not be required to take any action under this clause (ii) between the Amendment No. 4 Effective Date and the later of the New Mortgage Deadline and any such Extended New Mortgage Deadline),". (b) The last sentence of Section 10 of the Pledge Agreement is hereby amended to read in full as follows: "The Administrative Agent and the Obligors agree that such notice constitutes `REASONABLE AUTHENTICATED NOTIFICATION' within the meaning of Section 9-611(b) of the UCC." SECTION 29. Representations. (a) The Borrower represents and warrants that (i) the representations and warranties of the Borrower set forth in Article 4 of the Credit Agreement will be true on and as of the Amendment No. 4 Effective Date, (ii) no Default will have occurred and be continuing on such date and (iii) the aggregate "2003 Budget EBITDA with Cliff" allocated in the Strategic Review to the assisted living and skilled nursing facilities set forth on Schedule VI hereto is at least $33,000,000. 32 (b) Each Subsidiary Guarantor represents and warrants that the representations and warranties set forth in Article 3 of the Amended and Restated Subsidiary Guaranty dated as of April 25, 2001 (as amended through to the Amendment No. 4 Effective Date) among the Borrower and the Subsidiaries of the Borrower party thereto will be true on and as of the Amendment No. 4 Effective Date. SECTION 30. General Release. In consideration of the amendments provided for herein, the Borrower and the Subsidiary Guarantors, on behalf of themselves and their respective Subsidiaries and their and their respective Subsidiaries' successors and assigns (collectively, "RELEASORS"), hereby forever waive, release and discharge to the fullest extent permitted by law any and all claims (including, without limitation, crossclaims, counterclaims, rights of set-off and recoupment), causes of action, demands, suits, costs, expenses and damages (collectively, the "CLAIMS"), that any Releasor now has or hereafter may have, of whatsoever nature and kind, whether known or unknown, whether now existing or hereafter arising, whether arising at law or in equity, against any or all of the Agent and any Bank and their respective affiliates, shareholders and "controlling persons" (within the meaning of the federal securities laws), and their respective successors and assigns and each and all of the officers, directors, employees, agents, attorneys and other representatives of each of the foregoing (collectively, the "RELEASEES"), based in whole or in part on facts, whether or not now known, existing on or before the execution of this Amendment, except for Claims solely arising out of the gross negligence or willful misconduct of any Releasees (the "EXCLUDED CLAIMS"). In entering into this Amendment, the Borrower has consulted with and been represented by counsel and expressly disclaims any reliance on any representations, acts or omissions by any of the Releasees and hereby agrees and acknowledges that the validity and effectiveness of the release set forth above do not depend in any way on any such representations, acts and/or omissions or the accuracy, completeness or validity thereof. The provisions of this Section shall survive the termination of the Credit Agreement and the other Financing Documents and payment in full of all amounts owing thereunder. SECTION 31. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 32. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. SECTION 33. Effectiveness. This Amendment shall become effective as of the date hereof on the date when the following conditions are met: 33 (a) the Administrative Agent shall have received from each of the Borrower, the Subsidiary Guarantors, and the Required Banks a counterpart hereof signed by such party or facsimile or other written confirmation (in form satisfactory to the Administrative Agent) that such party has signed a counterpart hereof; (b) the Administrative Agent shall have received a favorable written opinion of each of (i) John Arena, General Counsel - Corporate Law, of the Borrower, and (ii) Weil, Gotshal & Manges LLP, in each case covering such matters as the Required Banks shall reasonably request and in form and substance satisfactory to the Administrative Agent; (c) receipt by the Administrative Agent of a certificate of an Authorized Financial Officer of the Borrower setting forth in reasonable detail calculations that establish that the aggregate fair market value of the assisted living and skilled nursing facilities set forth on Schedule VI does not exceed the amount of the available and unused Permitted Liens under clause (xi) of the definition of Permitted Liens in the Senior Note Agreement immediately prior to the Amendment No. 4 Effective Date; (d) the Administrative Agent shall have received from the Borrower a counterpart of the Investments Side Letter signed by the Borrower or facsimile or other written confirmation (in form satisfactory to the Administrative Agent) that the Borrower has signed a counterpart thereof; (e) receipt by the Administrative Agent of evidence satisfactory to it that the Borrower shall have prepaid (or deposited funds that are committed to the prepayment of) the Bank of Montreal Synthetic Lease Obligations in an aggregate principal amount of $20,000,000; (f) receipt by the Administrative Agent of a fully executed amendment to the Bank of Montreal Synthetic Lease, in form and substance satisfactory to the Administrative Agent, and evidence satisfactory to it that such amendment is effective; (g) receipt by the Administrative Agent (i) for the account of the Banks which have executed Amendment No. 3 on or prior to the date hereof, ratably in proportion to their Commitments, of an amendment fee equal to 0.125% of the Commitments of such Banks as in effect immediately prior to giving effect to Amendment No. 4 and (ii) for the account of the Banks executing Amendment No. 4 on or prior to the date hereof, ratably in proportion to their Commitments, of an amendment fee equal to 0.375% of the Commitments of such Banks as in effect immediately prior to giving effect to Amendment No. 4; 34 (h) receipt of arrangement fees in the amounts, and for the accounts of the Persons, previously agreed with the Borrower; and (i) receipt by the Administrative Agent of payment of all out-of-pocket expenses due and payable to it pursuant to Section 9.03(a) of the Credit Agreement (including, to the extent invoiced, all fees and disbursements of Davis Polk & Wardwell, special counsel to the Administrative Agent). 35 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. BEVERLY ENTERPRISES, INC. By: /s/ RICHARD D. SKELLY, JR. ---------------------------------------- Name: Richard D. Skelly, Jr. Title: Senior Vice President and Treasurer SUBSIDIARY GUARANTORS: 4F FUNDING, INC. (f/k/a Beverly Enterprises - Oklahoma, Inc.) AEDON STAFFING, LLC AEDON HOMECARE, LLC AEGIS THERAPIES, INC. (f/k/a Beverly Rehabilitation, Inc.) AEGIS THERAPIES-FLORIDA, INC. (f/k/a AEGIS-Florida, Inc.) AGI-CAMELOT, INC. BEVERLY- BELLA VISTA HOLDING, INC. BEVERLY - INDIANAPOLIS, LLC BEVERLY - MISSOURI VALLEY HOLDING, INC. BEVERLY - RAPID CITY HOLDING, INC. BEVERLY CLINICAL, INC. BEVERLY ENTERPRISES INTERNATIONAL LIMITED BEVERLY ENTERPRISES - ALABAMA, INC. BEVERLY ENTERPRISES - ARIZONA, INC. BEVERLY ENTERPRISES - ARKANSAS, INC. BEVERLY ENTERPRISES - CALIFORNIA, INC. (f/k/a Hospital Facilities Corporation) BEVERLY ENTERPRISES - COLORADO, INC. BEVERLY ENTERPRISES - CONNECTICUT, INC. BEVERLY ENTERPRISES - DELAWARE, INC. BEVERLY ENTERPRISES - DISTRIBUTION SERVICES, INC. (f/k/a Beverly Enterprises - New York, Inc.) BEVERLY ENTERPRISES - DISTRICT OF COLUMBIA, INC. BEVERLY ENTERPRISES - FLORIDA, INC. BEVERLY ENTERPRISES - GARDEN TERRACE, INC. BEVERLY ENTERPRISES - GEORGIA, INC. BEVERLY ENTERPRISES - HAWAII, INC. BEVERLY ENTERPRISES - IDAHO, INC. BEVERLY ENTERPRISES - ILLINOIS, INC. BEVERLY ENTERPRISES - INDIANA, INC. BEVERLY ENTERPRISES - IOWA, INC. BEVERLY ENTERPRISES - KANSAS, LLC (successor to Beverly Enterprises - Kansas, Inc.) BEVERLY ENTERPRISES - KENTUCKY, INC. BEVERLY ENTERPRISES - LOUISIANA, INC. BEVERLY ENTERPRISES - MAINE, INC. BEVERLY ENTERPRISES - MARYLAND, INC. BEVERLY ENTERPRISES - MASSACHUSETTS, INC. BEVERLY ENTERPRISES - MICHIGAN, INC. BEVERLY ENTERPRISES - MINNESOTA, LLC (successor to Beverly Enterprises - Minnesota, Inc.) BEVERLY ENTERPRISES - MISSISSIPPI, INC. BEVERLY ENTERPRISES - MISSOURI, INC. BEVERLY ENTERPRISES - MONTANA, INC. BEVERLY ENTERPRISES - NEBRASKA, INC. BEVERLY ENTERPRISES - NEVADA, INC. BEVERLY ENTERPRISES - NEW HAMPSHIRE, INC. BEVERLY ENTERPRISES - NEW JERSEY, INC. BEVERLY ENTERPRISES - NEW MEXICO, INC. BEVERLY ENTERPRISES - NORTH CAROLINA, INC. BEVERLY ENTERPRISES - NORTH DAKOTA, INC. BEVERLY ENTERPRISES - OHIO, INC. BEVERLY ENTERPRISES - OREGON, INC. BEVERLY ENTERPRISES - PENNSYLVANIA, INC. BEVERLY ENTERPRISES - RHODE ISLAND, INC. BEVERLY ENTERPRISES - SOUTH CAROLINA, INC. BEVERLY ENTERPRISES - TENNESSEE, INC. BEVERLY ENTERPRISES - TEXAS, INC. BEVERLY ENTERPRISES - UTAH, INC. BEVERLY ENTERPRISES - VERMONT, INC. BEVERLY ENTERPRISES - VIRGINIA, INC. BEVERLY ENTERPRISES - WASHINGTON, INC. BEVERLY ENTERPRISES - WEST VIRGINIA, INC. BEVERLY ENTERPRISES - WISCONSIN, INC. BEVERLY ENTERPRISES - WYOMING, INC. BEVERLY HEALTH AND REHABILITATION SERVICES, INC. BEVERLY HEALTHCARE, LLC BEVERLY HEALTHCARE - CALIFORNIA, INC. BEVERLY HOLDINGS I, INC. BEVERLY INDEMNITY, LTD. BEVERLY MANOR INC. OF HAWAII BEVERLY REAL ESTATE HOLDINGS, INC. BEVERLY SAVANA CAY MANOR, INC. BEVRD, LLC CERES OXYGEN SERVICES, LLC CERES STRATEGIES, INC. (f/k/a/ Beverly Healthcare Acquisition, Inc.) CERES STRATEGIES MEDICAL SERVICES, LLC COMMERCIAL MANAGEMENT, INC. COMMUNITY CARE, INC. COMPASSION AND PERSONAL CARE SERVICES, INC. EASTERN HOME HEALTH SUPPLY & EQUIPMENT CO., INC. HALLMARK CONVALESCENT HOMES, INC. HOMECARE PREFERRED CHOICE, INC. HOSPICE OF EASTERN CAROLINA, INC. HOSPICE PREFERRED CHOICE, INC. LARES CARE RESOURCE, LLC LIBERTY NURSING HOMES, INCORPORATED MATRIX OCCUPATIONAL HEALTH, INC. MATRIX WELLNESS, LLC MEDICAL ARTS HEALTH FACILITY OF LAWRENCEVILLE, INC. MODERNCARE OF LUMBERTON, INC. NEBRASKA CITY S-C-H, INC. NURSING HOME OPERATORS, INC. PETERSEN HEALTH CARE, INC. SOUTH ALABAMA NURSING HOME, INC. SOUTH DAKOTA - BEVERLY ENTERPRISES, INC. SPECTRA HEALTHCARE ALLIANCE, INC. TAR HEEL INFUSION COMPANY, INC. TMD DISPOSITION COMPANY VANTAGE HEALTHCARE CORPORATION All by: /s/ JOHN G. ARENA ------------------------------------- Name: John G. Arena Title: Secretary JPMORGAN CHASE BANK (formerly known as The Chase Manhattan Bank successor by merger to Morgan Guaranty Trust Company of New York) By: /s/ DAWN LEE LUM ----------------------------------------- Name: Dawn Lee Lum Title: Vice President BANK OF AMERICA, N.A. By: /s/ WILLIAM E. LIVINGSTON ----------------------------------------- Name: William E. Livingston Title: Managing Director THE BANK OF NEW YORK By: /s/ BRENDAN T. NEDEI ----------------------------------------- Name: Brendan T. Nedei Title: Senior Vice President BANK OF MONTREAL By: /s/ EDWARD P. McGUIRE ----------------------------------------- Name: Edward P. McGuire Title: Vice President GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ JANET K. WILLIAMS ----------------------------------------- Name: Janet K. Williams Title: Duly Authorized Signatory SCHEDULE I PRICING SCHEDULE The "EURO-DOLLAR MARGIN", "CD MARGIN", "BASE RATE MARGIN", "LETTER OF CREDIT COMMISSION RATE" and "COMMITMENT FEE RATE" for any day are the respective rates per annum set forth below in the applicable row in the column corresponding to the Pricing Level that applies on such day (or, in the case of any day on or after the Amendment No. 4 Effective Date and prior to the date upon which financial statements for the second full fiscal quarter occurring after the Amendment No. 4 Effective Date shall have been delivered pursuant to Section 5.01(b), the greater of (i) the applicable rate so determined for such day and (ii) (v) in the case of the Euro-Dollar Margin, 3.500%, (w) in the case of the CD Margin, 3.625%, (x) in the case of the Base Rate Margin, 2.500%, (y) in the case of the Letter of Credit Commission Rate, 3.500% and (z) in the case of the Commitment Fee Rate, 0.6875%):

For purposes of this Pricing Schedule, the following terms have the following meanings: "PRICING RATIO" means, on any day, the ratio of Adjusted Consolidated Debt on such day to Consolidated EBITDAR for the four consecutive fiscal quarters most recently ended on or prior to such day. "LEVEL I PRICING" applies on any day if, as of the last day of the fiscal quarter most recently ended on or prior to such day and as to which the Borrower shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 5.01(d), (i) the Pricing Ratio is less than 5.0 to 1.0. "LEVEL II PRICING" applies on any day if, as of the last day of the fiscal quarter most recently ended on or prior to such day and as to which the Borrower shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 5.01(d), (i) the Pricing Ratio is less than 5.5 to 1.0 and (ii) Level I Pricing does not apply. "LEVEL III PRICING" applies on any day if, as of the last day of the fiscal quarter most recently ended on or prior to such day and as to which the Borrower shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 5.01(d), (i) the Pricing Ratio is less than 6.0 to 1.0 and (ii) Level II Pricing does not apply. "LEVEL IV PRICING" applies on any day if, as of the last day of the fiscal quarter most recently ended on or prior to such day and as to which the Borrower shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 5.01(d), (i) the Pricing Ratio is less than 6.5 to 1.0 and (ii) Level III Pricing does not apply. "LEVEL V PRICING" applies on any day if, on such day, no other Pricing Level applies. "PRICING LEVEL" means any one of the six pricing levels denominated Level I Pricing, Level II Pricing, Level III Pricing, Level IV Pricing or Level V Pricing. SCHEDULE IV SUBSIDIARIES OF THE BORROWER 4F FUNDING, INC. (f/k/a Beverly Enterprises - Oklahoma, Inc.) AEDON STAFFING, LLC AEDON HOMECARE, LLC AEGIS THERAPIES, INC. (f/k/a Beverly Rehabilitation, Inc.) AEGIS THERAPIES-FLORIDA, INC. (f/k/a AEGIS-Florida, Inc.) AGI-CAMELOT, INC. BEVERLY- BELLA VISTA HOLDING, INC. BEVERLY - INDIANAPOLIS, LLC BEVERLY - MISSOURI VALLEY HOLDING, INC. BEVERLY - RAPID CITY HOLDING, INC. BEVERLY CLINICAL, INC. BEVERLY ENTERPRISES INTERNATIONAL LIMITED BEVERLY ENTERPRISES - ALABAMA, INC. BEVERLY ENTERPRISES - ARIZONA, INC. BEVERLY ENTERPRISES - ARKANSAS, INC. BEVERLY ENTERPRISES - CALIFORNIA, INC. (f/k/a Hospital Facilities Corporation) BEVERLY ENTERPRISES - COLORADO, INC. BEVERLY ENTERPRISES - CONNECTICUT, INC. BEVERLY ENTERPRISES - DELAWARE, INC. BEVERLY ENTERPRISES - DISTRIBUTION SERVICES, INC. (f/k/a Beverly Enterprises - New York, Inc.) BEVERLY ENTERPRISES - DISTRICT OF COLUMBIA, INC. BEVERLY ENTERPRISES - FLORIDA, INC. BEVERLY ENTERPRISES - GARDEN TERRACE, INC. BEVERLY ENTERPRISES - GEORGIA, INC. BEVERLY ENTERPRISES - HAWAII, INC. BEVERLY ENTERPRISES - IDAHO, INC. BEVERLY ENTERPRISES - ILLINOIS, INC. BEVERLY ENTERPRISES - INDIANA, INC. BEVERLY ENTERPRISES - IOWA, INC. BEVERLY ENTERPRISES - KANSAS, LLC (successor to Beverly Enterprises - Kansas, Inc.) BEVERLY ENTERPRISES - KENTUCKY, INC. BEVERLY ENTERPRISES - LOUISIANA, INC. BEVERLY ENTERPRISES - MAINE, INC. BEVERLY ENTERPRISES - MARYLAND, INC. BEVERLY ENTERPRISES - MASSACHUSETTS, INC. BEVERLY ENTERPRISES - MICHIGAN, INC. BEVERLY ENTERPRISES - MINNESOTA, LLC (successor to Beverly Enterprises - Minnesota, Inc.) BEVERLY ENTERPRISES - MISSISSIPPI, INC. BEVERLY ENTERPRISES - MISSOURI, INC. BEVERLY ENTERPRISES - MONTANA, INC. BEVERLY ENTERPRISES - NEBRASKA, INC. BEVERLY ENTERPRISES - NEVADA, INC. BEVERLY ENTERPRISES - NEW HAMPSHIRE, INC. BEVERLY ENTERPRISES - NEW JERSEY, INC. BEVERLY ENTERPRISES - NEW MEXICO, INC. BEVERLY ENTERPRISES - NORTH CAROLINA, INC. BEVERLY ENTERPRISES - NORTH DAKOTA, INC. BEVERLY ENTERPRISES - OHIO, INC. BEVERLY ENTERPRISES - OREGON, INC. BEVERLY ENTERPRISES - PENNSYLVANIA, INC. BEVERLY ENTERPRISES - RHODE ISLAND, INC. BEVERLY ENTERPRISES - SOUTH CAROLINA, INC. BEVERLY ENTERPRISES - TENNESSEE, INC. BEVERLY ENTERPRISES - TEXAS, INC. BEVERLY ENTERPRISES - UTAH, INC. BEVERLY ENTERPRISES - VERMONT, INC. BEVERLY ENTERPRISES - VIRGINIA, INC. BEVERLY ENTERPRISES - WASHINGTON, INC. BEVERLY ENTERPRISES - WEST VIRGINIA, INC. BEVERLY ENTERPRISES - WISCONSIN, INC. BEVERLY ENTERPRISES - WYOMING, INC. BEVERLY FUNDING CORPORATION BEVERLY HEALTH AND REHABILITATION SERVICES, INC. BEVERLY HEALTHCARE, LLC BEVERLY HEALTHCARE - CALIFORNIA, INC. BEVERLY HOLDINGS I, INC. BEVERLY INDEMNITY, LTD. BEVERLY MANOR INC. OF HAWAII BEVERLY REAL ESTATE HOLDINGS, INC. BEVERLY SAVANA CAY MANOR, INC. BEVRD, LLC CERES OXYGEN SERVICES, LLC CERES STRATEGIES, INC. (f/k/a/ Beverly Healthcare Acquisition, Inc.) CERES STRATEGIES MEDICAL SERVICES, LLC COMMERCIAL MANAGEMENT, INC. COMMUNITY CARE, INC. COMPASSION AND PERSONAL CARE SERVICES, INC. EASTERN HOME HEALTH SUPPLY & EQUIPMENT CO., INC. HALLMARK CONVALESCENT HOMES, INC. HOMECARE PREFERRED CHOICE, INC. HOSPICE OF EASTERN CAROLINA, INC. HOSPICE PREFERRED CHOICE, INC. LARES CARE RESOURCE, LLC LIBERTY NURSING HOMES, INCORPORATED MATRIX OCCUPATIONAL HEALTH, INC. MATRIX WELLNESS, LLC MEDICAL ARTS HEALTH FACILITY OF LAWRENCEVILLE, INC. MODERNCARE OF LUMBERTON, INC. NEBRASKA CITY S-C-H, INC. NURSING HOME OPERATORS, INC. PETERSEN HEALTH CARE, INC. SOUTH ALABAMA NURSING HOME, INC. SOUTH DAKOTA - BEVERLY ENTERPRISES, INC. SPECTRA HEALTHCARE ALLIANCE, INC. TAR HEEL INFUSION COMPANY, INC. TMD DISPOSITION COMPANY VANTAGE HEALTHCARE CORPORATION SCHEDULE VI NEW MORTGAGE PROPERTIES STATE FAC NO. ADDRESS - ----- ------- --------- AL 00359 1130 S. Hale Street, Oxford, AL 36203 AL 00650 600 Corley Avenue, Boas, AL 35957 AL 00732 1701 N. Alston, Foley, AL 35064 AL 04870 119 Watterson Parkway, Trussville, AL 35173 GA 00766 5470 Meridian Mark Road, Atlanta, GA 30342 GA 00769 2787 N. Decatur Road, Decatur, GA 30033 MA 00116 25 Armory Street, West Newton, MA 02165 MA 00117 188 Florence Street, Chestnut Hill, MA 02467 MA 02062 76 N. Street, Middleboro, MA 02346 MA 02061 27 George Street, Attleboro, MA 02703 MA 02063 195 Pleasant Street, Attleboro, MA 02703 MA 02070 383 Mill Street, Worchester, MA 01602 MA 02236 19 Obery Street, Plymouth, MA 02360 MA 02249 120 Main Street, Malden, MA 02148 MA 02259 Chief Justice Cushing Highway, Rte. 3A, Cohasset, MA 02025 MA 02260 146 Dean Street, Taunton, MA 02780 MA 02413 1650 Washington Street, West Newton, MA 02465 MA 03969 460 Washington Street, Norwood, MA 02062 MN 00438 305 Fremont Street, Anoka, MN 55303 MN 00442 2957 Redwood Avenue, Slayton, MN 56172 MN 00876 313 S. Greeley Street, Stillwater, MN 55082 MN 00883 2810 Second Avenue North, Moorhead, MN 56560 MN 02332 15409 Wayzata Boulevard, Wayzata, MN 55391 MO 02279 1050 Dawson, New Madrid, MO MN 02325 2727 N. Victoria , Roseville, MN 55113 MO 02367 215 Rear West Grant, Dexter, MO 63841 MO 02380 Sidney Street, R.R. 2, St. James, MO 65559 NC 00063 127 Moye Boulevard, Greenville, NC 27834 NE 00451 3918 27th Street, Columbus, NE 68601 NE 00458 202 N. Esther, Fullerton, NE 68638 NE 00489 5505 Grover Street, Omaha, NE 68106 NE 00492 N. Highway 2181, O'Neill, NE 68763 NE 00510 602 S. 18th Street, Plattsmouth, NE 68048 NE 00511 2023 Colfax Avenue, Schuyler, NE 68661 NE 00512 823 M Street, Tekamah, NE 68061 NE 02183 610 B Darr, Grand Island, NE 68803 NE 02187 1405 W. Highway 34, Grand Island, NE 68801

STATE FAC NO. ADDRESS - ----- ------- --------- NE 02188 1100 North "T" Street, Neligh, NE 68756 NE 02190 224 E. South East Street, Broken Bow, NE 68822 NE 02193 111 W. 36th Street, Scottsbluff, NE 69361 NE 02194 1435 Toledo Street, Sidney, NE 69162 PA 00262 824 Adams Ave, Scranton, PA 18510 PA 00266 833 S. Main Street, Phoenixville, PA 19460 PA 00267 35 Rosemont Avenue, Rosemont, PA 19010 PA 00268 221 E. Brown Street, E. Stroudsburg, PA 18301 PA 00284 3300 Logan Ferry Road, Murrayville, PA 15668 PA 00287 2686 Peach Street, Erie, PA 16508 PA 02145 26 Ann Street, Oakmont, PA 15139 PA 03533 7310 Stenton Avenue, Philadelphia, PA 19150 PA 03959 46 Erford Road, Camp Hill, PA 17011 PA 03963 700 S. Cayuga Avenue, Altoona, PA 16602 PA 03964 700 S. Cayuga Avenue, Altoona, PA 16602 SD 00321 1106 N. 2nd Street, Groton, SD 57445 SD 02199 803 Park Street, Lake Norden, SD 57248 SD 02201 1100 4th Avenue East, Mobridge, SD 57601 SD 02203 916 Mountain View Road, Rapid City, SD 57702 SD 02743 718 N.W. 8th Street, Madison, SD 57042 VA 00086 835 Glendale Road, Galax, VA 24333
SCHEDULE VII
FACILITY NUMBER LOCATION US$ - --------------- -------- ------------- 0776 Corporate Headquarters 36,010,011.00 3835 Arkadelphia 4,920,573.00 4850 El Dorado 4,589,223.00 4141 North Little Rock 5,364,812.00 4138 Murrieta 7,325,034.00 4310 Murrieta 4,417,644.00 3715 Cobb Co. 6,828,586.00 2046 Fontanblue Nursing Center Bloomington, Indiana 500,000.00 2272 Lincoln Hills Nursing Center Tell City, Indiana 800,000.00 3687 Woodlands Convalescent Center Newburgh, Indiana 1,200,000.00
EX-10.76 15 d03650exv10w76.txt EX-10.76 LOAN AGREEMENT WITH BANK OF AMERICA N.A. EXHIBIT 10.76 December 24, 2002 Beverly Enterprises - Washington, Inc. 1000 Beverly Way Fort Smith, Arkansas 72919 Re: $5,000,000 Term Loan Ladies and Gentlemen: BANK OF AMERICA, N.A. (the "Lender") is pleased to make available to BEVERLY ENTERPRISES - WASHINGTON, INC., a California corporation (the "Borrower"), a term loan on the terms and subject to the conditions set forth below. Terms not defined herein have the meanings assigned to them in Exhibit A hereto. 1. THE LOAN. (a) THE LOAN. Subject to the terms and conditions set forth herein, the Lender agrees to make available to the Borrower on the date hereof a term loan (the "Loan") in an aggregate ---- principal amount of $5,000,000. Once repaid, the Loan may not be reborrowed. (b) BORROWINGS, CONVERSIONS, CONTINUATIONS. The Borrower may request that the Loan be (i) made as or converted to a Base Rate Loan by irrevocable notice to be received by the Lender not later than 11:00 a.m. on the Business Day of the borrowing or conversion, or (ii) made or continued as, or converted to, a Eurodollar Rate Loan by irrevocable notice to be received by the Lender not later than 11:00 a.m. three Business Days prior to the Business Day of the borrowing, continuation or conversion. If the Borrower fails to give a notice of conversion or continuation prior to the end of any Interest Period in respect of any Eurodollar Rate Loan, the Borrower shall be deemed to have requested that such Loan be converted to a Base Rate Loan on the last day of the applicable Interest Period. If the Borrower requests that a Loan be continued as or converted to a Eurodollar Rate Loan, but fails to specify an Interest Period with respect thereto, the Borrower shall be deemed to have selected an Interest Period of one month. Notices pursuant to this Paragraph 1(b) may be given by telephone if promptly confirmed in writing. Each Eurodollar Rate Loan and each Base Rate Loan shall be in a principal amount of $1,000,000 or a whole multiple of $1,000,000 in excess thereof. There shall not be more than two different Interest Periods in effect at any time. (c) INTEREST. At the option of the Borrower, the Loan shall bear interest at a rate per annum equal to (i) the Eurodollar Rate plus the Applicable Margin; or (ii) the Base Rate plus the Applicable Margin. Interest on a Base Rate Loan when the Base Rate is determined by the Lender's "prime rate" shall be calculated on the basis of a year of 365 or 366 days and actual days elapsed. All other interest hereunder shall be calculated on the basis of a year of 360 days and actual days elapsed. The Borrower promises to pay interest (i) for each Eurodollar Rate Loan, (A) on the last day of the applicable Interest Period, and, if the Interest Period is longer than three months, on the respective dates that fall every three months after the beginning of the Interest Period, and (B) on the date of any conversion of such Loan to a Base Rate Loan; (ii) for each Base Rate Loan, on the last Business Day of each calendar quarter; and (iii) Beverly Enterprises - Washington, Inc. December 24, 2002 Page 2 for each Base Rate Loan and Eurodollar Rate Loan, on the Maturity Date. If the time for any payment is extended by operation of law or otherwise, interest shall continue to accrue for such extended period. After the date any principal amount of the Loan is due and payable (whether on the Maturity Date, upon acceleration or otherwise), or after any other monetary obligation hereunder shall have become due and payable (in each case without regard to any applicable grace periods), the Borrower shall pay, but only to the extent permitted by law, interest (after as well as before judgment) on such amounts at a rate per annum equal to the Base Rate plus 2%. Furthermore, while any Event of Default exists, the Borrower shall pay interest on the principal amount of the Loan at a rate per annum equal to the Base Rate plus 2%. Accrued and unpaid interest on past due amounts shall be payable on demand. In no case shall interest hereunder exceed the amount that the Lender may charge or collect under applicable law. (d) EVIDENCE OF THE LOAN. The Loan and all payments thereon shall be evidenced by the Lender's loan accounts and records; provided, however, that upon the request of the Lender, the Loan may be evidenced by a promissory note in the form of Exhibit B hereto in addition to such loan accounts and records. Such loan accounts, records and promissory note shall be conclusive absent manifest error of the amount of the Loan and payments thereon. Any failure to record the Loan or payment thereon or any error in doing so shall not limit or otherwise affect the obligation of the Borrower to pay any amount owing with respect to the Loan. (e) REPAYMENT. The Borrower promises to pay the outstanding principal amount of the Loan in six (6) consecutive quarterly installments as follows, unless accelerated sooner pursuant to paragraph 5:
PAYMENT DATES PAYMENT AMOUNT ------------- -------------- ~~March 31, 2003, $833,333.33 June 30, 2003, September 30, 2003, December 31, 2003 and March 31, 2004 Maturity Date $833,333.35~~
The Borrower shall make all payments required hereunder not later than 2:00 p.m. on the date of payment in same day funds in Dollars at the office of the Lender located at 101 North Tryon Street, Charlotte, North Carolina 28255 or such other address as the Lender may from time to time designate in writing. Beverly Enterprises - Washington, Inc. December 24, 2002 Page 3 All payments by the Borrower to the Lender hereunder shall be made to the Lender in full without set-off or counterclaim and free and clear of and exempt from, and without deduction or withholding for or on account of, any present or future taxes, levies, imposts, duties or charges of whatsoever nature imposed by any government or any political subdivision or taxing authority thereof. The Borrower shall reimburse the Lender for any taxes imposed on or withheld from such payments (other than taxes imposed on the Lender's income, and franchise taxes imposed on the Lender, by the jurisdiction under the laws of which the Lender is organized or any political subdivision thereof). (g) PREPAYMENTS. (i) Optional. The Borrower may, upon three Business Days' notice, in the case of a Eurodollar Rate Loan, and upon same-day notice in the case of a Base Rate Loan, prepay the Loan on any Business Day; provided that the Borrower pays all Breakage Costs (if any) associated with such prepayment on the date of such prepayment. Prepayments of a Eurodollar Rate Loan must be accompanied by a payment of interest on the amount so prepaid. Prepayments of a Eurodollar Rate Loan must be in a principal amount of $1,000,000 or a whole multiple of $1,000,000 in excess thereof. Prepayments of a Base Rate Loan must be in a principal amount of $1,000,000 or, if less, the entire principal amount thereof then outstanding. (ii) Mandatory. At the Lender's option, the Loan and all other sums outstanding hereunder and under the other Loan Documents, including all interest thereon, shall be immediately due and payable upon the occurrence of either of the following events: (A) the replacement, restatement or refinancing of the Parent Credit Agreement or (B) any sale, transfer or other disposition of all or substantially all of the Collateral. 2. CONDITIONS PRECEDENT. (a) CONDITIONS PRECEDENT TO THE LOAN. As a condition precedent to the Loan hereunder, the Lender must receive the following from the Borrower in form and substance satisfactory to the Lender: (i) the enclosed duplicate of this Agreement duly executed and delivered on behalf of the Borrower; (ii) a certified borrowing resolution or other evidence of the Borrower's authority to borrow; (iii) a certificate of incumbency; (iv) if requested by the Lender, a promissory note as contemplated in Paragraph 1(d) above; Beverly Enterprises - Washington, Inc. December 24, 2002 Page 4 (v) an executed and notarized Mortgage, together with UCC financing statements, a real estate title insurance policy, a survey and an environmental report, in each case as required by the Lender; (vi) an executed Parent Guaranty; (vii) a certificate of insurance naming the Lender as loss payee and/or additional insured, as applicable; and (viii) such other documents and certificates (including legal opinions of counsel to the Borrower and the Parent) as the Lender may reasonably request. (b) CONDITIONS TO EACH CONTINUATION AND CONVERSION. As a condition precedent to each continuation and conversion of the Loan: (i) The Borrower must furnish the Lender with, as appropriate, a notice of continuation and conversion; (ii) each representation and warranty set forth in Paragraph 3 below shall be true and correct in all material respects as if made on the date of such continuation and conversion; and (iii) no Default shall have occurred and be continuing on the date of such continuation and conversion. Each notice of continuation and conversion shall be deemed a representation and warranty by the Borrower that the conditions referred to in clauses (ii) and (iii) above have been met. 3. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants that: (a) EXISTENCE AND QUALIFICATION; POWER; COMPLIANCE WITH LAWS. It (i) is a corporation duly organized or formed, validly existing and in good standing under the laws of the state of its organization or formation, (ii) has the power and authority and the legal right to (A) own and operate its properties, to lease the properties it operates and to conduct its business and (B) execute, deliver and perform its obligations under the Loan Documents, (iii) is duly qualified and in good standing under the laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification, and (iv) is in compliance with all laws (included tax laws), except in each case referred to in clause (iii) or clause (iv), to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect. (b) POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The execution, delivery and performance of this Agreement and the other Loan Documents by the Borrower are within its powers and have been duly authorized by all necessary action, and this Agreement is and the other Loan Documents, when executed, will be legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective Beverly Enterprises - Washington, Inc. December 24, 2002 Page 5 terms. The execution, delivery and performance of this Agreement and the other Loan Documents are not in contravention of law or of the terms of the Borrower's organic documents and will not result in the breach of or constitute a default under, or result in the creation of a lien under any indenture, agreement or undertaking to which the Borrower is a party or by which it or its property may be bound or affected. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any governmental authority or any other Person is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Borrower of this Agreement or any other Loan Document except for mortgage filings and financing statement filings to perfect the security interest of the Lender. (c) NO MATERIAL ADVERSE EFFECT. Since December 31, 2001, there has been no event or circumstance that has or could reasonably be expected to have a Material Adverse Effect. (d) NO MATERIAL LITIGATION. Except as disclosed in the Parent's 10-K filed for the period ending December 31, 2001, no litigation or governmental proceeding is pending or, to the best knowledge of the Borrower, threatened by or against the Borrower or the Parent which, if adversely determined, could reasonably be expected to have a Material Adverse Effect. (e) NO DEFAULT. No Default has occurred and is continuing. (f) USE OF PROCEEDS. The proceeds of the Loan will be used solely for general business purposes and in accordance with requirements of law, and will not be used, directly or indirectly, immediately, incidentally or ultimately, to purchase or carry margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund indebtedness originally incurred for such purpose. (g) ENVIRONMENTAL MATTERS. All facilities owned or leased by the Borrower or its Subsidiaries have been and continue to be in material compliance with all material environmental laws and regulations. 4. COVENANTS. So long as principal of and interest on the Loan or any other amount payable hereunder or under any other Loan Document remains unpaid or unsatisfied: (a) INFORMATION. The Borrower shall deliver to the Lender: (i) within 90 days after the end of its fiscal year, an operating statement and balance sheet of the Borrower (which shall not be required to be prepared in accordance with GAAP) and within 90 days after the end of its fiscal year, an operating statement of the of the Borrower regarding the operations of the facility encumbered by the Mortgage. Each such financial statement shall accurately reflect the financial position of the Borrower or such facility, as applicable, in all material respects. Beverly Enterprises - Washington, Inc. December 24, 2002 Page 6 (ii) promptly upon the Borrower's obtaining knowledge of any Default, a certificate of the chief financial officer of the Borrower setting forth the details thereof and any action that the Borrower is taking or proposes to take with respect thereto; (iii) promptly upon the Borrower's obtaining knowledge thereof, notice of any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect (including litigation and environmental matters); and (iv) from time to time such additional information regarding the financial condition or business of the Borrower and its Subsidiaries as the Lender may reasonably request. (b) OTHER AFFIRMATIVE COVENANTS. The Borrower shall, and shall cause each of its Subsidiaries to: (i) preserve and maintain all of its rights, privileges, and franchises necessary or desirable in the normal conduct of its business; (ii) comply with the requirements of all applicable laws, rules, regulations, and orders of governmental authorities; (iii) pay and discharge when due all taxes, assessments, and governmental charges or levies imposed on it or on its income or profits or any of its property, except for any such tax, assessment, charge, or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; (iv) maintain all of its properties owned or used in its business in good working order and condition ordinary wear and tear excepted; (v) permit representatives of the Lender, during normal business hours, to examine, copy, and make extracts from its books and records, to inspect its properties, and to discuss its business and affairs with its officers, directors, and accountants; (vi) comply with its material contractual obligations; and (vii) maintain insurance in such amounts, with such deductibles, and against such risks as is customary for similarly situated businesses and otherwise in compliance with the Mortgage. (c) NEGATIVE COVENANTS. The Borrower shall not, nor shall it permit any of its Subsidiaries to: (i) after the date hereof, create, incur, assume or suffer to exist any other indebtedness or guaranty obligation, except (A) trade debt incurred in the ordinary course of business and (B) purchase money indebtedness to Beverly Enterprises - Washington, Inc. December 24, 2002 Page 7 finance the purchase of fixed assets in an aggregate principal amount not to exceed $250,000; (ii) create, incur, assume or suffer to exist any lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than liens securing purchase money indebtedness permitted to be incurred hereunder; or (iii) make any disposition (including pursuant to a sale and leaseback transaction) of any or all of the Collateral, other than the disposition of machinery and equipment no longer used or useful in the conduct of the Borrower's business. 5. EVENTS OF DEFAULT. The following are "Events of Default:" (a) The Borrower fails to pay any principal of the Loan as and on the date when due; or (b) The Borrower fails to pay any interest on the Loan, or any portion thereof, within three days after the date when due; or the Borrower fails to pay any other fee or amount payable to the Lender under any Loan Document, or any portion thereof, within five days after the date due; or (c) The Borrower fails to perform or observe any term, covenant or agreement contained in Paragraph 4(c)hereof; or (d) The Borrower fails to perform or observe any other covenant or agreement (not specified above) contained in any Loan Document on its part to be performed or observed and such failure continues for 30 days after the earlier of (i) the Borrower becoming aware of such failure or (ii) the Lender notifying the Borrower of such failure; or (e) Any representation, warranty, certification or statement of fact made or deemed made by or on behalf of the Borrower herein, in any other Loan Document, or in any document delivered in connection herewith or therewith shall be incorrect or misleading when made or deemed made; or (f) The Borrower or any of its Subsidiaries (i) fails to make any payment in respect of any indebtedness (other than indebtedness hereunder) or guaranty obligation having an aggregate principal amount in excess of $500,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise), or (ii) fails to observe or perform any other agreement or condition relating to any such indebtedness or guaranty obligation or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur, the effect of which default or other event is to cause, or to permit the holder or holders of such indebtedness or beneficiary or beneficiaries of such guaranty obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such indebtedness to be demanded or become due or to be repurchased, prepaid, defeased or redeemed (automatically or otherwise), or an offer to repurchase, prepay, defease or Beverly Enterprises - Washington, Inc. December 24, 2002 Page 8 redeem such indebtedness to be made, prior to its stated maturity, or such guaranty obligation to become payable or cash collateral in respect thereof to be demanded. For purposes of this clause (f), "indebtedness" shall not include trade debt incurred in the ordinary course of business and due within six months of the incurrence thereof); or (g) The Borrower or any of its Subsidiaries institutes or consents to the institution of any proceeding under Debtor Relief Laws, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of the Borrower or such Subsidiary and the appointment continues undischarged or unstayed for 60 calendar days; or any proceeding under Debtor Relief Laws relating to the Borrower or any Subsidiary or to all or any material part of the Borrower's or such Subsidiary's property is instituted without the consent of the Borrower or such Subsidiary and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding; or (h) The Borrower is unable or admits in writing its inability or fails generally to pay its debts as they become due; or (i) A final judgment against the Borrower or any of its Subsidiaries is entered for the payment of money in excess of $500,000 (to the extent not covered by insurance by a carrier that has not denied coverage and has the ability to perform) and such judgment remains unsatisfied without procurement of a stay of execution within 30 calendar days after the date of entry of judgment; or (j) Any Loan Document, at any time after its execution and delivery and for any reason other than the agreement of the Lender or satisfaction in full of all the indebtedness hereunder, ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any respect; or the Borrower or the Parent denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document; or (k) A Change of Control occurs; (l) The failure of the Parent to comply with the Incorporated Covenants (as defined in the Parent Guaranty); or (m) The occurrence of an Event of Default (as defined in the Parent Credit Agreement as in effect on the date hereof). Upon the occurrence of an Event of Default, the Lender may declare all sums outstanding hereunder and under the other Loan Documents, including all interest thereon, to be immediately due and payable, whereupon the same shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character, all of which are hereby expressly waived; provided, however, that upon the occurrence of an actual or deemed entry of an order for Beverly Enterprises - Washington, Inc. December 24, 2002 Page 9 relief with respect to the Borrower under the Bankruptcy Code of the United States of America, all sums outstanding hereunder and under each other Loan Document, including all interest thereon, shall become and be immediately due and payable, without notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor, or other notices or demands of any kind or character, all of which are hereby expressly waived. 6. MISCELLANEOUS. (a) All references herein and in the other Loan Documents to any time of day shall mean the local (standard or daylight, as in effect) time of Charlotte, North Carolina. (b) The Borrower shall be obligated to pay all Breakage Costs. (c) If at any time the Lender, in its sole discretion, determines that (i) adequate and reasonable means do not exist for determining the Eurodollar Rate, or (ii) the Eurodollar Rate does not accurately reflect the funding cost to the Lender of making Eurodollar Rate Loans, the Lender's obligation to make or maintain Eurodollar Rate Loans shall cease for the period during which such circumstance exists. (d) The Borrower shall reimburse or compensate the Lender, upon demand, for all costs incurred, losses suffered or payments made by the Lender which are applied or reasonably allocated by the Lender to the transactions contemplated herein (all as determined by the Lender in its reasonable discretion) by reason of any and all future reserve, deposit, capital adequacy or similar requirements against (or against any class of or change in or in the amount of) assets, liabilities or commitments of, or extensions of credit by, the Lender; and compliance by the Lender with any directive, or requirements from any regulatory authority, whether or not having the force of law. (e) No amendment, waiver or other modification of any provision of this Agreement or of any other Loan Document shall be effective unless such amendment, waiver or modification shall be in writing and signed by the Borrower and the Lender, and any such amendment, waiver or modification shall then be effective only for the period and on the conditions and for the specific instance specified in such writing. No failure or delay by the Lender in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other rights, power or privilege. (f) Except as otherwise expressly provided herein, notices and other communications to each party provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telecopy to the address provided from time to time by such party. Any such notice or other communication sent by overnight courier service, mail or telecopy shall be effective on the earlier of actual receipt and (i) if sent by overnight courier service, the scheduled delivery date, (ii) if sent by mail, the fourth Business Day after deposit in the U.S. mail first class postage prepaid, and (iii) if sent by telecopy, when transmission in legible form is complete. All notices and other communications sent by the other means listed in the first sentence of this paragraph shall be effective upon receipt. Notwithstanding anything to the contrary contained herein, all Beverly Enterprises - Washington, Inc. December 24, 2002 Page 10 notices (by whatever means) to the Lender pursuant to Paragraph 1(b) hereof shall be effective only upon receipt. Any notice or other communication permitted to be given, made or confirmed by telephone hereunder shall be given, made or confirmed by means of a telephone call to the intended recipient at the number specified in writing by such Person for such purpose, it being understood and agreed that a voicemail message shall in no event be effective as a notice, communication or confirmation hereunder. The Lender shall be entitled to rely and act upon any notices (including telephonic notices of borrowings, conversions and continuations) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Borrower shall indemnify the Lender, its affiliates and the officers, directors, employees, agents and attorneys-in-fact of the Lender and such affiliates from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other communications with the Lender may be recorded by the Lender, and the Borrower hereby consents to such recording. (g) This Agreement shall inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign its rights and obligations hereunder. The Lender may at any time (i) assign all or any part of its rights and obligations hereunder to any other Person with the consent of the Borrower, such consent not to be unreasonably withheld, provided that no such consent shall be required if the assignment is to an affiliate of the Lender or if a Default exists, and (ii) grant to any other Person participating interests in all or part of its rights and obligations hereunder without notice to the Borrower. The Borrower agrees to execute any documents reasonably requested by the Lender in connection with any such assignment. All information provided by or on behalf of the Borrower to the Lender or its affiliates may be furnished by the Lender to its affiliates and to any actual or proposed assignee or participant. (h) The Borrower shall pay the Lender, on demand, all reasonable out-of-pocket expenses and legal fees (including the allocated costs for in-house legal services) incurred by the Lender in connection with any instruments or agreements executed in connection herewith or, to the extent permitted by applicable law, the enforcement of this Agreement. (i) Whether or not the transactions contemplated hereby are consummated, the Borrower shall indemnify and hold harmless the Lender, its affiliates, and their respective directors, officers, employees, counsel, agents and attorneys-in-fact (collectively the "Indemnitees") from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses and disbursements (including fees, disbursements and expenses of counsel) of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against any such Indemnitee in any way relating to or arising out of or in connection with (a) the execution, delivery, enforcement, performance or administration of any Loan Document or any other agreement, letter or instrument delivered in connection with the transactions Beverly Enterprises - Washington, Inc. December 24, 2002 Page 11 contemplated thereby or the consummation of the transactions contemplated thereby, (b) the Loan or the use or proposed use of the proceeds therefrom, or (c) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnitee is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"), in all cases, whether or not caused by or arising, in whole or in part, out of the negligence of the Indemnitee; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. No Indemnitee shall be liable for any damages arising from the use by others of any information or other materials obtained through IntraLinks or other similar information transmission systems in connection with this Agreement, nor shall any Indemnitee have any liability for any indirect or consequential damages relating to this Agreement or any other Loan Document or arising out of its activities in connection herewith or therewith (whether before or after the Closing Date). The agreements in this Paragraph 6(i) shall survive the repayment, satisfaction or discharge of all the other Obligations. All amounts due under this Paragraph 6(i) shall be payable within ten Business Days after demand therefor. (j) If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (i) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (ii) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (k) This Agreement may be executed in one or more counterparts, and each counterpart, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same instrument. (l) This Agreement and the other Loan Documents are governed by, and shall be construed in accordance with, the laws of the State of New York and the applicable laws of the United States of America. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court and each state court in the City of New York for the purposes of all legal proceedings arising out of or relating to any of the Loan Documents or the transactions contemplated thereby. The Borrower irrevocably consents to the service of any and all process in any such action or proceeding by the mailing of copies of such process to the Borrower at its address set forth beneath its signature hereto. The Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Beverly Enterprises - Washington, Inc. December 24, 2002 Page 12 (m) THE BORROWER AND THE LENDER EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. (n) THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. Beverly Enterprises - Washington, Inc. December 24, 2002 Page 13 Please indicate your acceptance of the Loan on the foregoing terms and conditions by returning an executed copy of this Agreement to the undersigned. BANK OF AMERICA, N.A. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ Accepted and Agreed to as of the date first written above: BEVERLY ENTERPRISES - WASHINGTON, INC. By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- Date: ---------------------------------- EXHIBIT A DEFINITIONS Agreement: This letter agreement, as amended, restated, extended, supplemented or otherwise modified in writing from time to time. Applicable Margin: The following percentages per annum, based upon the Pricing Ratio (as defined in the Parent Credit Agreement as in effect on the date hereof) as set forth in the most recent certificate delivered by the Parent to the Lender pursuant to Section 5.01(d) of the Parent Credit Agreement (as incorporated by reference pursuant to Section 4 of the Parent Guaranty):
Pricing Applicable Margin for Applicable Margin for Ratio Eurodollar Rate Loans Base Rate Loans ------- --------------------- --------------------- I 2.125% 1.125% II 2.375% 1.375% III 2.625% 1.625% IV 2.875% 1.875%
The Applicable Rate in effect on the date hereof shall be determined based upon Pricing Level II. Base Rate: For any day, a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by the Lender as its "prime rate." The Lender's prime rate is a rate set by the Lender based upon various factors including the Lender's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in the prime rate announced by the Lender shall take effect at the opening of business on the day specified in the public announcement of such change. Base Rate Loan: A Loan bearing interest based on the Base Rate. Breakage Costs: Any loss, cost or expense incurred by the Lender (including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by the Lender to maintain the relevant Eurodollar Rate Loan or from fees payable to terminate the deposits from which such funds were obtained) as a result of (i) any continuation, conversion, payment or prepayment of any Eurodollar Rate Loan on a day other than the last day of the Interest Period therefor (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); or (ii) any failure by the Borrower (for a reason other than the failure of the Lender to make a Loan when all conditions to making such Loan have been met by the Borrower in accordance with the terms hereof) to prepay, borrow, continue or convert any Eurodollar Rate Loan on a date or in the amount notified by the Borrower. The certificate of the Lender as to its costs of funds, losses and expenses incurred shall be conclusive absent manifest error. Business Day: Any day other than a Saturday, Sunday, or other day on which commercial banks are authorized to close under the laws of, or are in fact closed in, the State of New York or the state where the Lender's lending office is located and, if such day relates to any Eurodollar Rate Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the London interbank eurodollar market. Change of Control: The Parent fails to own 100% of the shares of capital stock of, or other equity interests in, the Borrower. Code: The Internal Revenue Code of 1986, as amended from time to time. Collateral: The "Collateral" as defined in the Mortgage. Debtor Relief Laws: The Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States of America or other applicable jurisdictions from time to time in effect affecting the rights of creditors generally. Default: Any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default. Dollar or $: The lawful currency of the United States of America. Eurodollar Rate: For any Interest Period with respect to any Eurodollar Rate Loan, a rate per annum determined pursuant to the following formula: Eurodollar Rate = Eurodollar Base Rate ------------------------------------ 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Base Rate" means, for such Interest Period: (a) the rate per annum equal to the rate determined by the Lender to be the offered rate that appears on the page of the Telerate screen (or any successor thereto) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) if the rate referenced in the preceding clause (a) does not appear on such page or service or such page or service shall not be available, the rate per annum equal to the rate determined by the Lender to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) if the rates referenced in the preceding clauses (a) and (b) are not available, the rate per annum determined by the Lender as the rate of interest at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, converted or continued and with a term equivalent to such Interest Period would be offered by the Lender's London Branch to major banks in the London interbank eurodollar market at their request at approximately 4:00 p.m. (London time) two Business Days prior to the first day of such Interest Period. "Eurodollar Reserve Percentage" means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, carried out to five decimal places) in effect on such day applicable to the Lender under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Eurodollar Rate for each outstanding Eurodollar Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. Eurodollar Rate Loan: A Loan bearing interest based on the Eurodollar Rate. Event of Default: Has the meaning set forth in Paragraph 5. Federal Funds Rate: For any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to the Lender on such day on such transactions as determined by the Lender. Interest Period: For each Eurodollar Rate Loan, (a) initially, the period commencing on the date the Eurodollar Rate Loan is disbursed or converted from a Base Rate Loan and (b) thereafter, the period commencing on the last day of the preceding Interest Period, and, in each case, ending on the earlier of (x) the Maturity Date and (y) one, two, three or six months thereafter, as requested by the Borrower; provided that: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; and (ii) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period. Loan Documents: This Agreement, the Parent Guaranty, the Mortgage and the promissory note and fee letter, if any, delivered in connection with this Agreement. Material Adverse Effect: (a) A material adverse change in, or a material adverse effect upon, the business, financial position, results of operations or prospects of the Borrower and its Subsidiaries taken as a whole; (b) a material adverse change in, or a material adverse effect upon, the business, financial position, results of operations or prospects of the Parent and its Subsidiaries taken as a whole; (c) a material impairment of the ability of the Borrower or the Parent to perform its obligations under any Loan Document; or (d) a material adverse effect upon the legality, validity, binding effect or enforceability against the Borrower or the Parent of any Loan Document. The term "Material Adverse Effect" shall not include any reduction or adverse modification of amounts or rates payable to healthcare providers generally pursuant to a federal or state health care program that results from the action or inaction of a federal, state, or local government or agency. Maturity Date: June 24, 2004. Mortgage: That certain Deed of Trust, Assignment of Rents and Leases, Fixture Filing and Security Agreement dated as of the date hereof executed by the Borrower in favor of Fidelity National Title Insurance Company of Washington for the benefit of the Lender, as amended, restated, extended, supplemented or otherwise modified in writing from time to time. Parent: Beverly Enterprises, Inc., a Delaware corporation. Parent Credit Agreement: That certain Amended and Restated Credit Agreement dated as of April 25, 2001 among the Parent, the financial institutions party thereto and Morgan Guaranty Trust Company of New York, as issuing bank and administrative agent. Parent Guaranty: That certain Guaranty dated as of the date hereof executed by the Parent in favor of the Lender, as amended, restated, extended, supplemented or otherwise modified in writing from time to time. Person: Any natural person, corporation, limited liability company, trust, joint stock company, association, company, partnership, governmental authority or other entity. Subsidiary: With respect to any Person, a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise specified, all references herein to a "Subsidiary" or to "Subsidiaries" refer to a Subsidiary or Subsidiaries of the Borrower. EXHIBIT B FORM OF PROMISSORY NOTE $5,000,000 December 24, 2002 FOR VALUE RECEIVED, the undersigned, BEVERLY ENTERPRISES - WASHINGTON, INC., a California corporation (the "Borrower"), hereby promises to pay to the order of BANK OF AMERICA, N.A. (the "Lender") the principal sum of Five Million Dollars ($5,000,000) or, if less, the aggregate unpaid principal amount of all the Loan made by the Lender to the Borrower pursuant to the letter agreement, dated as of even date herewith (such letter agreement, as it may be amended, restated, extended, supplemented or otherwise modified from time to time, being hereinafter called the "Agreement"), between the Borrower and the Lender, at such times as provided in the Agreement. The Borrower further promises to pay interest on the unpaid principal amount of the Loan evidenced hereby from time to time at the rates, on the dates, and otherwise as provided in the Agreement. The loan account records maintained by the Lender shall at all times be conclusive evidence, absent manifest error, as to the amount of the Loan and payments thereon; provided, however, that any failure to record any payment thereon or any error in doing so shall not limit or otherwise affect the obligation of the Borrower to pay any amount owing with respect to the Loan. This promissory note is the promissory note referred to in, and is entitled to the benefits of, the Agreement, which Agreement, among other things, contains provisions for acceleration of the maturity of the Loan evidenced hereby upon the happening of certain stated events and also for prepayments on account of principal of the Loan prior to the maturity thereof upon the terms and conditions therein specified. Unless otherwise defined herein, terms defined in the Agreement are used herein with their defined meanings therein. This promissory note shall be governed by, and construed in accordance with, the laws of the State of New York. BEVERLY ENTERPRISES - WASHINGTON, INC. By ------------------------------------ Name -------------------------------- Title -------------------------------- EX-10.77 16 d03650exv10w77.txt EX-10.77 GUARANTY WITH BANK OF AMERICA N.A. EXHIBIT 10.77 GUARANTY This GUARANTY, dated as of December 24, 2002, is made by BEVERLY ENTERPRISES, INC., a Delaware corporation, as Guarantor, in favor of and for the benefit of Bank of America, N.A., as lender (the "Lender). WHEREAS Beverly Enterprises - Washington, Inc., a California corporation and wholly owned direct subsidiary of the Guarantor (the "Borrower"), is entering into a Loan Agreement, dated as of December 24, 2002, among the Borrower and the Lender (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Loan Agreement"); and WHEREAS it is a condition to the obligation of the Lender to enter into and perform their respective obligations under the Loan Documents that the Guarantor execute and deliver this Guaranty; and WHEREAS the Guarantor, in furtherance of its business objectives, is willing to provide such guaranty on the terms and conditions hereinafter set forth. NOW, THEREFORE, for valuable consideration (receipt whereof is hereby acknowledged), the parties hereto agree as follows: SECTION 1. Definitions. Capitalized terms used in this Guaranty and not otherwise defined herein shall have the respective meanings set forth in the Loan Agreement. SECTION 2 The Guaranty. 2.01 Guaranty. The Guarantor hereby irrevocably and unconditionally guarantees to the Lender and its successors and permitted assigns the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the principal of and interest on the Loan made by the Lender to the Borrower and all other amounts from time to time owing to the Lender by the Borrower under the Loan Agreement and any of the other Loan Documents, in each case strictly in accordance with the terms hereof or thereof (such obligations being herein collectively called the "Guaranteed Obligations"). The Guarantor hereby further agrees that if the Borrower shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guaranteed Obligations, the Guarantor will promptly pay the same, without any demand or notice whatsoever, and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at stated maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. This Guaranty is a primary obligation of the Guarantor. 2.02 Obligations Unconditional. The obligations of the Guarantor under Section 2.01 are absolute and unconditional, irrespective of the value, genuineness, validity, regularity or enforceability of the obligations of the Borrower under the Loan Agreement or the other Loan Documents or any other agreement or instrument referred to herein or therein, or any substitution, release or exchange of any other guaranty of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 2.02 that the obligations of the Guarantor hereunder shall be absolute and unconditional, under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of the Guarantor hereunder, which shall remain absolute and unconditional as described above: (a) at any time or from time to time, without notice to the Guarantor, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (b) any of the acts mentioned in any of the provisions of the Loan Agreement or the other Loan Documents or any other agreement or instrument referred to therein shall be done or omitted; (c) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any rights under the Loan Agreement or any other Loan Document or any other agreement or instrument referred to therein shall be waived or any other guaranty of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; or (d) any lien or security interest granted to, or in favor of the Lender as security for any of the Guaranteed Obligations shall fail to be perfected. The Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices (except as expressly provided herein) whatsoever, and any requirement that the Lender exhaust any right, power or remedy or proceed against the Borrower under the Loan Agreement or other Loan Document or any other agreement or instrument referred to therein, or against any other Person under any other guaranty of, or security for, any of the Guaranteed Obligations. The guaranty in Section 2.01 is a guaranty of payment and not of collection. 2.03 Reinstatement. The obligations of the Guarantor under this Guaranty shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of the Borrower in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy or reorganization or otherwise and the Guarantor agrees that it will indemnify the Lender on demand for all reasonable costs and expenses (including, without limitation, reasonable fees of counsel) incurred by the Lender in connection with such rescission or restoration, including any such costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency or similar law. 2.04 Subrogation. The Guarantor hereby agrees that until the payment and satisfaction in full of all Guaranteed Obligations, the Guarantor shall not exercise any right or remedy arising by reason of any performance by it of its guaranty in Section 2.01 hereof, whether by subrogation or otherwise, against the Borrower or any other guarantor of any of the Guaranteed Obligations or any security for any of the Guaranteed Obligations. 2.05 Remedies. The Guarantor agrees that, as between the Guarantor and the Lender, the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Paragraph 5 of the Loan Agreement for purposes of Section 2.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or such obligations from becoming automatically due and payable) as against the Borrower, and that, in the event of any such declaration (or such obligations being deemed to have become automatically due and payable), such obligations (whether or not due and payable by the Borrower) shall forthwith become due and payable by the Guarantor for purposes of said Section 2.01. 2 SECTION 3 Representations and Warranties. The Guarantor represents and warrants to the Lender that: 3.01 Organization, Power and Authority. The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Guarantor has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into this Guaranty and to carry out the transactions contemplated hereby. 3.02 Foreign Qualification. The Guarantor is qualified to do business and in good standing in every jurisdiction wherever necessary to carry out its business and operations, except in jurisdictions where the failure to be so qualified or in good standing would not in the reasonable determination of the Guarantor be expected to impair the ability of the Guarantor to perform its payment or other material obligations under this Guaranty. 3.03 Authorization. The Guarantor has duly authorized by all necessary corporate action the execution, delivery and performance of this Guaranty. 3.04 No Conflicts. The execution, delivery and performance by the Guarantor of this Guaranty and the consummation of the transactions contemplated hereby do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to the Guarantor, the certificate of incorporation or bylaws of the Guarantor or any order, judgment or decree of any court or other agency of government binding on the Guarantor, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any contractual obligation of the Guarantor, except for any such default which would not in the reasonable determination of the Guarantor be expected to impair the ability of the Guarantor to perform its payment or other material obligations hereunder, (iii) result in or require the creation or imposition of any lien upon any of the properties or assets of the Guarantor or (iv) require any approval of stockholders or any approval or consent of any Person under any contractual obligation of the Guarantor, except for such approvals or consents (A) which will have been obtained on or before the Closing Date and have been disclosed in writing to the Lender and (B) with respect to any contractual obligation, would not in the reasonable determination of the Guarantor be expected to impair the ability of the Guarantor to perform its payment or other material obligations hereunder. 3.05 No Consents, Approvals, etc. The execution, delivery and performance by the Guarantor of this Guaranty and the consummation of the transactions contemplated by this Guaranty do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body or any other Person which is required to be obtained or made on or prior to the date hereof and which has not previously been obtained or made. 3.06 Execution, Delivery. Enforceability. The Guarantor has duly executed and delivered this Guaranty and this Guaranty is the valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other similar laws relating to or affecting the enforcement of creditors' rights generally, including materiality, reasonableness, good faith and fair dealing, and by general principles of equity (regardless of whether considered in a proceeding in equity or at law). SECTION 4 Incorporated Covenants. Reference is made to the Parent Credit Agreement and the covenants contained in Article V of the Parent Credit Agreement. Such covenants shall hereinafter be 3 referred to as the "Incorporated Covenants." Guarantor agrees with Lender that the Incorporated Covenants (and all other relevant provisions of the Parent Credit Agreement related thereto, including without limitation the defined terms contained in Article I thereof which are used in the Incorporated Covenants, hereinafter referred to as the "Additional Incorporated Terms") are hereby incorporated by reference into this Guaranty to the same extent and with the same effect as if set forth fully herein and shall inure to the benefit of the Lender, without giving effect to any waiver, amendment, modification or replacement of the Parent Credit Agreement or any term or provision of the Incorporated Covenants occurring subsequent to the date of this Guaranty, except to the extent otherwise specifically provided in the following provisions of this paragraph. Guarantor agrees to, and to the extent applicable will cause its subsidiaries to, comply with the Incorporated Covenants as to the matters specified therein, except that references to the terms "Administrative Agent," "Required Banks," and "Banks" as used therein shall be interpreted to mean the Lender, unless, in any case, such interpretation is inappropriate under any reasonable interpretation. In the event a waiver is granted under the Parent Credit Agreement or an amendment or modification is executed with respect to the Parent Credit Agreement, and such waiver, amendment and/or modification affects the Incorporated Covenants or the Additional Incorporated Terms, then such waiver, amendment or modification shall be effective with respect to the Incorporated Covenants and the Additional Incorporated Terms as incorporated by reference into this Guaranty only if consented to in writing by the Lender. SECTION 5 Miscellaneous. 5.01 No Waiver. No failure on the part of any beneficiary of this Guaranty to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by any such beneficiary of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. 5.02 Governing Law; Waiver of Jury Trial. THIS GUARANTY SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES (OTHER THAN SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW). EACH OF THE PARTIES HERETO HEREBY WAIVES ITS RIGHTS TO A TRIAL BY JURY. 5.03 Notices. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof shall be in writing and shall be made or given in accordance with Paragraph 6(g) of the Loan Agreement; provided that, for this purpose, the address of the Guarantor shall be the one specified below its signature below. 5.04 Amendments. This Guaranty may be terminated, amended, supplemented, waived or modified only in a writing signed by the Lender and the Guarantor. 5.05 Successors and Assigns. This Guaranty shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the Guarantor and each other party hereto; provided, that the Guarantor shall not assign or transfer its rights or obligations hereunder without the prior written consent of the Lender. 5.06 Taxes. All payments by the Guarantor to the Lender hereunder shall be made to the Lender in full without set-off or counterclaim and free and clear of and exempt from, and without 4 deduction or withholding for or on account of, any present or future taxes, levies, imposts, duties or charges of whatsoever nature imposed by any government or any political subdivision or taxing authority thereof. The Guarantor shall reimburse the Lender for any taxes imposed on or withheld from such payments (other than taxes imposed on the Lender's income, and franchise taxes imposed on the Lender, by the jurisdiction under the laws of which the Lender is organized or any political subdivision thereof). 5.07 Counterparts. This Guaranty may be executed in multiple counterparts, all of which together shall constitute one and the same instrument, and each of the parties hereto may execute this Guaranty by signing any such counterpart. 5.08 Severability. Any provision of this Guaranty that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction only, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable laws, the Guarantor hereby waives any provision of applicable laws that renders any provision hereof prohibited or unenforceable in any respect. 5.09 Set-Off. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, to the fullest extent permitted by law, the Lender is hereby authorized by the Guarantor at any time or from time to time, upon notice to the Guarantor or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, Indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other Indebtedness at any time held or owing by the Lender to or for the credit or the account of the Guarantor against and on account of the obligations and liabilities of the Guarantor to the Lender under this Guaranty and the other Loan Documents, including, but not limited to, all claims of any nature or description arising out of or connected with this Guaranty or any other Loan Document, irrespective of whether or not (i) the Lender shall have made any demand hereunder or (ii) the principal of or the interest on the Loan or any other amounts due hereunder shall have become due and payable pursuant to Paragraph 5 of the Loan Agreement and although said obligations and liabilities, or any of them, may be contingent or unmatured. [Signature page to follow] 5 IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the day and year first above written. BEVERLY ENTERPRISES, INC. By: --------------------------------- Name: Title: Address for notices: -------------------- -------------------- Attention: -------------------------- Telecopy: 6 EX-21.1 17 d03650exv21w1.txt EX-21.1 SUBSIDIARIES OF REGISTRANT . . . EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE DECEMBER 31, 2002
STATE OF CORPORATION INCORPORATION - ----------- ------------- AEDON Staffing, LLC Delaware AEDON HomeCare, LLC Delaware AEGIS Therapies - Florida, Inc. Delaware AEGIS Therapies, Inc. Delaware AGI-Camelot, Inc. Missouri Beverly Enterprises, Inc. Delaware Beverly Enterprises International Limited California Beverly Enterprises - Alabama, Inc. California Beverly Enterprises - Arizona, Inc. California Beverly Enterprises - Arkansas, Inc. California Beverly Enterprises - California, Inc. California Beverly Enterprises - Colorado, Inc. California Beverly Enterprises - Connecticut, Inc. California Beverly Enterprises - Delaware, Inc. California Beverly Enterprises - Distribution Services, Inc. California Beverly Enterprises - District of Columbia, Inc. California Beverly Enterprises - Florida, Inc. California Beverly Enterprises - Garden Terrace, Inc. California Beverly Enterprises - Georgia, Inc. California Beverly Enterprises - Hawaii, Inc. California Beverly Enterprises - Idaho, Inc. California Beverly Enterprises - Illinois, Inc. California Beverly Enterprises - Indiana, Inc. California
1 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 2002
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly Enterprises - Iowa, Inc. California Beverly Enterprises - Kansas, LLC Delaware Beverly Enterprises - Kentucky, Inc. California Beverly Enterprises - Louisiana, Inc. California Beverly Enterprises - Maine, Inc. California Beverly Enterprises - Maryland, Inc. California Beverly Enterprises - Massachusetts, Inc. California Beverly Enterprises - Michigan, Inc. California Beverly Enterprises - Minnesota, Inc. California Beverly Enterprises - Minnesota, LLC Delaware Beverly Enterprises - Mississippi, Inc. California Beverly Enterprises - Missouri, Inc. California Beverly Enterprises - Montana, Inc. California Beverly Enterprises - Nebraska, Inc. California Beverly Enterprises - Nevada, Inc. California Beverly Enterprises - New Hampshire, Inc. California Beverly Enterprises - New Jersey, Inc. California Beverly Enterprises - New Mexico, Inc. California Beverly Enterprises - North Carolina, Inc. California Beverly Enterprises - North Dakota, Inc. California Beverly Enterprises - Ohio, Inc. California Beverly Enterprises - Oregon, Inc. California Beverly Enterprises - Pennsylvania, Inc. California Beverly Enterprises - Rhode Island, Inc. California
2 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 2002
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly Enterprises - South Carolina, Inc. California Beverly Enterprises - Tennessee, Inc. California Beverly Enterprises - Texas, Inc. California Beverly Enterprises - Utah, Inc. California Beverly Enterprises - Vermont, Inc. California Beverly Enterprises - Virginia, Inc. California Beverly Enterprises - Washington, Inc. California Beverly Enterprises - West Virginia, Inc. California Beverly Enterprises - Wisconsin, Inc. California Beverly Enterprises - Wyoming, Inc. California Beverly - Bella Vista Holding, Inc. Delaware Beverly Clinical, Inc. Delaware Beverly Funding Corporation Delaware Beverly Health and Rehabilitation Services, Inc. California Beverly Healthcare - California, Inc. California Beverly Holdings I, Inc. Delaware Beverly Indemnity, Ltd. Vermont Beverly - Indianapolis, LLC Indiana Beverly Manor Inc. of Hawaii California Beverly - Missouri Valley Holding, Inc. Delaware Beverly - Rapid City Holding, Inc. Delaware
3 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 2002
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly Real Estate Holdings, Inc. Delaware Beverly Savana Cay Manor, Inc. California BEVRD, LLC Delaware CERES Oxygen Services, LLC Delaware CERES Strategies, Inc. Delaware CERES Strategies Medical Services, LLC Delaware Carrolton Physical Therapy Clinic, Inc. Texas Commercial Management, Inc. Iowa Community Care, Inc. North Carolina Compassion and Personal Care Services, Inc. North Carolina Eastern Home Health Supply & Equipment Co., Inc. North Carolina Greenville Rehabilitation Services, Inc. Texas Hallmark Convalescent Homes, Inc. Michigan HomeCare Preferred Choice, Inc. Delaware Home Health and Rehabilitation Services, Inc. Texas Hospice of Eastern Carolina, Inc. North Carolina Hospice Preferred Choice, Inc. Delaware LARES Care Resource, LLC Delaware Las Colinas Physical Therapy Center, Inc. Texas Liberty Nursing Homes, Incorporated Virginia MATRIX Occupational Health, Inc. Delaware MATRIX Rehabilitation, Inc. Delaware
4 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 2002
STATE OF CORPORATION INCORPORATION - ----------- ------------- MATRIX Rehabilitation - Delaware, Inc. Delaware MATRIX Rehabilitation - Georgia, Inc. Delaware MATRIX Rehabilitation - Maryland, Inc. Delaware MATRIX Rehabilitation - Ohio, Inc. Delaware MATRIX Rehabilitation - South Carolina, Inc. Delaware MATRIX Rehabilitation - Texas, Inc. Delaware Medical Arts Health Facility of Lawrenceville, Inc. Georgia Moderncare of Lumberton, Inc. North Carolina Nebraska City S-C-H, Inc. Nebraska North Dallas Physical Therapy Associates, Inc. Texas Nursing Home Operators, Inc. Ohio Petersen Health Care, Inc. Florida South Alabama Nursing Home, Inc. Alabama South Dakota - Beverly Enterprises, Inc. California Spectra Healthcare Alliance, Inc. Delaware Tar Heel Infusion Company, Inc. North Carolina The Parks Physical Therapy and Work Hardening Center, Inc. Texas Theraphysics Corp. Delaware Theraphysics Partners of Colorado, Inc. Delaware Theraphysics Partners of Western Pennsylvania, Inc. Delaware Theraphysics Partners of Texas, Inc. Delaware TMD Disposition Company Florida Vantage Healthcare Corporation Delaware 4 F Funding, Inc. California
5 EX-23.1 18 d03650exv23w1.txt EX-23.1 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements and amendments thereto Form S-8 No 33-21505 Employee Stock Purchase Plan Form S-8 No 333-41671 Non-Employee Director Deferred Compensation Plan Form S-8 No 333-41669 1997 Long-Term Incentive Plan Form S-8 No 333-66026 1997 Long-Term Incentive Plan Form S-8 No 333-41673 Executive Deferred Compensation Plan Form S-8 No 333-42131 Non-Employee Directors' Stock Option Plan Form S-8 No 333-66108 Non-Employee Directors' Stock Option Plan Form S-8 No 333-54734 Stock Grant Plan Form S-8 No. 333-101 Executive Deferred Compensation Plan Form S-8 No 333-87290 Non-Employee Director Deferred Compensation Plan

of Beverly Enterprises, Inc. of our report dated February 19, 2003, with respect to the consolidated financial statements and schedule of Beverly Enterprises, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2002. /s/ ERNST & YOUNG LLP Little Rock, Arkansas March 26, 2003 ~~-----END PRIVACY-ENHANCED MESSAGE-----~~


(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Delaware		62-1691861
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


Title of each class		Name of each exchange on which registered

Common Stock, $.10 par value		New York Stock Exchange Pacific Stock Exchange
9% Senior Notes due February 15, 2006		New York Stock Exchange


FORWARD-LOOKING STATEMENTS
PART I
	ITEM 1. BUSINESS.
	ITEM 2. PROPERTIES.
	ITEM 3. LEGAL PROCEEDINGS.
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
PART II
	ITEM 5. MARKET FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
	ITEM 6. SELECTED FINANCIAL DATA.
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
	ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
	ITEM 11. EXECUTIVE COMPENSATION.
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
	ITEM 14. CONTROLS AND PROCEDURES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SIGNATURES
CERTIFICATIONS
INDEX TO EXHIBITS
EX-10.22 Executive Deferred Compensation Plan
EX-10.32 Employment Contract - William R Floyd
EX-10.33 Employment/Severance Agreement-Devereaux
EX-10.34 Severance Agreement - Bobby W Stephens
EX-10.35 Employment Contract - Douglas J Babb
EX-10.36 Severance Agreement - Michael J Matheny
EX-10.37 Severance Agreement - T Jerald Moore
EX-10.59 Amendment No.5 to Participation Agreement
EX-10.60 Amendment No.6 to Participation Agreement
EX-10.62 Amendment No.5 to Services Agreement
EX-10.65 Amendment No.3 to Credit Agreement
EX-10.66 Amendment No.4 to Credit Agreement
EX-10.76 Loan Agreement with Bank of America N.A.
EX-10.77 Guaranty with Bank of America N.A.
EX-21.1 Subsidiaries of Registrant
EX-23.1 Consent of Ernst & Young LLP



		Medicaid				Medicare				Private and Other

		Patient				Patient				Patient
		Days		Revenues		Days		Revenues		Days		Revenues

Year ended:
	December 31, 2002		71%		53%		11%		26%		18%		21%
	December 31, 2001		71%		55%		10%		25%		19%		20%
	December 31, 2000		71%		56%		10%		22%		19%		22%


Name	Position	Age

William R. Floyd	Chairman of the Board, President, Chief Executive Officer and Director		58
Douglas J. Babb	Executive Vice President and Chief Administrative and Legal Officer and Secretary		50
David R. Devereaux	Chief Operating Officer — Nursing Facilities		40
Jeffrey P. Freimark	Executive Vice President, Chief Financial and Information Officer		47
Patrice K. Acosta	Senior Vice President — Professional Services		46
Pamela H. Daniels	Senior Vice President, Controller and Chief Accounting Officer		39
James M. Griffith	Senior Vice President — Investor Relations and Corporate Communications		60
Patricia C. Kolling	Senior Vice President — Compliance		56
Blaise J. Mercadante, Ph.D.	Senior Vice President — Marketing and New Business Innovation		49
Harold A. Price, Ph.D.	Senior Vice President — Sales and Business Development		53
Richard D. Skelly, Jr.	Senior Vice President and Treasurer		43
Crystal J. Wright	Senior Vice President — Human Resources		54
Chris W. Roussos	President — CERES Strategies		38
Cindy H. Susienka	President — AEGIS Therapies and Home Care		43



	Nursing Facilities
					Assisted
					Living Centers						Hospice
			Total								and Home
			licensed				Total		Outpatient		Care
Location	Number		beds		Number		units		Clinics(1)		Centers(2)

Alabama		21		2,783		—		—		—		—
Arizona		3		480		—		—		—		—
Arkansas		34		4,081		3		64		—		—
California		60		6,362		3		185		40		11
Colorado		—		—		—		—		16		—
Delaware		—		—		—		—		4		—
District of Columbia		1		355		—		—		—		—
Georgia		15		1,970		4		133		16		1
Hawaii		2		396		—		—		—		—
Illinois		3		275		—		—		—		—
Indiana		28		3,571		1		16		—		1
Iowa		—		—		—		—		—		1
Kansas		21		1,257		2		29		—		—
Kentucky		8		1,039		—		—		—		—
Maryland		4		585		1		19		7		—
Massachusetts		19		2,068		—		—		—		—
Minnesota		30		2,367		1		16		—		—
Mississippi		19		2,395		—		—		—		—
Missouri		23		2,252		3		101		—		1
Nebraska		24		2,128		1		19		—		3
Nevada		—		—		—		—		—		1
New Jersey		1		140		—		—		—		—
North Carolina		10		1,278		1		16		10		19
Ohio		9		1,242		—		—		5		—
Pennsylvania		42		4,772		3		72		10		7
South Carolina		—		—		—		—		12		—
South Dakota		17		1,175		1		36		—		—
Tennessee		7		929		2		55		—		—
Texas		—		—		—		—		31		2
Virginia		14		1,843		3		80		—		—
Washington		9		922		—		—		—		—
West Virginia		3		310		—		—		—		—
Wisconsin		25		2,692		—		—		—		2

		452		49,667		29		841		151		49

Classification
Owned		315		34,462		24		555		—		—
Leased		136		15,130		5		286		151		49
Managed		1		75		—		—		—		—

		452		49,667		29		841		151		49


ITEM 5.	MARKET FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.



		Prices

		High		Low

2001
	First Quarter	$	8.50	$	5.94
	Second Quarter		10.73		5.20
	Third Quarter		12.10		8.50
	Fourth Quarter		10.69		6.50
2002
	First Quarter	$	9.50	$	5.66
	Second Quarter		9.18		6.95
	Third Quarter		7.95		1.90
	Fourth Quarter		3.89		1.60
2003
	First Quarter (through February 28)	$	3.00	$	1.63



			At or for the years ended December 31,

			2002(1)			2001(1)			2000(1)			1999(1)			1998(1)(2)


			(Dollars in thousands, except per share data)
Consolidated Statement of Operations Data:
Net operating revenues			$	2,419,923		$	2,599,963		$	2,523,265		$	2,411,740		$	2,723,567
Interest income				4,748			2,982			2,522			4,248			10,661

		Total revenues		2,424,671			2,602,945			2,525,787			2,415,988			2,734,228
Costs and expenses:
	Operating and administrative:
		Wages and related		1,433,413			1,562,324			1,523,316			1,463,657			1,611,114
		Provision for insurance and related items		125,341			101,418			120,893			88,377			154,267
		Other		645,460			683,614			716,400			675,077			792,481
	Interest			66,824			79,342			79,944			72,392			65,845
	Depreciation and amortization			81,124			81,208			87,778			88,262			84,391
	Florida insurance reserve adjustment			22,179			—			—			—			—
	California investigation settlement and related costs			6,300			—			—			—			—
	Special charges and adjustments related to settlements with the federal government			(9,441	)		77,495			—			202,447			1,865
	Asset impairments, workforce reductions and other unusual items			79,506			197,389			17,249			23,796			70,675
	Year 2000 remediation			—			—			—			12,397			9,719

		Total costs and expenses		2,450,706			2,782,790			2,545,580			2,626,405			2,790,357

Loss before provision for (benefit from) income taxes, discontinued operations and cumulative effect of changes in accounting principles				(26,035	)		(179,845	)		(19,793	)		(210,417	)		(56,129	)
Provision for (benefit from) income taxes				6,085			57,574			(4,636	)		(78,587	)		(27,925	)

Loss before discontinued operations and cumulative effect of changes in accounting principles				(32,120	)		(237,419	)		(15,157	)		(131,830	)		(28,204	)
Discontinued operations, net of taxes of $0 — 2002; $3,814 — 2001; $(17,626) — 2000; $(492) — 1999; and $932 — 1998				(36,799	)		(63,853	)		(39,345	)		(2,817	)		1,598
Cumulative effect of changes in accounting principles, net of taxes of $0 — 2002; $2,811 — 1998(3)				(77,171	)		—			—			—			(4,415	)

Net loss			$	(146,090	)	$	(301,272	)	$	(54,502	)	$	(134,647	)	$	(31,021	)

Basic and diluted income (loss) per share of common stock:
	Before discontinued operations and cumulative effect of changes in accounting principles		$	(0.31	)	$	(2.28	)	$	(0.15	)	$	(1.29	)	$	(0.27	)
	Discontinued operations, net of taxes			(0.35	)		(0.61	)		(0.38	)		(0.03	)		0.02
	Cumulative effect of changes in accounting principles, net of taxes			(0.74	)		—			—			—			(0.04	)

	Net loss(4)		$	(1.39	)	$	(2.90	)	$	(0.53	)	$	(1.31	)	$	(0.30	)

	Shares used to compute per share amounts			104,726,000			104,037,000			102,452,000			102,491,000			103,762,000
Other Financial Data:
Cash flow from operations			$	116,633		$	220,897		$	37,010		$	189,141		$	6,789
Capital expenditures			$	100,103		$	89,401		$	76,027		$	95,414		$	150,451
Consolidated Balance Sheet Data:
Total assets			$	1,349,895		$	1,681,070		$	1,875,993		$	1,982,880		$	2,160,511
Current portion of long-term debt			$	41,463		$	64,231		$	227,111		$	34,052		$	27,773
Long-term debt, excluding current portion			$	588,714		$	677,442		$	564,247		$	746,164		$	878,270
Stockholders’ equity			$	153,472		$	296,497		$	583,993		$	641,124		$	776,206
Other Data:
Average occupancy(5)				87.9	%		86.9	%		87.0	%		87.2	%		88.7	%
Number of nursing home beds				49,667			52,115			59,799			62,217			62,293


ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


	*Revenue Recognition, Accounts Receivable and Allowances for Doubtful Accounts*



		2002						2001						2000

		Workforce			Exit			Workforce			Exit			Workforce			Exit
		Reductions			Costs			Reductions			Costs			Reductions			Costs

Balance beginning of year		$	7,631		$	15,030		$	4,151		$	5,208		$	5,165		$	7,915
	Charged to operations		8,454			2,633			23,118			18,165			5,904			3,000
	Cash payments		(9,074	)		(10,313	)		(15,448	)		(8,343	)		(6,918	)		(3,207	)
	Stock transactions		(1,008	)		—			(4,158	)		—			—			—
	Reversals		(585	)		(2,359	)		(32	)		—			—			(2,500	)

Balance end of year		$	5,418		$	4,991		$	7,631		$	15,030		$	4,151		$	5,208



		Years Ended December 31,

		2002			2001			2000

Reported net loss		$	(146,090	)	$	(301,272	)	$	(54,502	)
Add back:
	Goodwill amortization		—			3,917			4,465
	Operating rights amortization		—			252			268

Adjusted net loss		$	(146,090	)	$	(297,103	)	$	(49,769	)


	*Discontinued Operations* — See 2002 vs. 2001 — Discontinued Operations


	*Off-Balance Sheet Obligations*


	*Asset Impairments*



				Payments Due by Period

		Total		2003		2004-2005		2006-2007		After 2007

Contractual obligations:
Long-term debt		$	621,025	$	40,611	$	55,466	$	216,904	$	308,044
Capital lease obligations			9,152		852		1,449		700		6,151
Operating leases			205,984		51,631		79,741		33,084		41,528
Off-balance sheet lease arrangement			69,456		35,000		34,456		—		—
Other long-term obligations			73,891		18,125		36,250		19,516		—
Data processing agreement			9,470		2,196		4,392		2,882		—

	Total contractual cash obligations	$	988,978	$	148,415	$	211,754	$	273,086	$	355,723



		Total		Amount of Commitment Expiration Per Period
		Amounts
		Committed		2003		2004-2005		2006-2007		After 2007

Other commercial commitments:
Letters of credit		$	25,944	$	16,744	$	9,200	$	—	$	—
Guarantees			31,528		9,018		8,450		7,365		6,695
Other commercial commitments			1,500		1,500		—		—		—

	Total commercial commitments	$	58,972	$	27,262	$	17,650	$	7,365	$	6,695


ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



		Expected Maturity Dates																				Fair Value		Fair Value
																						December 31,		December 31,
		2003			2004			2005			2006			2007			Thereafter			Total		2002		2001


		(Dollars In Thousands)
Total long-term debt:
	Fixed rate	$	37,893		$	33,381		$	21,325		$	195,404		$	21,541		$	313,258		$	622,802	$	578,282	$	734,602
	Average interest rate		7.98	%		7.11	%		8.01	%		8.88	%		7.73	%		9.06	%
	Variable rate	$	3,570		$	1,926		$	283		$	312		$	347		$	937		$	7,375	$	7,375	$	25,491
	Average interest rate		3.85	%		3.92	%		4.92	%		4.88	%		4.85	%		5.29	%
Total notes receivable:
	Fixed rate	$	16,018		$	198		$	60		$	45		$	15,987		$	1		$	32,309	$	24,548	$	21,660
	Average interest rate		9.32	%		8.01	%		5.83	%		8.30	%		12.81	%		8.30	%
	Variable rate	$	35		$	37		$	39		$	41		$	43		$	254		$	449	$	449	$	1,050
	Average interest rate		5.25	%		5.25	%		5.25	%		5.25	%		5.25	%		5.25	%
Off-balance sheet obligations:
	Variable rate	$	35,000		$	104,456		$	—		$	—		$	—		$	—		$	139,456	$	139,456	$	182,357
	Average interest rate		5.43	%		3.20	%		—			—			—			—


	Page

Report of Ernst & Young LLP, Independent Auditors		36
Consolidated Balance Sheets		37
Consolidated Statements of Operations		38
Consolidated Statements of Stockholders’ Equity		39
Consolidated Statements of Cash Flows		40
Notes to Consolidated Financial Statements		41
Supplementary Data (Unaudited) — Quarterly Financial Data		72


											Accumulated
						Additional					other
			Common			paid-in		Accumulated			comprehensive			Treasury
			stock			capital		deficit			income (loss)			stock			Total

Balances at January 1, 2000			$	11,038		$	875,637	$	(139,429	)	$	1,061		$	(107,183	)	$	641,124
	Employee stock transactions related to 2,436,442 shares of common stock, net			244			1,344		—			—			—			1,588
	Purchase of 1,174,500 shares of common stock for treasury			—			—		—			—			(3,874	)		(3,874	)
	Comprehensive income (loss):
		Foreign currency translation adjustments, net of income taxes of $257		—			—		—			383			—			383
		Unrealized losses on securities, net of income tax benefit of $177		—			—		—			(263	)		—			(263	)
		Gains reclassified into earnings from other comprehensive income, net of income tax benefit of $311		—			—		—			(463	)		—			(463	)
		Net loss		—			—		(54,502	)		—			—			(54,502	)

	Total comprehensive loss																	(54,845	)

Balances at December 31, 2000				11,282			876,981		(193,931	)		718			(111,057	)		583,993
	Employee stock transactions related to 5,495 shares of common stock, net			(1	)		8,456		—			—			—			8,455
	Reissuance of 545,542 shares of common stock from treasury			—			2,231		—			—			1,779			4,010
	Comprehensive income (loss):
		Foreign currency translation adjustments, net of income tax benefit of $222		—			—		—			(330	)		—			(330	)
		Unrealized gains on securities, net of income taxes of $1,104		—			—		—			1,641			—			1,641
		Net loss		—			—		(301,272	)		—			—			(301,272	)

	Total comprehensive loss																	(299,961	)

Balances at December 31, 2001				11,281			887,668		(495,203	)		2,029			(109,278	)		296,497
	Employee stock transactions related to 436,038 shares of common stock, net			44			3,680		—			—			—			3,724
	Reissuance of 124,212 shares of common stock from treasury			—			434		—			—			419			853
	Comprehensive loss:
		Unrealized losses on securities, net of income taxes of $0		—			—		—			(1,464	)		—			(1,464	)
		Foreign currency translation adjustments, net of income taxes of $0		—			—		—			(48	)		—			(48	)
		Net loss		—			—		(146,090	)		—			—			(146,090	)

	Total comprehensive loss																	(147,602	)

Balances at December 31, 2002			$	11,325		$	891,782	$	(641,293	)	$	517		$	(108,859	)	$	153,472


1.	Summary of Significant Accounting Policies — (Continued)



						Accumulated
		Cost Basis				Amortization				Carrying Value

		2002		2001		2002		2001		2002		2001

Operating rights and licenses		$	2,161	$	4,440	$	114	$	2,003	$	2,047	$	2,437
Leasehold interests			2,134		3,900		2,053		3,747		81		153

	Total	$	4,295	$	8,340	$	2,167	$	5,750	$	2,128	$	2,590


	2002		2001

Accrued wages and related liabilities	$	2,574	$	1,996
General and professional liabilities		77,025		51,784
Other liabilities and deferred items		94,414		119,910

	$	174,013	$	173,690


3.	Special Charges and Adjustments Related to Settlements with the Federal Government


	2002		2001

Federal government settlement obligations	$	11,915	$	10,891
Other accrued liabilities		—		8,267
Other liabilities and deferred items		61,976		73,968

	$	73,891	$	93,126


				MK
		Matrix		Medical		Nursing		Total

Current assets		$	13,711	$	923	$	—	$	14,634
Property and equipment, net			6,588		1,183		6,696		14,467
Goodwill			3,713		—		—		3,713
Other assets			3,531		73		—		3,604

	Total assets held for sale	$	27,543	$	2,179	$	6,696	$	36,418

Current liabilities held for sale		$	3,239	$	—	$	—	$	3,239



	Total				Owned				Leased

	2002		2001		2002		2001		2002		2001

Land, buildings and improvements	$	1,153,084	$	1,246,338	$	1,138,054	$	1,224,910	$	15,030	$	21,428
Furniture and equipment		301,604		340,113		298,244		335,452		3,360		4,661
Construction in progress		6,974		31,297		6,974		31,297		—		—

		1,461,662		1,617,748		1,443,272		1,591,659		18,390		26,089
Less accumulated depreciation and amortization		672,379		744,163		659,746		726,221		12,633		17,942

	$	789,283	$	873,585	$	783,526	$	865,438	$	5,757	$	8,147


	2002		2001

Revolver borrowings under Credit Facility, matures April 2004	$	—	$	—
9 5/8% Senior Notes due April 15, 2009, unsecured		200,000		200,000
9% Senior Notes due February 15, 2006, unsecured		180,000		180,000
Notes and mortgages, less imputed interest: 2002 — $15, 2001 — $29; due in installments through the year 2031, at effective interest rates of 3.77% to 12.50%, a portion of which is secured by property, equipment and other assets with a net book value of $175,803 at December 31, 2002		133,554		192,736
Industrial development revenue bonds, due in installments through the year 2013, at effective interest rates of 4.10% to 10%, a portion of which is secured by property and other assets with a net book value of $104,462 at December 31, 2002		78,530		115,730
7% A.I. Credit Corp. Note due in installments through January 2002, secured by a surety bond		—		12,500
8.750% First Mortgage Bonds due July 1, 2008, secured by first mortgages on 4 nursing facilities with an aggregate net book value of $9,599 at December 31, 2002		11,041		11,623
8.625% First Mortgage Bonds due October 1, 2008, secured by first mortgages on 7 nursing facilities with an aggregate net book value of $22,533 at December 31, 2002		17,900		18,793

		621,025		731,382
Present value of capital lease obligations, less imputed interest: 2002 — $6,977, 2001 — $7,889, at effective interest rates of 6.75% to 16.49%		9,152		10,291

		630,177		741,673
Less amounts due within one year		41,463		64,231

	$	588,714	$	677,442


Year ending
December 31,

2003	$	51,631
2004		43,188
2005		36,553
2006		21,188
2007		11,896
Thereafter		41,528

	$	205,984



	Options Outstanding						Options Exercisable

					Weighted-
			Weighted-		Average				Weighted-
	Options		Average		Remaining		Options		Average
Range of Exercise Prices	Outstanding		Exercise Price		Contractual Life		Exercisable		Exercise Price

$ 2.33 – $ 6.85		4,542,242	$	5.24		8.50		854,705	$	4.26
$ 7.00 – $ 9.80		3,925,058		7.70		8.23		1,022,380		7.70
$10.46 – $11.76		364,710		11.29		8.28		346,521		11.29
$12.88 – $14.38		50,625		13.58		5.17		50,625		13.58

$ 2.33 – $14.38		8,882,635		6.62		8.36		2,274,231		7.09



			2002					2001

			Asset			Liability		Asset			Liability

Insurance reserves			$	79,071		$	—	$	74,878		$	—
General business tax credit carryforwards				28,742			—		21,137			—
Alternative minimum tax credit carryforwards				19,124			—		18,608			—
Provision for dispositions				66,768			8,387		57,605			2,791
Provision for Medicare repayment				31,735			—		69,812			—
Depreciation and amortization				28,399			113,228		15,513			127,005
Operating supplies				—			11,489		—			12,099
Federal net operating loss carryforwards				55,659			—		30,772			—
Other				29,279			6,456		27,254			19,987

				338,777			139,560		315,579			161,882
Valuation allowances:
	Federal			(179,625	)		—		(134,219	)		—
	State			(19,592	)		—		(19,478	)		—

		Net deferred tax balances	$	139,560		$	139,560	$	161,882		$	161,882


12.	Fair Values of Financial Instruments — (Continued)


	Federal Government Settlements (Including Current Portion)



	2002				2001

	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value

Cash and cash equivalents	$	115,445	$	115,445	$	89,343	$	89,343
Notes receivable, net (including current portion)		24,997		24,997		22,710		22,710
Beverly Indemnity funds		2,809		2,809		2,163		2,163
Long-term debt (including current portion)		630,177		585,657		741,673		760,093
Federal government settlements (including current portion)		73,891		73,891		119,859		119,859