-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R+9PZixIQPvuuFekqunbdZGY4hbTWroE5Nkmw3ewidMxrMOgq/APyMiKtiSs7fsG ycT9Zsub9D5m5pfaJ0Gwew== 0000950134-97-006925.txt : 19970923 0000950134-97-006925.hdr.sgml : 19970923 ACCESSION NUMBER: 0000950134-97-006925 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970922 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW BEVERLY HOLDINGS INC CENTRAL INDEX KEY: 0001040441 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-28521 FILM NUMBER: 97683390 BUSINESS ADDRESS: STREET 1: 5111 ROGERS AVE STREET 2: SUITE 40-A CITY: FORT SMITH STATE: AR ZIP: 72903 BUSINESS PHONE: 5014526712 MAIL ADDRESS: STREET 1: 511 ROGERS AVE STREET 2: SUITE 40-A CITY: FORT SMITH STATE: AR ZIP: 72903 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1997 REGISTRATION NO. 333-28521 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- NEW BEVERLY HOLDINGS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 8051 62-1691861 (State or other jurisdiction of (Primary Standard Industrial (IRS Employer incorporation or organization) Classification Code Number) Identification No.)
5111 ROGERS AVENUE, SUITE 40-A FORT SMITH, ARKANSAS 72919-0155 (501) 452-6712 (Address, Including Zip Code, And Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ROBERT W. POMMERVILLE, ESQ. EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY NEW BEVERLY HOLDINGS, INC. 5111 ROGERS AVENUE, SUITE 40-A FORT SMITH, ARKANSAS 72919-0155 (501) 452-6712 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) --------------------- Copies to: H. WATT GREGORY, III, ESQ. MICHAEL E. KARNEY, ESQ. GIROIR, GREGORY, HOLMES & HOOVER, PLC 111 CENTER STREET, SUITE 1900 LITTLE ROCK, ARKANSAS 72201 (501) 372-3000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective and all other conditions described herein have been satisfied or are waived. If the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 22, 1997 NEW BEVERLY HOLDINGS, INC. COMMON STOCK PAR VALUE $0.10 PER SHARE This Prospectus covers up to 110,424,677 shares of common stock, par value $.10 per share ("New Beverly Common Stock"), of New Beverly Holdings, Inc., a Delaware corporation ("New Beverly"). This Prospectus is being furnished to the stockholders of Beverly Enterprises, Inc., a Delaware corporation ("Beverly"), the sole stockholder of New Beverly, in connection with the proposed distribution (the "Distribution") to Beverly's stockholders of all the outstanding shares of New Beverly Common Stock, pursuant to the terms of an Agreement and Plan of Distribution, dated as of April 15, 1997, by and between Beverly, New Beverly and Capstone Pharmacy Services, Inc., a Delaware corporation ("Capstone") (the "Distribution Agreement"). A copy of the Distribution Agreement is attached as Annex C to the Joint Proxy Statement/Prospectus (the "Joint Proxy Statement/ Prospectus") of Beverly and Capstone relating to the solicitation of proxies in order to obtain stockholder approval of the Distribution and Merger (as defined below) which accompanies this Prospectus. Beverly is proposing to make the Distribution in connection with and as part of a proposed reorganization that also involves the merger of Beverly with and into Capstone (the "Merger"), with Capstone remaining as the surviving corporation ("Surviving Corporation"), the Merger to take place immediately following the Distribution, pursuant to an Agreement and Plan of Merger by and between Capstone and Beverly dated as of April 15, 1997 (the "Merger Agreement"), a copy of which is attached as Annex B to the Joint Proxy Statement/Prospectus. Immediately following the Merger, New Beverly will change its name to "Beverly Enterprises, Inc." The consummation of the Merger is conditioned upon the successful completion of the Distribution. The completion of the Merger (and, in the case of Beverly, the Distribution) is subject to the approval of the stockholders of both Beverly and Capstone. One share of New Beverly Common Stock will be distributed for each share of common stock of Beverly, par value $.10 per share (the "Beverly Common Stock"), issued and outstanding on the date established by the Board of Directors of Beverly for determining stockholders of record entitled to receive New Beverly Common Stock in the Distribution (the "Distribution Record Date"). At the time of the Distribution, New Beverly will own all of Beverly's businesses and assets other than Beverly's institutional pharmacy business (the "Institutional Pharmacy Business"), currently operated through Beverly's wholly-owned subsidiary Pharmacy Corporation of America, a California corporation ("PCA"). The businesses to be owned and operated by New Beverly include Beverly's nursing facilities, acute long-term transitional hospitals, rehabilitation therapy services, outpatient therapy clinics, assisted living centers, hospices, home healthcare centers and other healthcare and related services and businesses, other than the Institutional Pharmacy Business (collectively, the "Remaining Healthcare Business"), which will be transferred to New Beverly or one or more direct or indirect subsidiaries of New Beverly. No consideration will be paid by Beverly's stockholders for the shares of New Beverly Common Stock to be received by them in the Distribution. There is currently no public trading market for the shares of New Beverly Common Stock. New Beverly intends to list the New Beverly Common Stock for trading on the New York Stock Exchange ("NYSE") and the Pacific Stock Exchange ("PSE") under the trading symbol "BEV," which is currently used by Beverly. The consummation of the Distribution is a condition to, among other things, Beverly's and Capstone's respective obligations to consummate the Merger. STOCKHOLDERS OF BEVERLY SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS" ON PAGE 7 HEREOF WITH RESPECT TO THE SECURITIES BEING OFFERED HEREBY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1997. 3 NEW BEVERLY HOLDINGS, INC. PROSPECTUS TABLE OF CONTENTS
AVAILABLE INFORMATION....................................... iv CAUTIONARY STATEMENTS....................................... v PROSPECTUS SUMMARY.......................................... 1 Overview.................................................. 1 New Beverly............................................... 1 The Transactions.......................................... 2 The Distribution Agreement................................ 2 Certain Tax Considerations................................ 3 New Beverly Stock Option Plans............................ 3 Effect of the Transactions on Employees and Employee Benefits............................................... 4 Expenses.................................................. 4 Risk Factors.............................................. 4 SUMMARY CONSOLIDATED FINANCIAL DATA......................... 5 RISK FACTORS................................................ 6 Substantial Indebtedness.................................. 6 Business to be Conducted by New Beverly................... 6 Uncertainty Associated with Healthcare Reform............. 6 Risks Involved with Reimbursement by Third Party Payors... 7 Government Regulation..................................... 7 Increased Labor Costs and Availability of Personnel....... 8 Dependence on Key Personnel............................... 8 Competition............................................... 8 Absence of Prior Trading Market........................... 9 Certain Indemnification Obligations....................... 9 Non-competition Agreement with Capstone................... 9 USE OF PROCEEDS............................................. 10 CAPITALIZATION.............................................. 11 UNAUDITED PRO FORMA NEW BEVERLY FINANCIAL STATEMENTS........ 13 NEW BEVERLY HOLDINGS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997.................... 14 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME...................................... 15 NEW BEVERLY HOLDINGS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997......................... 16 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET..................................................... 17 THE DISTRIBUTION............................................ 18 Terms of the Distribution Agreement....................... 18 Restructuring and Contribution of Remaining Healthcare Business to New Beverly................................ 18 Consummation of the Distribution; Treatment of Beverly Stock Options, Phantom Shares, Performance Shares and Shares of Restricted Stock............................. 19 Manner of Effecting the Distribution...................... 20 Listing of New Beverly Common Stock; Restrictions on Resale................................................. 20 Treatment of Indebtedness................................. 21 Expenses.................................................. 21 Conditions................................................ 21 Settlement of Intercompany Accounts....................... 22 Indemnification and Insurance............................. 22
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Terms of the Employee Benefit Agreement................... 23 Terms of the Non-competition Agreement.................... 25 Terms of the Interim Services Agreement................... 25 Terms of the Tax Allocation and Indemnification Agreement.............................................. 25 Preferred Provider Agreement.............................. 27 CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................... 27 The Distribution.......................................... 28 The Merger................................................ 29 Taxpayer Relief Act....................................... 30 Back-up Withholding Requirements.......................... 30 TREATMENT OF BEVERLY INDEBTEDNESS........................... 31 General................................................... 31 Existing Credit Facility.................................. 31 9% Senior Notes........................................... 32 Subordinated Debentures................................... 32 Industrial Revenue Bonds.................................. 33 First Mortgage Bonds...................................... 33 8.75% Notes............................................... 34 Medium Term Notes......................................... 34 REIT Promissory Notes..................................... 35 Bank Loans, Mortgages and Notes Payable................... 35 INFORMATION CONCERNING BEVERLY.............................. 36 Selected Historical Consolidated Financial Data........... 36 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 37 General................................................... 37 Operating Results......................................... 38 Liquidity and Capital Resources........................... 44 BUSINESS.................................................... 46 General................................................... 46 Operations................................................ 46 Governmental Regulation and Reimbursement................. 48 Competition............................................... 51 Employees................................................. 51 Properties................................................ 52 Legal Proceedings......................................... 53 Management................................................ 54 Dividend Policy........................................... 56 PRINCIPAL STOCKHOLDERS OF NEW BEVERLY....................... 57 Security Ownership of Certain Beneficial Owners........... 57 Security Ownership of Management.......................... 58 EXECUTIVE AND DIRECTOR COMPENSATION......................... 59 Executive Compensation.................................... 59 Option/SAR Grants in Last Fiscal Year..................... 62 Compensation of Directors and Other Information Concerning the Board and its Committees........................... 63 The Beverly Non-Employee Director Deferred Compensation Plan................................................... 64 Compensation Committee Report on Executive Compensation... 65 Compensation Philosophy................................... 65 Competitive Market Evaluation............................. 65 Base Salary............................................... 66 Annual Incentives......................................... 66 Long-term Incentives...................................... 66 Stock Ownership Guideline................................. 67 $1 Million Limit on Compensation.......................... 67
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Other Matters............................................. 67 Compensation Committee.................................... 67 Compensation Committee Interlocks and Insider Participation.......................................... 68 Performance Graph......................................... 68 Other Plans............................................... 68 New Beverly 1997 Long-Term Incentive Plan................. 72 New Beverly Non-Employee Directors Stock Option Plan...... 72 Certain Transactions with Management and Others........... 73 DESCRIPTION OF NEW BEVERLY CAPITAL STOCK.................... 73 Authorized Capital Stock.................................. 73 New Beverly Preferred Stock............................... 73 New Beverly Common Stock.................................. 73 New Beverly Common Stock Purchase Rights.................. 73 The Charter and Bylaws of New Beverly..................... 75 SHARES ELIGIBLE FOR FUTURE SALE............................. 76 LEGAL MATTERS............................................... 76 EXPERTS..................................................... 76 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES....................................... F-1
iii 6 AVAILABLE INFORMATION New Beverly has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the shares of New Beverly Common Stock described in this Prospectus. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement or the exhibits and schedules thereto, certain portions having been omitted pursuant to the rules and regulations of the Commission. Statements made in this Prospectus as to the contents of any contract or other document are not necessarily complete with respect to each such contract or other document filed with the Commission as an exhibit to the Registration Statement. Reference is made to such exhibits for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits and schedules thereto filed with the Commission may be inspected and copied (at prescribed rates) at the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York, 10048, and The Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511. Such reports and other information can be reviewed through the Commission's Electronic Data Gathering Analysis and Retrieval System, which is publicly available through the Commission's Web site (http://www.sec.gov). NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY NEW BEVERLY, BEVERLY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THIS PROSPECTUS SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF NEW BEVERLY OR BEVERLY SINCE THE DATE OF THIS PROSPECTUS. iv 7 CAUTIONARY STATEMENTS This Prospectus contains statements relating to future results of New Beverly and Beverly (including certain projections and business trends) that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"). Section 27A(b)(2)(D) of the Securities Act and Section 21E(b)(2)(D) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as promulgated by the Litigation Reform Act, expressly state that the safe harbor for forward-looking statements does not apply to statements made in connection with an initial public offering. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions, regulatory conditions, government healthcare spending, integration of acquisitions and competitive pricing pressures, all as detailed from time to time in the filings of New Beverly and Beverly made with the Commission. When used in this Prospectus with respect to New Beverly and Beverly the words "estimate," "project," "intend," "expect" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Such risks and uncertainties include those risks, uncertainties and risk factors identified in this Prospectus under the headings "Risk Factors," "The Distribution," "Certain Federal Income Tax Consequences," "Treatment of Beverly Indebtedness" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." New Beverly and Beverly do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. v 8 PROSPECTUS SUMMARY This Prospectus is being furnished to stockholders of Beverly together with the Joint Proxy Statement/ Prospectus. The following summary is qualified in its entirety by the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus and the Joint Proxy Statement/ Prospectus. Beverly stockholders are urged to read this Prospectus, the Joint Proxy Statement/Prospectus, and the Annexes thereto in their entirety. Except where otherwise indicated, the description of New Beverly and its businesses contained herein assumes the completion of the Distribution and the Merger. OVERVIEW Prior to the Merger, Beverly's Remaining Healthcare Business will be transferred or contributed to New Beverly, a wholly-owned subsidiary of Beverly, and all of the New Beverly Common Stock will be distributed to the stockholders of Beverly at the rate of one share of New Beverly Common Stock per share of Beverly Common Stock held as of the Distribution Record Date. Beverly's only remaining business then will be the Institutional Pharmacy Business operated through PCA, which will be combined with Capstone's institutional pharmacy business upon the Merger of Beverly with and into Capstone. All outstanding shares of Beverly Common Stock and the associated Rights (as defined in the Joint Proxy Statement/Prospectus under the caption "Comparative Rights of Stockholders -- Anti-Takeover Measures," will be converted into a right to receive an aggregate of 50 million shares of common stock, $.01 par value per share, of Capstone (the "Capstone Common Stock"). Capstone will be the Surviving Corporation in the Merger and will continue its corporate existence under the laws of the State of Delaware. In connection with the Merger, Capstone will assume approximately $275 million in debt incurred by PCA in connection with the Transactions, the proceeds of which are to be paid to Beverly prior to the Distribution Date (as defined below). Capstone will also assume options and awards covering an aggregate of approximately 700,000 shares (subject to adjustment) of Beverly Common Stock. As a result of the Distribution, New Beverly will be an independent, publicly-traded company engaged in the Remaining Healthcare Business and owned by the stockholders of Beverly as of the Distribution Record Date. Immediately following the Merger, the name of New Beverly will be changed to "Beverly Enterprises, Inc." NEW BEVERLY New Beverly is currently a wholly-owned subsidiary of Beverly incorporated under the laws of the State of Delaware. By virtue of the restructuring of Beverly as part of the Distribution, all of the Remaining Healthcare Business of Beverly, other than the Institutional Pharmacy Business, will be contributed to New Beverly prior to the Merger of Beverly with and into Capstone. The mailing address of Beverly's principal executive offices is 5111 Rogers Avenue, Suite 40-A, Fort Smith, Arkansas 72919-0155, and the telephone number at such address is (501) 452-6712. Following the Distribution, New Beverly's principal executive offices and phone number will be the same as Beverly's present address and number, indicated above. New Beverly will make application to list the New Beverly Common Stock for trading on the NYSE and PSE under the symbol "BEV," currently used by Beverly. New Beverly will be one of the largest operators of nursing facilities in the United States, with its business consisting principally of providing long-term healthcare, including the operation of nursing facilities, acute long-term transitional hospitals, rehabilitation therapy services, outpatient therapy clinics, assisted living centers, hospices and home healthcare centers. At June 30, 1997, Beverly operated 574 nursing facilities with 64,206 licensed beds. The facilities are located in 31 states and the District of Columbia, and range in capacity from 20 to 355 beds. At June 30, 1997, Beverly also operated 74 pharmacies through PCA, 33 assisted living centers containing 897 units, 12 transitional hospitals containing 639 beds, 46 outpatient therapy clinics, 21 hospices and six home healthcare centers. Beverly's facilities had average occupancy of 86.5%, 87.4%, 88.1% and 88.5% during the six months ended June 30, 1997 and the years ended December 31, 1996, 1995, and 1994, respectively. New Beverly is treated for accounting purposes in the Transactions as the continuing reporting entity with respect to the historical Beverly business in light of, among other factors, (i) all of Beverly's business operations (other than PCA) being continued by New Beverly after the Transactions, (ii) the stockholders of Beverly before, and New Beverly after, the Transactions being identical, (iii) the respective Boards of Directors of Beverly before, and New Beverly after, the Transactions being identical in composition, number 1 9 and tenure, (iv) the senior management of Beverly before, and New Beverly after, the Transactions being substantially identical and (v) the vast majority (approximately 95%) of the approximately 80,000 employees of Beverly before the Transactions being continued as employees of New Beverly after the Transactions. THE TRANSACTIONS Restructuring. Prior to the Distribution Record Date, Beverly will complete an internal restructuring pursuant to which all the assets and liabilities relating to the Remaining Healthcare Business will be transferred or contributed to New Beverly in one or more transactions expected to receive tax-free treatment. Upon completion of the restructuring, the Remaining Healthcare Business will be conducted by New Beverly and the Institutional Pharmacy Business conducted by PCA will remain with Beverly. See "The Distribution -- Restructuring and Contribution of Remaining Healthcare Business to New Beverly." Distribution. The Distribution will be effected immediately prior to the Merger. On the Distribution Date, Beverly will distribute to Beverly stockholders as of the Distribution Record Date, shares of New Beverly Common Stock. Each stockholder of Beverly as of the Distribution Record Date will receive one share of New Beverly Common Stock per share of Beverly Common Stock held as of the Distribution Record Date. The Distribution will not take place unless all of the conditions to effecting the Merger (other than the completion of the Distribution) have been fulfilled. Beverly's transfer agent, The Bank of New York, will act as the Distribution Agent for the Distribution and will deliver certificates for New Beverly Common Stock as soon as practicable to holders of record of Beverly Common Stock as of the close of business on the Distribution Record Date. All shares of New Beverly Common Stock will be fully paid and nonassessable and the holders thereof will not be entitled to preemptive rights. Immediately following the completion of the Distribution, New Beverly will be an independent, publicly-traded company, and it is contemplated that the shares of New Beverly Common Stock will be listed on the NYSE and PSE. See "The Distribution -- Consummation of the Distribution; Treatment of Beverly Stock Options, Phantom Shares, Performance Shares and Shares of Restricted Stock." Merger. Following the approval and adoption of the Merger Agreement by the requisite vote of the stockholders of Beverly and Capstone and the satisfaction or waiver of the other conditions to the Merger, Beverly will be merged with and into Capstone, with Capstone continuing as the Surviving Corporation. The Merger will become effective upon filing with the Secretary of State of the State of Delaware a duly executed Certificate of Merger, in the form required by and in accordance with the Delaware General Corporation Law ("DGCL"), or at such time thereafter as is provided in the Certificate of Merger. Pursuant to the Merger Agreement, at the effective time of the Merger ("Effective Time") each share of Beverly Common Stock, and associated Rights (as defined in "The Merger Agreement" in the Joint Proxy Statement/Prospectus), issued and outstanding immediately prior to the Effective Time (other than fractional shares) will be converted into the right to receive that number of duly authorized, validly issued, fully paid and nonassessable shares of Capstone Common Stock equal to the quotient, expressed to four decimal places, of (a) 50,000,000 divided by (b) the number of shares of Beverly Common Stock outstanding immediately prior to the Effective Time (the "Conversion Number"). THE DISTRIBUTION AGREEMENT The Distribution Agreement provides a general framework for allocating Beverly's assets and liabilities pursuant to the Internal Beverly Restructuring Plan (attached as Exhibit A to the Distribution Agreement which is attached as Annex C to the Joint Proxy Statement/Prospectus). The Internal Beverly Restructuring Plan will segregate the Remaining Healthcare Business from the Institutional Pharmacy Business prior to the date, as determined by the Beverly Board of Directors, on which the Distribution shall be effected (the "Distribution Date"). The Distribution Agreement also sets forth the general terms on which Beverly will conduct its business prior to the Distribution Date, as well as the terms regarding certain relationships between Capstone and New Beverly following the Distribution. The Distribution Agreement provides that the Distribution will be effected by distributing to each holder of Beverly Common Stock as of the close of business on the Distribution Record Date, one share of New Beverly Common Stock per share of Beverly Common Stock held by such holder as of such time. 2 10 CERTAIN TAX CONSIDERATIONS Beverly has requested a private letter ruling (the "Private Letter Ruling") from the Internal Revenue Service ("IRS") substantially to the effect that, among other things, the Distribution will qualify as a reorganization under Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the "Code"), and that neither Beverly, New Beverly nor their stockholders will recognize any gain or loss (i) in connection with such reorganization (as more fully described below), (ii) upon the receipt by New Beverly of the Remaining Healthcare Business from Beverly in exchange for the New Beverly Common Stock, or (iii) upon receipt by Beverly stockholders of the New Beverly Common Stock in the Distribution. As an alternative to obtaining the Private Letter Ruling, at Beverly's election, Beverly may request the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP to the same effect. Tax opinions are not binding on the IRS or any court. Receipt of either the Private Letter Ruling or a favorable tax opinion is a condition to the respective obligations of Beverly and Capstone to consummate the Merger. See "The Merger -- Conditions to Closing" in the Joint Proxy Statement/Prospectus. It is expected that the Distribution will qualify as a tax-free reorganization under Section 368 of the Code. Assuming that the Distribution so qualifies, (i) the holders of Beverly Common Stock will not recognize gain or loss upon receipt of shares of New Beverly Common Stock, (ii) each holder of Beverly Common Stock will allocate his, her or its aggregate tax basis in the Beverly Common Stock immediately before the Distribution among the Beverly Common Stock and New Beverly Common Stock in proportion to their respective fair market values, (iii) the holding period of each holder of Beverly Common Stock for the New Beverly Common Stock will include the holding period for his, her or its Beverly Common Stock, provided that the Beverly Common Stock is held as a capital asset at the time of the Distribution, and (iv) Beverly will not recognize any gain or loss on its distribution of the New Beverly Common Stock to its stockholders. See "Certain Federal Income Tax Consequences." It is also expected that the Merger will qualify as a tax-free reorganization within the meaning of Section 368(a) of the Code. Assuming the Merger so qualifies, (i) the holders of Beverly Common Stock will not recognize gain or loss upon the receipt of Capstone Common Stock in exchange for their shares of Beverly Common Stock, (ii) each holder of Beverly Common Stock will carry over his, her or its tax basis in the Beverly Common Stock (as determined immediately following the Distribution) to the Capstone Common Stock, (iii) the holding period for each holder of Beverly Common Stock will carry over to the Capstone Common Stock, provided that the Beverly Common Stock is held as a capital asset immediately prior to the Effective Time of the Merger, and (iv) any holder of Beverly Common Stock receiving cash in lieu of fractional shares will recognize capital gain or loss (provided the shares of Beverly Common Stock surrendered are held as capital assets immediately prior to the Effective Time of the Merger) equal to the difference between the amount of cash received and the portion of such holder's basis in the shares of Beverly Common Stock allocable to such fractional share interests, and such capital gain or loss will be long-term capital gain or loss if the holding period for such shares is more than one year. See "Certain Federal Income Tax Consequences." Beverly and Capstone will also receive, prior to the Effective Time of the Merger, the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP to the effect that: (i) the Merger will qualify as a reorganization within the meaning of Section 368(a) of the Code; (ii) no gain or loss will be recognized by Capstone or Beverly as a result of the Merger; and (iii) no gain or loss will be recognized by Beverly's stockholders upon the receipt of Capstone Common Stock solely in exchange for Beverly Common Stock in connection with the Merger (except with respect to cash received in lieu of a fractional interest in Capstone Common Stock). Tax opinions are not binding on the IRS or any court. Moreover, the tax opinions are based upon, among other things, certain representations as to factual matters made by Beverly and Capstone, which representations, if incorrect or incomplete in certain material respects, would jeopardize the conclusions reached in the opinions. See "Certain Federal Income Tax Consequences." NEW BEVERLY STOCK OPTION PLANS New Beverly will have one or more employee benefit plans pursuant to which shares or options to purchase shares of New Beverly Common Stock or other stock incentives will be issued or issuable to or for 3 11 the benefit of employees, former employees and directors. See "The Distribution -- Consummation of the Distribution; Treatment of Beverly Stock Options, Phantom Shares, Performance Shares and Shares of Restricted Stock." On May 29, 1997, the New Beverly Board of Directors adopted the New Beverly 1997 Long-Term Incentive Plan (the "New Beverly 1997 Incentive Plan"), pursuant to which New Beverly will be able to make stock incentive awards to its directors, officers, key employees and other persons on a going-forward basis. The New Beverly 1997 Incentive Plan was adopted by the Board of Directors and Compensation Committee of Beverly, and was approved by Beverly as the sole stockholder of New Beverly prior to the Distribution. It is expected that a total of approximately 5.5 million shares will be reserved for issuance by New Beverly to current holders of options to purchase Beverly Common Stock ("the Beverly Options") in connection with the Distribution. See "Executive and Director Compensation -- Executive Compensation." New Beverly has reserved 10 million shares of New Beverly Common Stock for issuance under the New Beverly 1997 Incentive Plan. The New Beverly 1997 Incentive Plan will be submitted for the approval of the stockholders of Beverly in connection with the Joint Proxy Statement/Prospectus. The New Beverly Board of Directors has also adopted the New Beverly Non-Employee Directors Stock Option Plan (the "New Beverly Directors Option Plan"), pursuant to which New Beverly will be able to make stock incentive awards to its non-employee directors on a going-forward basis. The New Beverly Directors Option Plan was adopted by the Board of Directors and Compensation Committee of Beverly, and was approved by Beverly as the sole stockholder of New Beverly prior to the Distribution. See "Executive and Director Compensation -- Compensation of Directors and Other Information Concerning the Board and its Committees." New Beverly has reserved 300,000 shares of New Beverly Common Stock under the New Beverly Directors Option Plan. The New Beverly Directors Option Plan will be submitted for the approval of stockholders of Beverly in connection with the Joint Proxy Statement/Prospectus. See "Other Beverly Proposals -- New Beverly Directors Option Plan" in the Joint Proxy Statement/Prospectus. EFFECT OF THE TRANSACTIONS ON EMPLOYEES AND EMPLOYEE BENEFITS Beverly employees that provide services in connection with the Institutional Pharmacy Business (together with current and former employees and current and former independent contractors of the Institutional Pharmacy Business, the "Retained Employees") are expected to become Capstone employees following the Merger, while all other Beverly employees (together with current and former employees and current and former independent contractors of the Remaining Healthcare Business, the "Transferred Employees") are expected to become New Beverly employees following the Distribution. Capstone will assume liabilities and obligations regarding the Retained Employees and New Beverly will assume liabilities and obligations regarding the Transferred Employees, in accordance with an Employee Benefit Matters Agreement between Beverly, New Beverly and Capstone (the "Employee Benefit Agreement"). Pursuant to the Employee Benefit Agreement, certain adjustments will be made to shares of Beverly Common Stock underlying options held by Retained Employees and Transferred Employees. See "The Distribution -- Consummation of the Distribution; Treatment of Beverly Stock Options, Phantom Shares, Performance Shares and Shares of Restricted Stock" and "-- Terms of Employee Benefit Agreement." EXPENSES Each of Capstone, on the one hand, and Beverly and New Beverly, on the other hand, will incur significant expenses in connection with the Transactions. The fees and expenses of Beverly and New Beverly are currently estimated to be approximately $32 million with respect to the Distribution and approximately $8 million with respect to the Merger. A significant portion of the estimated Beverly and New Beverly expenses with respect to the Distribution are expected to arise in connection with restructuring, modifying or replacing Beverly's existing indebtedness in connection with the Distribution. See "Treatment of Beverly Indebtedness." RISK FACTORS New Beverly stockholders should carefully consider certain risks in evaluating the New Beverly Common Stock to be received in the Distribution. See "Risk Factors." 4 12 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following summary historical consolidated financial data of Beverly has been derived from the historical financial statements and should be read in conjunction with such financial statements and notes thereto, which are included elsewhere herein. Beverly data for the six months ended June 30, 1997 and 1996 have been derived from and should be read in conjunction with the unaudited condensed consolidated financial statements which are also included elsewhere herein. The pro forma condensed consolidated financial data gives retroactive effect to (i) the Merger; (ii) the recapitalization/reorganization of Beverly, into New Beverly; and (iii) the receipt by Beverly of $275,000,000 as a partial repayment of its intercompany receivable from PCA and the contribution to PCA's capital of Beverly's remaining receivable from PCA. The pro forma condensed consolidated statement of operations data gives effect to the transactions as if they occurred on January 1, 1996. The pro forma condensed consolidated balance sheet data gives effect to the transactions as if they occurred on June 30, 1997. The pro forma data should be read in conjunction with the unaudited pro forma condensed consolidated New Beverly financial statements, and notes thereto included elsewhere herein.
AT AND FOR THE SIX MONTHS ENDED AT AND FOR THE JUNE 30, YEARS ENDED DECEMBER 31, ----------------------- -------------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ---------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net operating revenues................ $1,634,219 $1,609,380 $3,267,189 $3,228,553 $2,969,239 $2,884,451 $2,607,756 Depreciation and amortization......... 54,806 51,023 105,468 103,581 88,734 82,938 80,226 Interest expense, net................. 37,961 39,193 77,272 70,017 50,214 50,927 56,441 Income (loss) from continuing operations before income taxes...... 65,722 51,152 125,507 (6,154) 114,795 87,640 6,148 Income (loss) from continuing operations.......................... 39,433 30,691 52,026 (8,123) 76,913 57,956 1,945 Earnings per share.................... 0.40 0.31 0.52 (0.16) 0.79 0.41 0.01 CONSOLIDATED BALANCE SHEET DATA: Working capital....................... 330,196 249,795 318,215 243,047 242,712 154,419 137,026 Total assets.......................... 2,490,966 2,524,904 2,525,082 2,506,461 2,322,578 2,000,804 1,859,361 Current portion of long-term obligations......................... 35,669 37,710 38,826 84,639 60,199 43,125 30,466 Long-term obligations, excluding current portion..................... 1,018,551 1,076,462 1,106,256 1,066,909 918,018 706,917 712,896 Stockholders' equity.................. 890,717 843,217 861,095 820,333 827,244 742,862 593,505
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ---------------- ----------------- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME DATA: Net operating revenues...................................... $1,383,195 $2,832,872 Depreciation and amortization............................... 44,898 89,076 Interest expense, net....................................... 25,599 51,808 Income from continuing operations before provision for income taxes.............................................. 50,500 116,182 Income from continuing operations........................... 30,706 47,117 Earnings per share.......................................... 0.28 0.42
JUNE 30, 1997 ------------- UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DATA: Working capital............................................. $ 250,524 Total assets................................................ 2,025,534 Current portion of long-term obligations.................... 24,124 Long-term obligations, excluding current portion............ 661,206 Stockholders' equity........................................ 835,680
5 13 RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating New Beverly before making any investment decisions with respect to the New Beverly Common Stock to be received in the Distribution. SUBSTANTIAL INDEBTEDNESS New Beverly, as a result of the Distribution, will assume substantial indebtedness from Beverly. Although the indebtedness of Beverly to be assumed by New Beverly in connection with the Transactions will be reduced and restructured, the amount of indebtedness ultimately assumed by New Beverly will continue to be substantial. See "Treatment of Beverly Indebtedness." As of June 30, 1997, Beverly had total indebtedness of approximately $1,054,200,000. In addition to such indebtedness, Beverly has substantial obligations under operating leases which will be assumed by New Beverly. For the six months ended June 30, 1997 and the year ended December 31, 1996, Beverly's rent expense was approximately $58,200,000 and $116,700,000, respectively. The ability of New Beverly to satisfy its debt and operating lease obligations will be dependent upon its future operating performance, which will be subject to prevailing economic conditions and to financial, business and other factors, including factors beyond New Beverly's control such as federal and state healthcare reform. New Beverly's level of debt, and the covenants contained in the debt instruments governing such obligations might impair New Beverly's ability to take certain actions (including the incurrence of additional debt and the acquisition or the disposition of assets). BUSINESS TO BE CONDUCTED BY NEW BEVERLY At the Time of Distribution, the Remaining Healthcare Business will be transferred to New Beverly or one or more direct or indirect subsidiaries of New Beverly, and will constitute all of the businesses, assets and liabilities of New Beverly. The businesses, assets and liabilities of New Beverly will not include the Institutional Pharmacy Business represented by PCA. The Institutional Pharmacy Business represented by PCA accounted for approximately $251,000,000 and $434,300,000, or 15% and 13% of Beverly's net operating revenues (after elimination of intercompany revenue between PCA and the Remaining Healthcare Business) for the six months ended June 30, 1997 and the year ended December 31, 1996, respectively. The Institutional Pharmacy Business accounted for approximately $16,100,000 and $20,300,000, or 41% and 39% of Beverly's net income for the six months ended June 30, 1997 and the year ended December 31, 1996, respectively. Following the Distribution, New Beverly will derive its revenues from a smaller group of businesses and assets. While New Beverly intends to pursue strategies to expand its businesses, there can be no assurance that New Beverly will be successful in implementing such strategies or that, if implemented, such strategies will result in additional growth in New Beverly's businesses. UNCERTAINTY ASSOCIATED WITH HEALTHCARE REFORM In addition to extensive government healthcare regulation, there are numerous initiatives on the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. It is not clear at this time what proposals, if any, will be adopted or, if adopted, what effect such proposals may have on New Beverly's future business. Certain aspects of these healthcare proposals, such as cutbacks in Medicare and Medicaid programs, containment of healthcare costs on an interim basis by means that could include a short-term freeze on rates paid to healthcare providers and permitting greater flexibility to the states in the administration of Medicaid, could adversely affect New Beverly. See "-- Risks Involved with Reimbursement by Third-Party Payors." There can be no assurance that currently proposed or future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs will not have an adverse effect on New Beverly. Concern about the potential effects of the proposed reform measures has contributed to the volatility of stock prices of companies in healthcare and related industries, including Beverly, and may similarly affect the price of the New Beverly Common Stock in the future. 6 14 RISKS INVOLVED WITH REIMBURSEMENT BY THIRD PARTY PAYORS For the years ended December 31, 1996, 1995 and 1994 Beverly derived approximately 75%, 77% and 80%, respectively, of its net operating revenues from funds under federal and state medical assistance programs, and it is expected that New Beverly will continue to derive a significant portion of its revenue from such federal and state reimbursement programs. There can be no assurance that New Beverly will improve or achieve a better payor mix. Both governmental and private payor sources have instituted cost containment measures designed to limit payments made to long-term care providers, and there can be no assurance that future measures will not adversely affect both the timing and amount of reimbursement to New Beverly. Furthermore, government reimbursement programs are subject to statutory and regulatory changes, retroactive rate adjustments, administrative rulings and government funding restrictions, all of which could materially decrease the rates paid to New Beverly for its future services or the services for which New Beverly is able to seek reimbursement. There have been, and New Beverly expects that under the current and future presidential administrations there will continue to be, a number of proposals to limit Medicare and Medicaid reimbursement for long-term healthcare services. New Beverly cannot predict at this time whether any of these proposals will be adopted or, if adopted and implemented, what effect such proposals would have on New Beverly. There can be no assurance that payments under state or federal governmental programs will remain at levels comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to such programs, particularly with respect to individual, state-administered Medicaid programs, which generally provide lower reimbursement rates than does the Medicare program. In addition, there can be no assurance that the facilities to be operated by New Beverly and the services and supplies to be provided by New Beverly will meet or continue to meet the requirements for participation in such programs. Federal law requires state Medicaid programs to reimburse long-term care facilities for the costs that are incurred by efficiently and economically operated providers in order to meet quality and safety standards. Long-term care facilities may seek to enforce this requirement in the state or federal courts. Nevertheless, there can be no assurance that budget constraints or other factors will not cause states to reduce Medicaid reimbursement to long-term care facilities or that litigation to prevent such reductions will be successful. As a result, there can be no assurance that states in which New Beverly will operate will continue to meet their Medicaid obligations on a timely basis. Any failure by such states to meet their Medicaid obligations on a timely basis could have a material adverse effect on New Beverly. In addition, several states are considering various healthcare reforms, including reforms through Medicaid managed care demonstration projects. Several states in which Beverly operates and in which New Beverly will operate have applied for, or received, approval from the U.S. Department of Health and Human Services for waivers from certain Medicaid requirements which are generally required for managed care projects. Although these demonstration projects generally exempt institutional care, including long-term care facilities, no assurance can be given that these waiver projects ultimately will not change the reimbursement system for long-term care from fee-for-service to managed care negotiated or capitated rates. It is not possible to predict which reforms of the healthcare system will be adopted and the effect, if any, the reforms will have on New Beverly's business. GOVERNMENT REGULATION The federal government and all states in which New Beverly will operate regulate various aspects of the Remaining Healthcare Business to be operated by New Beverly. In particular, the operation of long-term care facilities and the provision of specialty medical services are subject to federal, state and local laws relating to the adequacy of medical care, equipment, personnel, operating policies, fire prevention, zoning, rate-setting and compliance with building codes and environmental and other laws. The facilities to be operated by New Beverly are subject to periodic inspection by governmental and other regulatory authorities to assure continued compliance with various standards and to provide for their continued licensing under state law and certification under the Medicare and Medicaid programs. Should New Beverly receive notifications of deficiency in the future, New Beverly expects to implement plans of correction with respect to any such statement to address any alleged deficiencies. While New Beverly will endeavor to comply with federal, state and local regulatory 7 15 requirements for the maintenance and operation of its facilities, there can be no assurance that all facilities will always be operated in full compliance. The failure to obtain or renew any required regulatory approvals or licenses could adversely affect New Beverly's operations. New Beverly will also be subject to federal and state laws that govern financial and other arrangements between healthcare providers. These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. Such laws include the anti-kickback provisions of the federal Medicare and Medicaid Patients and Program Protection Act of 1987. These provisions prohibit, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for the referral of Medicare and Medicaid patients. In addition, many states prohibit business corporations from providing, or holding themselves out as a provider of, medical care. These laws vary from state to state and have seldom been interpreted by the courts or regulatory agencies. Additionally, federal enactments that expand the list of healthcare services subject to existing federal referral prohibitions became effective on January 1, 1995. See "Business -- Government Regulation and Reimbursement." INCREASED LABOR COSTS AND AVAILABILITY OF PERSONNEL In recent years, Beverly has experienced increases in its labor costs primarily due to higher wages and greater benefits required to attract and retain qualified personnel, increased staffing levels in its nursing facilities due to greater patient acuity and the hiring of therapists on staff. Although New Beverly expects labor costs to continue to increase in the future, it is anticipated that any increase in costs will generally result in higher patient rates in subsequent periods, subject to the time lag in most states of up to 18 months between increases in reimbursable costs and the receipt of related reimbursement rate increases. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." In the past, the healthcare industry, including Beverly's long-term care facilities, has experienced a shortage of nurses to staff healthcare operations, and, more recently, the healthcare industry in general has experienced a shortage of therapists. While Beverly is not currently experiencing a nursing or therapist shortage, it competes with other healthcare providers for nursing and therapist personnel and may compete with other service industries for persons serving Beverly in other capacities, such as nurses' aides. A shortage of nursing therapists or nurse's aides could force New Beverly to pay even higher salaries and make greater use of higher cost temporary personnel. A lack of qualified personnel might also require New Beverly to reduce its census or admit patients requiring a lower level of care, both of which could adversely affect operating results. DEPENDENCE ON KEY PERSONNEL New Beverly's operations are dependent on the efforts, ability and experience of its executive officers. New Beverly's continued growth and success depends on its ability to attract and retain skilled employees and on the ability of its officers and employees to successfully manage New Beverly's expansion of service beyond the traditional long-term care services provided by Beverly. The loss of some or all of these executive officers and skilled employees could have a material adverse impact on New Beverly's future results of operations. COMPETITION The long-term care industry is highly competitive. New Beverly will compete with other providers on the basis of the breadth and quality of its services, the quality of its facilities and, to a limited extent, price. New Beverly will also compete with other providers in the acquisition and development of additional facilities and healthcare services. New Beverly's long-term care competitors will include national, regional and local operators of long-term care facilities, acute care hospitals, rehabilitation hospitals, subacute facilities, transitional hospitals, assisted living facilities, hospices, home healthcare centers, healthcare therapy clinics, and similar institutions, many of which have significantly greater financial and other resources than New Beverly. In addition, New Beverly will compete with a number of tax-exempt nonprofit organizations which can finance acquisitions and capital expenditures on a tax-exempt basis or receive charitable contributions 8 16 unavailable to New Beverly. There can be no assurance that New Beverly will not encounter increased competition which could adversely affect its business, results of operations or financial condition. ABSENCE OF PRIOR TRADING MARKET There is no existing trading market for the New Beverly Common Stock to be received by Beverly's stockholders in the Distribution and there can be no assurance as to the establishment of an active trading market. New Beverly expects to list its common stock on the NYSE and the PSE. New Beverly's management expects that approximately 110,424,677 shares of New Beverly Common Stock will be outstanding after the Distribution. New Beverly Common Stock may experience price volatility following the Distribution until trading values become established. As a result, it could be difficult to make purchases or sales of New Beverly Common Stock in the market at any particular time. There can be no assurance as to either the price at which New Beverly Common Stock will trade following the consummation of the Distribution and the Merger or whether such price will be significantly below the book value per share of New Beverly Common Stock. CERTAIN INDEMNIFICATION OBLIGATIONS Pursuant to the Distribution Agreement and the Tax Allocation and Indemnification Agreement, New Beverly has agreed to indemnify Capstone with respect to certain losses, damages, claims and liabilities which may arise from the consummation of the Transactions described herein, the conduct of the Remaining Healthcare Business prior to the Distribution Date and certain tax liabilities. See "The Distribution -- Indemnification and Insurance" and "-- Terms of the Tax Allocation and Indemnification Agreement." NON-COMPETITION AGREEMENT WITH CAPSTONE Following the Distribution and Merger, New Beverly will be prohibited from competing with Capstone in the Institutional Pharmacy Business in certain defined geographical areas for a period of five years. See "The Distribution -- Terms of the Non-competition Agreement." In the past, a significant portion of Beverly's net income has been derived from the Institutional Pharmacy Business, and in 1996, Beverly derived approximately 39% of its net income from the Institutional Pharmacy Business. The Non-competition Agreement will therefore restrict New Beverly's ability to pursue a line of business that historically has contributed a significant portion of Beverly's net income. 9 17 USE OF PROCEEDS Pursuant to the Distribution, Beverly will transfer the Remaining Healthcare Business to New Beverly or one or more of its subsidiaries and receive from New Beverly shares of New Beverly Common Stock. Such shares of New Beverly Common Stock will be distributed in a manner expected to receive tax-free treatment to Beverly stockholders as of the Distribution Record Date, and no consideration will be paid by such stockholders in the Distribution. Therefore, there will be no proceeds from the issuance of the New Beverly Common Stock. In connection with the Distribution and the Merger, Beverly expects to receive $275,000,000 as a partial repayment of PCA's intercompany balance owed to Beverly. Beverly intends to use: (i) approximately $90,000,000 of such net proceeds to repay Revolver borrowings under its Existing Credit Facility (as defined); (ii) approximately $62,480,000 to repay the remaining outstanding balance under the 7 5/8% Debentures (as defined); (iii) approximately $24,805,000 to repay the 8.75% Notes (as defined); (iv) approximately $38,822,000 to repay or defease certain other notes, mortgages and bonds; and (v) the remaining net proceeds to pay the estimated Transaction costs of $40,000,000, and for general corporate purposes, which may include: strategic investments; repayment of other indebtedness; selective acquisitions, including the purchase of previously leased facilities; construction of new facilities; and to meet working capital requirements. 10 18 CAPITALIZATION Following the Distribution and the Merger, New Beverly will change its name to Beverly Enterprises, Inc. and will be treated as the continuation of Beverly for financial reporting purposes. See "Unaudited Pro Forma New Beverly Financial Statements" and the consolidated financial statements of Beverly and notes thereto included elsewhere herein. The following table sets forth Beverly's historical capitalization at June 30, 1997, and pro forma to reflect the Distribution and the Merger:
AS OF JUNE 30, 1997 ------------------------ ACTUAL PRO FORMA ---------- ---------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................. $ 71,756 $ 83,144(1)(2)(4) ========== ========== Current portion of long-term debt......................... $ 35,669 $ 24,124(1)(2) ========== ========== Long-term debt, net of current portion: Revolver borrowings..................................... $ 90,000 $ --(2) Industrial revenue bonds................................ 193,837 185,047(2) Notes and mortgages..................................... 212,471 185,267(1)(2) First Mortgage Bonds.................................... 46,864 46,864 8.75% Notes............................................. 24,805 --(2) 9% Senior Notes......................................... 180,000 180,000 7 5/8% Debentures....................................... 54,980 --(2) 5 1/2% Debentures....................................... 150,000 --(4) Medium term notes....................................... 50,000 50,000 Capital lease obligations............................... 15,594 14,028(1) ---------- ---------- Total long-term debt............................ 1,018,551 661,206 Stockholders' equity: Preferred stock, 25,000,000 shares authorized........... -- -- Common stock, $0.10 par value; 300,000,000 shares authorized; 104,712,723 shares issued; 98,438,615 shares outstanding; pro forma 109,628,539 shares issued and outstanding............................... 10,471 10,963(4)(5)(6) Additional paid-in capital.............................. 777,172 855,527(4)(5) Retained earnings (deficit)............................. 173,390 (30,810)(1)(3) Treasury stock, at cost; 6,274,108 shares............... (70,316) --(5) ---------- ---------- Total stockholders' equity...................... 890,717 835,680 ---------- ---------- Total capitalization............................ $1,909,268 $1,496,886 ========== ==========
- --------------- (1) Reflects the following adjustments to eliminate PCA's historical amounts (in thousands): Cash and cash equivalents................................... $ 6,668 Current portion of long-term debt........................... 1,195 Other notes and mortgages................................... 22 Capital leases, net of current portion...................... 1,566 Retained earnings........................................... 103,853
(2) Reflects repayment or defeasance of approximately $216,107,000 of debt with the $275,000,000 of net proceeds to be received by Beverly as a partial repayment of PCA's intercompany balance in conjunction with the Transactions, with the remaining net proceeds of approximately $58,893,000 to be used to pay approximately $40,000,000 of Transaction costs, and for general corporate purposes, including: strategic investments; repayment of other indebtedness; selective acquisitions, including the purchase of previously leased facilities; construction of new facilities; and to meet working capital requirements. (3) Reflects the contribution to PCA's capital (after the repayment of $275,000,000 (See Note 2 above)) of the remaining $58,115,000 of PCA's intercompany balance, which will not be repaid to Beverly. 11 19 (4) Reflects conversion of $149,162,550 principal amount of 5 1/2% Debentures (as defined) into 11,189,924 shares of Beverly Common Stock and repayment in cash of the remaining principal amount of $837,450. A condition to closing under the Merger Agreement is that Beverly amend, modify or replace substantially all of its existing indebtedness so that upon closing the Merger, Beverly will have been released from liability under all of its existing indebtedness for borrowed money, except for the Institutional Pharmacy Liabilities and certain other pharmacy-related obligations. In conjunction therewith, on July 17, 1997, Beverly called its 5 1/2% Debentures for redemption on August 18, 1997. (5) Reflects cancellation and retirement of Beverly Common Stock held in treasury at the Effective Time of the Merger, pursuant to the terms of the Merger Agreement. (6) Reflects a one-for-one distribution of New Beverly Common Stock for each share of Beverly Common Stock held by a Beverly stockholder as of the Distribution Record Date. - --------------- See "Unaudited Pro Forma New Beverly Financial Statements." 12 20 UNAUDITED PRO FORMA NEW BEVERLY FINANCIAL STATEMENTS Under the Distribution Agreement and the Merger Agreement: (1) Beverly's Remaining Healthcare Business is to be reorganized into New Beverly with all of the shares of New Beverly Common Stock to be distributed to Beverly's stockholders in a tax-free reorganization; (2) Beverly (then consisting solely of the Institutional Pharmacy Business operated by PCA and its subsidiaries) is to be acquired by and merged with and into Capstone through a tax-free exchange of shares of Capstone Common Stock for shares of Beverly Common Stock; and (3) New Beverly will become an independent, publicly-traded company upon the completion of the Distribution and the Merger. New Beverly will immediately change its name to Beverly Enterprises, Inc., will be treated as the continuation of Beverly for financial reporting purposes and will continue to reflect Beverly's historical cost basis of assets and liabilities. Closing under the Merger Agreement is subject to a number of conditions, including, among other things, the approval of the Merger and the Distribution by Beverly's stockholders, and approval of the Merger by Capstone's stockholders. The accompanying unaudited pro forma condensed consolidated balance sheet reflects the historical balance sheets of Beverly and PCA at June 30, 1997 and as adjusted to give effect to the Distribution and the Merger, as if such events occurred at June 30, 1997. The accompanying unaudited pro forma condensed consolidated statements of income for the year ended December 31, 1996 and for the six months ended June 30, 1997 give effect to such transactions as if they occurred on January 1, 1996. Furthermore, in conjunction with the Distribution, Beverly will be required to restructure, repay or otherwise renegotiate substantially all of its outstanding indebtedness and to renegotiate or make certain payments under various employment agreements with officers of Beverly. An estimate of the effects of these items has been reflected in the accompanying unaudited pro forma condensed consolidated balance sheet, but such items have not been reflected in the accompanying unaudited pro forma condensed consolidated statements of income due to their nonrecurring nature. The unaudited pro forma condensed consolidated financial statements are not necessarily indicative of the operating results that would have been achieved had the Distribution and the Merger been consummated as of the indicated dates, nor are they necessarily indicative of future operating results. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of Beverly and PCA, and the related notes thereto, included elsewhere in this Prospectus. 13 21 NEW BEVERLY HOLDINGS, INC. PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 1996 ------------------------------------------------------ PRO FORMA TRANSACTION NEW BEVERLY PCA(1) ADJUSTMENTS BEVERLY ---------- --------- ----------- ---------- Net operating revenues............................ $3,267,189 $(516,400) $82,083(2) $2,832,872 Interest income................................... 13,839 (177) -- 13,662 ---------- --------- ------- ---------- Total revenues........................... 3,281,028 (516,577) 82,083 2,846,534 Costs and expenses: Operating and administrative: Wages and related............................. 1,819,500 (118,888) -- 1,700,612 Other......................................... 1,139,442 (346,331) 82,083(2) 875,194 Interest........................................ 91,111 (11) (25,630)(3) 65,470 Depreciation and amortization................... 105,468 (16,392) -- 89,076 ---------- --------- ------- ---------- Total costs and expenses................. 3,155,521 (481,622) 56,453 2,730,352 ---------- --------- ------- ---------- Income (loss) from continuing operations before provision for income taxes...................... 125,507 (34,955) 25,630 116,182 Provision for income taxes........................ 73,481 (14,668) 10,252(4) 69,065 ---------- --------- ------- ---------- Income from continuing operations................. $ 52,026 $ (20,287) $15,378 $ 47,117 ========== ========= ======= ========== Per share data (primary): Earnings per share from continuing operations... $ 0.52 $ 0.42 ========== ========== Weighted average shares outstanding............. 99,646 110,899 ========== ========== Per share data (fully diluted): Earnings per share from continuing operations... $ 0.50 $ 0.42 ========== ========== Weighted average shares outstanding............. 111,002 111,002 ========== ==========
SIX MONTHS ENDED JUNE 30, 1997 ------------------------------------------------------ PRO FORMA TRANSACTION NEW BEVERLY PCA(1) ADJUSTMENTS BEVERLY ---------- --------- ----------- ---------- Net operating revenues............................ $1,634,219 $(301,328) $50,304(2) $1,383,195 Interest income................................... 6,726 (82) -- 6,644 ---------- --------- ------- ---------- Total revenues........................... 1,640,945 (301,410) 50,304 1,389,839 Costs and expenses: Operating and administrative: Wages and related............................. 897,856 (65,476) -- 832,380 Other......................................... 577,874 (198,360) 50,304(2) 429,818 Interest........................................ 44,687 (130) (12,314)(3) 32,243 Depreciation and amortization................... 54,806 (9,908) -- 44,898 ---------- --------- ------- ---------- Total costs and expenses................. 1,575,223 (273,874) 37,990 1,339,339 ---------- --------- ------- ---------- Income (loss) from continuing operations before provision for income taxes...................... 65,722 (27,536) 12,314 50,500 Provision for income taxes........................ 26,289 (11,421) 4,926(4) 19,794 ---------- --------- ------- ---------- Income from continuing operations................. $ 39,433 $ (16,115) $ 7,388 $ 30,706 ========== ========= ======= ========== Per share data (primary): Earnings per share from continuing operations.................................. $ 0.40 $ 0.28 ========== ========== Weighted average shares outstanding........... 99,230 110,483 ========== ========== Per share data (fully diluted): Earnings per share from continuing operations.................................. $ 0.38 $ 0.28 ========== ========== Weighted average shares outstanding........... 110,865 110,865 ========== ==========
14 22 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (1) Reflects the historical stand-alone amounts of PCA which are eliminated to arrive at New Beverly. (2) Reflects add-back of intercompany revenues and costs of sales of PCA which are eliminated in Beverly historical amounts. (3) Reduction of interest expense related to: (i) debt paydowns described in Note 2 to the Unaudited Pro Forma Condensed Consolidated Balance Sheet; and (ii) repayment/conversion of $150,000,000 principal amount of 5 1/2% Debentures (as defined) into shares of Beverly Common Stock as described in Note 4 to the Unaudited Pro Forma Condensed Consolidated Balance Sheet. (4) Income tax effect of pro forma adjustments using a 40% statutory rate. - --------------- Note: Nonrecurring Transaction costs of approximately $37.2 million, net of tax, will be charged to the operations of New Beverly but are not reflected in the Pro Forma Condensed Consolidated Statements of Income. 15 23 NEW BEVERLY HOLDINGS, INC. PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (UNAUDITED) (IN THOUSANDS) ASSETS
PRO FORMA TRANSACTION NEW BEVERLY PCA(1) ADJUSTMENTS BEVERLY ---------- --------- ----------- ----------- Current assets: Cash and cash equivalents............................. $ 71,756 $ (6,668) $ 58,893(2) $ 83,144 (40,000)(3) (837)(4) Accounts receivable -- patient, less allowance for doubtful accounts................................... 502,511 (109,798) -- 392,713 Accounts receivable -- nonpatient, less allowance for doubtful accounts................................... 10,429 (101) -- 10,328 Notes receivable, less allowance for doubtful notes... 9,260 (772) -- 8,488 Operating supplies.................................... 55,713 (25,322) -- 30,391 Deferred income taxes................................. 23,547 -- -- 23,547 Prepaid expenses...................................... 43,738 (494) -- 43,244 ---------- --------- --------- ---------- Total current assets........................... 716,954 (143,155) 18,056 591,855 Property and equipment, net............................. 1,188,197 (35,215) -- 1,152,982 Other assets: Notes receivable, less allowance for doubtful notes... 28,958 (810) -- 28,148 Designated and restricted funds....................... 74,182 -- -- 74,182 Goodwill, net......................................... 375,221 (290,931) -- 84,290 Other, net............................................ 107,454 (11,435) (1,942)(2) 94,077 ---------- --------- --------- ---------- Total other assets............................. 585,815 (303,176) (1,942) 280,697 ---------- --------- --------- ---------- Total assets................................... $2,490,966 $(481,546) $ 16,114 $2,025,534 ========== ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...................................... $ 96,854 (21,237) $ -- $ 75,617 Accrued wages and related liabilities................. 128,892 (6,006) -- 122,886 Accrued interest...................................... 17,683 -- -- 17,683 Other accrued liabilities............................. 107,660 (6,639) -- 101,021 Current portion of long-term debt..................... 35,669 (1,195) (10,350)(2) 24,124 ---------- --------- --------- ---------- Total current liabilities...................... 386,758 (35,077) (10,350) 341,331 Long-term obligations................................... 1,018,551 (1,588) (205,757)(2) 661,206 (150,000)(4) Deferred income taxes payable........................... 98,769 (4,046) (777)(2) 91,146 (2,800)(3) Other liabilities and deferred items.................... 96,171 -- -- 96,171 Due to Parent........................................... -- (333,115) 333,115(2) -- Stockholders' equity: Common stock.......................................... 10,471 (1) 1(5) 10,963(6) (627)(7) 1,119(4) Additional paid-in capital............................ 777,172 (3,866) 3,866(5) 855,527 (69,689)(7) 148,044(4) Retained earnings..................................... 173,390 (103,853) (58,115)(2) (30,810) (1,165)(2) (3,867)(5) (37,200)(3) Treasury stock, at cost............................... (70,316) -- 70,316(7) -- ---------- --------- --------- ---------- Total stockholders' equity..................... 890,717 (107,720) 52,683 835,680 ---------- --------- --------- ---------- Total liabilities and stockholders' equity....................................... $2,490,966 $(481,546) $ 16,114 $2,025,534 ========== ========= ========= ==========
16 24 NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (1) Reflects the historical stand-alone amounts of PCA which are eliminated to arrive at New Beverly. (2) Reflects (i) repayment or defeasance of approximately $216,107,000 of long-term obligations with the $275,000,000 of net proceeds to be received as partial repayment of PCA's intercompany balance owed to Beverly, with the remaining net proceeds used for one or more of the following purposes: strategic investments; repayment of indebtedness; selective acquisitions, including the purchase of previously leased facilities; construction of new facilities; and to meet working capital requirements; (ii) write-off of deferred financing costs on such repaid long-term obligations and (iii) reduction in equity for the remaining intercompany balance owed by PCA which will not be repaid. The repayments of approximately $216,107,000 of long-term obligations, as noted above, are comprised of the following (in thousands):
CURRENT LONG-TERM TOTAL ------- --------- -------- Revolver borrowings................................... $ -- $ 90,000 $ 90,000 Notes and mortgages................................... 2,450 27,182 29,632 8.75% Notes........................................... -- 24,805 24,805 7 5/8% Debentures..................................... 7,500 54,980 62,480 Industrial revenue bonds.............................. 400 8,790 9,190 ------- -------- -------- $10,350 $205,757 $216,107 ======= ======== ========
(3) Reflects payment of estimated Merger and Distribution costs (which have not been reflected in the Unaudited Pro Forma Condensed Consolidated Statements of Income due to their nonrecurring nature) as follows (assuming $7,000,000 of such costs are deductible for income tax purposes) (in thousands): Estimated Merger costs: Investment banker fees.................................... $ 5,200 Professional fees and other Merger-related costs.......... 2,800 ------- Total estimated Merger costs...................... 8,000 Estimated Distribution costs: Consent fees to debt and lease holders.................... $10,200 Employee incentives and other related costs............... 17,000 Professional fees and other Distribution-related costs.... 4,800 ------- Total estimated Distribution costs................ 32,000 ------- Total estimated Transaction costs................. 40,000 Less: Estimated tax effect at a 40% statutory rate............................................ (2,800) ------- $37,200 =======
(4) Reflects conversion of $149,162,550 principal amount of 5 1/2% Debentures (as defined) into 11,189,924 shares of Beverly Common Stock and repayment in cash of the remaining principal amount of $837,450. A condition to closing under the Merger Agreement is that Beverly amend, modify or replace substantially all of its existing indebtedness so that upon closing the Merger, Beverly will have been released from liability under all of its existing indebtedness for borrowed money, except for the Institutional Pharmacy Liabilities and certain other pharmacy-related obligations. In conjunction therewith, on July 17, 1997, Beverly called its 5 1/2% Debentures for redemption on August 18, 1997. (5) Reflects add-back of common stock and additional paid-in capital of PCA which are eliminated in Beverly historical amounts. (6) Reflects a one-for-one distribution of New Beverly Common Stock for each share of Beverly Common Stock held by a Beverly stockholder as of the Distribution Record Date. (7) Reflects cancellation and retirement of Beverly Common Stock held in treasury at the Effective Time of the Merger, pursuant to the terms of the Merger Agreement. 17 25 THE DISTRIBUTION The following information describes certain aspects of the proposed restructuring of Beverly and the Distribution as well as certain contractual arrangements that will exist between New Beverly and Capstone following the completion of the Distribution and the Merger. For information describing certain aspects of the Merger, see "Certain Conditions Related to the Transactions" and "The Merger" in the Joint Proxy Statement/Prospectus. The descriptions of the various agreements contained herein, including, without limitation, the Distribution Agreement, the Employee Benefit Agreement, the Non-competition Agreement, the Interim Services Agreement and the Tax Allocation and Indemnification Agreement (each as defined below), do not purport to be complete and are qualified in their entirety by reference to forms of such agreements which are attached either as annexes to the Joint Proxy Statement/Prospectus or filed as an exhibit to the registration statement of which this Prospectus is a part, which such annexes and exhibits, as the case may be, are incorporated herein by reference. All Beverly Stockholders are urged to read such agreements in their entirety. TERMS OF THE DISTRIBUTION AGREEMENT Simultaneously with the execution of the Merger Agreement, Beverly, New Beverly and Capstone executed the Distribution Agreement. Following the Merger, Capstone will succeed to Beverly's obligations arising pursuant to the Distribution Agreement by operation of law following the Merger. The Distribution Agreement provides a general framework for allocating Beverly's assets and liabilities pursuant to the Internal Beverly Restructuring Plan (attached as Exhibit A to the Distribution Agreement which is attached as Annex C to the Joint Proxy Statement/Prospectus), to segregate the Remaining Healthcare Business from the Institutional Pharmacy Business prior to the Distribution Date in preparation for the Distribution and the Merger. The Distribution Agreement also sets forth the general terms on which Beverly will conduct its business prior to the Distribution Date, as well as the terms regarding certain relationships between Capstone and New Beverly following the Distribution. The Distribution Agreement provides that the Distribution will be effected by distributing to each holder of Beverly Common Stock as of the close of business on the Distribution Date certificates representing one share of New Beverly Common Stock for each share of Beverly Common Stock held by such holder as of such time. See "-- Manner of Effecting the Distribution." RESTRUCTURING AND CONTRIBUTION OF REMAINING HEALTHCARE BUSINESS TO NEW BEVERLY New Beverly, which is a wholly-owned subsidiary of Beverly, was recently organized for purposes of the Transactions. Until shortly before the Merger, New Beverly will own no material assets and will conduct no business activities other than in preparation for the Transactions. Consummation of the Distribution is a condition to the Merger. Prior to the Distribution Record Date, Beverly will complete an internal restructuring pursuant to which all the assets and liabilities relating to the Remaining Healthcare Business will be transferred or contributed to New Beverly in one or more tax-free transactions such that upon completion of such restructuring, the Remaining Healthcare Business will be conducted by New Beverly, a direct subsidiary of Beverly, and various direct and indirect subsidiaries of New Beverly. At the same time, any assets and liabilities of Beverly relating primarily to the Institutional Pharmacy Business which are not already in the Pharmacy Subsidiaries (as defined in the Distribution Agreement) will be transferred to such Pharmacy Subsidiaries so that upon completion of such restructuring the Institutional Pharmacy Business will be conducted by PCA, a direct subsidiary of Beverly, and various direct and indirect subsidiaries of PCA. In connection with the consummation of the transactions contemplated by the Distribution Agreement and the Merger Agreement, Beverly, New Beverly, and Capstone will enter into additional agreements and arrangements designed to complete the separation of Beverly's Remaining Healthcare Business from its Institutional Pharmacy Business and to define certain intercompany relationships subsequent to the completion of the Merger. Among these agreements are: (i) the Employee Benefit Matters Agreement (the "Employee Benefit Agreement") between Beverly, New Beverly, and Capstone; (ii) the Tax Allocation and 18 26 Indemnification Agreement (the "Tax Allocation and Indemnification Agreement") between Beverly and New Beverly; (iii) the Non-competition Agreement (the "Non-competition Agreement") between Capstone and New Beverly; (iv) the Interim Services Agreement (the "Interim Services Agreement") between New Beverly and Beverly; and (v) the Affiliate Agreement (the "Affiliate Agreement") between Capstone and certain individuals who may be deemed affiliates of Beverly. As provided in the Distribution Agreement, prior to the consummation of the Distribution, Beverly will take certain actions as the sole stockholder of New Beverly or will ratify action taken by officers and directors of New Beverly in connection with establishing New Beverly as an independent company, including: (i) incorporating New Beverly under the laws of the state of Delaware; (ii) adopting the Certificate of Incorporation and Bylaws of New Beverly to be in effect at the Time of Distribution (as defined in the Distribution Agreement); (iii) electing directors of New Beverly and causing the appointment of officers of New Beverly to serve in such capacities following the Distribution; and (iv) adopting various incentive compensation plans for the benefit of directors, officers, and employees of New Beverly to be in effect following the Distribution. For information concerning the Certificate of Incorporation and Bylaws of New Beverly, see "Description of New Beverly Capital Stock -- The Charter and Bylaws of New Beverly." For information concerning the individuals who may serve as directors and executive officers of New Beverly following the Distribution and certain compensatory arrangements for their benefit, including stock incentive plans, see "Executive and Director Compensation." Pursuant to the Distribution Agreement, New Beverly will acquire the right to use the name "Beverly" in connection with continuing the conduct of the Remaining Healthcare Business. It is anticipated that immediately following the Merger, New Beverly will change its name to "Beverly Enterprises, Inc." CONSUMMATION OF THE DISTRIBUTION; TREATMENT OF BEVERLY STOCK OPTIONS, PHANTOM SHARES, PERFORMANCE SHARES AND SHARES OF RESTRICTED STOCK The Distribution will be effected immediately prior to the Merger. However, the Distribution will not be effected unless both the proposal to approve the Distribution and the proposal to merge Beverly with and into Capstone are approved by Beverly's stockholders. Stockholder approval of the Distribution and the Merger are being sought pursuant to the requirements of the Merger Agreement. The Board of Directors of Beverly has not yet established the Distribution Record Date, although it is anticipated that the Distribution Record Date will be the date on which the Distribution occurs and will be immediately prior to the Effective Time of the Merger. On the Distribution Date Beverly's Board of Directors will cause Beverly to distribute to Beverly Stockholders, as of the Distribution Record Date, shares of New Beverly Common Stock. Each stockholder of Beverly as of the Distribution Record Date will receive one share of New Beverly Common Stock for each share of Beverly Common Stock held as of the Distribution Record Date. Immediately following the completion of the Distribution, New Beverly will be an independent, publicly-traded company and it is contemplated that the shares of New Beverly Common Stock will be listed on the NYSE and the PSE under the trading symbol "BEV". See "-- Listing of New Beverly Common Stock; Restrictions on Resale." Following the completion of the Distribution, Beverly will merge with and into Capstone with Capstone being the Surviving Corporation in the Merger. At such time, except insofar as fractional shares are concerned, each share of Beverly Common Stock issued and outstanding immediately prior to the Effective Time, (except for shares owned by Beverly as treasury stock, shares owned by Capstone or any Subsidiary of Beverly) together with the associated Rights (as defined in the Merger Agreement) shall be converted into the right to receive a number of shares of Capstone Common Stock equal to the Conversion Number. In the event of any change in Capstone Common Stock or Beverly Common Stock by reason of any stock split, readjustment, stock dividend, exchange of shares, reclassification, recapitalization or otherwise (other than the Distribution), the Conversion Number shall be correspondingly adjusted. Each holder of shares of Beverly Common Stock who, upon surrender of Beverly stock certificates (the "Certificates"), would be entitled to receive a fraction of a share of Capstone Common Stock shall receive, in lieu of such fractional share, cash in an amount equal to such fraction multiplied by the Average Market Value. "Average Market Value" means 19 27 the arithmetic average of the last reported sale price per share of Capstone Common Stock as reported on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") for the fifteen (15) consecutive trading days ending with the last trading day prior to the scheduled date of the Beverly Special Meeting specified in the Joint Proxy Statement/Prospectus. As of the Time of Distribution (as defined in the Distribution Agreement), by virtue of the Distribution and without any action on the part of the holders thereof, options to purchase shares of Beverly Common Stock that are outstanding under the applicable Beverly employee benefit plans immediately prior to the Time of Distribution and which have been granted to each person employed or formerly employed by Beverly or any subsidiary of Beverly other than an employee or former employee of any of the Pharmacy Subsidiaries, and any other person who becomes an employee of New Beverly immediately after the Time of Distribution (the "Transferred Employees") will become exercisable, and if not exercised, will be canceled and will be substituted with new options issued by New Beverly in accordance with the Employee Benefit Agreement and such shares shall be exercisable upon the same terms and conditions (except for 100% vesting as described below) as under the applicable Beverly employee benefit plan and the applicable option agreement issued thereunder, except that (i) the number of shares of New Beverly Common Stock for which such options may be converted and (ii) the option exercise price per share of such options, shall be adjusted in accordance with the Employee Benefit Agreement to take into account the effect of the Distribution. See "-- Terms of the Employee Benefit Agreement." All Beverly options, restricted stock, phantom stock and performance shares will be 100% vested as of the Time of Distribution, by virtue of the Distribution and without any action on the part of the holders thereof. MANNER OF EFFECTING THE DISTRIBUTION The Beverly Board of Directors will determine the Distribution Date and it is expected that the Distribution will be made on the Distribution Date to stockholders of record of Beverly Common Stock as of the Distribution Record Date. The Merger is expected to take place promptly following the satisfaction of certain conditions set forth in the Merger Agreement and is expected to occur immediately following the Time of Distribution. The Distribution will not take place unless all of the conditions to effecting the Merger (other than the completion of the Distribution) have been fulfilled, and there can be no assurance as to the timing or consummation of the Distribution. Beverly's transfer agent, The Bank of New York, will act as the Distribution Agent for the Distribution and will deliver certificates for New Beverly Common Stock as soon as practicable to holders of record of Beverly Common Stock as of the close of business on the Distribution Record Date on the basis of one share of New Beverly Common Stock for every one share of Beverly Common Stock held on the Distribution Record Date. All shares of New Beverly Common Stock will be fully paid and nonassessable and the holders thereof will not be entitled to preemptive rights. See "Description of New Beverly Capital Stock." Following the completion of the Distribution, New Beverly will operate as an independent, publicly-traded company. YOU WILL NOT BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE SHARES OF NEW BEVERLY COMMON STOCK RECEIVED IN THE DISTRIBUTION NOR WILL YOU NEED TO SURRENDER YOUR BEVERLY COMMON STOCK CERTIFICATES IN ORDER TO RECEIVE SHARES OF NEW BEVERLY COMMON STOCK IN THE DISTRIBUTION. THE DISTRIBUTION AGENT WILL SEND YOU YOUR NEW BEVERLY STOCK CERTIFICATES FOLLOWING THE CONSUMMATION OF THE DISTRIBUTION. LISTING OF NEW BEVERLY COMMON STOCK; RESTRICTIONS ON RESALE New Beverly will apply for listing the New Beverly Common Stock on the NYSE and PSE under the symbol "BEV," currently used by Beverly. The New Beverly Common Stock received pursuant to the Distribution will be freely transferable under the Securities Act, except for shares of New Beverly Common Stock received by any person who may be deemed to be an "affiliate" of New Beverly within the meaning of Rule 144 promulgated under the Securities Act. Persons who may be deemed to be affiliates of New Beverly after the Distribution generally include individuals or entities that control, are controlled by, or are under 20 28 common control with New Beverly, and may include the directors and executive officers of New Beverly. Persons who are affiliates of New Beverly will be permitted to sell their New Beverly Common Stock received pursuant to the Distribution only pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. The Registration Statement of which this Prospectus is a part will not cover resales of New Beverly Common Stock by affiliates of New Beverly. See "Shares Eligible for Future Sale." TREATMENT OF INDEBTEDNESS The Distribution Agreement provides that Beverly and New Beverly will take all commercially reasonable action to cause New Beverly or an appropriate subsidiary of New Beverly, to assume all of the items of Beverly's consolidated indebtedness other than (i) the Assumed Pharmacy Indebtedness and related Accrued Interest Cost, (ii) the Closing Debt, (iii) other permitted indebtedness constituting Institutional Pharmacy Liabilities (as defined in the Distribution Agreement), and (iv) certain capital leases and other items relating to the Institutional Pharmacy Business. Prior to the Time of Distribution, Beverly, and after the Time of Distribution, New Beverly is required to pay or cause to be paid, or otherwise provide for by appropriate assurances (in each case satisfactory to Capstone), to the extent Beverly or New Beverly is unable to effect releases of Beverly and the Pharmacy Subsidiaries from liability thereunder, all Beverly or New Beverly indebtedness or other non-contingent liabilities as to which Beverly or any of the Pharmacy Subsidiaries is a direct obligor, other than the Assumed Pharmacy Indebtedness and Institutional Pharmacy Liabilities. Beverly has agreed to use its reasonable best efforts to cause its outstanding indebtedness for borrowed money to be restructured, modified or amended, as appropriate, to cause such indebtedness to be assumed by New Beverly prior to the Effective Time, and to obtain all necessary consents, approvals, waivers or other agreements by the holders of such indebtedness and other fixed obligations of Beverly as may be required in order to effect the assignment to and assumption by New Beverly of, and release of Beverly from, liability with respect to, such obligations (collectively, the "Beverly Debt Restructuring"). Further, Beverly and Capstone have agreed to use all commercially reasonable efforts to cause Beverly's Pharmacy Subsidiaries to borrow $275 million from third party lenders on terms mutually agreeable to Beverly and Capstone for the purpose of repaying such amount to Beverly prior to the Distribution in settlement of the Assumed Pharmacy Indebtedness (as defined in the Distribution Agreement), which borrowing shall continue after the Effective Time as an obligation of the Surviving Corporation as part of its new credit facility. See "Treatment of Beverly Indebtedness." EXPENSES In accordance with the terms of the Merger Agreement, Capstone, on the one hand, and Beverly (before the Distribution) and New Beverly (after the Distribution), on the other hand, shall bear their own respective expenses incurred in connection with the Merger and the Distribution, including, without limitation, the preparation, execution and the performance of the Merger Agreement, the Distribution Agreement and the transactions contemplated thereby, and all fees and expenses of investment bankers, finders, brokers, agents, representatives, counsel and accountants. Expenses incurred in printing, mailing and filing (including without limitation, SEC filing fees, fees related to any state securities or "blue sky" laws and stock exchange listing application fees), (i) as to the Joint Proxy Statement/Prospectus and related Registration Statement, shall be paid by Capstone and (ii) as to the New Beverly Prospectus and related Registration Statement shall be paid by New Beverly. Beverly estimates that its (or New Beverly's, as the case may be) transaction expenses will approximate $40 million, including approximately $10.2 million expected to be incurred in connection with the Beverly Debt Restructuring. CONDITIONS The Merger Agreement requires, as a condition to the consummation of the Merger, Beverly stockholders' approval of the Distribution. The completion of the Distribution is also a condition to the consummation 21 29 of the Merger, and Beverly does not presently intend to consummate the Distribution unless and until all of the conditions to the consummation of the Merger (other than the completion of the Distribution) have been satisfied. The consummation of the Merger is subject to a number of conditions set forth in the Merger Agreement. See "The Merger -- Conditions to Closing" in the Joint Proxy Statement/Prospectus. SETTLEMENT OF INTERCOMPANY ACCOUNTS The Distribution Agreement provides that prior to the Distribution Date and after settlement of the Assumed Pharmacy Indebtedness and the related Accrued Interest Cost all intercompany accounts existing between Beverly and any of its subsidiaries (other than the Pharmacy Subsidiaries), on the one hand, and the Pharmacy Subsidiaries, on the other hand, will be netted out, in each case in such manner and amount as may be agreed to in writing by duly authorized representatives of Beverly, Capstone and New Beverly; and (i) the resulting net balance due, if any, from the Pharmacy Subsidiaries to Beverly and any of its subsidiaries (other than the Pharmacy Subsidiaries) shall be contributed to the appropriate Pharmacy Subsidiaries as additional capital; and (ii) the resulting net balance due, if any, from Beverly and any of its subsidiaries (other than the Pharmacy Subsidiaries) to the Pharmacy Subsidiaries will be distributed to Beverly as a dividend. Further, New Beverly shall provide an accounting to Capstone of the settlement of the intercompany accounts described above as soon as reasonably practicable following the Effective Time of the Merger. To the extent that the aggregate cash collected by Beverly from the Pharmacy Subsidiaries during the period from the date of the Distribution Agreement to the Distribution Date, is greater than the sum of (i) the Assumed Pharmacy Indebtedness and the related Accrued Interest Cost, (ii) Beverly's normal management fees collected from the Pharmacy Subsidiaries during such period in amounts consistent with past practices in the ordinary course of business, and (iii) the Closing Debt (as defined below, and collectively, the "Beverly Interim Period Cash Entitlements"), then New Beverly shall reimburse Capstone for the amount in excess of the Beverly Interim Period Cash Entitlements. To the extent that the amount of Beverly Interim Period Cash Entitlements is in excess of the aggregate cash collected by Beverly from the Pharmacy Subsidiaries during the period from the date of the Distribution Agreement to the Distribution Date, Capstone shall reimburse New Beverly for the amount of such difference. "Closing Debt" is defined as the amount of Beverly's indebtedness incurred in connection with the acquisition of institutional pharmacy businesses approved by Capstone during the period commencing at the time of execution of the Distribution Agreement and ending at the Distribution Date, which amount shall be in addition to the Assumed Pharmacy Indebtedness. New Beverly shall be reimbursed for the Closing Debt pursuant and subject to the provisions described above. INDEMNIFICATION AND INSURANCE The Distribution Agreement provides that from and after the Distribution Date, Capstone will indemnify, defend and hold harmless New Beverly and its subsidiaries, as well as the directors and officers of New Beverly and the various New Beverly subsidiaries (collectively, the "New Beverly Indemnitees") from and against all losses arising out of or relating to (i) the Institutional Pharmacy Liabilities, (ii) any breach, whether before or after the Distribution Date, by Beverly or the Pharmacy Subsidiaries of any provision of the Distribution Agreement or any Ancillary Agreement and (iii) liabilities related to the operation of Capstone. New Beverly will, following the Distribution Date, indemnify, defend and hold harmless, Beverly (and Capstone as its successor), each Pharmacy Subsidiary, and the directors and officers of Beverly and the Pharmacy Subsidiaries from and against losses arising out of or resulting from (i) the Remaining Healthcare Liabilities (as defined in the Distribution Agreement), (ii) the breach, whether before or after the Distribution Date, by New Beverly or any New Beverly subsidiary, of any provision of the Distribution Agreement or any Ancillary Agreement, (iii) any claims arising out of this Prospectus or the Registration Statement pertaining hereto and (iv) the failure to qualify as a tax-free reorganization. See "-- Terms of the Tax Allocation and Indemnification Agreement" and "The Merger -- Indemnification and Insurance" in the Joint Proxy Statement/Prospectus for information regarding Capstone's indemnification obligations arising pursuant to the Merger Agreement. 22 30 For a period of six years following the anniversary of the Distribution Date, Capstone will maintain in effect in such manner as is contemplated by the Merger Agreement policies of directors' and officers' liability insurance with respect to claims against present or former officers or directors of Beverly and its subsidiaries arising from facts or events occurring prior to the Effective Time of the Merger. The cost of maintaining such coverage in effect shall be shared as follows: (i) for the first three years after the Distribution Date, New Beverly and Capstone shall each bear 50% of the premium cost of maintaining said insurance policies or any applicable runoff policy in substitution or replacement thereof; and (ii) for the following three years after the Distribution Date, New Beverly shall bear 70% of such premium cost, and Capstone shall bear 30% of such premium cost. Following the Distribution Date, Capstone shall be responsible for providing such insurance coverage as it may deem appropriate with respect to the assets and business of the Institutional Pharmacy Business. Similarly, New Beverly shall be responsible for maintaining such insurance coverage as it deems appropriate with respect to the assets and business of the Remaining Healthcare Business. Notwithstanding the above, Capstone and Beverly, pursuant to the terms of the Merger Agreement, have agreed to use their joint best efforts to expeditiously obtain a commitment for retroactive insurance coverage, which shall be reasonably acceptable to Beverly, with respect to both known liabilities and unreported losses which are related to the Institutional Pharmacy Business which may have occurred or may occur at any time prior to the Effective Time. Capstone has agreed that at the Effective Time, it will, at its expense, cause such retroactive insurance coverage to be in effect. TERMS OF THE EMPLOYEE BENEFIT AGREEMENT Beverly, New Beverly and Capstone will execute the Employee Benefit Agreement on or prior to the Distribution Date to allocate responsibilities and obligations between Beverly and the Surviving Corporation for various employee and employee benefit matters, including the rights and claims of Retained Employees and Transferred Employees. The Employee Benefit Agreement allocates such responsibilities and obligations with respect to salary, wages and related benefits, as well as benefits under the current Beverly stock plans, non-tax qualified benefit plans, employee welfare benefit plans and tax-qualified defined contribution plans. Beverly and New Beverly intend to transfer the Transferred Employees to the employ of New Beverly or one of its subsidiaries, as appropriate, immediately prior to the Distribution. With respect to the Transferred Employees, New Beverly will assume the liabilities and obligations regarding, and will continue to be responsible for, all claims made by or on behalf of Transferred Employees concerning salary, wages, benefits, stock-based compensation, non-qualified plans, qualified plans, welfare plans, severance pay, salary continuation and post-employment obligations. With respect to Retained Employees, Beverly will retain and Capstone shall assume all such liabilities and obligations with respect to and concerning Retained Employees except for certain benefits of Retained Employees provided under certain non-tax qualified benefit plans that are to be maintained for such Retained Employees by New Beverly. Beverly and Capstone will, however, retain liability for such benefits of Retained Employees, and will indemnify New Beverly to the extent of the net cost to New Beverly of providing such benefits. All of the employee welfare benefit plans maintained by Beverly will be assumed, along with any underlying assets held for such plans, by New Beverly. New Beverly's assumption of liability for the provision of benefits under these plans will cover all liabilities with respect to Transferred Employees and will cover all liabilities for Retained Employees arising with respect to claims incurred up to the Distribution. However, Beverly will retain and Capstone will assume all coverage and benefit liabilities for Retained Employees as of the Distribution. Beverly's and Capstone's obligations with respect to Retained Employees as of the Distribution under COBRA will be administered and paid for by New Beverly, with Beverly and Capstone providing reimbursement to New Beverly for all costs incurred. Effective as of the Distribution, New Beverly will assume the Beverly Enterprises 401(k) Savings Plus Plan, taking on all of its assets and liabilities. New Beverly will continue to maintain that plan for the benefit of the Transferred Employees. The Retained Employees will cease to participate in that plan. New Beverly will cause the assets held in that plan for the benefit of the Retained Employees to be transferred in a trustee-to- 23 31 trustee transfer to another tax-qualified plan of which the Surviving Corporation is sponsor. The transferee plan will be designated by the Surviving Corporation. The Pharmacy Corporation of America Retirement Savings Plan will be amended to provide for its assumption by Capstone. The Beverly Enterprises, Inc. 1988 Stock Purchase Plan will be amended and assumed by New Beverly and Retained Employees will cease to participate in that plan. Retained Employees will receive a cash distribution of any remaining balance held in that plan to the extent it has not been used to purchase stock. Beverly, New Beverly and Capstone shall cooperate to amend the existing Beverly stock plans prior to the Distribution to provide for the assumption of such plans and certain options granted thereunder. In addition, prior to the Distribution, New Beverly shall adopt one or more stock option plans, the participants in which initially shall be all Transferred Employees who hold Beverly options, restricted shares, performance shares and/or phantom shares, which benefits shall be subject to accelerated vesting and other adjustments as described below. For all Transferred Employees and Retained Employees, immediately prior to the Distribution, (i) each option to purchase Beverly Common Stock then outstanding will become fully vested and exercisable, (ii) all restrictions on outstanding restricted shares will lapse and each such share shall become fully vested, (iii) each outstanding award of phantom shares shall become fully vested, and (iv) each outstanding performance share of Beverly Common Stock shall become fully vested. Beverly has requested that those Transferred Employees with existing employment or change in control severance agreements with Beverly enter into new employment, severance, or change of control agreements with New Beverly to be effective at the Time of Distribution (the "New Beverly Agreements"). The New Beverly Agreements provide, in exchange for the benefits provided therein, that the Transferred Employee agrees to, among other things, (i) waive any rights currently in existence under any change in control, severance or employment agreement or other compensation or employee benefit plan with or previously assumed by Beverly; and (ii) the cancellation of existing Beverly stock options and the substitution of new stock options to be issued by New Beverly (as described below). Effective immediately after the Distribution, New Beverly will substitute for each outstanding Beverly option held by a Transferred Employee, a New Beverly option to acquire shares of New Beverly Common Stock, which option shall be of the same character and subject to substantially the same terms and conditions, as the Beverly option for which it is substituted, provided, however, that (i) the exercise price per share of New Beverly Common Stock for which the option may be exercised shall be an amount equal to the product of (x) the per share exercise price under the Beverly option immediately prior to the Distribution, and (y) the fraction representing the Fair Market Value (defined as the last reported sales price per share of the Beverly Common Stock as reported on the New York Stock Exchange composite tape for the valuation date in question) of a share of New Beverly Common Stock immediately after the Distribution divided by the Fair Market Value of a share of Beverly Common Stock immediately before the Distribution (the "Distributed Stock Fraction"), and (ii) the number of New Beverly shares for which the option may be exercised shall be an amount equal to the quotient of (x) the number of shares of Beverly stock for which the Beverly option could have been exercised, immediately prior to the Distribution, divided by (y) the Distributed Stock Fraction. Capstone has agreed to assume the Beverly stock plans and each Beverly option granted thereunder that is held by a Retained Employee, and each such option so assumed shall be exercisable upon the same terms and conditions as under the applicable Beverly stock plan and the applicable option agreement issued thereunder. For each Retained Employee, the old Beverly stock options will be canceled and Capstone shall issue new Capstone options in substitution, with the number of shares and exchange price adjusted by two (2) different adjustments so as to preserve the terms and conditions of the Beverly option. See "The Merger Agreement" in the Joint Proxy Statement/Prospectus. Prior to the Distribution, Beverly, New Beverly and Capstone shall cooperate to amend all of Beverly's existing non-tax qualified benefit plans, employee welfare benefit plans and tax-qualified defined contribution plans, consistent with the transactions described above, and to provide generally for (i) the assumption of such plans by New Beverly, (ii) the ongoing participation in such plans by all Transferred Employees, (iii) the 24 32 cessation of participation in such plans as of the Distribution by all Retained Employees and (iv) taking such other steps as may be necessary to prevent the consummation of the Merger, the Distribution and the transactions contemplated thereby from causing, resulting in, or being treated as a termination of employment, cessation of service or a change of control with respect to such plans. TERMS OF THE NON-COMPETITION AGREEMENT In connection with the Distribution and the Merger, Beverly, Capstone and New Beverly will enter into a Non-competition Agreement whereby New Beverly will agree not to engage in the institutional pharmacy business (as defined in the Non-competition Agreement) within a 120-mile radius of any pharmacy included in the Institutional Pharmacy Business or operated by Capstone during the five-year term of such agreement, except that the Non-competition Agreement shall not restrict or impair any activities of New Beverly or any of its subsidiaries as currently provided in connection with the provision of any healthcare services or products in certain defined settings and in other settings where long-term healthcare is not the primary service furnished. If New Beverly, during the term of the Non-competition Agreement, acquires a pharmacy dispensing services business as part of the acquisition of a larger business where the pharmacy dispensing services business does not constitute the principal part of the larger business, New Beverly has agreed to offer to sell such pharmacy dispensing services business to Capstone within six months of the purchase of such business. The purchase price of any such pharmacy dispensing services business which Capstone elects to acquire under the Non-competition Agreement will be determined based upon an appraisal of an independent business appraisal firm. TERMS OF THE INTERIM SERVICES AGREEMENT Prior to the Distribution Date, New Beverly and Beverly will execute the Interim Services Agreement which establishes a framework for New Beverly to provide to Capstone, as the successor to Beverly following the Effective Time of the Merger, certain services as may be requested by Capstone to ensure an orderly transition of the Institutional Pharmacy Business. The contemplated services may include those services that have been historically provided by Beverly on a centralized basis to the Institutional Pharmacy Business such as cash management, compensation and benefits administrative assistance, management information systems and legal services. The term of the Interim Services Agreement extends through April 30, 1998, or as otherwise mutually agreed by the parties. New Beverly shall be reimbursed for all direct and indirect costs and expenses incurred in connection with providing any services, as well as the allocated portion of the base salaries of the New Beverly employees actually providing services; provided that in no event shall the amount to be reimbursed to New Beverly for such services be less than the fair market value for such services. TERMS OF THE TAX ALLOCATION AND INDEMNIFICATION AGREEMENT Prior to the Distribution, Beverly and New Beverly shall enter into a Tax Allocation and Indemnification Agreement (the "Tax Allocation and Indemnification Agreement"). This agreement sets forth each party's rights and obligations with respect to the allocation and payment of tax liabilities and entitlements to refunds, if any, for any federal, state or local taxes for periods before and after the Effective Time of the Merger. The Tax Allocation and Indemnification Agreement also addresses related matters such as the allocation of responsibility in connection with the preparation and filing of any tax returns, the conduct of proceedings related to taxes, cooperation of the parties with respect to certain tax matters and the indemnification of the parties against certain liabilities allocated under the Tax Allocation and Indemnification Agreement. In general, under the Tax Allocation and Indemnification Agreement, New Beverly will be responsible for (i) all tax liabilities of Beverly not allocable to the Pharmacy Subsidiaries (ii) any tax liability of New Beverly for periods beginning after the date of the Merger, and (iii) except as otherwise described in this section, any tax liability of Beverly resulting from the failure of the restructuring and the Distribution to qualify as transactions described in Sections 351 and 355 of the Code, and/or as a "reorganization" under Section 368(a)(1)(D) of the Code, or the Merger to qualify as a "reorganization" under Section 368(a)(1)(A) of the Code. New Beverly will also be entitled to any refunds that relate to those liabilities. 25 33 Under the Tax Allocation and Indemnification Agreement, the Surviving Corporation will generally be responsible for (i) all tax liabilities allocable to the Pharmacy Subsidiaries, and (ii) any tax liability of Capstone. If the tax return for the Beverly consolidated group (the "Group Tax Return") for taxable year 1996 is filed before the Distribution, Beverly shall be responsible for preparing and filing such Group Tax Return in a manner which fairly reflects the interests of Beverly and New Beverly. If the Group Tax Return for taxable year 1996 is filed after the Distribution, New Beverly shall be responsible for preparing such Group Tax Return in a manner which fairly reflects the interests of Beverly and for furnishing the completed Group Tax Return to Beverly in time to permit the timely signing and filing of such Group Tax Return by Beverly. Beverly will be responsible for preparing and filing the Group Tax Return for taxable year 1997 in a manner which fairly reflects the interests of New Beverly. New Beverly will be responsible for providing to Beverly for taxable year 1997 the information relating to New Beverly which is needed for the preparation of the taxable year 1997 Group Tax Return. All Group Tax Returns filed after the date of the Merger shall be prepared on a basis consistent with the elections, accounting methods, conventions and principles of taxation used for the most recent taxable periods for which Group Tax Returns have been filed. If the consolidated federal income tax liability reported on the Group Tax Return (the "Group Tax Liability"), if any, for any relevant tax period includes alternative minimum tax imposed by section 55 of the Code, the total amount of such alternative minimum tax shall be allocated to New Beverly. The remaining portion of the Group Tax Liability (after reduction for alternative minimum tax) will be apportioned between Beverly and New Beverly. The amount apportioned to Beverly will be based upon a determination of the tax liability of the Institutional Pharmacy Business had such business filed a federal income tax return on a stand-alone basis, and the amount apportioned to New Beverly will be the remaining portion of the Group Tax Liability, excluding any portion attributable to Capstone. For any tax period for which a Group Tax Return is filed after April 15, 1997, New Beverly shall be liable for the amount of taxes allocated to New Beverly reduced by the excess of (a) the total amount of estimated federal income taxes paid by Beverly with respect to any portion of such tax period which occurs on or before the Distribution, over (b) the amount included as a payable to Beverly for current federal income taxes with respect to such tax period on the audited financial statements of PCA determined as of April 15, 1997. If the amount allocated to New Beverly for any tax period with a reduction as provided above is a positive number, such net amount shall be a joint and several liability of New Beverly and its subsidiaries enforceable by Beverly and its subsidiaries under the terms of the Tax Allocation and Indemnification Agreement. If the amount allocated to New Beverly for any tax period reduced as provided above is a negative number, Beverly and its subsidiaries shall be jointly and severally liable for the payment of an amount equal to such negative number to New Beverly. If, as a result of any filing of an amended return or claim for refund, final determination or settlement with the IRS, or court decision, relating to a Group Tax Return for any tax period, there is an increase in the Group Tax Liability, then each of Beverly and New Beverly will be allocated the portion of the increase in the Group Tax Liability that is attributable to it under the apportionment method described above, plus any allocable interest and penalties. If there is a reduction in the Group Tax Liability, then each of Beverly and New Beverly will be allocated the portion of the refund from such reduction in the Group Tax Liability that is attributable to it under the apportionment method described above, plus any allocable interest. Each party to the agreement agrees to pay and be responsible for, and will indemnify, defend and hold harmless all other parties from and against all liabilities allocated to it under the Tax Allocation and Indemnification Agreement. If any party pays or has paid any Group Tax Liability or state or local income or franchise tax liability for which another party is or becomes liable pursuant to the terms of the Tax Allocation and Indemnification Agreement, appropriate reimbursement shall be made no later than ten days after demand for such reimbursement is made. The portion of any refund, rebate or reimbursement received by any party to which another party is entitled pursuant to the Tax Allocation and Indemnification Agreement will be paid over within ten days. Any payments required to be made between the parties that are not made in a 26 34 timely fashion will bear interest calculated at the rate specified under Section 6621(a)(2) of the Code from the date such payment is due to the date the payment is made. Beverly agrees to (i) retain all Group Tax Returns, related schedules and workpapers, and all material records and other documents as required under Section 6001 of the Code and the regulations promulgated thereunder existing on the date of the Tax Allocation and Indemnification Agreement or relating to tax periods ending with the Distribution, for seven years following the Distribution, or such longer period as a tax deficiency may be assessed or a refund claim filed under applicable periods of limitation, and (ii) allow New Beverly and its representatives (and representatives of any of its affiliates), at times and dates reasonably acceptable to Beverly, to inspect, review and make copies of such records, and have access to such employees, as New Beverly may reasonably deem necessary or appropriate from time to time. PREFERRED PROVIDER AGREEMENT Beverly and Capstone have agreed that effective upon the closing of the Merger, New Beverly and the Surviving Corporation will enter into a Preferred Provider Agreement for Pharmaceutical and Related Services (the "Preferred Provider Agreement") under which the Surviving Corporation will enter into one or more provider agreements, for a five year term, with a five year renewal right upon meeting certain competitive pricing criteria, to provide certain pharmacy and related products and services (collectively, the "Services") in New Beverly long-term care facilities where PCA has previously provided such Services, and New Beverly will under certain conditions cause additional long-term care facilities now or hereafter operated by Beverly to enter into similar provider agreements for such Services for up to a five year term, with similar renewal rights. Under the Preferred Provider Agreement, if New Beverly sells or otherwise disposes of any long-term care facility under contract with the Surviving Corporation to a third party, New Beverly will be obligated to cause the third party to assume New Beverly's obligation to obtain the Services at that facility from the Surviving Corporation. A default by either party with respect to its obligations under provider agreements covering 10% of the total number of long-term facilities at the time under contract with the Surviving Corporation will constitute a default under the Preferred Provider Agreement, entitling the non-defaulting party to, among other remedies, terminate the entire relationship. Under the Preferred Provider Agreement, pricing for the Services is expected to be determined and negotiated at the time of commencement of Services by the Surviving Corporation at a specific facility, and will continue at such amount for the duration of the term of the provider agreements, subject to such modifications as may be required by changes in governmental reimbursement regulations and rules. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following is a summary description of the material federal income tax consequences of the Distribution and the Merger. This summary is for general informational purposes only and is not intended as a complete description of all of the tax consequences of the Distribution and the Merger and does not discuss tax consequences under the laws of state or local governments or of any other jurisdiction. Moreover, the tax treatment of a stockholder may vary depending upon his, her or its particular situation. In this regard, certain stockholders (including (i) insurance companies, tax-exempt organizations, financial institutions or broker-dealers, and persons who are not citizens or residents of the United States or who are foreign corporations, foreign partnerships or foreign trusts or estates as defined for United States federal income tax purposes, and (ii) stockholders that hold shares as part of a position in a "straddle" or as part of a "hedging" or "conversion" transaction for United States federal income tax purposes and stockholders with a "functional currency" other than the United States dollar) may be subject to special rules not discussed below. In addition, this summary applies only to shares which are held as capital assets. The following discussion may not be applicable to a stockholder who acquired his or her shares pursuant to the exercise of stock options or otherwise as compensation. 27 35 THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE, TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE WHICH MAY OR MAY NOT BE RETROACTIVE, AND ANY SUCH CHANGES COULD AFFECT THE TAX CONSEQUENCES DESCRIBED HEREIN. SEE "POSSIBLE FUTURE LEGISLATION" BELOW. EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTION DESCRIBED HEREIN, INCLUDING, THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS. THE DISTRIBUTION On May 17, 1997, Beverly requested the Private Letter Ruling from the IRS substantially to the effect that, among other things, the Distribution will qualify as a reorganization within Section 368(a)(1)(D), and that neither Beverly, New Beverly nor their stockholders will recognize any gain or loss (i) in connection with such reorganization transaction (as more fully described below), (ii) upon the receipt by New Beverly of the Remaining Health Care Assets from Beverly in exchange for the New Beverly Common Stock, or (iii) upon receipt by Beverly stockholders of the New Beverly Common Stock in the Distribution. Receipt of the Private Letter Ruling, or an opinion to the effect as set forth below, at the election of Beverly, is a condition to the respective obligations of Beverly and Capstone to consummate the Merger. Beverly does not expect to have the Private Letter Ruling request acted upon prior to the fourth quarter of 1997. See "The Merger -- Conditions to Closing" in the Joint Proxy Statement/Prospectus. As an alternative to obtaining the Private Letter Ruling, at Beverly's option, Beverly and Capstone have the right to receive the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP to the effect that: (1) the transfer by Beverly to New Beverly of the Remaining Healthcare Assets, solely in exchange for New Beverly Common Stock, and the assumption by New Beverly of the Remaining Healthcare Liabilities of Beverly, followed by Beverly's distribution of the New Beverly Common Stock to Beverly's stockholders, will constitute a reorganization within the meaning of Section 368(a)(1)(D) of the Code; (2) Beverly will recognize no gain or loss in connection with the transactions described in (1) above, except to the extent that gain or loss is required to be recognized on intercompany transactions; (3) New Beverly will recognize no gain or loss upon the receipt of the Remaining Healthcare Assets from Beverly in exchange for the New Beverly Common Stock; and (4) Beverly's stockholders will recognize no gain or loss (and no amount will be included in the income of Beverly's stockholders) upon the receipt of the New Beverly Common Stock in the Distribution. Tax opinions are not binding on the IRS or any court. Moreover, the tax opinions are based upon, among other things, certain representations as to factual matters made by Beverly and Capstone, which representations if incorrect or incomplete in certain material respects, would jeopardize the conclusions reached in the opinions. It is expected that the Distribution will qualify as a tax-free reorganization under Section 368 of the Code. Assuming that the Distribution so qualifies, (i) the holders of Beverly Common Stock will not recognize gain or loss upon receipt of shares of New Beverly Common Stock, (ii) each holder of Beverly Common Stock will allocate his, her or its aggregate tax basis in the Beverly Common Stock immediately before the Distribution among the Beverly Common Stock and New Beverly Common Stock in proportion to their respective fair market values, (iii) the holding period of each holder of Beverly Common Stock for the New Beverly Common Stock will include the holding period for his, her or its Beverly Common Stock, provided that the Beverly Common Stock is held as a capital asset at the time of the Distribution, and (iv) 28 36 Beverly will not recognize any gain or loss on its distribution of the New Beverly Common Stock to its stockholders, except to the extent that gain or loss is required to be recognized on intercompany transactions. No fractional shares of New Beverly Common Stock will be distributed in the Distribution. A holder of Beverly Common Stock who, pursuant to the Distribution, receives cash in lieu of fractional shares of New Beverly Common Stock will be treated as having received such fractional shares of New Beverly Common Stock pursuant to the Distribution and then as having received such cash in a sale of such fractional shares of New Beverly Common Stock. Such holder will generally recognize capital gain or loss pursuant to such demand sale equal to the difference between the amount of cash received and such holder's adjusted tax basis in the fractional share of New Beverly Common Stock received. Such gain or loss will be capital (provided the Beverly Common Stock is held as a capital asset at the time of the Distribution) and will be treated as a long- term capital gain or loss if the holding period for the fractional shares of New Beverly Common Stock deemed to be received and then sold is more than one year. If the Distribution does not qualify as a tax-free reorganization under Section 368 of the Code, then each holder of Beverly Common Stock who received shares of New Beverly Common Stock in the Distribution will be treated as if such holder received a taxable distribution in an amount equal to the fair market value of the New Beverly Common Stock received. Such distribution will be treated as (i) a dividend to the extent paid out of Beverly's current and accumulated earnings and profits, then (ii) a reduction in such holder's basis in Beverly Common Stock to the extent the amount received exceeds the amount referenced in clause (i), and then (iii) a gain from the sale or exchange of Beverly Common Stock to the extent the amount received exceeds the sum of the amounts referenced in clauses (i) and (ii). Each holder's basis in the New Beverly Common Stock would be equal to the fair market value of such stock at the time of the Distribution. In addition, if the Distribution were not to qualify as a tax-free reorganization under Section 368 of the Code, then, in general, a corporate level federal income tax would be payable by the consolidated group of which Beverly is the common parent, which tax would be based upon the gain (computed as the difference between the fair market value of the stock distributed and the distributing corporation's adjusted basis in such stock) realized by Beverly upon its distribution of the stock of New Beverly to its stockholders in the Distribution, and New Beverly would be liable for the payment of such tax pursuant to the terms of the Tax Allocation and Indemnification Agreement. THE MERGER In addition to the tax treatment with respect to the Distribution, as set forth above, Beverly and Capstone shall receive, prior to the Effective Time of the Merger, the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP with respect to the Merger, to the effect that: (1) the Merger will qualify as a reorganization within the meaning of Section (368)(a) of the Code; (2) no gain or loss will be recognized by Capstone or Beverly as a result of the Merger; and (3) no gain or loss will be recognized by Beverly's stockholders upon the receipt of Capstone Common Stock solely in exchange for Beverly Common Stock in connection with the Merger (except with respect to cash received in lieu of a fractional interest in Capstone Common Stock). Tax opinions are not binding on the IRS or any court. Moreover, the tax opinions are based upon, among other things, certain representations as to factual matters made by Beverly and Capstone, which representations if incorrect or incomplete in certain material respects, would jeopardize the conclusions reached in the opinions. It is expected that the Merger will constitute a reorganization within the meaning of Section 368(a) of the Code. If the Merger so qualifies, (i) the holders of Beverly Common Stock will not recognize gain or loss upon the receipt of Capstone Common Stock in exchange for their shares of Beverly Common Stock, (ii) each holder of Beverly Common Stock will carry over his, her or its tax basis in the Beverly Common Stock (as determined immediately following the Distribution) to the Capstone Common Stock, (iii) the holding period for each holder of Beverly Common Stock will carry over to the Capstone Common Stock, 29 37 provided that the Beverly Common Stock is held as a capital asset immediately prior to the Effective Time of the Merger, and (iv) any holder of Beverly Common Stock receiving cash in lieu of fractional shares will recognize capital gain or loss (provided the shares of Beverly Common Stock surrendered are held as capital assets immediately prior to the Effective Time of the Merger) equal to the difference between the amount of cash received and the portion of such holder's basis in the shares of Beverly Common Stock allocable to such fractional share interests, and such capital gain or loss will be long-term capital gain or loss if the holding period for such shares is more than one year. If the Merger does not qualify as a reorganization within the meaning of Section 368(a) of the Code, then each holder of Beverly Common Stock will recognize gain or loss upon the receipt of the Capstone Common Stock in exchange for such Beverly Common Stock equal to the difference between the fair market value of the Capstone Common Stock received and such holder's basis in Beverly Common Stock. In this regard, the failure of the Merger to qualify as a reorganization within the meaning of Code Section 368(a) of the Code may also cause the Distribution to not qualify as a tax-free reorganization under Section 368 of the Code, in which case (as described in "-- The Distribution" above) each holder of Beverly Common Stock who receives shares of New Beverly Common Stock in the Distribution, will be treated as if such holder received a taxable distribution in an amount equal to the fair market value of the New Beverly Common Stock received. Such distribution would be treated as (i) a dividend to the extent paid out of Beverly's current and accumulated earnings and profits, then (ii) a reduction in such holder's basis in Beverly Common Stock to the extent the amount received exceeds the amount referenced in clause (i), and then (iii) gain from the sale or exchange of Beverly Common Stock to the extent the amount received exceeds the sum of the amounts referenced in clauses (i) and (ii). Each holder's basis in the New Beverly Common Stock would be equal to the fair market value of such stock at the time of the Distribution. In addition, if the Merger were not to qualify as a tax-free reorganization under Section 368 of the Code, then, in general, a corporate level federal income tax would be payable by the consolidated group of which Beverly is the common parent, which tax would be based upon the gain (computed as the difference between the fair market value of the PCA stock exchanged in the Merger and Beverly's adjusted basis in such stock) realized by Beverly upon the consummation of the Merger. TAXPAYER RELIEF ACT The Taxpayer Relief Act of 1997 ("TRA 1997") was signed into law on August 5, 1997. TRA 1997 contains certain restrictions involving a distribution or "spin off" to stockholders of portions of a business enterprise, accompanied by a merger or acquisition of a specific unit of the business enterprise involving a third party acquiror. The Distribution and the Merger are not affected by the restrictions imposed by TRA 1997. BACK-UP WITHHOLDING REQUIREMENTS United States information reporting requirements and backup withholding at the rate of 31% may apply with respect to dividends paid on, and proceeds from the taxable sale, exchange or other disposition of Beverly Common Stock, unless the stockholder (i) is a corporation or comes with certain other exempt categories, and, when required, demonstrates these facts, or (ii) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A stockholder who does not supply Beverly with his, her or its correct taxpayer identification number may be subject to penalties imposed by the IRS. Any amount withheld under these rules will be refunded or credited against the stockholder's federal income tax liability. Stockholders should consult their tax advisers as to their qualification for exemption from backup withholding and the procedure for obtaining such an exemption. If information reporting requirements apply to a stockholder, the amount of dividends paid with respect to such shares will be reported annually to the IRS and to such stockholder. These back-up withholding tax and information reporting rules currently are under review by the United States Treasury Department and proposed Treasury Regulations issued on April 15, 1996 would modify certain of such rules generally with respect to payments made after December 31, 1997. Accordingly, the application of such rules may be changed. 30 38 TREATMENT OF BEVERLY INDEBTEDNESS GENERAL The Merger Agreement provides, among other things, that it is a condition to Capstone's obligations to consummate the Merger, and Beverly has agreed that prior to the Distribution and the Merger it will amend, modify or replace substantially all of its existing indebtedness so that upon closing the Merger, Beverly will have been released from liability under all its existing indebtedness for borrowed money, except for the Institutional Pharmacy Liabilities and certain other pharmacy-related obligations. Accordingly, Beverly will be obligated to seek modifications or amendments to numerous credit or lending agreements, leases and other instruments with third parties for the purpose of causing New Beverly to be substituted as the obligor in Beverly's place, and obtaining the release of Beverly from liability thereunder. To the extent that Beverly is not able to obtain releases from such liabilities or able to refinance the same, Capstone may not be obligated to consummate the Merger, or if it elects to consummate the Merger, to reduce the amount of Assumed Pharmacy Indebtedness which PCA is obligated to repay Beverly, by the amount of any such indebtedness as to which Beverly has not obtained a release for itself. Set forth below is a summary of the principal obligations of Beverly whereunder it is either the primary obligor or guarantor, and Beverly's present plans with respect to satisfaction of its covenant and the condition in the Merger Agreement with respect to obtaining a release from liability. In one or more cases Beverly may not be able to effect appropriate modifications to the debt instruments and release of Beverly from liability thereunder, and accordingly Beverly may be required to refinance or pay off such indebtedness or terminate such leases, under terms and conditions which may be less favorable than presently exist, and there is no assurance that Beverly will be able to successfully refinance any such indebtedness. For information with respect to anticipated one-time transactional costs associated with Beverly's effecting debt amendments, modifications or replacements, see "Unaudited Pro Forma New Beverly Financial Statements." EXISTING CREDIT FACILITY As of June 30, 1997, Beverly had approximately $125,759,000 outstanding under a letter of credit/revolving credit facility which permitted borrowings of up to $375 million (the "Existing Credit Facility"), including approximately $90,000,000 under the revolving portion of the Existing Credit Facility and approximately $35,759,000 of letters of credit issued pursuant thereto. The Existing Credit Facility was established pursuant to an Amended and Restated Credit Agreement dated as of December 20, 1996 (as heretofore amended, the "Existing Credit Agreement") by and among Beverly, as borrower, and Morgan Guaranty Bank of New York, as Issuing Bank, and as Agent for a lending bank group ("Morgan"). The Existing Credit Agreement terminates on December 31, 2001. The obligations of Beverly under the Existing Credit Facility are guaranteed by Beverly's active, direct and indirect subsidiaries other than Beverly Funding Corporation and Beverly Indemnity, Ltd. (including Beverly's Pharmacy Subsidiaries) and are secured by a pledge of all of the capital stock of PCA and certain of Beverly's other Pharmacy Subsidiaries (the "Pledged Stock"). The Existing Credit Agreement contains representations and warranties, affirmative covenants, reporting covenants, negative covenants and events of default customary for similar financing transactions. Covenants include but are not limited to certain restrictions on investments, debt incurrence, contingent obligations, liens, consolidations, mergers and asset sales, payment of dividends and the purchase or redemption of capital stock. In addition, Beverly is required to comply with certain financial covenants governing, among other things, minimum consolidated net worth, fixed charge coverage ratio, and the ratio of adjusted consolidated debt to consolidated net worth. Effective August 20, 1997, Beverly, Morgan and the other members of a group of lending banks amended the Existing Credit Agreement and the Existing Credit Facility by entering into an amended and restated credit facility (the "Amended Credit Agreement"). The Amended Credit Agreement provides that, upon the occurrence of the Transactions and the delivery of certain certificates, opinions by Beverly, a new pledge agreement and an assumption agreement by New Beverly, New Beverly will be substituted as the borrower; Beverly will be released from its obligations thereunder; the Pledged Stock will be released and the capital stock of certain direct or indirect subsidiaries of Beverly engaged in the Remaining Healthcare Business and 31 39 having a fair value substantially equivalent to the fair market value of the Pledged Stock will be substituted; and all Pharmacy Subsidiaries (as defined in the Distribution Agreement) will be released as guarantors. 9% SENIOR NOTES As of June 30, 1997, there was outstanding $180 million principal amount of 9% senior notes due 2006 (the "9% Senior Notes") that were issued pursuant to an indenture dated as of February 1, 1996 (the "9% Indenture") between Beverly and The Chase Manhattan Bank, as trustee (the "9% Senior Note Trustee") for the holders of the 9% Senior Notes. The 9% Senior Notes are senior in right of payment to all subordinated indebtedness of Beverly (including the convertible subordinated debentures, discussed below). The 9% Senior Notes are redeemable commencing February 1, 2001 at an initial redemption price of 104.5% of the principal amount thereof, plus accrued and unpaid interest. The 9% Indenture contains affirmative covenants, reporting covenants, negative covenants and events of default customary for similar public debt financing transactions. Covenants include but are not limited to certain restrictions on: investments; liens; debt incurrence; issuance of preferred stock; consolidations, mergers and asset sales; payment of dividends and the purchase or redemption of capital stock and subordinated indebtedness. Many of these limitations relate to certain financial tests or ratios which include but are not limited to minimum consolidated net worth, debt to consolidated cash flow and fixed charge coverage. In order that the 9% Senior Notes be assigned to and assumed by New Beverly, and Beverly be released from liability thereunder, Beverly intends to solicit the consent of holders of a majority of the principal amount outstanding of the 9% Senior Notes (the "Consent Solicitation") to amend the 9% Senior Notes (as amended, the "Amended Notes") and the 9% Indenture to address the following matters: (i) waiver of the consolidated net worth test in connection with the Distribution; (ii) substitution of New Beverly as the "Company" for all purposes of the 9% Indenture and the release of Beverly and the Pharmacy Subsidiaries from all liability and obligations thereunder and (iii) waiver of the limitation on redemption of subordinated debentures to permit Beverly to redeem the subordinated debentures, as discussed below. If the consent of the required holders is obtained, Beverly, New Beverly and certain other subsidiaries of Beverly, as guarantors, and the 9% Senior Note Trustee will enter into a supplemental indenture to substitute New Beverly as primary obligor thereunder, release Beverly and the Pharmacy Subsidiaries from further liability under the 9% Senior Notes and permit the redemption of the 7 5/8% convertible subordinated debentures described below. There can be no assurance given that Beverly will be successful in obtaining the consent of the required majority 9% Senior Note holders. If it is not successful in the Consent Solicitation, Beverly anticipates it or New Beverly will make an exchange offer whereby holders of the 9% Senior Notes would be offered in exchange for the 9% Senior Notes a New Beverly debt security without the limitation on redemption of subordinated debentures and without a guarantee from the Pharmacy Subsidiaries (the "New Beverly Notes"). It is expected that the New Beverly Notes will, except as noted above, contain covenants similar to the 9% Senior Notes but there can be no assurance that any New Beverly Notes issued pursuant to an exchange offer will not have higher coupon rates, be issued at a discount or contain covenants more onerous or restrictive than those in the 9% Indenture or 9% Senior Notes. SUBORDINATED DEBENTURES 5 1/2% Debentures As of June 30, 1997, there was outstanding $150 million aggregate principal amount of 5 1/2% convertible subordinated debentures ("5 1/2% Debentures"). The 5 1/2% Debentures bore interest at a rate of 5 1/2% per annum with a scheduled maturity date of August 1, 2018 and were redeemable after August 1, 1997 at a redemption price of 103.30% of principal plus accrued and unpaid interest. The 5 1/2% Debentures were convertible into Beverly Common Stock at a conversion price of $13.33 per share. On July 17, 1997, Beverly called the 5 1/2% Debentures for redemption on August 18, 1997. A total of $149,162,550 of the $150 million aggregate principal amount outstanding was converted to 11,189,924 shares of Beverly Common Stock, increasing the outstanding shares of Beverly Common Stock by that amount. The payment of the redemption 32 40 price of 103.30% of the remaining principal amount plus the cash in lieu of fractional shares was within the amount permitted under the restrictive payment provisions of the 9% Indenture. 7 5/8% Debentures As of June 30, 1997, there was outstanding approximately $62.5 million aggregate principal amount of 7 5/8% convertible subordinated debentures ("7 5/8% Debentures"). The 7 5/8% Debentures bear interest at a rate of 7 5/8% per annum, mature March 15, 2003, are presently redeemable at a redemption price of 100% of principal amount plus accrued and unpaid interest thereon and are subject to an annual sinking fund redemption of $7.5 million. The 7 5/8% Bonds are convertible into Beverly Common Stock at the option of the holder at any time prior to the close of business on March 14, 2003 but if the 7 5/8% Bonds are called for redemption, holders must convert them prior to the close of business on the business day immediately preceding the redemption date. The conversion price currently in effect is $20.47 per share. The 9% Indenture contains a covenant that restricts Beverly's ability to redeem or repurchase subordinated debt such as the 7 5/8% Debentures unless the redemption is accomplished with the net cash proceeds from an incurrence of subordinated indebtedness of a longer term and no more than the principal amount of the subordinated indebtedness being redeemed. Because redemption of the 7 5/8% Debentures is restricted under the terms of the 9% Indenture, Beverly is seeking, as part of the Consent Solicitation, consent from the holders of the 9% Senior Notes to permit the redemption of the 7 5/8% Debentures. Once the Consent Solicitation is successfully completed, Beverly intends to call the 7 5/8% Debentures for redemption, and anticipates that all of the 7 5/8% Debentures will be redeemed. INDUSTRIAL REVENUE BONDS As of June 30, 1997, Beverly has guaranteed the obligations of various subsidiaries and others on 104 issues of industrial revenue bonds in various states and local jurisdictions, totalling an aggregate principal amount of approximately $292.6 million (individually an "IRB" and collectively the "IRBs"). A total of 89 issues with an aggregate principal amount of approximately $204.5 million involve Beverly guarantees of the obligations of Beverly subsidiaries operating the Remaining Healthcare Business, while 15 issues with an aggregate principal amount of approximately $88.1 million involved guarantees of the obligations of third parties that have acquired facilities from subsidiaries of Beverly subject to IRBs. The IRBs bear interest at rates ranging from 4.0% to 11.5% per annum, mature from May 1, 1998 to December 1, 2019, and are not redeemable until from June 1, 1997 to June 1, 2013. Beverly's obligations are set forth in a guaranty agreement for each issue (individually a "Guaranty Agreement" and collectively the "Guaranty Agreements"). The Guaranty Agreements have been entered into by Beverly and 21 respective trustees (individually an "IRB Trustee" and collectively the "IRB Trustees"). In order to effect the Distribution, Beverly intends to request each IRB Trustee to enter into appropriate assumption, substitution and release agreements to, among other things: (i) substitute New Beverly as the guarantor, assuming all of Beverly's obligations under the relevant Guaranty Agreement and (ii) release Beverly from all obligations under the Guaranty Agreement. As of September 8, 1997, IRB Trustees with respect to 51 IRB issues totalling approximately $123.7 million have agreed, subject to the occurrence of the Transactions and delivery of certain certificates and opinions, to enter into such agreements. While Beverly will seek the assumption, substitution and release from all IRB Trustees, there can be no assurance given that one or more of the remaining IRB Trustees will not require that the holders of the IRBs consent to the proposed changes. If consents from such IRB holders are required, Beverly anticipates promptly seeking such consents. There remains the possibility that one or more IRB holders may not enter into a consent agreement and if such consent is not obtained from all IRB holders Beverly proposes to refinance or pay off that portion of the IRBs with respect to which consents have not been obtained. FIRST MORTGAGE BONDS As of June 30, 1997, there was outstanding approximately $48.4 million aggregate principal amount of first mortgage bonds (the "First Mortgage Bonds") in two series: Series A ("Series A Bonds") and Series B ("Series B Bonds"). The Series A Bonds bear interest at a rate of 8 3/4% per annum, mature July 1, 2008 and 33 41 are redeemable after July 1, 1997 at a redemption price of 105% of the principal amount plus accrued and unpaid interest thereon. The Series B Bonds bear interest at a rate of 8 5/8% per annum, mature October 1, 2008 and are not redeemable prior to October 1, 1997. After October 1, 1997, the Series B Bonds are redeemable at a redemption price of 105% of the principal amount plus accrued and unpaid interest thereon. The First Mortgage Bonds were issued pursuant to an indenture dated as of April 1, 1993 (as supplemented the "First Mortgage Bond Indenture") between Beverly and First Union Bank of Connecticut, as trustee (the "First Mortgage Bond Trustee") for the holders of such bonds. The First Mortgage Bond Indenture permits the substitution of New Beverly for Beverly, the assumption by New Beverly of the obligations of Beverly under the First Mortgage Bond Indenture and the First Mortgage Bonds and the release of Beverly from such obligations, upon the condition that (a) New Beverly executes documents necessary to evidence the assumption; (b) such transaction will not disturb the continuance of the lien of the First Mortgage Bond Indenture on the property mortgaged and pledged as collateral and (c) immediately after giving effect to the transaction, no default or event of default will occur. In order to effect the Distribution, Beverly, New Beverly and the First Mortgage Bond Trustee will execute and enter into a supplemental indenture and other documents necessary to provide for the (i) substitution of New Beverly for Beverly, (ii) assumption by New Beverly of the obligations of Beverly and (iii) release of Beverly from its obligations under the First Mortgage Bond Indenture and the First Mortgage Bonds. 8.75% NOTES As of June 30, 1997, there was outstanding approximately $24.8 million aggregate principal amount of 8.75% Notes ("8.75% Notes"), which were issued pursuant to an indenture dated as of December 30, 1993 (as supplemented, the "8.75% Note Indenture"), between Beverly and Boatman's Trust Company as trustee for the holders of such notes. The 8.75% Notes bear interest at a rate of 8.75% per annum, mature December 31, 2003, and are redeemable at a redemption price of 100% of the principal amount plus accrued and unpaid interest thereon. At Beverly's request, the trustee has called the 8.75% Notes for redemption on October 1, 1997. MEDIUM TERM NOTES As of June 30, 1997, there was outstanding $50.0 million aggregate principal amount of medium term notes (the "Medium Term Notes"), which were issued by Beverly Funding Corporation ("BFC"), a wholly-owned subsidiary of Beverly, pursuant to an indenture dated as of December 1, 1994 (the "Medium Term Note Indenture") between BFC and The Chase Manhattan Bank, as trustee (the "Medium Term Note Trustee") for the holders of such notes. The Medium Term Notes bear interest at LIBOR (as defined in the Medium Term Note Indenture) plus 0.35% and mature on June 15, 2000. The Medium Term Notes are secured by a security interest in patient accounts receivable generated by subsidiaries of Beverly and sold to BFC. The Medium Term Notes were issued in a private placement to The Long Term Credit Bank of Japan, Los Angeles Agency ("LTCB") as holder of the entire amount of notes issued. Beverly has agreed to certain covenants pursuant to the First Amendment and Restatement to Master Sales and Servicing Agreement (the "Servicing Agreement") dated as of December 1, 1994. In order to effect the Distribution, Beverly will seek the consent of LTCB as the sole holder of the Medium Term Notes to permit the following under the Servicing Agreement and the Medium Term Note Indenture: (i) substitution of New Beverly for Beverly for all purposes of such instruments; (ii) assumption by New Beverly of the obligations of Beverly and (iii) release of Beverly from its obligations under the Servicing Agreement and the Medium Term Note Indenture. Although no binding commitments have yet been requested or obtained, based upon informal discussions between the parties, Beverly anticipates that prior to the Distribution Beverly, New Beverly, the Medium Term Note Trustee, and LTCB will enter into appropriate documents to reflect these consents and agreements. 34 42 REIT PROMISSORY NOTES As of June 30, 1997, there was outstanding approximately $41.8 million aggregate principal amount of promissory notes due to real estate investment trusts ("REIT Promissory Notes"). The REIT Promissory Notes, which were executed by subsidiaries of Beverly that are part of the Remaining Healthcare Business that will transfer to New Beverly as part of the Distribution bear interest at rates ranging from 10.15% to 10.60% and mature from July 1, 2003 to May 1, 2010. Health Care Property Investors ("HCPI") holds approximately $34.2 million of the REIT Promissory Notes, which may not be prepaid until 2005. Nationwide Health Properties ("NHP") holds approximately $7.6 million of the REIT Promissory Notes, which have no prepayment rights. Beverly guarantees the performance under the REIT Promissory Notes by the obligors, pursuant to one or more guaranty agreements (individually a "Guaranty Agreement" and collectively the "Guaranty Agreements"). Prior to the Distribution, Beverly intends to seek the consent of both HCPI and NHP to permit the following under the Guaranty Agreements and the REIT Promissory Notes: (i) substitution of New Beverly for Beverly; (ii) assumption by New Beverly of the obligations of Beverly and (iii) release of Beverly from its obligations. Although there have been preliminary discussions between Beverly and representatives of the holders of the REIT Promissory Notes, the terms on which a consent may be granted by the holders of the REIT Promissory Notes remain uncertain. BANK LOANS, MORTGAGES AND NOTES PAYABLE As of June 30, 1997, there was outstanding approximately $125.7 million aggregate principal amount of certain bank loans, mortgages and notes payable representing financings by various subsidiaries of Beverly engaged in the Remaining Healthcare Business that will be transferred to New Beverly as part of the Distribution (the "Miscellaneous Debt Obligations"). The Miscellaneous Debt Obligations represent obligations ranging from $10.3 million to $25 million in outstanding principal amount, bear interest at rates ranging from 5.75% to 9.08% per annum, mature at various dates from December 31, 1997 to September 30, 2006 and are prepayable at various dates from September 1, 1997 to June 1, 2000. The Miscellaneous Debt Obligations are guaranteed by Beverly, and certain of them contain financial and other covenants related to Beverly. Prior to the Distribution, Beverly intends to seek amendments of the Miscellaneous Debt Obligations to provide, among other things: (i) substitution of New Beverly as guarantor in place of Beverly; (ii) assumption by New Beverly of the obligations of Beverly; (iii) release of Beverly from its obligations and (iv) adjustment of certain covenants to reflect the effects of the Distribution and the Merger (the "Miscellaneous Debt Amendments"). To the extent Beverly is unable to obtain Miscellaneous Debt Amendments to effect the foregoing, Beverly expects the Miscellaneous Debt Obligations will be paid off or refinanced with other lenders. As of September 15, 1997 Beverly has entered into Miscellaneous Debt Amendments with lenders representing approximately $37.7 million out of the $125.7 million aggregate principal amount of Miscellaneous Debt Obligations outstanding as of June 30, 1997. 35 43 INFORMATION CONCERNING BEVERLY SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following selected consolidated statement of operations data and selected consolidated balance sheet data for the periods ended and as of December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the consolidated financial statements of Beverly and should be read in conjunction with the financial statements and notes thereto included herein. The consolidated statements of operations data and selected balance sheet data for the six months ended and as of June 30, 1997 and 1996 have been derived from the unaudited condensed consolidated financial statements and should be read in conjunction with those financial statements and related notes included herein. Operating results for the six months ended June 30, 1997 are not necessarily indicative of results that may be expected for the full calendar year ending December 31, 1997.
AT OR FOR THE SIX MONTHS ENDED JUNE 30, AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------------- ------------------------------------------------------------------- 1997 1996 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net operating revenues.......... $ 1,634,219 $ 1,609,380 $ 3,267,189 $ 3,228,553 $ 2,969,239 $ 2,884,451 $ 2,607,756 Interest income................. 6,726 6,935 13,839 14,228 14,578 15,269 14,502 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total revenues.......... 1,640,945 1,616,315 3,281,028 3,242,781 2,983,817 2,899,720 2,622,258 Costs and expenses: Operating and administrative: Wages and related........... 897,856 894,522 1,819,500 1,736,151 1,600,580 1,593,410 1,486,191 Other....................... 577,874 573,490 1,139,442 1,224,681 1,114,916 1,069,536 921,750 Interest...................... 44,687 46,128 91,111 84,245 64,792 66,196 70,943 Depreciation and amortization................ 54,806 51,023 105,468 103,581 88,734 82,938 80,226 Impairment of long-lived assets: Adoption of SFAS No. 121.... -- -- -- 68,130 -- -- -- Development and other costs..................... -- -- -- 32,147 -- -- -- Restructuring costs........... -- -- -- -- -- -- 57,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Total costs and expenses.............. 1,575,223 1,565,163 3,155,521 3,248,935 2,869,022 2,812,080 2,616,110 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before provision for income taxes, extraordinary charge and cumulative effect of change in accounting for income taxes... 65,722 51,152 125,507 (6,154) 114,795 87,640 6,148 Provision for income taxes...... 26,289 20,461 73,481 1,969 37,882 29,684 4,203 ----------- ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before extraordinary charge and cumulative effect of change in accounting for income taxes... 39,433 30,691 52,026 (8,123) 76,913 57,956 1,945 Extraordinary charge, net of income taxes of $1,099 in 1996, $1,188 in 1994, $1,155 in 1993 and $5,415 in 1992.... -- -- (1,726) -- (2,412) (2,345) (8,835) Cumulative effect of change in accounting for income taxes... -- -- -- -- -- -- (5,454) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss)............... $ 39,433 $ 30,691 $ 50,300 $ (8,123) $ 74,501 $ 55,611 $ (12,344) =========== =========== =========== =========== =========== =========== =========== Net income (loss) applicable to common shares................. $ 39,433 $ 30,691 $ 50,300 $ (14,998) $ 66,251 $ 31,173 $ (13,344) =========== =========== =========== =========== =========== =========== =========== Income (loss) per share of common stock: Before redemption premium on preferred stock, extraordinary charge and cumulative effect of change in accounting for income taxes....................... $ .40 $ .31 $ .52 $ (.16) $ .79 $ .66 $ .01 Redemption premium on preferred stock............. -- -- -- -- -- (.25) -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Before extraordinary charge and cumulative effect of change in accounting for income taxes................ .40 .31 .52 (.16) .79 .41 .01 Extraordinary charge.......... -- -- (.02) -- (.03) (.03) (.11) Cumulative effect of change in accounting for income taxes....................... -- -- -- -- -- -- (.07) ----------- ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss)............. $ .40 $ .31 $ .50 $ (.16) $ .76 $ .38 $ (.17) =========== =========== =========== =========== =========== =========== =========== Shares used to compute per share amounts....................... 99,230,000 100,028,000 99,646,000 92,233,000 87,087,000 81,207,000 77,685,000 CONSOLIDATED BALANCE SHEET DATA: Total assets.................... $ 2,490,966 $ 2,524,904 $ 2,525,082 $ 2,506,461 $ 2,322,578 $ 2,000,804 $ 1,859,361 Current portion of long-term obligations................... $ 35,669 $ 37,710 $ 38,826 $ 84,639 $ 60,199 $ 43,125 $ 30,466 Long-term obligations, excluding current portion....................... $ 1,018,551 $ 1,076,462 $ 1,106,256 $ 1,066,909 $ 918,018 $ 706,917 $ 712,896 Stockholders' equity............ $ 890,717 $ 843,217 $ 861,095 $ 820,333 $ 827,244 $ 742,862 $ 593,505 OTHER DATA: Patient days.................... 11,173,000 11,902,000 23,670,000 25,297,000 26,766,000 29,041,000 29,341,000 Average occupancy percentage (based on licensed beds)...... 86.5% 87.3% 87.4% 88.1% 88.5% 88.5% 88.4% Number of nursing home beds..... 64,206 72,022 71,204 75,669 78,058 85,001 89,298
36 44 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of financial condition and results of operations for Beverly includes both the Remaining Healthcare Business and the Institutional Pharmacy Business. After the Distribution and the Merger, the financial condition and results of operations of New Beverly will not include those of the Institutional Pharmacy Business. The following discussion is based upon and should be read in conjunction with the Selected Historical Consolidated Financial Data, the Unaudited Pro Forma Condensed Consolidated Financial Statements and the historical consolidated financial statements of Beverly and the notes thereto, included elsewhere herein. GENERAL Healthcare system reform and concerns over rising Medicare and Medicaid costs continue to be high priorities for both federal and state governments. Although no comprehensive healthcare, Medicare or Medicaid reform legislation has yet been implemented, pressures to contain costs and the active discussions between the Clinton Administration, Congress and various other groups have impacted the healthcare delivery system. Many states are experimenting with alternatives to traditional Medicaid delivery systems through federal waiver programs, and efforts to provide these services more efficiently will continue to be a priority. In August 1996, Congress passed the Health Insurance Portability and Accountability Act of 1996 which, among other things, provides favorable changes in the tax treatment of long-term care insurance and allows inclusion of long-term care insurance in medical savings accounts. Although Beverly believes this legislation will have a favorable impact on the long-term care industry, the full effect is not readily determinable. There can be no assurances made as to the ultimate impact of this, or future healthcare reform legislation, on New Beverly's financial position, results of operations or cash flows. However, future federal budget legislation and regulatory changes may negatively impact New Beverly. During the first quarter of 1997, proposed rules were issued by the Health Care Financing Administration of the Department of Health and Human Services which, if implemented in their proposed form, would establish guidelines for maximum reimbursement to skilled nursing facilities for contracted speech and occupational therapy services, based on equivalent salary amounts for on-staff therapists. In addition, these proposed rules would revise the salary equivalency rules already in effect for physical therapy services. The full effect of the new rules is not readily determinable as the details of the proposal have not yet been finalized; however, New Beverly does not expect this will have a material adverse effect on its consolidated results of operations or cash flows. The federal government recently increased the minimum wage in two phases, beginning October 1, 1996 and September 1, 1997, respectively. This new legislation did not result in a material increase in Beverly's wage rates in 1996, and Beverly does not anticipate a material impact on its wage rates in 1997, because a substantial portion of Beverly's associates earn in excess of the new minimum wage levels; however, Beverly believes there may continue to be competitive pressures to increase the wage levels of associates earning above the new minimum wage. The effect of the new minimum wage on New Beverly's future operations is not expected to be material as New Beverly believes that a significant portion of such increase will be reimbursed through Medicare and Medicaid rate increases. New Beverly's future operating performance will be affected by the issues facing the long-term healthcare industry as a whole, including the maintenance of occupancy, its ability to continue to expand higher margin businesses, the availability of nursing, therapy and other personnel, the adequacy of funding of governmental reimbursement programs, the demand for nursing home care and the nature of any healthcare reform measures that may be taken by the federal government, as discussed above, as well as by any state governments. New Beverly's ability to control costs, including its wages and related expenses which continue to rise and will represent the largest component of New Beverly's operating and administrative expenses, will also significantly impact its future operating results. As a general matter, increases in operating costs of New Beverly will result in higher patient rates under Medicaid programs in subsequent periods. However, New Beverly's results of operations will continue to be affected by the time lag in most states between increases in reimbursable costs and the receipt of related 37 45 reimbursement rate increases. Medicaid rate increases, adjusted for inflation, are generally based upon changes in costs for a full calendar year period. The time lag before such costs are reflected in permitted rates varies from state to state, with a substantial portion of the increases taking effect up to 18 months after the related cost increases. OPERATING RESULTS Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Beverly's net income was $39,433,000 for the six months ended June 30, 1997, as compared to $30,691,000 for the same period in 1996. Beverly's income before provision for income taxes was $65,722,000 for the six months ended June 30, 1997, as compared to $51,152,000 for the same period in 1996. Beverly's estimated annual effective tax rate of 40% for 1997 and 1996 was different than the federal statutory rate primarily due to the impact of state income taxes and amortization of nondeductible goodwill. Excluding the Institutional Pharmacy Business, net income for the six months ended June 30, 1997 would have been $23,318,000 as compared to $18,960,000 for the same period in 1996. Income before provision for income taxes for the six months ended June 30, 1997, excluding the Institutional Pharmacy Business, would have been $38,186,000, as compared to $30,940,000 for the same period in 1996. Excluding the Institutional Pharmacy Business, Beverly's estimated annual effective tax rate for the six months ended June 30, 1997 and 1996 would have been 38.9% and 38.7%, respectively. Beverly's net operating revenues and operating and administrative costs increased approximately $24,800,000 and $7,700,000, respectively, for the six months ended June 30, 1997, as compared to the same period in 1996. These increases consist of the following: increases in net operating revenues and operating and administrative costs of approximately $72,800,000 and $51,900,000, respectively, for facilities which Beverly operated during each of the six-month periods ended June 30, 1997 and 1996 ("same facility operations"); increases in net operating revenues and operating and administrative costs of approximately $42,200,000 and $37,300,000, respectively, related to the acquisitions of eight nursing facilities in 1996, as well as certain pharmacy, hospice and outpatient therapy businesses acquired in 1996 and 1997; partially offset by decreases in net operating revenues and operating and administrative costs of approximately $90,200,000 and $81,500,000, respectively, due to the disposition of, or lease terminations on, 59 nursing facilities in 1997 and 83 nursing facilities and Beverly's MedView Services unit ("MedView") in 1996. Excluding the Institutional Pharmacy Business, net operating revenues would have decreased approximately $16,000,000 for the six months ended June 30, 1997, as compared to the same period in 1996. This decrease consisted of the following: a decrease of approximately $90,200,000 due to certain dispositions, as noted above; partially offset by increases of approximately $49,500,000 for same facility operations and increases of approximately $24,700,000 related to acquisitions of nursing facilities, hospices and outpatient therapy clinics. Excluding the Institutional Pharmacy Business, operating and administrative costs would have decreased approximately $23,500,000 for the six months ended June 30, 1997, as compared to the same period in 1996. This decrease consisted of the following: decreases of approximately $81,500,000 due to certain dispositions, as noted above; partially offset by increases of approximately $35,400,000 for same facility operations and increases of approximately $22,600,000 related to acquisitions of nursing facilities, hospices and outpatient therapy clinics. The increase in Beverly's net operating revenues for same facility operations for the six months ended June 30, 1997, as compared to the same period in 1996, was due to the following: approximately $56,800,000 due primarily to increases in room and board rates; approximately $23,400,000 due to increases in pharmacy-related revenues and approximately $4,500,000 due primarily to increases in ancillary revenues and various other items. These increases in Beverly's net operating revenues were partially offset by approximately $6,600,000 due to a decrease in same facility occupancy to 89.4% for the six months ended June 30, 1997, as compared to 90.0% for the same period in 1996 based on operational beds; and approximately $5,300,000 due to one less calendar day for the six months ended June 30, 1997, as compared to the same period in 1996. 38 46 Excluding the Institutional Pharmacy Business, the increase in net operating revenues for same facility operations for the six months ended June 30, 1997, as compared to the same period in 1996, was due to the following: approximately $56,800,000 due primarily to increases in room and board rates and approximately $4,600,000 due primarily to increases in ancillary revenues and various other items; partially offset by approximately $6,600,000 due to a decrease in same facility occupancy, and approximately $5,300,000 due to one less calendar day for the six months ended June 30, 1997, as compared to the same period in 1996. The increase in Beverly's operating and administrative costs for same facility operations for the six months ended June 30, 1997, as compared to the same period in 1996, was due to the following: approximately $31,900,000 due to increased wages and related expenses (excluding pharmacy) principally due to higher wages and greater benefits required to attract and retain qualified personnel, the hiring of therapists on staff as opposed to contracting for their services and increased staffing levels in Beverly's nursing facilities to cover increased patient acuity; approximately $17,000,000 due to increases in pharmacy-related costs; approximately $3,200,000 due to increases in nursing supplies and other variable costs; and approximately $15,500,000 due to various other items. These increases in Beverly's operating and administrative costs were partially offset by approximately $15,700,000 due to a decrease in contracted therapy expenses as a result of hiring therapists on staff as opposed to contracting for their services. Excluding the Institutional Pharmacy Business, the increase in operating and administrative costs for same facility operations for the six months ended June 30, 1997, as compared to the same period in 1996, was due to the following: approximately $31,900,000 due to increased wages and related expenses; approximately $3,200,000 due to increases in nursing supplies and other variable costs; and approximately $16,000,000 due to various other items; partially offset by approximately $15,700,000 due to a decrease in contracted therapy expenses. Beverly's interest expense decreased approximately $1,400,000 as compared to the same period in 1996 primarily due to repayments of the term loan and revolver borrowings under Beverly's 1994 Credit Agreement, the term loan under Beverly's 1992 Credit Facility and the Nippon Term Loan during late 1996 with the proceeds from a new credit facility. The increase in Beverly's depreciation and amortization expense of approximately $3,800,000 as compared to the same period in 1996, was affected by the following: approximately $6,300,000 increase primarily due to capital additions and improvements, as well as, acquisitions; partially offset by a decrease of approximately $2,500,000 related to the disposition of, or lease terminations on, certain nursing facilities and MedView. The Institutional Pharmacy Business had an immaterial effect on the change in interest expense for the six months ended June 30, 1997, as compared to the same period in 1996. Excluding the Institutional Pharmacy Business, depreciation and amortization expense increased approximately $1,700,000 for the six months ended June 30, 1997, as compared to the same period in 1996. Such increase was due to the following: approximately $4,200,000 increase primarily due to capital additions and improvements, as well as, acquisitions; partially offset by a decrease of approximately $2,500,000 related to the disposition of, or lease terminations on, certain nursing facilities and MedView. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which is required to be adopted in financial statements for periods ending after December 15, 1997. At that time, New Beverly will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, primary earnings per share will be renamed basic earnings per share and will exclude the dilutive effect of stock options. The impact is not expected to result in a change in New Beverly's primary earnings per share or fully diluted earnings per share (which will be renamed dilutive earnings per share) for the six-month periods ended June 30, 1997 and 1996. 1996 Compared to 1995 Beverly's net income was $50,300,000 for the year ended December 31, 1996, as compared to a net loss of $8,123,000 for the same period in 1995. Beverly's net income for 1996 included a $1,726,000 extraordinary charge, net of income taxes, related to the write-off of unamortized deferred financing costs related to certain 39 47 refinanced debt. Beverly's net loss for 1995 included a pre-tax charge of $100,277,000 for impaired long-lived assets related primarily to the adoption of SFAS No. 121 (as defined below) and the write-off of software and business development costs, as well as a charge of $4,000,000 related to an overhead and staff reduction program implemented during the fourth quarter of 1995. Excluding the Institutional Pharmacy Business, net income for the year ended December 31, 1996 would have been $31,739,000 as compared to a net loss of $12,709,000 for the same period in 1995. Excluding the Institutional Pharmacy Business, the net loss for 1995 would have included a pre-tax charge of $90,734,000 for impaired long-lived assets related primarily to the adoption of SFAS No. 121 and the write-off of software costs as well as the $4,000,000 overhead and staff reduction charge, as mentioned above. Beverly had an annual effective tax rate of 59% for the year ended December 31, 1996, compared to a negative annual effective tax rate of 32% for the same period in 1995. Beverly's annual effective tax rate in 1996 was different than the federal statutory rate primarily due to the impact of nondeductible goodwill associated with the sale of MedView. In addition, Beverly's annual effective tax rate in 1995 was different than the federal statutory rate primarily due to the impact of nondeductible goodwill included in the adjustments resulting from the adoption of SFAS No. 121. At December 31, 1996, Beverly had general business tax credit carryforwards of $12,236,000 for income tax purposes which expire in years 2005 through 2011. For financial reporting purposes, the general business tax credit carryforwards have been utilized to offset existing net taxable temporary differences reversing during the carryforward periods. Excluding the Institutional Pharmacy Business, Beverly would have had an annual effective tax rate of 64.9% for the year ended December 31, 1996, as compared to an annual effective tax rate of 24% for the same period in 1995. Beverly's net operating revenues increased approximately $38,600,000 for the year ended December 31, 1996, as compared to the same period in 1995. This increase consisted of the following: increases of approximately $62,300,000 for facilities which Beverly operated during each of the years ended December 31, 1996 and 1995 ("same facility operations"); increases of approximately $91,700,000 related to the acquisition of Pharmacy Management Services, Inc. ("PMSI") in mid-1995, acquisitions of eight nursing facilities, and certain pharmacy, hospice and outpatient therapy businesses during 1996 and the expanded operations of American Transitional Hospitals, Inc. ("ATH"); partially offset by decreases of approximately $115,400,000 due to the disposition of, or lease terminations on, 83 nursing facilities and MedView in 1996 and 29 nursing facilities in 1995. Beverly's operating and administrative costs decreased approximately $1,900,000 for the year ended December 31, 1996, as compared to the same period in 1995. This decrease consisted of the following: decreases of approximately $114,200,000 due to the disposition of, or lease terminations on, 83 nursing facilities and MedView in 1996 and 29 nursing facilities in 1995; offset by increases of approximately $39,000,000 for same facility operations and increases of approximately $73,300,000 related to the acquisition of PMSI in mid-1995, acquisitions of eight nursing facilities, and certain pharmacy, hospice and outpatient therapy businesses during 1996 and the expanded operations of ATH. Excluding the Institutional Pharmacy Business, net operating revenues would have decreased approximately $18,000,000 for the year ended December 31, 1996, as compared to the same period in 1995. This decrease consisted of the following: a decrease of approximately $115,400,000 due to certain dispositions, as noted above; partially offset by increases of approximately $57,800,000 for same facility operations; and increases of approximately $39,600,000 related to acquisitions of nursing facilities, hospices and outpatient therapy clinics, the acquisition of MedView in mid-1995 and the expanded operations of ATH. Excluding the Institutional Pharmacy Business, operating and administrative costs would have decreased approximately $40,500,000 for the year ended December 31, 1996, as compared to the same period in 1995. This decrease consisted of the following: decreases of approximately $114,200,000 due to certain dispositions, as noted above; partially offset by increases of approximately $39,500,000 for same facility operations and increases of approximately $34,200,000 related to acquisitions of nursing facilities, hospices and outpatient therapy clinics, the acquisition of MedView in mid-1995 and the expanded operations of ATH. The increase in Beverly's net operating revenues for same facility operations for the year ended December 31, 1996, as compared to the same period in 1995, was due to the following: approximately 40 48 $110,500,000 due primarily to increases in room and board rates; and approximately $5,600,000 due to one additional calendar day for the year ended December 31, 1996, as compared to the same period in 1995. These increases in Beverly's net operating revenues were partially offset by approximately $28,500,000 due to a decrease in same facility occupancy to 87.7% for the year ended December 31, 1996, as compared to 88.9% for the same period in 1995; approximately $19,700,000 due to decreases in ancillary revenues primarily due to Beverly's continuing efforts to bring therapists on staff as opposed to contracting for their services; and approximately $5,600,000 due to various other items. Excluding the Institutional Pharmacy Business, the increase in net operating revenues for same facility operations for the year ended December 31, 1996, as compared to the same period in 1995, was due to the following: approximately $110,500,000 due primarily to increases in room and board rates; and approximately $5,600,000 due to one additional calendar day for the year ended December 31, 1996, as compared to the same period in 1995. These increases in net operating revenues were partially offset by approximately $28,500,000 due to a decrease in same facility occupancy; approximately $19,700,000 due to a decrease in ancillary revenues primarily due to bringing therapists on staff; and approximately $10,100,000 due to various other items. The increase in Beverly's operating and administrative costs for same facility operations for the year ended December 31, 1996, as compared to the same period in 1995, was due to the following: approximately $109,000,000 due to increased wages and related expenses (excluding pharmacy) principally due to higher wages and greater benefits required to attract and retain qualified personnel, the hiring of therapists on staff as opposed to contracting for their services and increased staffing levels in Beverly's nursing facilities to cover increased patient acuity; approximately $8,300,000 due to increases in nursing supplies and other variable costs; and approximately $19,100,000 due to various other items. These increases in Beverly's operating and administrative costs were partially offset by approximately $93,400,000 due to a decrease in contracted therapy expenses as a result of hiring therapists on staff as opposed to contracting for their services; and approximately $4,000,000 due to an overhead and staff reduction program implemented during the fourth quarter of 1995. Excluding the Institutional Pharmacy Business, the increase in operating and administrative costs for same facility operations for the year ended December 31, 1996, as compared to the same period in 1995, was due to the following: approximately $109,000,000 due to increased wages and related expenses; approximately $8,300,000 due to increases in nursing supplies and other variable costs; and approximately $15,600,000 due to various other items. These increases in operating and administrative costs were partially offset by approximately $93,400,000 due to a decrease in contracted therapy expenses. Beverly's interest expense increased approximately $6,900,000 as compared to the same period in 1995 primarily due to the exchange of Preferred Stock into 5 1/2% Debentures in November 1995, the issuance and assumption of approximately $40,000,000 of long-term obligations in conjunction with certain acquisitions and the issuance of $25,000,000 of taxable revenue bonds during 1995, partially offset by a reduction of approximately $52,800,000 of long-term obligations in conjunction with the disposition of certain facilities. Although Beverly's depreciation and amortization expense increased only $1,900,000 as compared to the same period in 1995, it was affected by the following: approximately $5,800,000 increase primarily due to capital additions and improvements and, to a lesser extent, acquisitions; partially offset by a decrease of approximately $3,900,000 related to the disposition of, or lease terminations on, certain nursing facilities. The Institutional Pharmacy Business had an immaterial effect on the change in interest expense for the year ended December 31, 1996, as compared to the same period in 1995. Excluding the Institutional Pharmacy Business, depreciation and amortization expense decreased approximately $1,300,000 for the year ended December 31, 1996, as compared to the same period in 1995, primarily due to the disposition of, or lease terminations on certain nursing facilities, partially offset by an increase due to capital additions and improvements. 1995 Compared to 1994 Beverly's net loss was $8,123,000 for the year ended December 31, 1995, as compared to net income of $74,501,000 for the same period in 1994. Net loss for 1995 included a pre-tax charge of $100,277,000 for 41 49 impaired long-lived assets related primarily to the adoption of SFAS No. 121 (as defined below) and the write-off of software and business development costs, as well as a charge of $4,000,000 related to an overhead and staff reduction program implemented during the fourth quarter of 1995. Net income for 1994 included a $2,412,000 extraordinary charge, net of income taxes, related to the write-off of unamortized deferred financing costs related to certain refinanced debt. Excluding the Institutional Pharmacy Business, net loss for the year ended December 31, 1995 would have been $12,709,000 as compared to a net income of $61,855,000 for the same period in 1994. Excluding the Institutional Pharmacy Business, the net loss for 1995 would have included a pre-tax charge of $90,734,000 for impaired long-lived assets related primarily to the adoption of SFAS No. 121 and the write-off of software costs, as well as the $4,000,000 overhead and staff reduction charge, as mentioned above. In March 1995, the Financial Accounting Standards Board issued 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") which requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. In the fourth quarter of 1995, Beverly recorded an impairment loss of approximately $68,130,000 upon adoption of SFAS No. 121. Such loss primarily related to certain nursing facilities, transitional hospitals, institutional pharmacies and assisted living centers with current period operating losses. Such current period operating losses, combined with a history of operating losses and anticipated future operating losses, led management to believe that impairment existed at such facilities. In addition, there were certain nursing facilities for which management expected an adverse impact on future earnings and cash flows as a result of recent changes in state Medicaid reimbursement programs. Accordingly, management estimated the undiscounted future cash flows to be generated by each facility. If the undiscounted future cash flow estimates were less than the carrying value of the corresponding facility, management estimated the fair value of such facility and wrote the carrying value down to their estimate of fair value. Management calculated the fair value of the impaired facilities by using the present value of estimated future cash flows, or its best estimate of what such facility, or similar facilities in that state, would sell for in the open market. Management believes it has the knowledge to make such estimates of open market sales prices based on the volume of facilities Beverly has purchased and sold in previous years. In addition to the SFAS No. 121 charge, Beverly recorded a fourth quarter impairment loss for other long-lived assets of approximately $32,147,000 primarily related to the write-off of software and business development costs. During the fourth quarter of 1995, Beverly hired a new Senior Vice President of Information Technology, who redirected Beverly's systems development initiatives, causing a write-down, or a write-off, of certain software and software development projects. In addition, Beverly wrote off certain business development and other costs where Beverly believed the carrying amount was unrecoverable. The impairment loss recorded upon adoption of SFAS No. 121, excluding the Institutional Pharmacy Business, would have been approximately $62,738,000 and the impairment loss for other long-lived assets would have been approximately $27,996,000, excluding the Institutional Pharmacy Business. Beverly had a negative annual effective tax rate of 32% for the year ended December 31, 1995, compared to an annual effective tax rate of 33% for the same period in 1994. Beverly's annual effective tax rate in 1995 was different than the federal statutory rate primarily due to the impact of nondeductible goodwill included in the adjustments resulting from the adoption of SFAS No. 121. In addition, Beverly's 1994 annual effective tax rate was lower than the federal statutory rate primarily due to the utilization of certain tax credit carryforwards, partially offset by the impact of state income taxes. At December 31, 1995, Beverly had general business tax credit carryforwards of $20,784,000 for income tax purposes which expire in years 2005 through 2009. For financial reporting purposes, the general business tax credit carryforwards have been utilized to offset existing net taxable temporary differences reversing during the carryforward periods. Due to taxable losses in prior years, future taxable income was not assumed and a valuation allowance of $198,000 for the year ended December 31, 1994 was recognized to offset the deferred tax assets related to those carryforwards. Beverly's valuation allowance was eliminated in 1995 due to the utilization of general business tax credits. 42 50 Excluding the Institutional Pharmacy Business, Beverly would have had an annual effective tax rate of 24% for the year ended December 31, 1995, as compared to an annual effective tax rate of 30.8% for the same period in 1994. Beverly's net operating revenues and operating and administrative costs increased approximately $259,300,000 and $245,300,000, respectively, for the year ended December 31, 1995, as compared to the same period in 1994. These increases consist of the following: increases in net operating revenues and operating and administrative costs for facilities which Beverly operated during each of the years ended December 31, 1995 and 1994 ("same facility operations") of approximately $157,600,000 and $148,900,000, respectively; increases in net operating revenues and operating and administrative costs of approximately $239,500,000 and $222,400,000, respectively, related to the expanded operations of ATH and the acquisitions of Insta-Care Holdings, Inc. ("Insta-Care") and Synetic, Inc. ("Synetic") in late 1994 as well as PMSI in mid-1995; and decreases in net operating revenues and operating and administrative costs of approximately $137,800,000 and $126,000,000, respectively, due to the disposition of, or lease terminations on, 29 facilities in 1995 and 77 facilities in 1994. Excluding the Institutional Pharmacy Business, net operating revenues and operating and administrative costs would have increased approximately $51,900,000 and $39,900,000, respectively, for the year ended December 31, 1995, as compared to the same period in 1994. These increases consist of the following: increases in net operating revenues and operating and administrative costs of $139,900,000 and $127,600,000 for same facility operations, respectively; increases in net operating revenues and operating and administrative costs of approximately $49,800,000 and $38,300,000, respectively, related to the acquisition of MedView in mid-1995 and the expanded operations of ATH; and decreases in net operating revenues and operating and administrative costs of approximately $137,800,000 and $126,000,000, respectively, due to certain dispositions, as noted above. The increase in Beverly's net operating revenues for same facility operations for the year ended December 31, 1995, as compared to the same period in 1994, was due to the following: approximately $111,800,000 due primarily to increases in Medicaid room and board rates, and to a lesser extent, private and Medicare room and board rates; approximately $37,500,000 due primarily to increases in pharmacy-related revenues; approximately $23,000,000 due to increased ancillary revenues as a result of providing additional ancillary services to Beverly's Medicare and private-pay patients; and approximately $8,300,000 due to various other items. These increases in Beverly's net operating revenues were partially offset by approximately $23,000,000 due to a decrease in same facility occupancy to 88.5% for the year ended December 31, 1995, as compared to 89.5% for the same period in 1994. Excluding the Institutional Pharmacy Business, the increase in net operating revenues for same facility operations for the year ended December 31, 1995, as compared to the same period in 1994, was due to the following: approximately $111,800,000 due primarily to increases in room and board rates; approximately $23,000,000 due to increased ancillary revenues; and approximately $28,100,000 due to various other items. These increases in net operating revenues were partially offset by approximately $23,000,000 due to a decrease in same facility occupancy. The increase in Beverly's operating and administrative costs for same facility operations for the year ended December 31, 1995, as compared to the same period in 1994, was due to the following: approximately $125,700,000 due to increased wages and related expenses (excluding pharmacy) principally due to higher wages and greater benefits required to attract and retain qualified personnel, the hiring of therapists on staff as opposed to contracting for their services and increased staffing levels in Beverly's nursing facilities to cover increased patient acuity; approximately $4,000,000 due to an overhead and staff reduction program implemented during the fourth quarter of 1995; approximately $38,100,000 due to increases in nursing supplies and other variable costs; and approximately $38,800,000 due primarily to increases in pharmacy-related costs and various other items. These increases in Beverly's operating and administrative costs were partially offset by approximately $57,700,000 due to a decrease in contracted therapy expenses as a result of hiring therapists on staff as opposed to contracting for their services. 43 51 Excluding the Institutional Pharmacy Business, the increase in operating and administrative costs for same facility operations for the year ended December 31, 1995, as compared to the same period in 1994, was due to the following: approximately $125,700,000 due to increased wages and related expenses; approximately $4,000,000 due to the overhead and staff reduction program discussed above; approximately $38,100,000 due to increases in nursing supplies and other variable costs; and approximately $17,500,000 due to various other items. These increases in operating and administrative costs were partially offset by approximately $57,700,000 due to a decrease in contracted therapy expenses. Beverly's interest expense increased approximately $19,500,000 as compared to the same period in 1994 primarily due to additional interest related to the issuance of approximately $308,000,000 of long-term obligations during late 1994 and in 1995 primarily in conjunction with certain acquisitions. Beverly's depreciation and amortization expense increased approximately $14,800,000 as compared to the same period in 1994 primarily due to acquisitions, capital additions and improvements and the opening of newly constructed facilities, partially offset by a decrease due to the dispositions of, or lease terminations on, certain facilities. The Institutional Pharmacy Business had no effect on the increase in interest expense for the year ended December 31, 1995, as compared to the same period in 1994. Excluding the Institutional Pharmacy Business, depreciation and amortization expense increased approximately $7,400,000 for the year ended December 31,1995, as compared to the same period in 1994 primarily due to capital additions and improvements and the opening of newly constructed facilities, partially offset by a decrease due to the dispositions of, or lease terminations on, certain facilities. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, Beverly had approximately $71,800,000 in cash and cash equivalents and net working capital of approximately $330,200,000. Beverly anticipates that approximately $42,700,000 of its existing cash at June 30, 1997, while not legally restricted, will be utilized to fund certain workers' compensation and general liability claims, and Beverly does not expect to use such cash for other purposes. Beverly had approximately $249,200,000 of unused commitments under its Existing Credit Facility as of June 30, 1997. Excluding the Institutional Pharmacy Business, cash and cash equivalents were approximately $65,100,000 and net working capital was approximately $222,100,000 as of June 30, 1997. Beverly's net cash provided by operating activities for the six months ended June 30, 1997 was approximately $61,500,000, an increase of approximately $4,500,000 from the prior year. Beverly's net cash provided by investing activities and net cash used for financing activities were approximately $42,900,000 and $102,400,000, respectively, for the six months ended June 30, 1997. Beverly primarily used cash generated from operations to fund capital expenditures totaling approximately $70,300,000. Beverly received net cash proceeds of approximately $143,400,000 from the dispositions of facilities and other assets and approximately $18,400,000 from collections on notes receivable and Beverly's REMIC investment. Such net cash proceeds were used to fund acquisitions of approximately $45,400,000, to repay approximately $28,200,000 of long-term obligations, to repurchase shares of Beverly Common Stock, and to repay borrowings under its Existing Credit Facility. Excluding the Institutional Pharmacy Business, net cash provided by operating activities for the six months ended June 30, 1997 was approximately $49,200,000, an increase of approximately $8,600,000 from the prior year. Net cash provided by investing activities and net cash used for financing activities, excluding the Institutional Pharmacy Business, were approximately $76,100,000 and $101,900,000, respectively, for the six months ended June 30, 1997. Excluding the Institutional Pharmacy Business, cash from operations were used to fund capital expenditures totalling approximately $64,700,000. Excluding the Institutional Pharmacy Business, net cash proceeds of approximately $143,400,000 from the dispositions of facilities and other assets and approximately $17,800,000 from collections on notes receivable and Beverly's REMIC investment were used to fund acquisitions of approximately $17,800,000, to repay approximately $27,700,000 of long-term obligations, to repurchase shares of Beverly Common Stock, and to repay borrowings under its Existing Credit Facility. 44 52 In April 1997, Beverly entered into a definitive agreement with Capstone to combine PCA with Capstone to create one of the nation's largest independent institutional pharmacy companies. Beverly will receive approximately $275,000,000 of cash as partial repayment for PCA's intercompany debt, with any remaining intercompany balance contributed to PCA's capital. Beverly intends to use the $275,000,000 to repay Revolver borrowings, to pay off the 7 5/8% Debentures, to pay off the 8.75% Notes, to repay certain other notes and mortgages and for general corporate purposes. Pursuant to the Merger Agreement, at the Effective Time, each share of Beverly Common Stock issued and outstanding immediately prior to the Effective Time (other than fractional shares) will be converted into the right to receive that number of newly issued shares of Capstone Common Stock equal to the quotient, expressed to four decimal places, of (a) 50,000,000 divided by (b) the number of shares of Beverly Common Stock outstanding immediately prior to the Effective Time. The Merger, which is subject to approvals by the stockholders of both Beverly and Capstone, completion of the Distribution (as discussed below), and approvals by various government agencies, is expected to close by year-end. In connection with the restructuring, Beverly will transfer all of its non-PCA assets and liabilities to New Beverly, in exchange for the issuance of New Beverly Common Stock. Beverly will then distribute such New Beverly Common Stock to the holders of Beverly's Common Stock on a one-for-one basis. In connection with the Distribution, Beverly will be required to restructure, repay or otherwise renegotiate substantially all of its outstanding debt instruments and renegotiate or make certain payments under various employment agreements with officers of Beverly. Beverly estimates that the costs of such undertakings will approximate $10,200,000 as it relates to restructuring, repaying or renegotiating debt instruments and approximately $17,000,000 as it relates to renegotiating or paying certain amounts under various employment agreements. It is expected that such amounts, along with other transaction costs, will be funded with a portion of the $275,000,000 proceeds to be received as a partial repayment of PCA's intercompany debt, as discussed above. For additional information with respect to material debt instruments of Beverly which affect the liquidity and capital resources of both Beverly and New Beverly, and Beverly's current intentions with respect thereto in order to satisfy its covenants under the Merger Agreement, see "Treatment of Beverly Indebtedness." On July 17, 1997, Beverly called its 5 1/2% Debentures for redemption on August 18, 1997. A total of $149,162,550 of the $150 million aggregate principal amount outstanding was converted to 11,189,924 shares of Beverly Common Stock, increasing the outstanding shares of Beverly Common Stock by that amount. The payment of the redemption price of 103.3% of the remaining principal amount plus the cash in lieu of fractional shares was within the amount permitted under the restrictive payment provisions of the 9% Indenture. Beverly believes that its existing cash and cash equivalents, working capital from operations, borrowings under its banking arrangements, issuance of certain debt securities and refinancings of certain existing indebtedness will be adequate to repay its debts due within one year of approximately $35,700,000 (including scheduled sinking fund redemption requirements with respect to Beverly's 7 5/8% Debentures, which may be funded in whole or in part from time to time through open market purchases of such debentures), to make normal recurring capital additions and improvements of approximately $138,000,000, to make selective acquisitions, including the purchase of previously leased facilities, to construct new facilities, and to meet working capital requirements for the twelve months ending June 30, 1998. As of June 30, 1997, Beverly had total indebtedness of approximately $1,054,200,000 and total stockholders' equity of approximately $890,700,000. On a pro forma basis, as of June 30, 1997, after giving effect to the Merger, the Distribution and all transactions contemplated thereby, as described in the section captioned "Capitalization," above, New Beverly would have total indebtedness of approximately $685,300,000 and stockholders' equity of approximately $835,700,000. The ability of Beverly, or New Beverly, to satisfy its long-term obligations will be dependent upon its future performance, which will be subject to prevailing economic conditions and to financial, business and other factors beyond Beverly's, or New Beverly's, control, such as federal and state healthcare reform. In addition, healthcare service providers operate in an industry that is currently subject to significant changes from business combinations, new strategic alliances, legislative reform, increased regulatory oversight, aggressive marketing practices by competitors and market pressures. In this environment, Beverly is, and it is expected that New Beverly will be, frequently contacted by, and 45 53 otherwise engage in discussions with, other healthcare companies and financial advisors regarding possible strategic alliances, joint ventures, business combinations and other financial alternatives. The terms of substantially all of New Beverly's debt instruments will require New Beverly to repay or refinance indebtedness under such debt instruments in the event of a change of control. There can be no assurance that New Beverly will have the financial resources to repay such indebtedness upon a change of control. See " -- General." Following the Distribution and Merger, New Beverly believes that its cash and cash equivalents, working capital from operations, borrowings under its banking arrangements, issuance of certain debt securities and refinancings of certain existing indebtedness will be adequate to repay its debts due within one year, to make normal recurring capital additions and improvements, to make selective acquisitions, including the purchase of previously leased facilities, to construct new facilities and to meet working capital requirements. On a pro forma basis, as of June 30, 1997, New Beverly would have debts due within one year of approximately $24,100,000 and normal recurring capital additions and improvements for the twelve months ending June 30, 1998 of approximately $118,000,000. BUSINESS GENERAL References herein to Beverly include Beverly Enterprises, Inc. and its wholly-owned subsidiaries. References herein to New Beverly are to the Remaining Healthcare Business after the consummation of the Transactions. Immediately following the completion of the Transactions, New Beverly will change its name to Beverly Enterprises, Inc. The business of Beverly consists principally of providing long-term healthcare, including the operation of nursing facilities, acute long-term transitional hospitals, institutional and mail service pharmacies, rehabilitation therapy services, outpatient therapy clinics, assisted living centers, hospices and home healthcare centers. The business of New Beverly will consist of all of the operations of Beverly except the institutional and mail service pharmacies. Beverly is, and New Beverly is expected to be one of the largest operators of nursing facilities in the United States. At June 30, 1997, Beverly operated 574 nursing facilities with 64,206 licensed beds. The facilities are located in 31 states and the District of Columbia, and range in capacity from 20 to 355 beds. At June 30, 1997, Beverly also operated 74 pharmacies, 33 assisted living centers containing 897 units, 12 transitional hospitals containing 639 beds, 46 outpatient therapy clinics, 21 hospices and six home healthcare centers. It is expected that New Beverly will operate all of such businesses after the Transactions, except for the 74 pharmacies. Beverly's facilities had average occupancy of 86.5% for the six months ended June 30, 1997 and 87.4%, 88.1% and 88.5% during the years ended December 31, 1996, 1995 and 1994, respectively. See "Properties" below. Healthcare service providers, such as Beverly, and after the Transactions New Beverly, operate in an industry that is subject to significant changes from business combinations, new strategic alliances, legislative reform, aggressive marketing practices by competitors and market pressures. In this environment, Beverly is, and it is expected that New Beverly will be frequently contacted by, and otherwise engage in discussions with, other healthcare companies and financial advisors regarding possible strategic alliances, joint ventures, business combinations and other financial alternatives. OPERATIONS New Beverly will be organized into three operating units, which will support New Beverly's delivery of vertically integrated services to the long-term healthcare market. These operating units include: (i) Beverly Health and Rehabilitation Services, Inc. ("BHRS") and its subsidiaries provide long-term and subacute care through the operation of nursing facilities and assisted living centers; (ii) Spectra Rehab Alliance, Inc. ("Spectra") and its subsidiaries operate outpatient therapy clinics, and hospices and manage Beverly's rehabilitation services business; and (iii) ATH and its subsidiaries operate Beverly's transitional hospitals. 46 54 Each operating unit will be headed by a President who will be a senior officer of New Beverly and will report directly to the President of New Beverly. Each of the three operating units will also have a separate Board of Directors consisting of four senior executives of New Beverly and the President of the unit. Long-Term Care. BHRS's nursing facilities provide, and BHRS will continue to provide residents with routine long-term care services, including daily dietary, social and recreational services and a full range of pharmacy services and medical supplies. BHRS's highly skilled staff also offers complex and intensive medical services to patients with higher acuity disorders outside the traditional acute care hospital setting. Rehabilitation Therapies. Spectra has developed, and will continue to develop and expand New Beverly's healthcare expertise in rehabilitation and provide skilled rehabilitation (occupational, physical, speech and respiratory) therapies in substantially all of BHRS's nursing facilities. Through Spectra, Beverly offers, and New Beverly will offer, industrial rehabilitation, outpatient therapy clinics, acute hospital therapy contracts, management/consulting rehabilitation programs and hospice programs within Beverly's, and after the Transactions New Beverly's, network of facilities, and to other healthcare providers. Transitional Care. ATH operates, and will continue to operate, transitional hospitals which address the needs of patients requiring intense therapy regimens, but not necessarily the breadth of services provided within traditional acute care hospitals. The typical ATH patient requires an average of six hours of nursing care per day for 30 to 45 days. Other Services. Beverly offers, and New Beverly will offer, other healthcare related services to payors and patients, including assisted living and home healthcare services, and information and referral systems that link payors and employees to long-term care providers. Pharmacy Services. PCA is one of the nation's largest institutional pharmacies delivering drugs and related products and services, infusion therapy and other healthcare products (enteral and urological) to nursing facilities, acute care and transitional care hospitals, home care providers, psychiatric facilities, correctional facilities, assisted living centers, retirement homes and their patients. PCA also provides consultant pharmacist services, which include evaluations of patient drug therapy, and drug handling, distribution and administration within a nursing facility as well as assistance with state and federal regulatory compliance. PCA's mail service pharmacy delivers drugs and medical equipment to workers' compensation payors, claimants and employers. Pursuant to the Merger Agreement and the Distribution Agreement, the Remaining Healthcare Business of Beverly will be transferred to New Beverly and the Institutional Pharmacy Business, operated by PCA, which will be the sole remaining business of Beverly, will be merged with and into Capstone. See "The Distribution" herein and "The Merger Agreement" in the Joint Proxy Statement/Prospectus. Beverly has, and New Beverly will have, a Quality Management ("QM") program to help ensure that high quality care is provided in each of its nursing, transitional and outpatient facilities. Beverly's QM program has been a key factor in helping Beverly to exceed the industry's nationwide average compliance statistics, as determined by the Health Care Financing Administration of the Department of Health and Human Services ("HCFA"). Beverly's nationwide QM network of healthcare professionals includes physician Medical Directors, registered nurses, dieticians, social workers and other specialists who work in conjunction with regional and facility based QM professionals. Facility based QM is structured through Beverly's Quality Assessment and Assurance committee. With a philosophy of quality improvement, Beverly-wide clinical indicators are utilized as a database to set goals and monitor thresholds in critical areas directly related to the delivery of healthcare related services. These internal evaluations are used by local quality improvement teams, which include QM advisors, to identify and correct possible problems. The Senior Vice President of QM reports directly to the President of Beverly and the QM Committee of Beverly's Board of Directors, and will report directly to the President of New Beverly and the QM Committee of New Beverly's Board of Directors. 47 55 GOVERNMENTAL REGULATION AND REIMBURSEMENT Beverly's nursing facilities are, and New Beverly's nursing facilities will be, subject to compliance with various federal, state and local healthcare statutes and regulations. Compliance with state licensing requirements imposed upon all healthcare facilities is a prerequisite for the operation of the facilities and for participation in government-sponsored healthcare funding programs, such as Medicaid and Medicare. Medicaid is a medical assistance program for the indigent, operated by individual states with the financial participation of the federal government. Medicare is a health insurance program for the aged and certain other chronically disabled individuals, operated by the federal government. Changes in the reimbursement policies of such funding programs as a result of budget cuts by federal and state governments or other legislative and regulatory actions could have a material adverse effect on Beverly's and New Beverly's financial position, results of operations and cash flows. Beverly receives, and New Beverly will receive, payments for services rendered to patients from (a) each of the states in which its nursing facilities are located under the Medicaid program; (b) the federal government under the Medicare program; and (c)private payors, including commercial insurers and managed care payors, and Veterans Administration ("VA"). The following table sets forth: (i) patient days derived from the indicated sources of payment as a percentage of total patient days, (ii) room and board revenues derived from the indicated sources of payment as a percentage of net operating revenues, and (iii) ancillary and other revenues derived from all sources of payment as a percentage of net operating revenues, for the periods indicated:
MEDICAID MEDICARE PRIVATE AND VA ------------------ ------------------ ------------------ ANCILLARY ROOM AND ROOM AND ROOM AND AND PATIENT BOARD PATIENT BOARD PATIENT BOARD OTHER DAYS REVENUES DAYS REVENUES DAYS REVENUES REVENUES ------- -------- ------- -------- ------- -------- --------- Six months ended: June 30, 1997................ 68% 40% 13% 13% 19% 15% 32% Year ended: December 31, 1996............ 69% 42% 12% 12% 19% 14% 32% December 31, 1995............ 68% 43% 12% 11% 20% 15% 31% December 31, 1994............ 68% 47% 12% 11% 20% 16% 26%
Excluding revenues from the Institutional Pharmacy Business, Medicaid, Medicare, Private and VA, and Ancillary and Other Revenues would have been 47%, 15%, 18% and 20%, respectively, as a percentage of net operating revenues for the six months ended June 30, 1997. Consistent with the long-term care industry in general, changes in the mix of Beverly's, or New Beverly's, patient population among the Medicaid, Medicare and private categories can significantly affect revenues and profitability. Although the level of cost reimbursement for Medicare patients typically generates the highest revenue per patient day, profitability is not proportionally increased due to the additional costs associated with the required higher level of nursing care and other services for such patients. In most states, private patients are the most profitable, and Medicaid patients are the least profitable. Beverly has experienced significant growth in ancillary revenues over the past several years. Ancillary revenues are derived from providing services to residents beyond room, board and custodial care and include occupational, physical, speech, respiratory and intravenous ("IV") therapy, as well as sales of pharmaceuticals and other services. Such services are currently provided primarily to Medicare and private pay patients, consistent with the trend in healthcare of providing a broader range of services in a lower cost setting, such as Beverly's nursing facilities. Beverly is pursuing, and New Beverly will continue to pursue, further growth of ancillary revenues, through acquisitions as well as internal expansion of specialty services such as rehabilitation. Due to Beverly's continuing efforts to bring therapists on staff as opposed to contracting for their services, and the corresponding reduction in costs, the overall rate of growth in ancillary revenues has been adversely impacted. Medicaid programs are currently in existence in all of the states in which Beverly currently, and New Beverly will, operate nursing facilities. While these programs differ in certain respects from state to state, they 48 56 are all subject to federally-imposed requirements, and at least 50% of the funds available under these programs are provided by the federal government under a matching program. Medicare and most state Medicaid programs utilize a cost-based reimbursement system for nursing facilities which reimburses facilities for the reasonable direct and indirect allowable costs incurred in providing routine patient care services (as defined by the programs) plus, in certain states, efficiency incentives or a return on equity, subject to certain cost ceilings. These costs normally include allowances for administrative and general costs as well as the costs of property and equipment (e.g. depreciation and interest, fair rental allowance or rental expense). In some states, cost-based reimbursement is subject to retrospective adjustment through cost report settlement. In other states, payments made to a facility on an interim basis that are subsequently determined to be less than or in excess of allowable costs may be adjusted through future payments to the affected facility and to other facilities owned by the same owner. State Medicaid reimbursement programs vary as to methodology used to determine the level of allowable costs which are reimbursed to operators. Arkansas, California, Louisiana and Texas provide for reimbursement at a flat daily rate, as determined by the responsible state agency. In all other states with a Medicaid program in which Beverly currently operates, and in which New Beverly will operate, payments are based upon facility-specific cost reimbursement formulas established by the applicable state. The Medicaid and Medicare programs each contain specific requirements which must be adhered to by healthcare facilities in order to qualify under the programs. Governmental funding for healthcare programs is subject to statutory and regulatory changes, administrative rulings, interpretations of policy, intermediary determinations and governmental funding restrictions, all of which may materially increase or decrease program reimbursement to healthcare facilities. Healthcare system reform and concerns over rising Medicare and Medicaid costs continue to be high priorities for both federal and state governments. Although no comprehensive healthcare, Medicare or Medicaid reform legislation has yet been implemented, pressures to contain costs and the active discussions between the Clinton Administration, Congress and various other groups have impacted the healthcare delivery system. Many states are experimenting with alternatives to traditional Medicaid delivery systems through federal waiver programs, and efforts to provide these services more efficiently will continue to be a priority. In August 1996, Congress passed the Health Insurance Portability and Accountability Act of 1996 which, among other things, provides favorable changes in the tax treatment of long-term care insurance and allows inclusion of long-term care insurance in medical savings accounts. Although Beverly believes this legislation will have a favorable impact on the long-term care industry, the full effect is not readily determinable. There can be no assurances made as to the ultimate impact of this, or future healthcare reform legislation, on Beverly's and New Beverly's financial position, results of operations or cash flows. However, future federal budget legislation and regulatory changes may negatively impact New Beverly. During the first quarter of 1997, proposed rules were issued by HCFA which, if implemented in their proposed form, would establish guidelines for maximum reimbursement to skilled nursing facilities for contracted speech and occupational therapy services based on equivalent salary amounts for on-staff therapists. In addition, these proposed rules would revise the salary equivalency rules currently in effect for physical therapy services. The full effect of the new rules is not readily determinable as the details of the proposal have not yet been finalized; however, New Beverly does not expect the new rules to have a material adverse effect on its consolidated results of operations or cash flows due to the fact that Beverly provides, and New Beverly will provide, the majority of its therapy services through on-staff therapists. In addition to the requirements to be met by nursing facilities for annual licensure renewal, healthcare facilities are subject to annual surveys and inspections in order to be certified for participation in the Medicare and Medicaid programs. In order to maintain their operator's licenses and their certification for participation in Medicare and Medicaid programs, the nursing facilities must meet certain statutory and administrative requirements. These requirements relate to the condition of the facilities and the adequacy and condition of the equipment used therein, the quality and adequacy of personnel, and the quality of medical care. Such requirements are subject to change. There can be no assurance that, in the future, New Beverly will be able to 49 57 maintain such licenses for its facilities or that New Beverly will not be required to expend significant sums in order to do so. HCFA adopted survey, certification and enforcement procedures by regulations effective July 1, 1995 to implement the Medicare and Medicaid provisions of the Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987") governing survey, certification and enforcement of the requirements for contract participation by skilled nursing facilities under Medicare and nursing facilities under Medicaid. Among the provisions that HCFA has adopted are requirements that (i) surveys focus on residents' outcomes; (ii) all deviations from the participation requirements will be considered deficiencies, but that all deficiencies will not constitute noncompliance; and (iii) certain types of deficiencies must result in the imposition of a sanction. The regulations also identify alternative remedies and specify the categories of deficiencies for which they will be applied. These remedies include: temporary management; denial of payment for new admissions; denial of payment for all residents; civil money penalties of $50 to $10,000 per day of violation; closure of facility and/or transfer of residents in emergencies; directed plans of correction; and directed in service training. The regulations also specify under what circumstances alternative enforcement remedies or termination, or both, will be imposed on facilities which are not in compliance with the participation requirements. Beverly has undertaken an analysis of the procedures in respect of its programs and facilities covered by the final HCFA regulations. While Beverly is unable to predict with total accuracy the degree to which its programs and facilities will be determined to be in compliance with regulations, compliance data for the past year is available. Results of HCFA surveys for the past year determined that approximately 96% of Beverly's facilities were in compliance with the HCFA criteria. HCFA reports have determined that of the non-Beverly facilities surveyed nationally, approximately 95% of such facilities were determined to be in compliance with such HCFA criteria. Although New Beverly could be adversely affected if a substantial portion of its programs or facilities were eventually determined not to be in compliance with the HCFA regulations, New Beverly believes its programs and facilities generally exceed industry standards. Beverly believes that its facilities are in substantial compliance with the various Medicaid and Medicare regulatory requirements currently applicable to them. In the ordinary course of its business, however, Beverly receives notices of deficiencies for failure to comply with various regulatory requirements. Beverly reviews such notices and takes appropriate corrective action. In most cases, Beverly and the reviewing agency will agree upon the steps to be taken to bring the facility into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take a number of adverse actions against a facility. These adverse actions can include the imposition of fines, temporary suspension of admission of new patients to the facility, decertification from participation in the Medicaid or Medicare programs and, in extreme circumstances, revocation of a facility's license. The Medicaid and Medicare programs provide criminal penalties for entities that knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business that is reimbursed under these programs. The illegal remuneration provisions of the Social Security Act, also known as the "anti-kickback" statute, prohibit the payment or receipt of remuneration intended to induce the purchasing, leasing, ordering or arranging for any good, facility, service or item paid by Medicaid or Medicare programs. The violation of the illegal remuneration provisions is a felony and can result in the imposition of fines of up to $25,000 per occurrence. In addition, certain states in which Beverly's facilities are located, and in which New Beverly facilities will be located, have enacted statutes which prohibit the payment of kickbacks, bribes and rebates for the referral of patients. The Medicare program has published certain "Safe Harbor" regulations which describe various criteria and guidelines for transactions which are deemed to be in compliance with the anti- remuneration provisions. Although Beverly has, and New Beverly will have, contractual arrangements with some healthcare providers, management believes it is in compliance with the anti-kickback statute and other provisions of the Social Security Act and with the applicable state statutes. However, there can be no assurance that government officials responsible for enforcing these statutes will not assert that New Beverly or certain transactions in which it is involved are in violation of these statutes. The Social Security Act also imposes criminal and civil penalties for making false claims to the Medicaid and Medicare programs for services not rendered or for misrepresenting actual services rendered in order to obtain higher reimbursement. 50 58 The Medicare and Medicaid programs also provide for the mandatory and/or permissive exclusion of providers of services who are convicted of certain offenses or who have been found to have violated certain laws or regulations. In certain circumstances, conviction of abusive or fraudulent behavior with respect to one facility may subject other facilities under common control or ownership to disqualification from participation in Medicaid and Medicare programs. In addition, some federal and state regulations provide that all facilities under common control or ownership licensed to do business within a state are subject to delicensure if any one or more of such facilities is delicensed. While federal regulations do not provide states with grounds to curtail funding of their Medicaid cost reimbursement programs due to state budget deficiencies, states have nevertheless curtailed funding in such circumstances in the past. No assurance can be given that states will not do so in the future or that the future funding of Medicaid programs will remain at levels comparable to the present levels. The United States Supreme Court ruled in 1990 that healthcare providers may bring suit in federal court to enforce the Medicaid Act requirement that the states reimburse nursing facilities at rates which are reasonable and adequate. Nursing facility operators, such as Beverly, and New Beverly after the Transactions, have utilized and should continue to be able to utilize the federal courts to require states to comply with their legal obligation to adequately fund Medicaid programs. However, certain of the legislative proposals discussed above contain provisions which would repeal the provisions of the Medicaid Acts which require states to pay reasonable and adequate rates and which would also eliminate the right to judicial review of certain aspects of the reimbursement systems of state Medicaid programs; therefore, there can be no assurance that nursing facility operators will be able to utilize federal courts for such purposes in the future. COMPETITION The long-term care industry is highly competitive. Beverly's competitive position has varied, and New Beverly's competitive position will vary, from facility to facility, from community to community and from state to state. Some of the significant competitive factors for the placing of patients in a nursing facility include quality of care, reputation, physical appearance of facilities, services offered, family preferences, location, physician services and price. New Beverly's operations will compete with services provided by nursing facilities, acute care hospitals, subacute facilities, transitional hospitals, rehabilitation facilities, therapy clinics, hospices and home healthcare centers. Beverly does, and New Beverly will, compete with a number of tax-exempt nonprofit organizations which can finance acquisitions and capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to Beverly, and New Beverly. There can be no assurance that New Beverly will not encounter increased competition which could adversely affect its business, results of operations or financial condition. EMPLOYEES At June 30, 1997, Beverly had approximately 80,000 employees (approximately 76,000 employees excluding those of the Institutional Pharmacy Business). Beverly is, and New Beverly will be, subject to both federal minimum wage and applicable federal and state wage and hour laws and maintains various employee benefit plans. The federal government recently increased the minimum wage in two phases, beginning October 1, 1996 and September 1, 1997, respectively. This new legislation did not result in a material increase in Beverly's wage rates in 1996, and Beverly does not anticipate a material impact on its wage rates in 1997, because a substantial portion of Beverly's associates earn in excess of the new minimum wage levels; however, Beverly believes there may continue to be competitive pressures to increase the wage levels of associates earning above the new minimum wage. The effect of the new minimum wage on New Beverly's future operations is not expected to be material as New Beverly believes that a significant portion of such increase will be reimbursed through Medicare and Medicaid rate increases. In recent years, Beverly has experienced increases in its labor costs primarily due to higher wages and greater benefits required to attract and retain qualified personnel, increased staffing levels in its nursing facilities due to greater patient acuity and the hiring of therapists on staff. Although New Beverly expects 51 59 labor costs to increase in the future, it is anticipated that any increase in costs will generally result in higher patient rates in subsequent periods, subject to the time lag in most states, of up to 18 months, between increases in reimbursable costs and the receipt of related reimbursement rate increases. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Operating Results." In the past, the healthcare industry, including Beverly's long-term care facilities, has experienced a shortage of nurses to staff healthcare operations, and, more recently, the healthcare industry has experienced a shortage of therapists. Beverly is not currently experiencing a nursing or therapist shortage, but it competes with other healthcare providers for nursing and therapist personnel and may compete with other service industries for persons serving Beverly in other capacities, such as nurses' aides. A nursing, therapist or nurse's aide shortage could force New Beverly to pay even higher salaries and make greater use of higher cost temporary personnel. A lack of qualified personnel might also require New Beverly to reduce its census or admit patients requiring a lower level of care, both of which could adversely affect operating results. Approximately 100 of Beverly's facilities, and after the Transactions New Beverly's 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. Beverly, being one of the largest employers within the long-term healthcare industry, has been the target of a "corporate campaign" by two AFL-CIO affiliated unions attempting to organize certain of Beverly's facilities. Although Beverly has never experienced any material work stoppages and believes that its relations with its employees (and the existing unions that represent certain of them) are generally good, Beverly cannot predict the effect continued union representation or organizational activities will have on its, or New Beverly's, future activities. There can be no assurance that continued union representation and organizational activities will not result in material work stoppages, which could have a material adverse effect on New Beverly's operations. Excessive litigation is a tactic common to "corporate campaigns" and one that is being employed against Beverly and is expected to continue against New Beverly. There have been several proceedings against facilities to be operated by New Beverly before the National Labor Relations Board ("NLRB"). These proceedings consolidate individual cases from separate facilities, and certain of these proceedings are currently pending before the NLRB. Beverly has, and New Beverly will continue to, vigorously defend these proceedings. Beverly believes, based on advice of its general counsel, that many of these cases are without merit, and further, it is Beverly's belief that the NLRB-related proceedings, individually and in the aggregate, are not material to Beverly's financial position or results of operations or cash flows. PROPERTIES At June 30, 1997, Beverly operated 574 nursing facilities, 33 assisted living centers, 12 transitional hospitals, 74 pharmacies, 46 outpatient therapy clinics, 21 hospices and six home healthcare centers in 36 states and the District of Columbia. It is expected that New Beverly will operate all of such businesses after the Transactions, except for the 74 pharmacies. Most of the 195 leased nursing facilities are subject to "net" leases which require the payment of all taxes, insurance and maintenance costs. Most of these leases have original terms from ten to fifteen years and contain at least one renewal option, which could extend the original term of the leases by five to fifteen years. Many of these leases also contain purchase options. New Beverly believes that all of its physical properties are in good operating condition and suitable for the purposes for which they are being used. Certain of the nursing facilities and assisted living centers to be owned by New Beverly will be included in the collateral securing the obligations under various debt agreements to be assumed by New Beverly. 52 60 The following is a summary of Beverly's and, after the Transactions, subject to adjustments for acquisitions, dispositions and construction after June 30, 1997, New Beverly's nationwide network of nursing facilities, assisted living centers, transitional hospitals, outpatient therapy clinics and hospices at June 30, 1997:
OUTPATIENT ASSISTED LIVING TRANSITIONAL THERAPY NURSING FACILITIES CENTERS HOSPITALS CLINICS HOSPICES ------------------- ---------------- ----------------- ---------- -------- TOTAL TOTAL LICENSED TOTAL LICENSED NUMBER BEDS NUMBER UNITS NUMBER BEDS NUMBER NUMBER ------- --------- ------- ------ ------ -------- ---------- -------- LOCATION: Alabama.................... 21 2,701 -- -- -- -- -- -- Arizona.................... 3 480 -- -- 2 78 -- -- Arkansas................... 31 3,803 3 48 -- -- -- 2 California................. 69 7,323 2 113 -- -- -- 5 Connecticut................ 1 120 -- -- -- -- -- -- District of Columbia....... 1 355 -- -- -- -- -- -- Florida.................... 64 8,049 5 290 -- -- -- -- Georgia.................... 17 2,100 4 72 -- -- 18 1 Hawaii..................... 2 396 -- -- -- -- -- -- Illinois................... 3 275 -- -- -- -- -- -- Indiana.................... 26 3,817 1 16 1 40 -- 1 Kansas..................... 33 2,146 3 39 -- -- -- -- Kentucky................... 8 1,041 -- -- -- -- -- -- Louisiana.................. 1 200 -- -- -- -- -- -- Maryland................... 4 585 1 16 -- -- -- -- Massachusetts.............. 24 2,402 -- -- -- -- -- -- Michigan................... 2 206 -- -- -- -- -- -- Minnesota.................. 35 3,152 2 28 -- -- -- 1 Mississippi................ 21 2,466 -- -- -- -- -- -- Missouri................... 29 3,038 3 101 -- -- -- 1 Nebraska................... 24 2,205 1 16 -- -- -- 3 New Jersey................. 1 120 -- -- -- -- -- -- North Carolina............. 11 1,398 1 16 -- -- -- -- Ohio....................... 12 1,435 -- -- 1 44 3 -- Oklahoma................... -- -- -- -- 2 64 -- -- Pennsylvania............... 42 4,895 3 53 -- -- -- 3 South Carolina............. 3 302 -- -- -- -- 1 -- South Dakota............... 17 1,232 -- -- -- -- -- -- Tennessee.................. 7 948 2 57 2 70 -- -- Texas...................... -- -- -- -- 4 343 24 3 Virginia................... 16 2,113 2 32 -- -- -- -- Washington................. 11 1,080 -- -- -- -- -- -- West Virginia.............. 3 310 -- -- -- -- -- -- Wisconsin.................. 32 3,513 -- -- -- -- -- 1 --- ------ -- --- -- --- -- -- 574 64,206 33 897 12 639 46 21 === ====== == === == === == == CLASSIFICATION: Owned...................... 378 41,656 29 705 1 198 -- -- Leased..................... 195 22,475 4 192 11 441 46 21 Managed.................... 1 75 -- -- -- -- -- -- --- ------ -- --- -- --- -- -- 574 64,206 33 897 12 639 46 21 === ====== == === == === == ==
LEGAL PROCEEDINGS There are various lawsuits and regulatory actions pending against Beverly arising in the normal course of business, some of which seek punitive damages. To the extent those actions relate to the Remaining 53 61 Healthcare Business, they will be assumed by New Beverly after the Disposition and the Merger. Management does not believe that the ultimate resolution of these matters will have a material adverse effect on Beverly's or New Beverly's financial position or results of operations. MANAGEMENT The table below sets forth, as to each executive officer and director of Beverly, such person's name, positions with Beverly and age. Each executive officer and director of Beverly holds office until a successor is elected, or until the earliest of death, resignation or removal. Each executive officer is elected or appointed by the Beverly Board of Directors. It is expected that most, if not all, of the executive officers listed below (other than Dr. Renschler who will become the Chief Executive Officer and a director of Capstone following the Distribution and Merger) will be asked to continue their employment with New Beverly in substantially the same capacity as such individuals have served Beverly. It is also expected that the directors of Beverly, listed below, will continue as directors of New Beverly. The executive officers listed below have employment or severance agreements that provide for certain payments in the event of a "change of control" (as defined in the relevant employment or severance agreements). Executive officers entitled to payments in the event of a change of control under current employment agreements with Beverly will be asked to waive their right to such payments as a condition to entering into a new employment or severance agreement with New Beverly. It is anticipated that the employment or severance agreements to be entered into between such executive officers and New Beverly will provide certain payments in the event of a "change of control" (as such term will be defined in such employment agreements) of New Beverly. The current directors of New Beverly are Messrs. Banks, Hendrickson, Pommerville, Stephens and Tabakin. Immediately following the Distribution, Messrs. Pommerville, Stephens and Tabakin will resign from the Board of Directors of New Beverly and will be replaced by the then current non-employee directors of Beverly. No assurance can be given that any of the executive officers or directors listed below will accept any offered positions with New Beverly or that the management team of New Beverly will remain substantially the same as Beverly's management team. The information below is given as of August 31, 1997.
NAME POSITION AGE ---- -------- --- David R. Banks(1)......................... Chairman of the Board, Chief Executive 60 Officer and Director Boyd W. Hendrickson(1).................... President, Chief Operating Officer and 52 Director William A. Mathies........................ Executive Vice President and President of 37 BHRS T. Jerald Moore........................... Executive Vice President and President of 56 ATH Robert W. Pommerville..................... Executive Vice President, General Counsel 56 and Secretary C. Arnold Renschler, M.D. ................ Executive Vice President and President of 55 PCA Bobby W. Stephens......................... Executive Vice President -- Asset Management 52 Scott M. Tabakin.......................... Executive Vice President and Chief Financial 38 Officer Mark D. Wortley........................... Executive Vice President and President of 42 Spectra Pamela H. Daniels......................... Vice President, Controller and Chief 33 Accounting Officer Beryl F. Anthony, Jr.(1)(3)(5)............ Director 59 James R. Greene(2)(3)(4).................. Director 75 Edith E. Holiday(2)(4)(5)................. Director 45 Jon E. M. Jacoby(1)(2).................... Director 59 Risa J. Lavizzo-Mourey, M.D.(3)(4)........ Director 42 Marilyn R. Seymann(2)(4)(5)............... Director 54
- --------------- (1) Member of Executive Committee. (2) Member of Audit Committee. (3) Member of Compensation Committee. (4) Member of Quality Management Committee. (5) Member of Nominating Committee. 54 62 Mr. Banks has been a director of Beverly since 1979 and has served as Chief Executive Officer since May 1989 and Chairman of the Board since March 1990. Mr. Banks was President of Beverly from 1979 to September 1995. Mr. Banks is a director of Nationwide Health Properties, Inc., Ralston Purina Company, Wellpoint Health Networks, Inc., and trustee for Occidental College. Mr. Hendrickson joined Beverly in 1988 as a Division President. He was elected Vice President of Marketing in May 1989, Executive Vice President of Operations and Marketing in February 1990, President of BHRS in January 1995 and President, Chief Operating Officer and a director of Beverly in September 1995. Mr. Mathies joined Beverly in 1981 as an Administrator in training. He was an Administrator until 1986 at which time he became a Regional Manager. In 1988, Mr. Mathies was elected Vice President of Operations for the California region and was elected Executive Vice President of Beverly and President of BHRS in September 1995. Mr. Moore joined Beverly as Executive Vice President in December 1992 and was elected President of ATH in June 1996. Mr. Moore was employed at Aetna Life and Casualty from 1963 to 1992 and was elected Senior Vice President in 1990. Mr. Pommerville first joined Beverly in 1970 and left in 1976. He rejoined Beverly as Vice President and General Counsel in 1984 and was elected Secretary in February 1990, Senior Vice President in March 1990 and Executive Vice President and Acting Compliance Officer in February 1995. Dr. Renschler joined Beverly in 1996 as Executive Vice President and President of PCA. In connection with the Merger, it is expected that Dr. Renschler will resign as an officer of Beverly and become Chief Executive Officer and a director of Capstone. From 1990 to 1996, Dr. Renschler was Senior Vice President and Chief Clinical Officer, as well as President of three operating divisions of NovaCare, Inc. and a member of its board of directors. Prior to that time, he held a series of key executive positions at Manor Healthcare Corp., including President and Chief Operating Officer. Mr. Stephens joined Beverly as a staff accountant in 1969. He was elected Assistant Vice President in 1978, Vice President of Beverly and President of Beverly's Central Division in 1980, and Executive Vice President in February 1990. Mr. Stephens is a director of City National Bank in Fort Smith, Arkansas, Beverly Japan Corporation, and Harbortown Properties, Inc. Mr. Tabakin joined Beverly in October 1992 as Vice President, Controller and Chief Accounting Officer. He was elected Senior Vice President in May 1995, Acting Chief Financial Officer in September 1995, and Executive Vice President and Chief Financial Officer in October 1996. From 1980 to 1992, Mr. Tabakin was with Ernst & Young LLP. Mr. Wortley joined Beverly as Senior Vice President and President of Spectra in September 1994 and was elected Executive Vice President in February 1996. From 1988 to 1994, Mr. Wortley was an officer of Therapy Management Innovations. Ms. Daniels joined Beverly in May 1988 as Audit Coordinator. She was promoted to Financial Reporting Senior Manager in 1991 and Director of Financial Reporting in 1992. She was elected Vice President, Controller and Chief Accounting Officer in October 1996. From 1985 to 1988, Ms. Daniels was with Price Waterhouse LLP. Mr. Anthony served as a member of the United States Congress and was Chairman of the Democratic Congressional Campaign Committee from 1987 through 1990. In 1993, he became a partner in the Winston & Strawn law firm. He has been a director of Beverly since January 1993. Mr. Greene's principal occupation has been that of a director and consultant to various U.S. and international businesses since 1986. He is a director of a number of mutual funds of Alliance Capital Management Corporation, Buck Engineering Company and Bank Leumi. He has been a director of Beverly since January 1991. Ms. Holiday is an attorney. She served as White House Liaison for the Cabinet and all federal agencies 55 63 during the Bush administration. Prior to that, Ms. Holiday served as General Counsel of the U.S. Treasury Department, as well as its Assistant Secretary of Treasury for Public Affairs and Public Liaison. She is a director of Amerada Hess Corporation, Hercules Incorporated and H. J. Heinz Company and a director or trustee of various investment companies in the Franklin Templeton Group of Funds. She has been a director of Beverly since March 1995. Mr. Jacoby is Executive Vice President, Chief Financial Officer and a director of Stephens Group, Inc. Mr. Jacoby has held the indicated positions with Stephens Group, Inc. since 1986, and prior to that time, served as Manager of the Corporate Finance Department and Assistant to the President of Stephens Inc. Mr. Jacoby is a director of the American Classic Voyages Company, Delta and Pine Land Company, Inc. and Medicus Systems, Inc. He has been a director of Beverly since February 1987. Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the Division of Geriatric Medicine and Associate Executive Vice President for health policy at the University of Pennsylvania, Ralston-Penn Center. From 1992 to 1994, Dr. Lavizzo-Mourey was in the Senior Executive Service in the Agency for Health Care Policy and Research, U.S. Public Health Service of the Department of Health and Human Services. She is a director of Medicus Systems, Inc. and Nellcor Puritan Bennett. She has been a director of Beverly since March 1995. Ms. Seymann is President and Chief Executive Officer of M One, Inc., a management and information systems consulting firm specializing in the financial services industry. From 1990 to 1993, Ms. Seymann was Director and Vice Chairman of the Federal Housing Finance Board. Prior to that, she served as Managing Director of Andersen Asset Based Services, a unit of Arthur Andersen LLP. From 1986 to 1990, Ms. Seymann was Executive Vice President of Chase Bank of Arizona and served as President, Private Banking of Chase Trust Company from 1987 to 1990. She has been a director of Beverly since March 1995. During 1996, there were nine meetings of Beverly's Board of Directors. Each director attended 75% or more of the meetings of the Board and committees on which he or she served. DIVIDEND POLICY Beverly currently does not pay dividends on any of its issued and outstanding securities. New Beverly does not expect to pay any dividends for the foreseeable future. Rather, New Beverly expects that it will reinvest any earnings into funding future acquisitions and growth. Any future payments of dividends and the amount thereof will be dependent upon New Beverly's results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board of Directors of New Beverly from time to time. 56 64 PRINCIPAL STOCKHOLDERS OF NEW BEVERLY New Beverly will be a wholly-owned subsidiary of Beverly until the consummation of the Distribution. Because all of the shares of New Beverly Common Stock now held by Beverly will be distributed to shareholders of Beverly in connection with the Distribution, the number of shares of New Beverly Common Stock shown below to be owned beneficially by certain beneficial owners holding more than five percent of the issued and outstanding Beverly Common Stock, as well as by each director and by all directors and officers as a group will depend upon the number of shares held by such persons at the time of the Distribution. This table assumes that each of the executive officers set forth below will (i) be offered a position with New Beverly and (ii) accept such position if offered. In order to present estimated beneficial ownership of the persons and entities set forth below immediately following the Distribution, the following table shows: (i) the number of shares of Beverly Common Stock beneficially owned by such person or entities as of August 31, 1997 (including, if applicable, shares underlying Company Options exercisable within 60 days of such date) and (ii) the number of shares of New Beverly Common Stock that such persons or entities would own immediately following the Distribution (including, if applicable, shares underlying New Beverly Options exercisable within 60 days of such date), assuming none of such persons or entities disposes of any shares of Beverly Common Stock prior to the Distribution and Merger. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth as of August 31, 1997, those persons who beneficially own more than five percent of the issued and outstanding Beverly Common Stock based on information filed in reports by such persons with the SEC.
NUMBER OF PERCENT OF SHARES OF TOTAL NAME COMMON STOCK COMMON STOCK ---- ------------ ------------ FMR Corp............................................... 7,894,799(1) 7.2% ("FMR") 82 Devonshire Street Boston, MA 02109 Franklin Resources, Inc................................ 8,417,800(2) 7.7% ("Franklin") 777 Mariners Island Blvd. San Mateo, CA 94404 Loomis, Sayles & Company, L.P.......................... 6,213,650(3) 5.7% ("Loomis") One Financial Center Boston, MA 02111 Wellington Management Company.......................... 6,463,419(4) 5.9% ("WMC") 75 State Street Boston, MA 02109
- --------------- (1) Based on the latest schedule 13G, dated February 14, 1997, provided to Beverly by FMR; FMR had sole voting power with regard to 746,928 shares and sole dispositive power with respect to 7,894,799 shares. (2) Based on the latest schedule 13G, dated February 12, 1997, provided to Beverly by Franklin; Franklin had sole voting and dispositive power with respect to 8,417,800 shares. (3) Based on the latest schedule 13G, dated February 13, 1997, provided to Beverly by Loomis; Loomis had sole voting power with respect to 2,176,125 shares and shared dispositive power with respect to 6,213,650 shares. (4) Based on the latest schedule 13G, dated January 24, 1997, provided to Beverly by WMC; WMC had shared voting power with respect to 1,663,574 shares and shared dispositive power with respect to 6,463,419 shares. 57 65 SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth as of August 31, 1997, the amount of Beverly Common Stock beneficially owned by each of Beverly's directors, each executive officer named in the Summary Compensation Table included in Beverly's Proxy Statement for the Annual Meeting of Stockholders held on May 29, 1997, and all directors and executive officers as a group based on information obtained from such persons.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP ---------------------------------------------------------------- SOLE VOTING OPTIONS PERCENTAGE AND EXERCISABLE OTHER OF INVESTMENT WITHIN BENEFICIAL DEFERRED COMMON POWER 60 DAYS OWNERSHIP COMPENSATION TOTAL STOCK ----------- ----------- ---------- ------------ ------- ---------- Beryl F. Anthony, Jr............ 0 22,500 0 4,317(1) 26,817 * David R. Banks.................. 216,864(3) 377,223 8,774(4) 1,578(2) 604,439 * James R. Greene................. 500 22,500 0 9,396(1) 32,396 * Boyd W. Hendrickson............. 190,218(3) 128,643 0 1,192(2) 320,053 * Edith E. Holiday................ 800 7,500 200(4) 1,819(1) 10,319 * Jon E. M. Jacoby................ 0 22,500 0 7,467(1) 29,967 * Risa J. Lavizzo-Mourey, M.D..... 1,000 7,500 0 1,971(1) 10,471 * William A. Mathies.............. 76,693(3) 71,250 2,879(4) 728(2) 151,550 * C. Arnold Renschler, M.D.(5).... 65,000(3) 58,750 0 990(2) 124,740 * Marilyn R. Seymann.............. 1,000 7,500 0 2,400(1) 10,900 * Mark D. Wortley................. 66,738(3) 41,250 0 700(2) 108,688 * All Directors and Executive Officers as a Group (16 Persons)(5)................... 1,142,915 1,097,172 16,268 35,120 2,291,475 2.1%
- --------------- * Percentage of Common Stock owned does not exceed 1%. (1) Participant in the Beverly Non-Employee Director Deferred Compensation Plan. (2) Participant in the Beverly Executive Deferred Compensation Plan. (3) Includes shares allocated to the employee through participation in Beverly's Employee Stock Purchase Plan. (4) Includes shares owned by family members. (5) C. Arnold Renschler, M.D., currently an Executive Vice President of Beverly and President of PCA, is expected to resign his position with Beverly effective as of the Effective Time of the Merger, when he will assume the position of Chief Executive Officer and will become a director of Capstone. 58 66 EXECUTIVE AND DIRECTOR COMPENSATION EXECUTIVE COMPENSATION The following table sets forth information with respect to the Chief Executive Officer and the other four most highly compensated individuals of Beverly as to whom the total annual salary and bonus for the year ended December 31, 1996, exceeded $100,000. All of these individuals were executive officers of Beverly at December 31, 1996. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ---------------------- AWARDS PAYOUTS ANNUAL ---------------------- COMPENSATION RESTRICTED SECURITIES ----------------- OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER FISCAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)(7)(8) (#) ($) ($)(9) --------------------------- ------ ------- ------- ------------ ---------- ------------ ------- ------------ David R. Banks.................. 1996 597,542 324,973 None 697,500 90,000 None 20,230 Chairman of the Board and 1995 622,096 None None None None None 51,973 Chief Executive Officer 1994 539,170 173,384 None 151,711 60,000 None 51,469 Boyd W. Hendrickson............. 1996 437,971 245,314 None 581,250 65,000 None 17,973 President and Chief 1995 392,862 None None 412,500 70,000 None 38,100 Operating Officer(1) 1994 323,502 80,912 None 70,798 30,000 None 40,646 William A. Mathies.............. 1996 275,000 185,000 216,198(5) 465,000 40,000 None 8,858 Executive Vice President 1995 203,481 44,334 48,465(5) 206,250 35,000 None 19,526 and President-Beverly 1994 159,260 29,958 None 26,223 12,000 None 18,630 Health & Rehabilitation Services, Inc.(BHRS)(2) C. Arnold Renschler, MD......... 1996 200,481 187,500 46,995(6) 673,750 285,000 None 1,226 Executive Vice President 1995 and President-Pharmacy 1994 Corporation of America(3) Mark D. Wortley................. 1996 258,704 171,316 None 465,000 75,000 None 8,693 Executive Vice President 1995 230,481 None None None None None 12,793 and President-Spectra 1994 65,769 24,000 None 20,996 50,000 None 3,779 Rehab Alliance, Inc.(4)
- --------------- (1) Mr. Hendrickson was elected to his current position on September 29, 1995. Prior to that he was Executive Vice President and President-BHRS. (2) Mr. Mathies was elected to his current position on September 29, 1995. Prior to that he was a Vice President-Operations of BHRS. (3) Dr. Renschler assumed his current position on June 3, 1996. (4) Mr. Wortley was elected to his current position on February 9, 1996. Prior to that he was a Senior Vice President and President of Spectra Rehab Alliance, Inc. (5) Relocation costs and expenses paid to Mr. Mathies in connection with his relocation from California to Arkansas. (6) Relocation costs and expenses paid to Dr. Renschler in connection with his relocation from Pennsylvania to Florida. 59 67 (7) Amounts shown as Restricted Stock Awards consist of the following (shown in dollars) (Beverly does not currently pay dividends on its Common Stock).
YEAR MR. BANKS MR. HENDRICKSON MR. MATHIES DR. RENSCHLER MR. WORTLEY ---- --------- --------------- ----------- ------------- ----------- Restricted Stock Grants.......... 1996 None None None 183,750(a) None 1995 None 412,500(b) 206,250(b) None 1994 None None None None Performance Shares(c)............ 1996 697,500 581,250 465,000 490,000 465,000 1995 1994 Award Pursuant to the............ 1996 Annual Incentive Plan(d) 1995 1994 43,346 20,228 7,494 5,995 Award Pursuant to the............ 1996 Equity Incentive Plan(e) 1995 1994 108,365 50,570 18,729 15,001 Total........................ 1996 697,500 581,250 465,000 673,750 465,000 1995 None 412,500 206,250 None 1994 151,711 70,798 26,223 20,996
- --------------- (a) The total $183,750 restricted stock award to Dr. Renschler in 1996 consists of, on June 3, 1996, at which time the closing price of the Common Stock was $12.25, a grant of 15,000 shares which vest twenty-five percent per year beginning one year from the date of the grant. (b) The total $412,500 restricted stock award to Mr. Hendrickson and the total $206,250 restricted stock award to Mr. Mathies in 1995 consists of, on October 2, 1995, at which time the closing price of the Common Stock was $13.75, grants of 30,000 and 15,000 shares respectively, which vest twenty-five percent per year beginning one year from the date of grant. (c) The total $697,500, $581,250, $465,000 and $465,000 Performance Share awards to Mr. Banks, Mr. Hendrickson, Mr. Mathies and Mr. Wortley consist of, on February 9, 1996, at which time the closing price of the Common Stock was $11.625, a grant of performance-based restricted stock in the following number of shares: 60,000; 50,000; 40,000; and 40,000 respectively. Performance is measured by appreciation in the price of Common Stock from December 31, 1995. To satisfy the performance restriction, the Common Stock must close at or above the performance target for at least five consecutive trading days on the New York Stock Exchange. Achievement of the performance target for any performance period is deemed to be achievement of the performance target for all prior performance periods. The percentage of shares that vest, if the performance target is met, and the performance target, are: 10% and $14.00; 20% and $16.125; 20% and $18.50; 25% and $21.375; 25% and $24.50 for 1996, 1997, 1998, 1999 and 2000 respectively. The total $490,000 Performance Share award to Dr. Renschler consists of, on June 3, 1996, at which time the closing price of the Common Stock was $12.25, a grant of 40,000 shares with the same performance targets and vesting schedule as set forth above. (d) For 1994 performance, the Annual Incentive Plan provided for the payment of 20% of the annual incentive award earned to be paid by a grant of other stock units, vesting one year from the grant date. The following number of other stock units were granted to the named Executive Officers: Mr. Banks -- 3,152; Mr. Hendrickson -- 1,471; Mr. Mathies -- 545; and Mr. Wortley -- 436. (e) The Equity Incentive Plan provided, for 1994 performance, the granting of phantom units, with cliff vesting four years from the grant date. The phantom units are payable, upon vesting, at an amount per unit equal to the fair market value of the Common Stock on that date, in cash, shares of Common Stock or a combination thereof at the discretion of the Compensation Committee. The following number of phantom units were granted to the named executive officers, to vest on February 14, 2000: Mr. Banks -- 7,881; Mr. Hendrickson -- 3,678; Mr. Mathies -- 1,362; and Mr. Wortley -- 1,091. (8) Based on the closing price for the Common Stock of $12.75, at December 31, 1996, the number and value of aggregate restricted stock, performance shares and phantom unit holdings for the named executive officers are as follows:
MR. BANKS MR. HENDRICKSON MR. MATHIES DR. RENSCHLER MR. WORTLEY --------- --------------- ----------- ------------- ----------- Restricted Stock............ (Shares) None 22,500 11,250 15,000 None (Value $) None 286,875 143,437 191,250 None Performance Shares.......... (Shares) 60,000 50,000 40,000 40,000 40,000 (Value $) 765,000 637,500 510,000 510,000 510,000 Phantom Units............... (Shares) 16,274 7,571 2,436 None 1,091 (Value $) 207,493 96,530 31,059 None 13,910
60 68 (9) All other compensation consists of the following:
YEAR MR. BANKS MR. HENDRICKSON MR. MATHIES DR. RENSCHLER MR. WORTLEY ---- --------- --------------- ----------- ------------- ----------- Car Allowance(a)................. 1996 None None None None None 1995 2,019 2,019 2,019 2,019 1994 7,500 7,500 7,500 2,192 Matching Contribution to......... 1996 2,340 2,340 2,340 None 2,340 Employee Stock Purchase 1995 2,340 2,340 2,340 2,340 Plan(b) 1994 2,340 2,340 2,250 None Executive Medical Plan........... 1996 3,834 6,659 1,347 62 887 1995 6,168 9,660 4,098 2,530 1994 7,661 11,479 3,570 1,379 Premiums Under Executive......... 1996 1,350 1,080 177 None 216 Life Insurance Plan(c) 1995 4,753 2,607 420 294 1994 4,410 2,392 407 None Regular Life Insurance........... 1996 5,648 2,187 297 626 464 Plan(d) 1995 3,410 1,483 167 282 1994 1,125 720 99 33 Matching Contribution to......... 1996 3,341 1,990 980 None 1,069 Executive Retirement 1995 30,541 17,249 7,938 2,586 Plan(e) 1994 28,258 16,040 4,629 None Financial Planning............... 1996 None None None None None 1995 None None None None 1994 175 175 175 175 Benefit Allowance(f)............. 1996 3,717 3,717 3,717 538 3,717 1995 2,742 2,742 2,544 2,742 Total........................ 1996 20,230 17,973 8,858 1,226 8,693 1995 51,973 38,100 19,526 12,793 1994 51,469 40,646 18,630 3,779
- --------------- (a) Car allowances were discontinued in 1995. Amounts previously paid were added to base salary. (b) The Employee Stock Purchase Plan enables all full-time employees which have completed one year of continuous service to purchase shares of Common Stock through payroll deductions of up to $300 per pay period. Beverly contributes 30% of the amount of payroll deductions for the participating employee. (c) Effective January 1, 1996, the amount shown represents the dollar value benefit of premium payments under split dollar life insurance policies for which Beverly will be reimbursed for premiums paid. In prior years, the amounts shown represented premiums on individual term life insurance policies. (d) Imputed income for life insurance provided under Beverly's regular life insurance plan for amounts in excess of $50,000. (e) The Beverly Enterprises, Inc. Executive Retirement Plan, (the "Executive Retirement Plan") provides that, depending on the Beverly's profits, Beverly will match each participant's annual contribution, based on a sliding scale relating to years of service with the Beverly, up to a maximum of six percent of a participant's compensation. The Executive Retirement Plan also provides that Beverly will pay each participant additional compensation approximately equivalent to the tax liability such participant shall accrue as a result of the Beverly's contribution. During 1995 and 1994, Beverly contributed 50 percent and during 1996, five percent of the maximum match permitted under the Executive Retirement Plan for each participant. These figures include both the employer match and the additional compensation for reimbursement of taxes. (f) Reimbursement for premiums paid under regular medical and dental insurance. 61 69 The following tables set forth certain information at December 31, 1996 and for the fiscal year then ended with respect to stock options granted to and exercised by the individuals named in the Summary Compensation Table above. No stock appreciation rights have been granted and no options have been granted at an option price below fair market value on the date of the grant. OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS GRANT DATE ------------------------------------------------------ VALUE NUMBER OF % OF TOTAL ---------- SECURITIES OPTIONS/SARS GRANT DATE UNDERLYING GRANTED TO EXERCISE OR PRESENT OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE NAME GRANTED(#) FISCAL YEAR ($/SH) DATE ($)(2) ---- ------------ ------------ ----------- ---------- ---------- David R. Banks................... 90,000(1) 5.26% 12.75 12/11/06 684,900(6) Boyd W. Hendrickson.............. 65,000(1) 3.80% 12.75 12/11/06 494,650(6) William B. Mathies............... 40,000(1) 2.34% 12.75 12/11/06 304,400(6) C. Arnold Renschler, M.D. ....... 35,000(2) 2.04% 12.25 06/03/01 172,900(7) 160,000(2) 9.35% 12.625 06/13/01 819,200(8) 40,000(1) 2.34% 12.75 12/11/06 304,400(6) 50,000(3) 2.92% 12.625 06/12/02 256,000(8) Mark Wortley..................... 22,400(4) 1.31% 11.625 02/09/01 97,216(9) 40,000(1) 2.34% 12.75 12/11/06 304,400(6) 12,600(5) 0.74% 11.625 02/09/01 54,684(9)
- --------------- (1) Nonqualified stock options granted on December 12, 1996. 25% of these options become fully exercisable one year from the grant date and 25% per year thereafter on a cumulative basis. (2) Nonqualified stock options for 35,000 shares were granted on June 3, 1996 and nonqualified stock options for 160,000 shares were granted on June 13, 1996. 25% of these options become fully exercisable one year from the grant date and 25% per year thereafter on a cumulative basis. (3) Nonqualified stock options granted on June 13, 1996. 10,000 shares vested on December 31, 1996. 40,000 shares are subject to performance conditions contained in the stock option agreement. 20,000 shares will vest on December 31, 1997 if the 1997 performance conditions are met and 20,000 shares will vest on December 31, 1998 if the 1998 performance conditions are met. Certain of the 1997 and all of the 1998 performance conditions will be set by the Compensation Committee at a later date. (4) Nonqualified stock options granted on February 9, 1996. 25% of these options become fully exercisable one year from the grant date and 25% per year thereafter on a cumulative basis. (5) Incentive stock options granted on February 9, 1996. 25% of these options become fully exercisable one year from the grant date and 25% per year thereafter on a cumulative basis. (6) Based upon the Black-Scholes Option Valuation Model, which estimates the present dollar value of options to purchase shares of Common Stock to be $7.61 per option share. The actual value, if any, an executive may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised, so that there is no assurance the value realized will be at or near the value estimated by the Black-Scholes Model. The assumptions underlying the Black-Scholes Model include: (a) an expected volatility of .3440 based on the thirty-six months prior to the grant date, (b) a risk-free rate of return of 6.54%, which approximates the ten year U.S. Treasury Strip Rate on the grant date, (c) no dividend on the Common Stock, and (d) a ten year period from the grant until expiration. (7) Based upon the Black-Scholes Option Valuation Model, which estimates the present dollar value of options to purchase shares of Common Stock to be $4.94 per option share. The actual value, if any, an executive may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised, so that there is no assurance the value realized will be at or near the value estimated by the Black-Scholes Model. The assumptions underlying the Black-Scholes Model include: (a) an expected volatility of .3226 based on the thirty-six months prior to the grant date, (b) a risk-free rate of 62 70 return of 6.64%, which approximates the five year U.S. Treasury Strip Rate on the grant date, (c) no dividend on the Common Stock, and (d) a five year period from the grant until expiration. (8) Based upon the Black-Scholes Option Valuation Model, which estimates the present dollar value of options to purchase shares of Common Stock to be $5.12 per option share. This analysis assumed that all performance conditions would be met for vesting. The actual value, if any, an executive may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised, so that there is no assurance the value realized will be at or near the value estimated by the Black-Scholes Model. The assumptions underlying the Black-Scholes Model include: (a) an expected volatility of .3326 based on the thirty-six months prior to the grant date, (b) a risk-free rate of return of 6.79%, which approximates the five year U.S. Treasury Strip Rate on the grant date, (c) no dividend on the Common Stock, and (d) a five year period from the grant until expiration. (9) Based upon the Black-Scholes Option Valuation Model, which estimates the present dollar value of options to purchase shares of Common Stock to be $4.34 per option share. The actual value, if any, an executive may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised, so that there is no assurance the value realized will be at or near the value estimated by the Black-Scholes Model. The assumptions underlying the Black-Scholes Model include: (a) an expected volatility of .3167 based on the thirty-six months prior to the grant date, (b) a risk-free rate of return of 5.23%, which approximates the five year U.S. Treasury Strip Rate on the grant date, (c) no dividend on the Common Stock, and (d) a five year period from the grant until expiration. COMPENSATION OF DIRECTORS AND OTHER INFORMATION CONCERNING THE BOARD AND ITS COMMITTEES Effective June 1, 1996, compensation to Beverly directors other than Mr. Banks and Mr. Hendrickson was changed to an annual retainer of $25,000 for serving as a director plus an additional fee of $1,000 for each Board or committee meeting attended. In addition, committee chairpersons receive $1,000 for each committee meeting chaired. Mr. Banks, the current Chairman of the Board and Chief Executive Officer of Beverly, and Mr. Hendrickson, the current President and Chief Operating Officer of Beverly, received no additional cash compensation for serving on the Board or its committees. Pursuant to the Beverly Enterprises, Inc. Non-Employee Directors' Stock Option Plan, each non-employee director is automatically granted an option to purchase 2,500 shares of Beverly Common Stock on June 1 of each year, at an exercise price of 100 percent of the fair market value of such Common Stock on the respective grant dates. The options become fully exercisable one year from the grant date. During 1996, there were nine meetings of the Beverly Board. Each director attended 75% or more in the aggregate of the meetings of the Beverly Board and committees on which the director served. The Executive Committee, which met nine times during 1996, is delegated authority to exercise all of the authority of the Beverly Board during the intervals between meetings except that authority delegated to other committees or extraordinary actions. The Audit Committee, which met three times during 1996, reviews and acts, or reports to the Beverly Board, with respect to various auditing and accounting matters, including the selection of Beverly's independent auditors, the scope of audit procedures, the nature of services to be performed for Beverly by and the fees to be paid to the independent auditors, oversight of Beverly's internal audit function, the performance of Beverly's independent auditors and the accounting practices of Beverly. The Nominating Committee, which met two times during 1996, is delegated the following responsibilities: (i) identification and recommendation for nomination of candidates to stand for election to the Beverly Board; and (ii) establishment of procedures for the nomination process and criteria for the selection of nominees, including stockholders' suggestions of nominees for director that are submitted in writing in compliance with Beverly's Bylaws. The Nominating Committee is also responsible for administering the Beverly Board's self-evaluation. 63 71 The Quality Management Committee, which met six times during 1996, monitors the quality of service provided by Beverly and reports to the Beverly Board of Directors progress made toward reaching quality goals. The Compensation Committee met seven times during 1996. See the Compensation Committee Report on Executive Compensation below for a discussion of the Compensation Committee functions. THE BEVERLY NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN The following is a description of the Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan (the "Non-Employee Director Plan") that was approved by the Beverly stockholders and became effective May 29, 1997. The purpose of the Non-Employee Director Plan is to provide outside directors with the opportunity to receive awards equivalent to shares of Beverly Common Stock (referred to as "deferred share units") and to defer receipt of compensation for services rendered to Beverly. It is expected that New Beverly will assume the Non-Employee Director Plan immediately following the Transactions. It is intended that the Non-Employee Director Plan shall aid Beverly (and after the Transactions, New Beverly) in retaining and attracting non-employee directors whose abilities, experience and judgment can contribute to the continued progress of Beverly (and after the Transactions, New Beverly). Further, the Non-Employee Director Plan is intended to more closely align directors with stockholders through compensation awards equivalent to shares of Beverly Common Stock (and after the Transactions, New Beverly Common Stock). There are three types of contributions available under the Non-Employee Director Plan. First, directors will be able to defer all or part of retainer and meeting fees to a pre-tax deferred compensation account with two investment options. The first investment option will be a cash account which is credited with interest (at a variable interest rate equal to the prime interest rate as established by a major New York bank), and the second investment option will be a deferred share unit account, with each unit having a value equivalent to one share of Beverly Common Stock (and after the Transactions, New Beverly Common Stock). A director's deferred share unit account will fluctuate in value as if it had been invested in Beverly Common Stock (and after the Transactions, New Beverly Common Stock), however the Non-Employee Director Plan is not actually funded and amounts deferred will not necessarily be invested in the Beverly Common Stock (and after the Transactions, New Beverly Common Stock). It is possible for the value of a director's account to decrease in value as a result of this deemed investment if the value of the Beverly Common Stock (and after the Transactions, New Beverly Common Stock) decreases. The second type of contribution is a Beverly matching contribution. Beverly (and after the Transactions, New Beverly) will match 25% of the amount that is deferred, but only to the extent the director elects to credit his deferral into the deferred share unit account. Third, in connection with the termination of Beverly's previous retirement plan for non-employee directors, in order to replace lost benefits under such plan, directors will receive a grant of 500 deferred share units each year under the Non-Employee Director Plan. Both Beverly (and after the Transactions, New Beverly) matching contributions and the annual 500 deferred share unit grant will be automatically credited to the deferred share unit account. Directors are at all times 100% vested in their accounts. Distributions will commence upon retirement, termination, death, or disability. Earlier payments are available only if approved by the full Board of Directors (which administers the Non-Employee Director Plan), in the event of an unforeseeable emergency resulting in an extreme financial hardship. Payment will be in the form of a single lump sum or installment of up to ten years, as elected by each director. Distributions will be made in shares of Beverly Common Stock (and after the Transactions, New Beverly Common Stock). However, with prior Board of Directors approval, a director may elect to be paid out of cash instead. The right of a Director or his or her beneficiary to receive a distribution under the Non-Employee Directors Plan is an unsecured claim against the general assets of Beverly (and after the Transactions, New Beverly) . Beverly (and after the Transactions, New Beverly) may (but is not required to) informally "fund" some or all of the Non-Employee Director Plan liabilities through a so-called "rabbi trust" or grantor trust, 64 72 but neither a director nor any beneficiary shall have any rights in or against any specific assets of Beverly (and after the Transactions, New Beverly). The Non-Employee Directors Plan became effective May 29, 1997, upon approval by the stockholders of Beverly. New Beverly, at the Time of Distribution, will assume the obligations and responsibilities of the Non-Employee Director Plan from Beverly. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The following is the Compensation Committee Report of the Beverly Board of Directors, provided in connection with the Beverly Annual Meeting of Stockholders held on May 29, 1997. This report reviews executive compensation for Beverly for the fiscal year ended December 31, 1996. It is anticipated that, prior to the consummation of the Transactions, the Compensation Committee of Beverly will become the Compensation Committee of New Beverly and will continue the same compensation philosophies currently in place at Beverly. The Compensation Committee of Beverly's Board of Directors (the Committee) is currently composed of three independent, non-employee Directors. There were four members until June 1996, when new Committee assignments were made. Mr. Louis W. Menk, former Chairman of the Compensation Committee, retired from the Beverly Board of Directors in May 1997. Three Committee members remained and one, Marilyn R. Seymann, left for another committee assignment. The Committee's overall responsibility is to ensure executive compensation policies are directly aligned with the strategic goals of Beverly. The Committee approves the design of compensation programs, evaluates their effectiveness, and authorizes the adoption of new plans and strategies as warranted. COMPENSATION PHILOSOPHY The Committee's compensation philosophy and the underlying compensation programs are designed to directly support Beverly's business objectives by: - Allowing Beverly to recruit, retain and develop highly qualified executive employee talent - Linking individual compensation with Beverly and individual performance - Maintaining compensation levels that are competitive (targeted at the median (50th percentile) of the Competitive Market discussed below) - Emphasizing the variable and at-risk portion of compensation through incentive plans which properly reflect and reward both short and long-term performance - Promoting executive stock ownership and encouraging stock retention by executives The Committee evaluates each element of compensation as well as total executive compensation. The Chief Executive Officer provides input to the Committee in this regard. In addition, the Committee receives consulting advice and assistance from an independent executive compensation firm on an ongoing basis. COMPETITIVE MARKET EVALUATION Beverly and its Compensation Committee evaluate competitive compensation practices and levels in the marketplace by considering data from publicly available surveys published by recognized, major compensation consulting firms, as well as special studies and surveys of industry comparisons. In addition, the compensation consulting firm engaged by the Committee and Beverly provided a comprehensive assessment of compensation from its executive database. This analysis included reference to companies of comparable revenues to Beverly in the healthcare services industry as well as general industry. In addition, the compensation consultant conducted several private surveys of executive pay in companies that compete with Beverly for management talent. All of these sources of data have been combined and median and averages calculated to establish targets for each element of compensation for Company executives for 1997 and the immediate future. The Competitive Market is the combination of all the survey data in general industry of similar revenues, healthcare industry with similar lines of business and companies from the proxy analysis peer group 65 73 with similar revenues. In establishing competitive levels, Beverly has used the 50th percentile as its target level for each element of compensation. The Committee believes that actual compensation levels for the five executive officers named in the Summary Compensation Table were at or below the 50th percentile of the Competitive Market during 1996. BASE SALARY The Committee regularly reviews the base salary of corporate officers. In addition to targeting the median of the Competitive Market, the Committee also considers the level and scope of responsibility, experience, performance and internal equity. No specific weighting is assigned to each of these criteria. The Committee's annual salary review for corporate officers was moved from December 1996 to March 1997 in order to provide the Committee the opportunity to review 1996 performance prior to making compensation decisions. The base salary for Mr. Banks, Chairman of the Board and Chief Executive Officer of Beverly, and other corporate officers was reviewed at the March 27, 1997 meeting of the Committee. The Compensation Committee reviewed the performance criteria it had established on April 11, 1996 to evaluate Mr. Banks' performance for 1996. The performance criteria included financial and operating objectives as well as succession planning, strategic planning and stockholder relations. Effective January 1, 1997, Mr. Banks' base salary was reinstated to $627,500, where it had been prior to the 5% salary reduction in 1996. In addition, based on the results of Mr. Banks' performance in meeting these objectives, and the comparison to the Competitive Market, his base salary was also adjusted, effective January 1, 1997, to $700,000, which represents an 11.5% increase over the reinstated level and places Mr. Banks at approximately the 50th percentile level of the Competitive Market for total compensation. ANNUAL INCENTIVES The annual incentive plans are designed to provide a direct link between Beverly performance and individual performance over the annual performance period (calendar year). During 1996, Beverly maintained two annual incentive plans; one for corporate management and one for operations management. Each plan has an initial performance threshold which must be met before potential awards become available. This initial threshold is an internal standard of the quality of service being provided by Beverly to its residents. The internal standard of quality is set and approved by the Quality Management Committee of the Board. Once the quality threshold has been reached or exceeded, the financial criteria are then assessed for each executive based upon appropriate corporate or individual areas of responsibility. The incentive plans measure financial performance by evaluating Beverly earnings per share and operating margin and, in the case of individuals responsible for business units, other key operating financial measures related to the business unit. Each executive participating in the annual incentive plan, including all of the executive officers listed in the Summary Compensation Table, has a target and maximum annual incentive opportunity expressed as a percentage of base salary. Opportunities for participants under this plan for 1996 ranged from 25% to 100% of base salary. In calculating the 1996 annual incentive for the Chief Executive Officer, the Committee first ascertained that the quality performance threshold had been achieved. The Committee then determined that the Chief Executive Officer exceeded the specific performance goals established by the Committee. As a result, Mr. Banks received a bonus of $324,973, which amounted to 54.5% of base salary. LONG-TERM INCENTIVES Long-term incentives are delivered through the Beverly Enterprises, Inc. 1996 Long-Term Incentive Stock Plan (the "1996 Plan"), which was approved by stockholders at the 1996 annual meeting. The Committee believes that annual grants of stock options provide a long-term incentive for key personnel to remain with Beverly and improve future Beverly performance. In addition, stock option grants confirm the mutuality of interests shared by Beverly's management and its other stockholders with this compensation 66 74 dependent upon the appreciation of Beverly's Common Stock. The compensation consulting firm provides the Committee with data on granting practices of other healthcare companies to determine if Beverly's grants are competitive in size and terms. Stock options are always granted at 100% of fair market value on the date of grant. During 1996, a stock option grant for 90,000 shares was provided to Mr. Banks. Option grants for the following number of shares were granted in 1996 to the following executive officers: Mr. Hendrickson -- 65,000; Mr. Mathies -- 40,000; Dr. Renschler -- 285,000; and Mr. Wortley -- 75,000. STOCK OWNERSHIP GUIDELINE In 1994, Beverly introduced a stock ownership initiative for key executives and officers of Beverly. The purpose of this initiative is to align executive interests with stockholders' interests and to encourage executives to retain Beverly shares over an extended period. Participants are required to own Beverly securities with a value based on a multiple of the officer's base salary. Failure to comply with this guideline may result in reduction in or suspension from participation in Beverly's incentive plans. The Chief Executive Officer is required to own securities with a market value of three times his base salary. Other executives and officers are required to own Beverly securities with a market value ranging from one to two and a half times base salary. $1 MILLION LIMIT ON COMPENSATION Section 162(m) of the Internal Revenue Code generally limits the corporate deduction for compensation paid to executive officers named in the Summary Compensation Table to $1 million, unless certain requirements are met which allows for an exemption of certain compensation as performance-based. The Board of Directors and the Committee desire that all incentive compensation plans for executive officers be qualified as performance-based, thereby ensuring Beverly will retain full tax deductibility. In 1994, the Committee approved a change in the design and operation of both the annual and long-term incentive plans, which change was then approved by the stockholders in May 1994. In 1996, stockholders approved the 1996 Long-Term Incentive Stock Plan which provides certain features designed to ensure tax deductibility of awards granted under the Plan. OTHER MATTERS The Committee has worked with a compensation consulting firm in revamping Beverly's compensation plans for 1996 and future years. The focus of this work was to develop pay for performance and included revised base salary ranges, annual incentive compensation opportunities, long-term incentives and the streamlining of certain employee benefits. All of this work has been accomplished with the goal of motivating management behaviors which will enhance Beverly's financial and operating results, thereby leading to the potential for increased stockholder value. The work is ongoing and the Committee anticipates working with top management and the consulting firm throughout 1997 to meet this end. COMPENSATION COMMITTEE Louis W. Menk, Chairman Beryl F. Anthony, Jr. Edith E. Holiday Marilyn R. Seymann The Compensation Committee Report on Executive Compensation shall not be deemed incorporated by reference by any general statement incorporating by reference this registration statement into any filing under the Securities Act of 1933 or the Securities and Exchange Act of 1934, except to the extent that Beverly specifically incorporates this information by reference, and shall not otherwise be deemed filed under such acts. 67 75 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No Committee member had any relationship requiring disclosure under any paragraph of Item 404 of Regulation S-K. PERFORMANCE GRAPH The following graph shows a five-year comparison of cumulative total returns for Beverly, the S&P 500 Composite Index and the S&P Health Care Composite Index. The stock price performance shown on the graph below is not necessarily indicative of future price performance.
MEASUREMENT PERIOD S&P HEALTHCARE (FISCAL YEAR COVERED) BEVERLY S&P 500 COMPOSITE 1991 100 100 100 1992 146 108 84 1993 149 118 77 1994 162 120 87 1995 120 165 137 1996 144 203 165
The total cumulative return on investment (change during the year in stock price plus reinvested dividends) for each of the periods for Beverly, the S&P 500 Composite Index and the S & P Healthcare Composite Index is based on the stock price or the composite index on December 31, 1991. The performance graph and its description above shall not be deemed incorporated by reference by any general statement incorporating by reference this registration statement into any filing under the Securities Act of 1933 or the Securities and Exchange Act of 1934, except to the extent that Beverly specifically incorporates this information by reference, and shall not otherwise be deemed filed under such acts. OTHER PLANS Executive Stock Purchase Program On October 10, 1996 the Board of Directors established the Executive Stock Purchase Program whereby those officers subject to the Stock Ownership Guideline, described on page 69, could borrow, under three year loans made by City National Bank of Fort Smith and guaranteed by Beverly, for the purpose of buying Common Stock in order to meet the Stock Ownership Guideline. Executives participating in the program were required to pledge the stock purchased to Beverly pursuant to an Indemnification and Pledge Agreement. Messrs. Hendrickson, Mathies, Renschler, and Wortley borrowed the following amounts under the program: $182,125; $100,000; $135,620 and $203,481 respectively. 68 76 Deferred Compensation Plan As of July 18, 1991, Beverly amended and restated the Deferred Compensation Plan: to allow no future grants; to close and pay out accounts with balances of $10,000 or less; and to fix accounts with balances in excess of $10,000 using the closing price of Beverly's Common Stock on the New York Stock Exchange on July 18, 1991, of $11.00, which was credited to participants' Special Ledger Accounts. Messrs. Banks and Hendrickson maintain accounts in the Deferred Compensation Plan which are credited with interest at a rate of 9% per annum. Employment Contracts and Termination of Employment and Change in Control Arrangements Beverly adopted a severance policy, as of December 1, 1989, which provides assistance in the form of a lump sum severance payment to active, full-time, corporate or regional office employees who are permanently, involuntarily and without cause separated from all employment with Beverly or its successor. Severance pay is calculated based upon an employee's base weekly pay, position and continuous past service with Beverly as of the last day of the employee's active employment. David R. Banks, Boyd W. Hendrickson, William A. Mathies, C. Arnold Renschler, M.D. and Mark D. Wortley would have received $323,077, $192,308, $150,000, $59,385 and $105,192, respectively, if they were entitled to a severance payment as of January 1, 1997. Effective December 8, 1995, Beverly entered into Change in Control Severance Agreements that provide for payments to be made to the Executive Vice Presidents of Beverly (including Messrs. Mathies and Wortley) (the "Severance Agreements"). The Severance Agreements have an initial term of three years, with an automatic extension of one additional day for each day beyond December 8, 1995 that the Executive Vice President (the "Executive") remains employed by Beverly until such time as Beverly elects to cease such extension by written notice, thereby setting the term to end three years from the written notice. The Severance Agreements provide for specified severance benefits in the event of a change in control and (i) termination of employment of the Executive by Beverly without cause or by the Executive for good reason (which includes material reduction in duties or authority, reduction in compensation or benefits, or a relocation of employment from Fort Smith) during a period of two years following the change in control or (ii) termination of employment initiated by the Executive without good cause during the 31 day period commencing on the first day of the 13th month following the change in control. For purposes of the Severance Agreements, a change in control shall be deemed to have taken place if: (i) any person, corporation, or other entity or group, including any "group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, other than any employee benefit plan then maintained by Beverly, becomes the beneficial owner of shares of Beverly's Common Stock having 30 percent or more of the total number of votes that may be cast for the election of directors of Beverly; (ii) as the result of, or in connection with, any contested election for the Board of Directors of Beverly, 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 before the Transaction shall cease to constitute a majority of the Board of Directors of Beverly or any successor to Beverly or its assets, or (iii) at any time (a) Beverly shall consolidate with, or merge with, any other Person and Beverly shall not be the continuing or surviving corporation, (b) any Person shall consolidate with, or merge with, Beverly, and Beverly shall be the continuing or surviving corporation and in connection therewith, all or part of the outstanding Common Stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, (c) Beverly shall be a party to a statutory share exchange with any other Person after which Beverly is a subsidiary of any other Person, or (d) Beverly shall sell or otherwise transfer 50% or more of the assets or earning power of Beverly and its subsidiaries (taken as a whole) to any Person or Persons. The severance benefit under the Severance Agreements includes (i) a lump sum payment equal to three times the sum of (a) the Executive's base salary and (b) the Executive's target bonus under Beverly's Annual Incentive Plan, with (a) and (b) to be determined at either the termination of employment or the change in control so as to produce the greater payment; (ii) vesting of all options, restricted stock, phantom units, and other awards granted to Executive which have not otherwise vested; (iii) continuation, for a period of three years following termination of employment, of participation in Beverly's Medical Plan, Executive Medical 69 77 Reimbursement Plan, and Dental Plan; (iv) relocation to the next base of full-time employment, if commenced within three years of termination of employment, in accordance with Beverly's general relocation policy for executives; (v) a matching contribution to Beverly's Executive Retirement Plan for the plan year in which the termination of employment occurs; and (vi) for two years following termination of employment, disability insurance benefits equivalent to the benefits the Executive would have received had he or she remained employed by Beverly. The Severance Agreements include a provision for a gross-up payment if, in the opinion of a Big 6 accounting firm or if so alleged by the Internal Revenue Service, the aggregate severance benefit described above would cause the payment of any part of such benefit to constitute an "excess parachute payment" as defined in Section 280G(b) of the Internal Revenue Code. The amount of the gross-up payment will be equal to the amount necessary to cause the net amount retained by the Executive, after deduction of any (a) excise tax on the severance benefit, (b) income tax on the gross-up payment, and (c) excise tax on the gross-up payment, to be equal to the aggregate remuneration the Executive would have received, as if Sections 280G and 4999 of the Internal Revenue Code had not been enacted into law. Effective December 8, 1995, Beverly entered into employment contracts (each an "Employment Contract" and collectively the "Employment Contracts") with Mr. Banks and Mr. Hendrickson (collectively the "Senior Executives"). The Employment Contracts have an initial term of three years, with an automatic extension of one additional day for each day beyond December 8, 1995 that each of the respective Senior Executives remains employed by Beverly until such time as Beverly elects to cease such extension by giving written notice thereby setting the term to end three years from the written notice. The Employment Contracts provide the Senior Executives with: (i) a stated minimum base salary per annum through a specified date, and thereafter at any such greater rate as is determined by the Committee (the stated minimum base salary per annum for Messrs. Banks and Hendrickson is $627,500 and $450,000 respectively; (ii) participation in all benefit plans; and (iii) an annual cash bonus pursuant to Beverly's Annual Incentive Plan. The Employment Contracts provide severance benefits in the event of a change in control (including gross-up payments) on substantially the same terms and conditions as set forth above with respect to the Severance Agreements except that the Senior Executives may claim the relocation benefit without commencing full-time employment. In addition Mr. Banks' Employment Contract provides that Beverly will provide office space to Mr. Banks for a period of the lesser of three years or the date he commences full-time employment. In addition to severance benefits in the event of a change in control, the Employment Contracts provide for severance benefits to the Senior Executives during their term if there is a termination of employment initiated by (i) Beverly without cause or (ii) by the Senior Executive for good reason. In this event, the severance benefit includes: (a) a lump sum payment equal to one times the sum of the Senior Executive's (1) base salary and (2) target bonus or actual bonus for the previous year, if higher; (b) vesting of all unvested equity-based compensation; (c) continuation, for at least two years from termination of employment, of participation in Beverly's Medical Plan, Executive Medical Reimbursement Plan, and Dental Plan; (d) relocation benefits as described above; and (e) a matching contribution to Beverly's Executive Retirement Plan for the plan year in which the termination of employment occurs. Effective June 3, 1996 Beverly entered into an employment contract with Dr. Renschler (as amended by the Employment Contract Addendum and Amendment to Employment Contract, the "Renschler Agreement"). The Renschler Agreement contains the same terms as the Employment Contract with Mr. Hendrickson with the following exceptions: (i) the minimum base salary is $375,000; (ii) a guaranteed bonus for 1996 performance of no less than 50% of base salary; (iii) a payment of $400,000 in quarterly installments of $100,000 each beginning in June 1996 to reimburse Dr. Renschler for lost benefits; (iv) Beverly agreed to be a co-signer on a note for $1,200,000 to enable Dr. Renschler to exercise options from his former employer (which note has since been repaid in full and Beverly's obligations terminated and released); (v) the definition of "Change of Control" was amended to include the sale by Beverly of at least 80 % of the capital stock of Pharmacy Corporation of America to a person other than Beverly or any direct or 70 78 indirect affiliate and (vi) various provisions relating to Dr. Renschler's participation in various Company stock-based compensation and other benefit plans. A trust has been established with Chemical Bank to fund certain benefits payable pursuant to certain employee benefit plans, including the Severance Agreements, the Employment Contracts and the Renschler Agreement in the event of termination of employment after a change in control of Beverly. Immediately prior to a change in control of Beverly, Beverly is required to make a deposit to the trust in an amount equal to the excess of the maximum amount potentially payable under the plans to all participants over the current value of the trust assets. The trust is revocable by Beverly until a change in control. The trust assets are subject to the claims of general creditors of Beverly in the event of Beverly's insolvency. The Beverly Board of Directors believes that the Severance Agreements, the Employment Contracts and the Renschler Agreement will encourage the commitment and availability of its key management employees in the face of potentially disruptive and distracting circumstances that may arise in the event of an attempted or actual change in control or an unsolicited takeover of Beverly. In any such event, such key management employees will be able to analyze and evaluate proposals objectively with a view to the best interest of Beverly and its stockholders. The Severance Agreements, the Employment Contracts and the Renschler Agreement, however, may have the incidental effect of discouraging takeovers and protecting employees from removal, since the agreements increase the cost that would be incurred by an acquiror seeking to replace current management. Beverly currently has employment and change of control agreements (including certain severance agreements and employment contracts) (the "Existing Agreements") with 87 employees, 84 of which are expected to become Transferred Employees and will be transferred to New Beverly or one of its subsidiaries, as appropriate, immediately prior to the Distribution. It is anticipated that 3 employees that currently have Existing Agreements will not become Transferred Employees and will terminate their employment with Beverly. In addition, Beverly currently has Existing Agreements with 13 employees of PCA (including the Renschler Agreement), all of whom will become Retained Employees and be employed by Capstone or one of its subsidiaries as of the Effective Time of the Merger. If the Transactions were deemed to constitute a change in control within the meaning of such Existing Agreements, all employees with such agreements could be entitled to receive, upon termination of employment, up to $42 million in aggregate payments. Beverly has requested that the 84 employees who will become Transferred Employees enter into new employment, severance, or change of control severance agreements with New Beverly to be effective on the effective date of the Distribution (the "New Beverly Agreements"). The New Beverly Agreements provide, in exchange for the benefits provided therein (as described below), that the employee agrees to: (i) waive any rights currently in existence under any change in control, severance or employment agreement or other compensation or employee benefit plan with or previously assumed by Beverly; (ii) waive any claim that either the Distribution or the Merger constitutes a Change in Control; (iii) non-disclosure and non-solicitation provisions not contained in the Existing Agreements; (iv) a more narrow definition of "change in control" for future transactions; and (v) cancellation of existing Beverly stock options and the substitution of new stock options to be issued by New Beverly with similar terms and conditions (including 100% vesting) as the prior options, other than an increase in the number of shares for which the option may be exercised and a decrease in the exercise price thereof in order to take into account the effect of the Distribution. The New Beverly Agreements provide the following benefits: (i) change in control severance benefits substantially the same as those set forth in Existing Agreements plus the addition of vesting of life insurance benefits for certain officers; and (ii) additional severance benefits for officers upon termination not in connection with a change in control. Four employees have failed to execute and deliver a New Beverly Agreement. New Beverly will assume the obligations of Beverly under the Existing Agreements. New Beverly will also assume any Beverly stock options by cancellation of the Beverly grants and the substitution of new grants by New Beverly with similar terms and conditions (including 100% vesting) as the prior grants other than appropriate adjustments to the number of shares and exercise price in order to take into account the effect of the Distribution. In addition, the Existing Agreements (unlike many of the New Beverly Agreements), generally provide no severance benefits outside of a change in control. 71 79 Capstone will assume the Existing Agreements with the 13 PCA employees, effective on the Effective Date of the merger (the "Assumed Agreements"). Beverly will accelerate vesting of currently unvested Beverly options, phantom shares, performance shares and restricted stock held by PCA employees on the Effective Date of the Merger. On that date, Beverly will cancel all unexercised Beverly stock options and Capstone will issue new Capstone stock options in substitution, with similar terms and conditions (including 100% vesting) as the prior options, other than an increase in the number of shares for which the option may be exercised and a decrease in the exercise price to take into account the effect of the Distribution and Merger. It is anticipated that 3 of the 13 PCA employees will terminate employment with Capstone after a transition period and be eligible for severance benefits under the Assumed Agreements. NEW BEVERLY 1997 LONG-TERM INCENTIVE PLAN On May 29, 1997, the Board of Directors of New Beverly adopted the New Beverly 1997 Long-Term Incentive Plan (the "New Beverly 1997 Incentive Plan"). The Board of Directors, its Compensation Committee and Beverly, as sole stockholder of New Beverly prior to the Distribution, has approved the New Beverly 1997 Incentive Plan and recommended its approval by Beverly stockholders at a meeting called to vote thereon. The Compensation Committee and Board of Directors of Beverly have determined that it is in the best interest of Beverly and its stockholders to seek stockholder approval from the Beverly stockholders of the New Beverly 1997 Incentive Plan in view of the federal tax provisions contained in Section 162(m) of the Code. Under Code Section 162(m), New Beverly may be prohibited from deducting the expense of compensation accrued or paid to its chief executive officer and its four other most highly-compensated officers ("Covered Participants") to the extent such compensation to any Covered Participant exceeds $1 million for any taxable year of New Beverly. An exception exists to this deduction limit for performance-based compensation such as an award granted under the New Beverly 1997 Incentive Plan, if, among other conditions, the specific terms of the performance-based compensation to such Covered Participants are disclosed to and approved by the stockholders. Stockholder approval of the New Beverly 1997 Incentive Plan is being sought in order that awards granted under the New Beverly 1997 Incentive Plan will not count toward the $1 million deductible compensation limit under Code Section 162(m). The purpose of the New Beverly 1997 Incentive Plan is to allow New Beverly to attract and retain qualified officers, key employees and consultants and to provide these individuals with an additional incentive to devote themselves to the future success of New Beverly. Additionally, New Beverly believes that awards under the 1997 Incentive Plan will more closely align the interests of its personnel with those of its stockholders. New Beverly will also use the New Beverly 1997 Incentive Plan to fulfill its obligations under the Employee Benefit Agreement with regards to Transferred Employees. For a discussion of the material terms of the New Beverly 1997 Incentive Plan, see "Other Beverly Proposals -- New Beverly 1997 Long-Term Incentive Plan" in the Joint Proxy Statement/Prospectus. The New Beverly 1997 Incentive Plan is attached as Annex I to the Joint Proxy Statement/Prospectus. NEW BEVERLY NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN On May 29, 1997, the Board of Directors of New Beverly adopted the New Beverly Non-Employee Directors Stock Option Plan ("New Beverly Directors Option Plan"). The New Beverly Directors Option Plan has been adopted by the Board of Directors and Compensation Committee of Beverly, and has been approved by Beverly as sole stockholder of New Beverly prior to the Distribution. Non-Employee Directors are not eligible to participate under the New Beverly 1997 Incentive Plan. The purpose of the New Beverly Directors Option Plan is to build a proprietary interest among the Non-Employee Directors on the New Beverly Board of Directors, and thereby secure for New Beverly stockholders the benefits associated with stock ownership by those who will oversee New Beverly's future growth and success. For a discussion of the material terms of the New Beverly Directors Option Plan, see "Other Beverly Proposals -- New Beverly Non-Employee Directors Stock Option Plan" in the Joint Proxy Statement/Prospectus. The New Beverly Directors Option Plan is attached as Annex J to the Joint Proxy Statement/Prospectus. 72 80 CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS Jon E.M. Jacoby, a director of Beverly, serves as Executive Vice President, Chief Financial Officer and director of Stephens Group, Inc. For the year ended December 31, 1996, Beverly paid to Stephens Group, Inc. or its affiliates, approximately $880,113 for investment banking and brokerage services. It is anticipated that prior to the consummation of the Transactions, Mr. Jacoby will be appointed as a director of New Beverly. See "Business -- Management." DESCRIPTION OF NEW BEVERLY CAPITAL STOCK AUTHORIZED CAPITAL STOCK Prior to the Distribution, New Beverly shall cause to be filed an amendment to its Certificate of Incorporation which shall grant to New Beverly the authority to issue shares of capital stock, of which will be common stock, par value $.10 per share, and will be preferred stock, par value $1.00 per share ("New Beverly Preferred Stock"). At August 31, 1997, New Beverly had outstanding 1,000 shares of New Beverly Common Stock, all of which are currently held by Beverly. NEW BEVERLY PREFERRED STOCK Under New Beverly's Certificate of Incorporation, New Beverly's Board of Directors may from time to time establish and issue one or more series of preferred stock and fix the designations, powers, preferences and rights of the shares of such series and the qualification, limitations or restrictions thereon, including, but not limited to, the fixing of the dividend rights, dividend rate or rates, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences, in each case, if any, of any wholly unissued series of New Beverly Preferred Stock. NEW BEVERLY COMMON STOCK Holders of New Beverly Common Stock are entitled to receive such dividends as are declared by the Board of Directors, subject to the preference of any outstanding New Beverly Preferred Stock, and are entitled to cast one vote per share on all matters voted upon by stockholders. There is no cumulative voting for the election of directors and New Beverly Common Stock does not have any preemptive rights. Upon liquidation of New Beverly, holders of New Beverly Common Stock are entitled to share equally and ratably in any assets available for distribution to them, after payment or provision for liabilities and amounts owing with respect to any outstanding New Beverly Preferred Stock. Payment and declaration of dividends on New Beverly Common Stock and purchases of shares thereof by New Beverly will be subject to restrictions if New Beverly fails to pay dividends on any series of New Beverly Preferred Stock ranking prior to New Beverly Common Stock as to the payment of dividends. It is anticipated that New Beverly will be subject to certain restrictions under its banking arrangements related to the payment of cash dividends on its common stock. The Registrar and Transfer Agent for New Beverly Common Stock is The Bank of New York. NEW BEVERLY COMMON STOCK PURCHASE RIGHTS The New Beverly Board of Directors on May 29, 1997 adopted a stockholders rights plan, pursuant to which one common stock purchase right (a "Right" or "Rights") will be issued with respect to each share of New Beverly Common Stock (the "Common Shares"), outstanding at the close of business on the Distribution Date. The Rights are identical in substance to the stock purchase rights currently outstanding in connection with the Beverly stockholders rights plan. Each Right entitles the registered holder thereof, after the Right becomes exercisable and until (or the earlier redemption, exchange, or termination of the Right), to purchase from New Beverly one Common Share at a price of $ per share, subject to adjustment (the "Purchase Price"). The description and terms of the Rights are set forth in a Rights Agreement dated (the "Rights Agreement") between New Beverly and The Bank of New York, as Rights Agent (the "Rights Agent"). 73 81 The Rights are represented by the Common Share certificates and are not exercisable until a Distribution Date (as defined). A Distribution Date is defined as the earlier of the following: (i) ten days following the Shares Acquisition Date (the first date of a public announcement by New Beverly or an Acquiring Person (as defined in the Rights Agreement) which reveals the existence of an Acquiring Person) or (ii) the tenth day after the date of the commencement of, or of the first public announcement of the intent of any person (other than New Beverly, any of its subsidiaries, or any of its Employee Benefit Plans) to commence a tender or exchange offer which would result in any Person becoming the beneficial owner of common shares aggregating 15% or more of the outstanding New Beverly Common Shares (an "Acquiring Person"). The Board of Directors of New Beverly may postpone, under certain circumstances, one or more times, a Distribution Date beyond the dates set forth above. As soon as practicable, after a Distribution Date, the Rights Agent will send to each record holder of New Beverly Common Shares, as of the close of business on a Distribution Date, a certificate for Rights evidencing one Right for each Common Share. The Rights will first become exercisable on a Distribution Date, unless earlier redeemed or exchanged, and may then begin trading separately. The Rights will not at any time have any voting rights. Each holder of a Right (other than those owned by the Acquiring Person which shall be void) will have the right to receive upon its exercise that number of Common Shares having a market value of two times the then current Purchase Price of one Right if one of the following events is triggered: (1) a person becomes an Acquiring Person (except under certain circumstances where cash offers for all outstanding Common Shares are approved by the Board of Directors of New Beverly); or (2) if New Beverly is the surviving corporation in a merger with an Acquiring Person or any Associate or Affiliate (as defined in Section 12b-2 of the Exchange Act) of any Acquiring Person, and the Common Shares were not changed or exchanged. In the event that a person or group becomes an Acquiring Person, or New Beverly is acquired in a merger or other business combination transaction where more than 50% of its assets or earning power was sold, proper provision shall be made so that each holder of a Right shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have the market value of two times the then current Purchase Price of one Right. The New Beverly Board of Directors has the right at any time prior to an acquisition of an Acquiring Person of 50% or more of the then outstanding Common Shares to cause New Beverly to acquire the Rights (other than those owned by the Acquiring Person which are void) in exchange for that number of Common Shares which has an aggregate value, per Right, equal to the excess of the value of the Common Shares issuable upon exercise of a Right after a person becomes an Acquiring Person over the Purchase Price. The New Beverly Board of Directors may redeem the Rights in whole at a price of $.01 per Right (the "Redemption Price") at any time prior to the close of business on the tenth day following the public announcement of an Acquiring Person. The ten-day redemption period may be changed by a majority of the Board of Directors under certain circumstances. The right to exercise the Rights will immediately terminate upon action by the New Beverly Board of Directors to redeem the Rights and the holders of the Rights will only have the right to receive the Redemption Price. The Rights will expire on , unless earlier redeemed or exchanged. The Purchase Price, the number of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time to prevent dilution. Such adjustments may be made in the event New Beverly (i) declares a stock dividend on, or a subdivision, combination or reclassification of, the Common Shares, (ii) upon the grant to holders of the Common Shares of certain rights or warrants to subscribe for or purchase Common Shares or convertible securities at less than the current market price of the Common Shares or (iii) upon the distribution to holders of the Common Shares of evidences of indebtedness, securities or assets (excluding regular periodic cash dividends at a rate not in excess of 125% of the last regular periodic cash dividend paid, or if not previously paid at a rate not to exceed 50% of the average net income per share of New Beverly for the four quarters ended immediately prior to the payment of such dividend, or dividends payable in Common Shares (which dividends will be subject to the adjustment described in clause (i) above) or of subscription rights or warrants (other than those referred to above). 74 82 No adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional shares will be issued and in lieu thereof, a payment in cash will be made based on the market price of the Common Shares on the last trading date prior to the date of exercise. Until a Right is exercised, the holder thereof will have no rights as a stockholder of New Beverly beyond those as an existing stockholder, including, without limitation, the right to vote or to receive dividends. Any provisions of the Rights Agreement may be amended by the Board of Directors of New Beverly prior to a Distribution Date. After a Distribution Date, New Beverly and the Rights Agent may amend or supplement the Rights Agreement without the approval of any holders of Right Certificates to cure any ambiguity, to correct or supplement any provision contained therein which may be defective or inconsistent with any other provisions therein, to shorten or lengthen any period under the Rights Agreement (requiring a majority of the Board of Directors under certain circumstances), or so long as the interest of the holders of Right Certificates (other than an Acquiring Person or an affiliate or associate of an Acquiring Person) are not adversely affected, thereby, to make any other provision in regard to matters or questions arising thereunder which New Beverly and the Rights Agent may deem necessary or desirable, including but not limited to extending the Final Expiration Date. New Beverly may at any time prior to a Person becoming an Acquiring Person amend the Rights Agreement to lower the thresholds described above to not less than the greater of (i) any percentage greater than the largest percentage of the outstanding Common Shares then known by New Beverly to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%. The Rights will cause substantial dilution to a person or group that acquires 15% or more of New Beverly's stock on terms not approved by the New Beverly's Board of Directors, except pursuant to an offer conditioned on substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors prior to ten days after the time that a Person or group has become an Acquiring Person as the Rights may be redeemed by New Beverly at $.01 per Right prior to such time. THE CHARTER AND BYLAWS OF NEW BEVERLY The provisions of the New Beverly Certificate of Incorporation (the "New Beverly Certificate") and the New Beverly Bylaws will be amended and restated by Beverly prior to the Distribution to duplicate the substance of the provisions of Beverly's current Certificate of Incorporation (the "Beverly Certificate") and the Beverly Bylaws, respectively. For a discussion of the material provisions of the Beverly Certificate and the Beverly Bylaws, see the information set forth in the Joint Proxy Statement/Prospectus under the caption "Comparative Rights of Stockholders." 75 83 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Distribution, New Beverly will have an estimated 110,424,677 shares of New Beverly Common Stock outstanding, all of which will be freely tradable without restriction or further registration under the Securities Act, except to the extent such shares are held by "affiliates" of New Beverly, which will be subject to the limitations of Rule 144 promulgated under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, persons who may be deemed affiliates of New Beverly, as that term is defined in the Securities Act would be entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of New Beverly Common Stock (approximately 1.1 million shares immediately after the Distribution) or the average weekly trading volume during the four calendar weeks preceding a sale by such person. Sales under Rule 144 are also subject to certain provisions relating to the manner and notice of sale and availability of current public information about New Beverly. Following the Distribution, approximately 5.5 million shares of New Beverly Common Stock will be issuable upon the exercise of options held by directors and employees of New Beverly and former employees of Beverly. LEGAL MATTERS Certain legal matters in connection with the Distribution will be passed upon for New Beverly by Giroir, Gregory, Holmes & Hoover, PLC, Little Rock, Arkansas, and certain other legal matters in connection with this Offering will be passed upon for New Beverly by John W. MacKenzie, Deputy General Counsel of New Beverly. EXPERTS The consolidated financial statements and schedule of Beverly Enterprises, Inc. at December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements and schedule of Pharmacy Corporation of America at December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, appearing in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The balance sheet of New Beverly Holdings, Inc. as of May 31, 1997, appearing in this Prospectus and Registration Statement, has been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and is included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. 76 84 BEVERLY ENTERPRISES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements and schedules are included herein: BEVERLY ENTERPRISES, INC. Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996................................... F-2 Condensed Consolidated Statements of Income for the three-month and six-month periods ended June 30, 1997 and 1996................................................ F-3 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996................. F-4 Notes to Condensed Consolidated Financial Statements...... F-5 PHARMACY CORPORATION OF AMERICA Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996................................... F-8 Condensed Consolidated Statements of Income for the three-month and six-month periods ended June 30, 1997 and 1996................................................ F-9 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996................. F-10 Notes to Condensed Consolidated Financial Statements...... F-11 BEVERLY ENTERPRISES, INC. Report of Ernst & Young LLP, Independent Auditors......... F-13 Consolidated Balance Sheets as of December 31, 1996 and 1995.................................................... F-14 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994........................ F-15 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994............ F-16 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994........................ F-17 Notes to Consolidated Financial Statements................ F-18 Schedule II -- Valuation and Qualifying Accounts.......... F-36 PHARMACY CORPORATION OF AMERICA Report of Ernst & Young LLP, Independent Auditors......... F-37 Consolidated Balance Sheets as of December 31, 1996 and 1995.................................................... F-38 Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1996, 1995 and 1994.... F-39 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994........................ F-40 Notes to Consolidated Financial Statements................ F-41 Schedule II -- Valuation and Qualifying Accounts.......... F-51 NEW BEVERLY HOLDINGS, INC. Report of Ernst & Young LLP, Independent Auditors......... F-52 Balance Sheet as of May 31, 1997.......................... F-53 Note to Balance Sheet..................................... F-54
F-1 85 BEVERLY ENTERPRISES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND DECEMBER 31, 1996 (DOLLARS IN THOUSANDS) ASSETS
JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) (NOTE) Current assets: Cash and cash equivalents................................. $ 71,756 $ 69,761 Accounts receivable -- patient, less allowance for doubtful accounts: 1997 -- $34,755; 1996 -- $25,618........................ 502,511 491,063 Accounts receivable -- nonpatient, less allowance for doubtful accounts: 1997 -- $580; 1996 -- $401.............................. 10,429 13,480 Notes receivable.......................................... 9,260 10,746 Operating supplies........................................ 55,713 55,348 Deferred income taxes..................................... 23,547 14,543 Prepaid expenses and other................................ 43,738 42,304 ---------- ---------- Total current assets................................ 716,954 697,245 Property and equipment, net of accumulated depreciation and amortization: 1997 -- $635,982; 1996 -- $643,085...................... 1,188,197 1,248,785 Other assets: Notes receivable, less allowance for doubtful notes: 1997 -- $5,674; 1996 -- $4,951.......................... 28,958 37,306 Designated and restricted funds........................... 74,182 75,848 Goodwill, net............................................. 375,221 356,197 Other, net................................................ 107,454 109,701 ---------- ---------- Total other assets.................................. 585,815 579,052 ---------- ---------- $2,490,966 $2,525,082 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 96,854 $ 99,121 Accrued wages and related liabilities..................... 128,892 131,072 Accrued interest.......................................... 17,683 16,969 Other accrued liabilities................................. 107,660 93,042 Current portion of long-term obligations.................. 35,669 38,826 ---------- ---------- Total current liabilities........................... 386,758 379,030 Long-term obligations....................................... 1,018,551 1,106,256 Deferred income taxes payable............................... 98,769 83,610 Other liabilities and deferred items........................ 96,171 95,091 Commitments and contingencies Stockholders' equity: Preferred stock, shares authorized: 25,000,000............ -- -- Common stock, shares issued: 1997 -- 104,712,723; 1996 -- 104,432,848..................................... 10,471 10,443 Additional paid-in capital................................ 777,172 774,672 Retained earnings......................................... 173,390 133,957 Treasury stock, at cost: 1997 -- 6,274,108; 1996 -- 5,423,408....................................... (70,316) (57,977) ---------- ---------- Total stockholders' equity.......................... 890,717 861,095 ---------- ---------- $2,490,966 $2,525,082 ========== ==========
- --------------- NOTE: The balance sheet at December 31, 1996 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. F-2 86 BEVERLY ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 1997 1996 1997 1996 -------- -------- ---------- ---------- Net operating revenues.......................... $817,503 $798,333 $1,634,219 $1,609,380 Interest income................................. 3,161 3,475 6,726 6,935 -------- -------- ---------- ---------- Total revenues........................ 820,664 801,808 1,640,945 1,616,315 Costs and expenses: Operating and administrative: Wages and related.......................... 448,074 444,527 897,856 894,522 Other...................................... 287,944 280,006 577,874 573,490 Interest...................................... 21,971 22,983 44,687 46,128 Depreciation and amortization................. 27,725 25,967 54,806 51,023 -------- -------- ---------- ---------- Total costs and expenses.............. 785,714 773,483 1,575,223 1,565,163 -------- -------- ---------- ---------- Income before provision for income taxes........ 34,950 28,325 65,722 51,152 Provision for income taxes...................... 13,980 11,330 26,289 20,461 -------- -------- ---------- ---------- Net income...................................... $ 20,970 $ 16,995 $ 39,433 $ 30,691 ======== ======== ========== ========== Net income per share of common stock: Primary: Net income per share of common stock....... $ .21 $ .17 $ .40 $ .31 ======== ======== ========== ========== Shares used to compute net income per share.................................... 99,048 100,079 99,230 100,028 ======== ======== ========== ========== Fully diluted: Net income per share of common stock....... $ .20 $ .16 $ .38 $ .30 ======== ======== ========== ========== Shares used to compute net income per share.................................... 110,640 111,341 110,865 111,299 ======== ======== ========== ==========
Primary earnings per share for the three-month and six-month periods ended June 30, 1997 and 1996 were computed by dividing net income by the weighted average number of shares of common stock outstanding during the period and the weighted average number of shares issuable upon exercise of common stock equivalents (principally stock options), calculated using the treasury stock method. Fully diluted earnings per share for the three-month and six-month periods ended June 30, 1997 and 1996 were computed as above and assumed conversion of the Company's 5 1/2% convertible subordinated debentures. Conversion of the Company's 7 5/8% convertible subordinated debentures and zero coupon notes would have an anti-dilutive effect and, therefore, were not assumed. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," which is required to be adopted in financial statements for periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements, primary earnings per share will be renamed basic earnings per share and will exclude the dilutive effect of stock options. The impact is not expected to result in a change in the Company's primary earnings per share or fully diluted earnings per share (which will be renamed dilutive earnings per share) for the three-month and six-month periods ended June 30, 1997 and 1996. See accompanying notes. F-3 87 BEVERLY ENTERPRISES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS)
1997 1996 --------- --------- Cash flows from operating activities: Net income................................................ $ 39,433 $ 30,691 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 54,806 51,023 Provision for reserves and discounts on patient, notes and other receivables, net............................ 19,818 11,549 Amortization of deferred financing costs............... 1,336 2,726 Gains on dispositions of facilities and other assets, net................................................... (20,842) (2,890) Deferred taxes......................................... 6,632 8,271 Net increase (decrease) in insurance related accounts.............................................. 383 (8,204) Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable -- patient....................... (33,960) (22,809) Operating supplies................................... (2,036) 2,247 Prepaid expenses and other receivables............... (727) (1,752) Accounts payable and other accrued expenses.......... 829 (19,662) Income taxes payable................................. (4,309) 6,199 Other, net........................................... 154 (359) --------- --------- Total adjustments................................. 22,084 26,339 --------- --------- Net cash provided by operating activities......... 61,517 57,030 Cash flows from investing activities: Payments for acquisitions, net of cash acquired........... (45,373) (25,721) Proceeds from dispositions of facilities and other assets................................................. 143,409 12,579 Collections on notes receivable and REMIC investment...... 18,441 6,005 Capital expenditures...................................... (70,317) (61,392) Other, net................................................ (3,263) (4,820) --------- --------- Net cash provided by (used for) investing activities...................................... 42,897 (73,349) Cash flows from financing activities: Revolver borrowings....................................... 772,000 601,000 Repayments of Revolver borrowings......................... (838,000) (624,000) Proceeds from issuance of long-term obligations........... 3,534 180,000 Repayments of long-term obligations....................... (28,242) (136,834) Purchase of common stock for treasury..................... (14,736) (6,238) Proceeds from exercise of stock options................... 2,546 2,426 Deferred financing costs.................................. (354) (5,893) Dividends paid on preferred stock......................... -- (688) Proceeds from designated funds, net....................... 833 1,676 --------- --------- Net cash provided by (used for) financing activities...................................... (102,419) 11,449 --------- --------- Net increase (decrease) in cash and cash equivalents........ 1,995 (4,870) Cash and cash equivalents at beginning of period............ 69,761 56,303 --------- --------- Cash and cash equivalents at end of period.................. $ 71,756 $ 51,433 ========= ========= Supplemental schedule of cash flow information: Cash paid during the period for: Interest (net of amounts capitalized).................. $ 42,637 $ 37,026 Income taxes (net of refunds).......................... 23,966 5,991
See accompanying notes. F-4 88 BEVERLY ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) (i) The condensed consolidated financial statements included herein have been prepared by the Company, without audit, and include all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the results of operations for the three-month and six-month periods ended June 30, 1997 and 1996 pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's consolidated financial statements and the notes thereto included in the Company's 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The results of operations for the three-month and six-month periods ended June 30, 1997 are not necessarily indicative of the results for a full year. Unless the context indicates otherwise, the Company means Beverly Enterprises, Inc. and its consolidated subsidiaries. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform with the 1997 presentation. (ii) The provisions for income taxes for the three-month and six-month periods ended June 30, 1997 and 1996 were based on an estimated annual effective tax rate of 40%. The Company's estimated annual effective tax rates for 1997 and 1996 are different than the federal statutory rate primarily due to the impact of state income taxes and amortization of nondeductible goodwill. The provisions for income taxes consist of the following for the three-month and six-month periods ended June 30 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------- 1997 1996 1997 1996 -------- -------- ------- ------- Federal: Current...................................... $10,009 $ 4,946 $15,307 $ 9,499 Deferred..................................... 2,075 4,074 6,915 6,839 State: Current...................................... 3,079 1,377 4,350 2,691 Deferred..................................... (1,183) 933 (283) 1,432 ------- ------- ------- ------- $13,980 $11,330 $26,289 $20,461 ======= ======= ======= =======
(iii) During the six months ended June 30, 1997, the Company purchased six previously leased nursing facilities (758 beds) and certain other assets including, among other things, 14 institutional pharmacies and 17 outpatient therapy clinics, for approximately $44,700,000 cash and approximately $3,800,000 closing and other costs. Also during such period, the Company sold or terminated the leases on 59 nursing facilities (7,244 beds) and certain other assets for cash proceeds of approximately $143,700,000. The Company primarily used the net cash proceeds from the disposition of facilities and other assets to repay Revolver borrowings, to repurchase the zero coupon notes and to repay various other indebtedness. The operations of these facilities were immaterial to the Company's financial position and results of operations. F-5 89 BEVERLY ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In April 1997, the Company entered into a definitive agreement with Capstone Pharmacy Services, Inc. ("Capstone") to combine Pharmacy Corporation of America ("PCA"), a wholly-owned subsidiary of the Company, with Capstone (the "Merger") to create one of the nation's largest independent institutional pharmacy companies. The Company will receive approximately $275,000,000 of cash as partial repayment for PCA's intercompany debt, with any remaining intercompany balance contributed to PCA's capital. The Company intends to use the $275,000,000 to repay Revolver borrowings, to pay off the 7 5/8% convertible subordinated debentures, to pay off the 8 3/4% Senior Notes, to repay certain other notes and mortgages and for general corporate purposes. Pursuant to the Merger Agreement, at the effective time of the Merger (the "Effective Time") each share of the Company's Common Stock issued and outstanding immediately prior to the Effective Time (other than fractional shares) will be converted into the right to receive that number of newly issued shares of Capstone common stock equal to the quotient, expressed to four decimal places, of (a) 50,000,000 divided by (b) the number of shares of the Company's Common Stock outstanding immediately prior to the Effective Time. The Merger, which is subject to approvals by the shareholders of both the Company and Capstone, completion of the Distribution (as discussed below), and approvals by various government agencies, is expected to close by year-end. In connection with the restructuring, the Company will transfer all of its non-PCA assets and liabilities to New Beverly Holdings, Inc. ("New Beverly"), in exchange for the issuance of New Beverly common stock. The Company will then distribute (the "Distribution") such New Beverly common stock to the then current shareholders of the Company's Common Stock on a one-for-one basis. In connection with the Distribution, the Company will be required to restructure, repay or otherwise renegotiate substantially all of its outstanding debt instruments and renegotiate or make certain payments under various employment agreements with officers of the Company. The Company estimates that the costs of such undertakings will approximate $10,200,000 as it relates to restructuring, repaying or renegotiating debt instruments and approximately $14,000,000 as it relates to renegotiating or paying certain amounts under various employment agreements. It is expected that such amounts, along with other transaction costs will be funded with a portion of the $275,000,000 proceeds to be received as a partial repayment of PCA's intercompany debt, as discussed above. On July 17, 1997, the Company called its 5 1/2% convertible subordinated debentures (the "5 1/2% Debentures") for redemption on August 18, 1997. The Company has obtained a stand-by commitment for the issuance of subordinated indebtedness, whose net cash proceeds would qualify under the restrictive covenant contained in an indenture dated as of February 1, 1996, to be used to redeem the 5 1/2% Debentures. The Company anticipates that if the price of the Company's Common Stock is more than 3.30% above the conversion price of $13.33 immediately prior to the redemption date, the holders will be likely to convert their 5 1/2% Debentures to the Company's Common Stock. The right to convert the 5 1/2% Debentures into shares of the Company's Common Stock will expire at the close of business August 15, 1997. Conversion of all or substantially all of the 5 1/2% Debentures into the Company's Common Stock prior to the Effective Time of the Merger would cause an increase in the Company's outstanding Common Stock of approximately 11,250,000 shares and would result in holders of the Company's Common Stock receiving a comparatively smaller number of shares of Capstone common stock in the Merger. (iv) There are various lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. (v) Effective July 31, 1987, Beverly Enterprises, a California corporation ("Beverly California"), became a wholly-owned subsidiary of Beverly Enterprises, Inc., a Delaware corporation ("Beverly Delaware"). Effective January 1, 1995, Beverly California changed its name to Beverly Health and Rehabilitation Services, Inc. ("BHRS"). Beverly Delaware (the parent) provides financial, administrative and legal services to its subsidiaries, including BHRS, for which it charges management fees. F-6 90 BEVERLY ENTERPRISES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarized unaudited financial information concerning BHRS is being reported because BHRS's 7 5/8% convertible subordinated debentures due March 2003 and its zero coupon notes (collectively, the "Debt Securities") are publicly-held. Beverly Delaware is co-obligor of the Debt Securities. Summary unaudited financial information for BHRS is as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------------- 1997 1996 1997 1996 -------- -------- ---------- ---------- Total revenues............................. $668,891 $664,929 $1,339,244 $1,345,202 Total costs and expenses................... 629,525 635,114 1,271,880 1,293,854 Net income................................. 23,619 17,889 40,418 30,809
AS OF AS OF JUNE 30, DECEMBER 31, 1997 1996 ---------- ------------ Current assets............................................. $ 362,080 $ 369,501 Long-term assets........................................... 1,318,214 1,404,292 Current liabilities........................................ 204,962 184,887 Long-term liabilities...................................... 641,584 795,593
F-7 91 PHARMACY CORPORATION OF AMERICA CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) (NOTE) ASSETS Current assets: Cash and cash equivalents................................. $ 6,668 $ 7,575 Accounts receivable, less allowance for doubtful accounts: 1997 -- $14,608; 1996 -- $13,070....................... 109,798 93,078 Notes and other receivables, less allowance for doubtful accounts: 1997 -- $394; 1996 -- $820............................. 873 1,383 Inventory................................................. 25,322 22,025 Prepaid expenses and other................................ 494 335 -------- -------- Total current assets.............................. 143,155 124,396 Property and equipment, net of accumulated depreciation and amortization: 1997 -- $27,307; 1996 -- $23,263.......................... 35,215 32,698 Other assets: Goodwill, net............................................. 290,931 276,430 Systems development, net.................................. 4,720 4,837 Other, net................................................ 7,525 3,215 -------- -------- Total other assets................................ 303,176 284,482 -------- -------- $481,546 $441,576 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable.......................................... $ 21,237 $ 18,017 Accrued wages and related liabilities..................... 6,006 6,656 Other accrued liabilities................................. 6,639 6,621 Current portion of long-term obligations.................. 1,195 968 -------- -------- Total current liabilities......................... 35,077 32,262 Long-term obligations....................................... 1,588 1,334 Deferred income taxes payable............................... 4,046 3,980 Due to Parent............................................... 333,115 312,395 Commitments and contingencies Stockholder's equity: Common stock, 1,000 shares issued......................... 1 1 Additional paid-in capital................................ 3,866 3,866 Retained earnings......................................... 103,853 87,738 -------- -------- Total stockholder's equity........................ 107,720 91,605 -------- -------- $481,546 $441,576 ======== ========
NOTE: The balance sheet at December 31, 1996 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See accompanying notes. F-8 92 PHARMACY CORPORATION OF AMERICA CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Revenues: Non-affiliates................................ $128,634 $104,930 $251,024 $210,151 Affiliates.................................... 25,102 19,925 50,304 39,080 -------- -------- -------- -------- Total revenues........................ 153,736 124,855 301,328 249,231 Cost of goods sold.............................. 82,310 67,498 162,397 133,170 -------- -------- -------- -------- Gross profit.................................... 71,426 57,357 138,931 116,061 Costs and expenses: Wages and related............................. 33,443 28,665 65,476 58,279 Selling, general and administrative........... 15,073 12,314 29,277 24,669 Provision for doubtful accounts............... 2,807 1,515 5,178 3,704 Depreciation and amortization................. 5,082 3,975 9,908 7,782 Management fees............................... 889 886 1,556 1,415 -------- -------- -------- -------- Total costs and expenses.............. 57,294 47,355 111,395 95,849 -------- -------- -------- -------- Income before provision for income taxes........ 14,132 10,002 27,536 20,212 Provision for income taxes...................... 5,845 4,197 11,421 8,481 -------- -------- -------- -------- Net income...................................... $ 8,287 $ 5,805 $ 16,115 $ 11,731 ======== ======== ======== ========
See accompanying notes. F-9 93 PHARMACY CORPORATION OF AMERICA CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (IN THOUSANDS)
1997 1996 -------- -------- Cash flows from operating activities: Net income................................................ $ 16,115 $ 11,731 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 9,908 7,782 Provision for reserves on accounts, notes and other receivables, net...................................... 5,178 3,704 Deferred taxes......................................... 66 2,405 Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable.................................. (19,610) (5,194) Inventory............................................ (1,839) 2,577 Prepaid expenses and other receivables............... (128) (464) Accounts payable and other accrued expenses.......... 2,588 (6,152) -------- -------- Total adjustments................................. (3,837) 4,658 -------- -------- Net cash provided by operating activities......... 12,278 16,389 Cash flows from investing activities: Payments for acquisitions, net of cash acquired........... (27,589) (110) Capital expenditures...................................... (5,242) (3,498) Systems development....................................... (365) (330) Other, net................................................ (1) 1,810 -------- -------- Net cash used for investing activities............ (33,197) (2,128) Cash flows from financing activities: Advances (to) from Parent, net............................ 20,531 (12,787) Repayments of long-term obligations....................... (519) (270) -------- -------- Net cash provided by (used for) financing activities...................................... 20,012 (13,057) -------- -------- Net increase (decrease) in cash and cash equivalents........ (907) 1,204 Cash and cash equivalents at beginning of period............ 7,575 3,315 -------- -------- Cash and cash equivalents at end of period.................. $ 6,668 $ 4,519 ======== ======== Supplemental schedule of cash flow information: Cash paid (received) during the period for: Interest............................................... $ 130 $ (28)
See accompanying notes. F-10 94 PHARMACY CORPORATION OF AMERICA NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 (UNAUDITED) (i) The condensed consolidated financial statements included herein have been prepared by Pharmacy Corporation of America (the "Company"), without audit, and include all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the results of operations for the three-month and six-month periods ended June 30, 1997 and 1996 pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures in these condensed consolidated financial statements are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's December 31, 1996 consolidated financial statements and the notes thereto. The results of operations for the three-month and six-month periods ended June 30, 1997 are not necessarily indicative of the results for a full year. Unless the context indicates otherwise, the Company means Pharmacy Corporation of America and its consolidated subsidiaries. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (ii) The provisions for income taxes for the three-month and six-month periods ended June 30, 1997 and 1996 were based on estimated annual effective tax rates of 41.5% and 42.0%, respectively. The Company's estimated annual effective tax rates for 1997 and 1996 are different than the federal statutory rate primarily due to the impact of state income taxes and amortization of nondeductible goodwill. The provisions for income taxes consist of the following for the three-month and six-month periods ended June 30 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 1997 1996 1997 1996 ------- ------- ------- ------ Federal: Current...................................... $5,617 $2,474 $ 9,345 $5,001 Deferred..................................... (807) 980 54 1,979 State: Current...................................... 1,208 532 2,010 1,075 Deferred..................................... (173) 211 12 426 ------ ------ ------- ------ $5,845 $4,197 $11,421 $8,481 ====== ====== ======= ======
(iii) During the six months ended June 30, 1997, the Company purchased 14 pharmacies for approximately $27,600,000 cash. The operations of these pharmacies were immaterial to the Company's financial position and results of operations. In April 1997, Beverly Enterprises, Inc. ("Beverly") entered into a definitive agreement with Capstone Pharmacy Services, Inc. ("Capstone") to combine the Company, a wholly-owned subsidiary of Beverly, with Capstone (the "Merger") to create one of the nation's largest independent institutional pharmacy companies. Beverly will receive approximately $275,000,000 of cash as partial repayment for the Company's intercompany debt, with any remaining intercompany balance contributed to the Company's capital. Beverly intends to use the $275,000,000 to repay Revolver borrowings, to pay off the 7 5/8% convertible subordinated debentures, to pay off the 8 3/4% Notes, to repay certain other notes and mortgages and for general corporate purposes. Pursuant to the Merger Agreement, at the effective time of the Merger (the "Effective Time") each share of Beverly's Common Stock issued and outstanding immediately prior to the Effective Time (other than F-11 95 PHARMACY CORPORATION OF AMERICA NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) fractional shares) will be converted into the right to receive that number of newly issued shares of Capstone common stock equal to the quotient, expressed to four decimal places, of (a) 50,000,000 divided by (b) the number of shares of Beverly's Common Stock outstanding immediately prior to the Effective Time. In connection with the Merger, Beverly will transfer all of its non-Company assets and liabilities to New Beverly Holdings, Inc. ("New Beverly"), in exchange for the issuance of New Beverly common stock. Beverly will then distribute (the "Distribution") such New Beverly common stock to the then current stockholders of Beverly's Common Stock on a one-for-one basis. The Merger, which is subject to approvals by the stockholders of both Beverly and Capstone, completion of the Distribution and approvals by various government agencies, is expected to close by year-end. (iv) There are various lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. (v) The Company provides its pharmaceutical dispensing, infusion therapy products and services and its pharmacy and nursing consulting services to nursing facilities operated by Beverly, and to the residents of Beverly facilities. Revenues from sales directly to Beverly nursing facilities were approximately $50,304,000 and $39,080,000 for the six months ended June 30, 1997 and 1996, respectively. Revenues from sales to residents of Beverly facilities, which are not considered by the Company to be revenues from affiliates, are estimated to be approximately $51,000,000 and $42,000,000 for the six months ended June 30, 1997 and 1996, respectively. Beverly provides certain administrative services to the Company. These services have included, among others, cash management, finance, legal, tax, financial reporting, executive management, payroll and payables processing and employee benefit plans maintenance. The responsibility for certain of these services, including finance, tax and payables processing was transferred to the Company in mid-1996 as part of a consolidation and reorganization of the Company's accounting and related functions. Substantially all cash received by the Company is deposited daily and wired to Beverly's corporate cash account. In turn, all of the Company's operating expenses, capital expenditures and other cash needs are paid by Beverly, and charged back to the Company along with a management fee for handling such services. Fees for these services amounted to approximately $1,556,000 and $1,415,000 for the six months ended June 30, 1997 and 1996, respectively. The Company believes that the charges for services provided by Beverly to the Company are a reasonable allocation of the costs incurred by Beverly on behalf of the Company in providing these services; however, such costs are not necessarily indicative of the costs that would have been incurred if the Company operated as a stand-alone entity. The net result of all intercompany transactions between the Company and Beverly is recorded in the "Due to Parent" account in the accompanying consolidated balance sheets. There are currently no required repayment terms for this account nor do such amounts bear interest. F-12 96 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Beverly Enterprises, Inc. We have audited the accompanying consolidated balance sheets of Beverly Enterprises, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included financial statement Schedule II-Valuation and Qualifying Accounts of Beverly Enterprises, Inc. 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 generally accepted auditing standards. 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, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP Little Rock, Arkansas February 7, 1997, except for Note 2, paragraph 3, as to which the date is March 13, 1997 F-13 97 BEVERLY ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ----------------------- 1996 1995 ---------- ---------- ASSETS Current assets: Cash and cash equivalents................................. $ 69,761 $ 56,303 Accounts receivable -- patient, less allowance for doubtful accounts: 1996 -- $25,618; 1995 -- $22,860....................... 491,063 514,820 Accounts receivable -- nonpatient, less allowance for doubtful accounts: 1996 -- $401; 1995 -- $497............................. 13,480 15,995 Notes receivable.......................................... 10,746 7,460 Operating supplies........................................ 55,348 59,109 Deferred income taxes..................................... 14,543 24,892 Prepaid expenses and other................................ 42,304 38,013 ---------- ---------- Total current assets.............................. 697,245 716,592 Property and equipment, net................................. 1,248,785 1,189,985 Other assets: Notes receivable, less allowance for doubtful notes: 1996 -- $4,951; 1995 -- $4,953......................... 37,306 41,915 Designated and restricted funds........................... 75,848 57,082 Goodwill, net............................................. 356,197 380,681 Other, net................................................ 109,701 120,206 ---------- ---------- Total other assets................................ 579,052 599,884 ---------- ---------- $2,525,082 $2,506,461 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 99,121 $ 155,385 Accrued wages and related liabilities..................... 131,072 134,391 Accrued interest.......................................... 16,969 10,261 Other accrued liabilities................................. 93,042 88,869 Current portion of long-term obligations.................. 38,826 84,639 ---------- ---------- Total current liabilities......................... 379,030 473,545 Long-term obligations....................................... 1,106,256 1,066,909 Deferred income taxes payable............................... 83,610 54,687 Other liabilities and deferred items........................ 95,091 90,987 Commitments and contingencies Stockholders' equity: Preferred stock, shares authorized: 25,000,000............ -- -- Common stock, shares issued: 1996 -- 104,432,848; 1995 -- 102,618,241.................................... 10,443 10,262 Additional paid-in capital................................ 774,672 766,549 Retained earnings......................................... 133,957 83,657 Treasury stock, at cost: 1996 -- 5,423,408 shares; 1995 -- 3,972,208 shares............................... (57,977) (40,135) ---------- ---------- Total stockholders' equity........................ 861,095 820,333 ---------- ---------- $2,525,082 $2,506,461 ========== ==========
See accompanying notes. F-14 98 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---------- ---------- ---------- Net operating revenues................................... $3,267,189 $3,228,553 $2,969,239 Interest income.......................................... 13,839 14,228 14,578 ---------- ---------- ---------- Total revenues................................. 3,281,028 3,242,781 2,983,817 Costs and expenses: Operating and administrative: Wages and related................................... 1,819,500 1,736,151 1,600,580 Other............................................... 1,139,442 1,224,681 1,114,916 Interest............................................... 91,111 84,245 64,792 Depreciation and amortization.......................... 105,468 103,581 88,734 Impairment of long-lived assets: Adoption of SFAS No. 121............................ -- 68,130 -- Development and other costs......................... -- 32,147 -- ---------- ---------- ---------- Total costs and expenses....................... 3,155,521 3,248,935 2,869,022 ---------- ---------- ---------- Income (loss) before provision for income taxes and extraordinary charge................................... 125,507 (6,154) 114,795 Provision for income taxes............................... 73,481 1,969 37,882 ---------- ---------- ---------- Income (loss) before extraordinary charge................ 52,026 (8,123) 76,913 Extraordinary charge, net of income taxes of $1,099 in 1996 and $1,188 in 1994................................ (1,726) -- (2,412) ---------- ---------- ---------- Net income (loss)........................................ $ 50,300 $ (8,123) $ 74,501 ========== ========== ========== Net income (loss) applicable to common shares............ $ 50,300 $ (14,998) $ 66,251 ========== ========== ========== Income (loss) per share of common stock: Primary: Before extraordinary charge......................... $ .52 $ (.16) $ .79 Extraordinary charge................................ (.02) -- (.03) ---------- ---------- ---------- Net income (loss)................................... $ .50 $ (.16) $ .76 ========== ========== ========== Shares used to compute per share amounts............ 99,646 92,233 87,087 ========== ========== ========== Fully-diluted: Before extraordinary charge......................... $ .50 $ (.16) $ .78 Extraordinary charge................................ (.02) -- (.02) ---------- ---------- ---------- Net income (loss)................................... $ .48 $ (.16) $ .76 ========== ========== ========== Shares used to compute per share amounts............ 111,002 92,233 98,428 ========== ========== ==========
See accompanying notes. F-15 99 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
ADDITIONAL PREFERRED COMMON PAID-IN RETAINED TREASURY STOCK STOCK CAPITAL EARNINGS STOCK TOTAL --------- -------- ---------- -------- -------- --------- Balances at January 1, 1994................ $ 150,000 $ 8,825 $590,909 $ 33,263 $(40,135) $ 742,862 Exercise of stock option grant........... -- 100 11,900 -- -- 12,000 Employee stock transactions, net......... -- 37 4,830 -- -- 4,867 Preferred stock dividends................ -- -- -- (8,250) -- (8,250) Issuance of ATH preferred stock(1)....... -- -- 1,264 -- -- 1,264 Accretion of amounts due upon redemption of ATH preferred stock(1)............. -- -- 859 (859) -- -- Net income............................... -- -- -- 74,501 -- 74,501 --------- -------- -------- -------- -------- --------- Balances at December 31, 1994.............. 150,000 8,962 609,762 98,655 (40,135) 827,244 Issuance of 12,361,184 shares of common stock for the purchase of PMSI........ -- 1,236 149,693 -- -- 150,929 Exchange of Preferred Stock into 5 1/2% Debentures............................ (150,000) -- -- -- -- (150,000) Employee stock transactions, net......... -- 64 7,094 -- -- 7,158 Preferred stock dividends................ -- -- -- (6,875) -- (6,875) Net loss................................. -- -- -- (8,123) -- (8,123) --------- -------- -------- -------- -------- --------- Balances at December 31, 1995.............. -- 10,262 766,549 83,657 (40,135) 820,333 Employee stock transactions, net......... -- 181 8,123 -- -- 8,304 Purchase of common stock for treasury.... -- -- -- -- (17,842) (17,842) Net income............................... -- -- -- 50,300 -- 50,300 --------- -------- -------- -------- -------- --------- Balances at December 31, 1996.............. $ -- $ 10,443 $774,672 $133,957 $(57,977) $ 861,095 ========= ======== ======== ======== ======== =========
- --------------- (1) Amounts were recorded by ATH prior to its merger with the Company in September 1994. See accompanying notes. F-16 100 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 ----------- ---------- --------- Cash flows from operating activities: Net income (loss)................................... $ 50,300 $ (8,123) $ 74,501 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.................... 105,468 103,581 88,734 Impairment of long-lived assets.................. -- 100,277 -- Provision for reserves and discounts on patient, notes and other receivables, net............... 28,544 15,889 14,107 Amortization of deferred financing costs......... 3,210 4,379 4,241 Extraordinary charge............................. 2,825 -- 3,600 Gains on dispositions of facilities and other assets, net.................................... (20,951) (2,253) (9,749) Deferred taxes................................... 33,765 (20,394) (2,031) Net increase (decrease) in insurance related accounts....................................... (22,336) (10,531) 8,342 Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable -- patient................. (25,851) (84,420) (76,320) Operating supplies............................. 3,226 1,649 (2,777) Prepaid expenses and other receivables......... 771 (154) 1,597 Accounts payable and other accrued expenses.... (53,029) 16,370 (2,809) Income taxes payable........................... 26,711 (6,194) 7,332 Other, net..................................... 527 (3,867) (13,361) ----------- ---------- --------- Total adjustments........................... 82,880 114,332 20,906 ----------- ---------- --------- Net cash provided by operating activities... 133,180 106,209 95,407 Cash flows from investing activities: Payments for acquisitions, net of cash acquired..... (80,981) (34,184) (267,227) Proceeds from dispositions of facilities and other assets........................................... 121,660 46,892 77,211 Collections on notes receivable and REMIC investment....................................... 12,809 15,594 8,393 Capital expenditures................................ (136,442) (161,911) (124,742) Other, net.......................................... (8,547) (10,945) (12,375) ----------- ---------- --------- Net cash used for investing activities...... (91,501) (144,554) (318,740) Cash flows from financing activities: Revolver borrowings................................. 1,308,000 1,017,000 62,000 Repayments of Revolver borrowings................... (1,230,000) (939,000) (62,000) Proceeds from issuance of long-term obligations..... 228,862 25,000 309,308 Repayments of long-term obligations................. (318,447) (68,400) (98,340) Purchase of common stock for treasury............... (15,445) -- -- Proceeds from exercise of stock options............. 3,620 2,146 14,509 Proceeds from issuance of ATH preferred stock....... -- -- 1,264 Deferred financing costs............................ (7,560) (2,161) (7,653) Dividends paid on preferred stock................... (688) (8,250) (8,250) Proceeds from designated funds, net................. 3,437 349 3,401 ----------- ---------- --------- Net cash provided by (used for) financing activities................................ (28,221) 26,684 214,239 ----------- ---------- --------- Net increase (decrease) in cash and cash equivalents......................................... 13,458 (11,661) (9,094) Cash and cash equivalents at beginning of year........ 56,303 67,964 77,058 ----------- ---------- --------- Cash and cash equivalents at end of year.............. $ 69,761 $ 56,303 $ 67,964 =========== ========== ========= Supplemental schedule of cash flow information: Cash paid during the year for: Interest (net of amount capitalized)............. $ 81,193 $ 80,433 $ 59,242 Income taxes (net of refunds).................... 11,906 28,557 31,501
See accompanying notes. F-17 101 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation References herein to the Company include Beverly Enterprises, Inc. and its wholly-owned subsidiaries. The Company provides long-term healthcare in 35 states and the District of Columbia. Its operations include nursing facilities, acute long-term transitional hospitals, institutional and mail service pharmacies, rehabilitation therapy services, outpatient therapy clinics, assisted living centers, hospices and home healthcare centers. The consolidated financial statements of the Company include the accounts of the Company and all of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less. Property and Equipment Property and equipment is stated at cost less accumulated depreciation or, where appropriate, the present value of the related capital lease obligations less accumulated amortization. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets. Intangible Assets Goodwill (stated at cost less accumulated amortization of $38,446,000 in 1996 and $30,431,000 in 1995) is being amortized over 40 years or, if applicable, the life of the lease using the straight-line method. Operating and leasehold rights and licenses, which are included in the consolidated balance sheet caption "Other, net," (stated at cost less accumulated amortization of $18,716,000 in 1996 and $19,040,000 in 1995) are being amortized over the lives of the related assets (principally 40 years) and leases (principally 10 to 15 years), using the straight-line method. On an ongoing basis, the Company reviews the carrying value of its intangible assets in light of any events or circumstances that indicate they may be impaired or that the amortization period may need to be adjusted. If such circumstances suggest the intangible value cannot be recovered, calculated based on undiscounted cash flows over the remaining amortization period, the carrying value of the intangible will be reduced by such shortfall. As of December 31, 1996, the Company does not believe there is any indication that the carrying value or the amortization period of its intangibles needs to be adjusted. See "-- Impairment of Long-Lived Assets." Impairment of Long-Lived Assets In March 1995, the Financial Accounting Standards Board issued 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") which requires impairment losses to be recognized for long-lived assets F-18 102 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) used in operations when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. In accordance with SFAS No. 121, the Company assesses the need for an impairment write-down when such indicators of impairment are present. There were no material impairment adjustments recorded during the year ended December 31, 1996. In the fourth quarter of 1995, the Company recorded an impairment loss of approximately $68,130,000 upon adoption of SFAS No. 121. Such loss primarily related to certain nursing facilities, transitional hospitals, institutional pharmacies and assisted living centers with current period operating losses. Such current period operating losses, combined with a history of operating losses and anticipated future operating losses, led management to believe that impairment existed at such facilities. In addition, there were certain nursing facilities for which management expected an adverse impact on future earnings and cash flows as a result of recent changes in state Medicaid reimbursement programs. Accordingly, management estimated the undiscounted future cash flows to be generated by each facility. If the undiscounted future cash flow estimates were less than the carrying value of the corresponding facility, management estimated the fair value of such facility and wrote the carrying value down to their estimate of fair value. Management calculated the fair value of the impaired facilities by using the present value of estimated future cash flows, or its best estimate of what such facility, or similar facilities in that state, would sell for in the open market. Management believes it has the knowledge to make such estimates of open market sales prices based on the volume of facilities the Company has purchased and sold in previous years. In addition to the SFAS No. 121 charge, the Company recorded a fourth quarter of 1995 impairment loss for other long-lived assets of approximately $32,147,000 primarily related to the write-off of software and business development costs. During the fourth quarter of 1995, the Company hired a new Senior Vice President of Information Technology, who redirected the Company's systems development initiatives, causing a write-down, or a write-off, of certain software and software development projects. In addition, the Company wrote off certain business development and other costs where the Company believed the carrying amount was unrecoverable. Insurance The Company insures auto liability, general liability and workers' compensation risks, in most states, through insurance policies with third parties, some of which may be subject to reinsurance agreements between the insurer and Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company. The liabilities for estimated incurred losses not covered by third party insurance are discounted at 10% to their present value based on expected loss payment patterns determined by independent actuaries. The discounted insurance liabilities are included in the consolidated balance sheet captions as follows (in thousands):
1996 1995 -------- -------- Accrued wages and related liabilities....................... $ 32,644 $ 35,265 Other accrued liabilities................................... 8,226 6,572 Other liabilities and deferred items........................ 90,714 84,720 -------- -------- $131,584 $126,557 ======== ========
On an undiscounted basis, the total insurance liabilities as of December 31, 1996 and 1995 were $170,099,000 and $164,060,000, respectively. As of December 31, 1996, the Company had deposited approximately $94,500,000 in funds (the "Beverly Indemnity funds") that are restricted for the payment of F-19 103 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) insured claims. In addition, the Company anticipates that approximately $21,700,000 of its existing cash at December 31, 1996, while not legally restricted, will be utilized to fund certain workers' compensation and general liability claims, and the Company does not expect to use such cash for other purposes. Stock-Based Awards In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") which encourages, but does not require, companies to recognize compensation expense for stock-based awards based on their fair value on the date of grant. The Company has elected to continue to account for its stock-based awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for its stock option grants. See Note 6 for the pro forma effects on the Company's reported net income and earnings per share assuming the election had been made to recognize compensation expense on stock-based awards in accordance with SFAS No. 123. Revenues The Company's revenues are derived primarily from providing long-term healthcare services. Approximately 75%, 77% and 80% of the Company's net operating revenues for 1996, 1995 and 1994, respectively, were derived from funds under federal and state medical assistance programs, and approximately 73%, 72% and 78% of the Company's net patient accounts receivable at December 31, 1996, 1995 and 1994, respectively, are due from such programs. These revenues and receivables are reported at their estimated net realizable amounts and are subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered and are adjusted in the period of settlement. Changes in estimates related to third party receivables resulted in the recording of approximately $10,900,000, $19,700,000 and $11,000,000 of revenues for the years ended December 31, 1996, 1995 and 1994, respectively. Concentration of Credit Risk The Company has significant accounts receivable, notes receivable and other assets whose collectibility or realizability is dependent upon the performance of certain governmental programs, primarily Medicaid and Medicare. These receivables and other assets represent the only concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an adequate provision has been made for the possibility of these receivables and other assets proving uncollectible and continually monitors and adjusts these allowances as necessary. Earnings per Share For the years ended December 31, 1995 and 1994, net income (loss) applicable to common shares was computed by deducting preferred stock dividends from net income (loss), when dilutive. During the fourth quarter of 1995, the Company exchanged its cumulative convertible exchangeable preferred stock into 5 1/2% convertible subordinated debentures. Primary earnings per share for the years ended December 31, 1996 and 1994 were computed by dividing net income applicable to common shares by the weighted average number of shares of Common Stock outstanding during the period and the weighted average number of shares issuable upon exercise of stock options, calculated using the treasury stock method. Fully diluted earnings per share for the year ended December 31, 1996 was computed as above and assumed conversion of the Company's 5 1/2% convertible subordinated debentures. Fully diluted earnings per share for the year ended December 31, 1994 F-20 104 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) was computed as above and assumed conversion of the Company's cumulative convertible exchangeable preferred stock. Conversion of the Company's 7 5/8% convertible subordinated debentures and zero coupon notes would have an anti-dilutive effect and, therefore, were not assumed. For the year ended December 31, 1995, primary and fully diluted earnings per share were computed by dividing net loss applicable to common shares by the weighted average number of shares of Common Stock outstanding during the period. Other Certain prior year amounts have been reclassified to conform with the 1996 presentation. 2. ACQUISITIONS AND DISPOSITIONS During the year ended December 31, 1996, the Company acquired 22 nursing facilities (2,138 beds)(15 of such facilities (1,747 beds)were previously leased), one previously managed nursing facility (180 beds) and certain other assets including, among other things, pharmacy, hospice and outpatient therapy businesses, for approximately $80,000,000 cash, approximately $7,500,000 acquired debt, approximately $7,000,000 closing and other costs, approximately $4,800,000 reduction in receivables and approximately $1,900,000 security and other deposits. The acquisitions of such facilities and other assets were accounted for as purchases. The Company does not operate three of such nursing facilities which were subleased to other nursing home operators in prior year transactions. Also during such period, the Company sold or terminated the leases on 83 nursing facilities (5,230 beds) (including the three nursing facilities which were not operated by the Company, as mentioned above) and certain other assets for cash proceeds of approximately $36,700,000 and approximately $4,200,000 of notes receivable. The operations of these facilities and certain other assets were immaterial to the Company's financial position and results of operations. In November 1996, the Company sold its MedView Services unit ("MedView") for cash of approximately $89,700,000 (approximately $2,200,000 of which was included in accounts receivable-nonpatient at December 31, 1996). MedView provides a full range of managed care services to the workers' compensation market and is the nation's largest workers' compensation-related preferred provider organization with 120,000 member providers. It also offers case management and injury reporting and tracking services. The operations of MedView were immaterial to the Company's financial position and results of operations. On March 13, 1997, the Company announced that it has entered into a definitive agreement to sell 49 of its skilled nursing facilities in the state of Texas to Complete Care Services, L.P. The transaction is scheduled to close during the second quarter of 1997 and is subject to normal regulatory review. The Company anticipates using the net cash proceeds generated from the sale for one or more of the following purposes: strategic investments; repay indebtedness; and repurchase Common Stock. The operations of these facilities are immaterial to the Company's financial position and results of operations. During the year ended December 31, 1995, the Company purchased 17 previously leased nursing facilities (2,118 beds), one previously leased retirement living center (17 units) and certain other assets for approximately $32,700,000 cash, approximately $40,400,000 acquired debt and approximately $1,700,000 security and other deposits. The Company does not operate four of such facilities which were subleased to other nursing home operators in prior year transactions. Also during such period, the Company sold, subleased or terminated the leases on 11 nursing facilities (1,199 beds), 12 homes for the developmentally disabled (1,065 beds), six retirement living centers (1,141 units) and certain other assets for cash proceeds of approximately $39,400,000, approximately $3,700,000 of notes receivable and the assumption of approximately $52,800,000 of debt. In addition, the Company terminated a management agreement on two nursing F-21 105 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 2. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED) facilities (150 beds) and four assisted living centers (510 units). The operations of these facilities were immaterial to the Company's financial position and results of operations. In June 1995, the Company acquired Pharmacy Management Services, Inc. ("PMSI") in exchange for approximately 12,400,000 shares of the Company's Common Stock plus closing and related costs. PMSI is a leading nationwide provider of medical cost containment and managed care services to workers' compensation payors and claimants. The acquisition was accounted for as a purchase and was not material to the Company's financial position or results of operations. During the year ended December 31, 1994, the Company purchased 19 previously leased nursing facilities (2,202 beds), one previously leased retirement living center (20 units) and certain other assets for approximately $43,600,000 cash, approximately $1,000,000 issuance of debt, approximately $16,900,000 assumed and acquired debt and approximately $1,400,000 security and other deposits. Also during such period, the Company sold, subleased or terminated the leases on 77 nursing facilities (7,192 beds) and certain other assets for cash proceeds of approximately $80,200,000, approximately $700,000 of notes receivable and the assumption of approximately $40,000 of debt. The operations of these facilities were immaterial to the Company's financial position and results of operations. During the third quarter of 1994, the Company issued 2,400,000 shares of Common Stock for all of the outstanding stock of American Transitional Hospitals, Inc. ("ATH"). ATH operates licensed hospitals specializing in long-term acute care and transitional acute care to medically complex, chronically ill patients. The merger was accounted for as a pooling of interests and, accordingly the Company's consolidated financial statements were restated to reflect ATH's financial position, results of operations and cash flows for each period prior to the merger. All transactions between the Company and ATH prior to the merger were eliminated in the restated consolidated financial statements. The merger of ATH was not material to the Company's financial position or results of operations. In November 1994, Pharmacy Corporation of America ("PCA"), a wholly-owned subsidiary of the Company, acquired Insta-Care Holdings, Inc. ("Insta-Care"), for cash of approximately $112,000,000, as well as other costs incurred totaling approximately $10,500,000. Insta-Care provides pharmaceutical dispensing services in six states to approximately 65,000 patients in nursing homes and correctional facilities. In December 1994, PCA acquired three institutional pharmacy subsidiaries of Synetic, Inc. ("Synetic pharmacies"), for cash of approximately $107,300,000, as well as other costs incurred totaling approximately $6,000,000. The Synetic businesses provide pharmaceutical dispensing services in the New England area and the state of Indiana to approximately 45,000 patients in various institutions, including nursing homes, transitional care facilities, correctional facilities and group homes. These acquisitions were accounted for as purchases and were not material to the Company's financial position or results of operations. F-22 106 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 3. PROPERTY AND EQUIPMENT Following is a summary of property and equipment and related accumulated depreciation and amortization, by major classification, at December 31 (in thousands):
TOTAL OWNED LEASED ----------------------- ----------------------- ----------------- 1996 1995 1996 1995 1996 1995 ---------- ---------- ---------- ---------- ------- ------- Land, buildings and improvements................ $1,476,988 $1,375,945 $1,424,517 $1,319,008 $52,471 $56,937 Furniture and equipment......................... 375,479 347,478 365,678 340,220 9,801 7,258 Construction in progress........................ 39,403 47,587 39,403 47,587 -- -- ---------- ---------- ---------- ---------- ------- ------- 1,891,870 1,771,010 1,829,598 1,706,815 62,272 64,195 Less accumulated depreciation and amortization.................................. 643,085 581,025 601,330 537,704 41,755 43,321 ---------- ---------- ---------- ---------- ------- ------- $1,248,785 $1,189,985 $1,228,268 $1,169,111 $20,517 $20,874 ========== ========== ========== ========== ======= =======
The Company provides depreciation and amortization using the straight-line method over the following estimated useful lives: land improvements -- 5 to 15 years; buildings -- 35 to 40 years; building improvements -- 5 to 20 years; leasehold improvements -- 5 to 20 years or term of lease, if less; furniture and equipment -- 5 to 15 years. Capitalized lease assets are amortized over the remaining initial terms of the leases. Depreciation and amortization expense related to property and equipment for the years ended December 31, 1996, 1995 and 1994 was $85,221,000, $82,752,000 and $77,575,000, respectively. F-23 107 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 4. LONG-TERM OBLIGATIONS Long-term obligations consist of the following at December 31 (dollars in thousands, except per share amounts):
1996 1995 ---------- ---------- Notes and mortgages, less imputed interest: 1996 -- $257, 1995 -- $312; due in installments through the year 2031, at effective interest rates of 5.89% to 14.00%, a portion of which is secured by property, equipment and other assets with a net book value of $272,875 at December 31, 1996...................................................... $ 178,983 $ 158,597 Industrial development revenue bonds, less imputed interest: 1996 -- $48, 1995 -- $61; due in installments through the year 2013, at effective interest rates of 4.99% to 10.52%, a portion of which is secured by property and other assets with a net book value of $221,964 at December 31, 1996.... 203,606 214,107 9% Senior Notes due February 15, 2006, unsecured............ 180,000 -- 1996 Credit Agreement due December 31, 2001................. 156,000 -- 1994 Credit Agreement (repaid in December 1996)............. -- 280,500 Term Loan under the 1992 Credit Facility (repaid in December 1996)..................................................... -- 55,000 Nippon Term Loan under the Nippon Credit Agreement (repaid in December 1996)......................................... -- 20,000 Term Loan under the GE Capital Facility..................... 9,547 -- 8 3/4% First Mortgage Bonds due July 1, 2008, secured by first mortgages on eight nursing facilities with an aggregate net book value of $16,924 at December 31, 1996...................................................... 19,362 19,765 8 5/8% First Mortgage Bonds due October 1, 2008, secured by first mortgages on 11 nursing facilities with an aggregate net book value of $30,417 at December 31, 1996............ 29,062 29,788 8 3/4% Notes due December 31, 2003, unsecured............... 24,845 24,875 7 3/4% Note due in quarterly installments through June 1, 2001, secured by first mortgages on 11 nursing facilities and one assisted living center with an aggregate net book value of $22,109 at December 31, 1996..................... 22,554 23,589 Series 1995 Bonds due June 2005, at interest rates of 6.88% with respect to $7,000 and 7.24% with respect to $18,000, secured by a letter of credit............................. 25,000 25,000 Medium Term Notes due June 15, 2000, at an interest rate based on LIBOR, as defined, plus .35%, secured by eligible receivables of selected nursing facilities of $70,902 at December 31, 1996, which cannot be used to satisfy claims of the Company or any of its subsidiaries................. 50,000 50,000 7 5/8% convertible subordinated debentures due March 15, 2003, convertible at $20.47 per share of Common Stock..... 67,924 67,924 5 1/2% convertible subordinated debentures due August 1, 2018, convertible at $13.33 per share of Common Stock..... 150,000 150,000 Zero coupon notes, face amount, less unamortized discount: 1996 -- $785, 1995 -- $1,039; maturing July 16, 2003, anticipated to be due September 30, 1997, convertible into 13.32 shares of Common Stock per $1 note.................. 1,172 1,288 ---------- ---------- 1,118,055 1,120,433 Present value of capital lease obligations, less imputed interest: 1996 -- $863, 1995 -- $972, at effective interest rates of 5.71% to 13.00%......................... 27,027 31,115 ---------- ---------- 1,145,082 1,151,548 Less amounts due within one year............................ 38,826 84,639 ---------- ---------- $1,106,256 $1,066,909 ========== ==========
F-24 108 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 4. LONG-TERM OBLIGATIONS -- (CONTINUED) In February 1996, the Company completed the sale of $180,000,000 of 9% Senior Notes due February 15, 2006 (the "Senior Notes") through a public offering (the "Senior Notes offering") for net cash proceeds of approximately $174,850,000. The Company used approximately $87,500,000 of such net proceeds to prepay certain scheduled maturities on the Term Loan under its 1994 Credit Agreement, approximately $28,000,000 to prepay certain scheduled maturities on the Term Loan under its 1992 Credit Facility, approximately $8,750,000 to prepay certain scheduled maturities under its Nippon Term Loan, and the remaining net proceeds to repay Revolver borrowings and for general corporate purposes. The Senior Notes are unsecured obligations, guaranteed by substantially all of the Company's present and future subsidiaries (collectively, the "Subsidiary Guarantors"), and impose on the Company certain restrictive covenants. Separate financial statements of the Subsidiary Guarantors are not considered to be material to holders of the Senior Notes since the guaranty of each of the Subsidiary Guarantors is joint and several and full and unconditional (except that liability thereunder is limited to an aggregate amount equal to the largest amount that would not render its obligations thereunder subject to avoidance under Section 548 of the Bankruptcy Code of 1978, as amended, or any comparable provisions of applicable state law), and Beverly Enterprises, Inc., the parent, has no operations or assets separate from its investment in its subsidiaries. In July 1996, the Company entered into a term loan facility (the "GE Capital Facility"), whereby the Company may borrow up to $25,000,000 from time to time in separate series, in amounts and at interest rates based on the three-year U.S. Treasury Note rate plus 230 basis points at the date of funding. The GE Capital Facility requires monthly principal and interest payments and is secured by a security interest in certain lighting equipment of various nursing facilities. As of December 31, 1996, approximately $14,900,000 of aggregate principal amount under the GE Capital Facility remained unissued. In December 1996, the Company entered into a $375,000,000 Amended and Restated Credit Agreement (the "1996 Credit Agreement") which provides for a Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). The proceeds from the 1996 Credit Agreement were used to repay the Term Loan and Revolver borrowings under the 1994 Credit Agreement, the Term Loan under the 1992 Credit Facility and the Nippon Term Loan. Borrowings under the 1996 Credit Agreement bear interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the adjusted CD rate, as defined, plus 1%, at the Company's option. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. The Company pays certain commitment fees and commissions with respect to the Revolver/LOC Facility and had approximately $186,800,000 of unused commitments under such facility at December 31, 1996. The 1996 Credit Agreement is secured by a security interest in the stock of PCA and certain of its subsidiaries and imposes on the Company certain financial tests and restrictive covenants. The Company incurred a $1,726,000 extraordinary charge, net of income taxes, in 1996 related to the write-off of unamortized deferred financing costs associated with the repayment of these debt instruments, as well as certain bond refundings. The Company entered into various other notes and mortgages during 1996 totaling approximately $38,700,000 in conjunction with the purchase of certain nursing facilities. Such debt instruments bear interest at rates ranging from 8.25% to 9.08%, 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 purchased nursing facilities. During 1996, the Company filed a Registration Statement covering $200,000,000 of debt securities, shares of preferred stock, shares of Common Stock and warrants to purchase Common Stock which may be offered, separately or together, in separate series in amounts, at prices and on terms to be determined at the time of sale. The net proceeds from the offerings are anticipated to be used for general corporate purposes, F-25 109 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 4. LONG-TERM OBLIGATIONS -- (CONTINUED) which may include, but are not limited to, working capital, capital expenditures, repayments of indebtedness and acquisitions. As of December 31, 1996, no securities have been issued under such registration statement. In 1993, the Company registered with the Securities and Exchange Commission $100,000,000 aggregate principal amount of certain debt securities, which are to be offered from time to time as separate series in amounts, at prices and on terms to be determined at the time of sale. The Company issued $20,000,000 of 8 3/4% First Mortgage Bonds, $30,000,000 of 8 5/8% First Mortgage Bonds and $25,000,000 of 8 3/4% Notes under such registration. As of December 31, 1996, $25,000,000 of aggregate principal amount of debt securities under such registration remained unissued. Maturities and sinking fund requirements of long-term obligations, including capital leases, for the years ending December 31 are as follows (in thousands):
1997 1998 1999 2000 2001 THEREAFTER TOTAL ------- ------- ------- ------- -------- ---------- ---------- Future minimum lease payments.................... $ 6,682 $ 5,191 $ 4,272 $ 3,202 $ 3,228 $ 24,920 $ 47,495 Less interest.................................... 2,457 2,127 1,839 1,620 1,446 10,979 20,468 ------- ------- ------- ------- -------- -------- ---------- Net present value of future minimum lease payments....................................... 4,225 3,064 2,433 1,582 1,782 13,941 27,027 Notes, mortgages, bonds and debentures........... 34,601 39,790 34,687 87,076 205,525 716,376 1,118,055 ------- ------- ------- ------- -------- -------- ---------- $38,826 $42,854 $37,120 $88,658 $207,307 $730,317 $1,145,082 ======= ======= ======= ======= ======== ======== ==========
Many of the capital and operating leases contain at least one renewal option (which could extend the term of the leases by five to fifteen years), purchase options, escalation clauses and provisions for payments by the Company of real estate taxes, insurance and maintenance costs. The industrial development revenue bonds were originally issued prior to 1985 primarily for the construction or acquisition of nursing facilities. Bond reserve funds are included in designated funds. These funds are invested primarily in certificates of deposit and in United States government securities and are carried at cost, which approximates market value. Net capitalized interest relating to construction was not material in 1996, 1995 or 1994. 5. COMMITMENTS AND CONTINGENCIES The future minimum rental commitments required by all noncancelable operating leases with initial or remaining terms in excess of one year as of December 31, 1996, are as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 1997............................................................... $ 73,533 1998............................................................... 58,579 1999............................................................... 47,373 2000............................................................... 32,578 2001............................................................... 22,036 Thereafter......................................................... 57,076 -------- $291,175 ========
Total future minimum rental commitments are net of approximately $15,194,000 of minimum sublease rental income due in the future under noncancelable subleases. Rent expense on operating leases, net of sublease rental income, for the years ended December 31 was as follows: 1996 -- $116,718,000; 1995 -- $127,074,000; 1994 -- $127,187,000. Sublease rent income was approximately $4,595,000, $5,426,000 and F-26 110 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) $5,410,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Contingent rent expense, based primarily on revenues, was approximately $18,000,000, $22,000,000 and $22,000,000 for the years ended December 31, 1996, 1995 and 1994, respectively. In 1992, the Company entered into an agreement to outsource its management information systems functions for a period of seven years, with an option to renew based on mutual agreement among the parties. The future minimum commitments as of December 31, 1996 required under such agreement, as amended, are as follows: 1997 -- $6,133,000; 1998 -- $6,133,000; 1999 -- $3,578,000. The Company incurred approximately $8,711,000, $8,529,000 and $8,906,000 under such agreement during the years ended December 31, 1996, 1995 and 1994, respectively. The Company is contingently liable for approximately $105,596,000 of long-term obligations maturing on various dates through 2019, as well as annual interest and letter of credit fees of approximately $8,460,000. Such contingent liabilities principally arose from the Company's sale of nursing facilities and retirement living centers. The Company operates the facilities related to approximately $25,891,000 of the principal amount for which it is contingently liable, pursuant to long-term agreements accounted for as operating leases. In addition, the Company is contingently liable for various operating leases that were assumed by purchasers and are secured by the rights thereto. Approximately 100 of the Company's 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. The Company, being one of the largest employers within the long-term healthcare industry, has been the target of a "corporate campaign" by two AFL-CIO affiliated unions attempting to organize certain of the Company's facilities. Although the Company has never experienced any material work stoppages and believes that its relations with its employees (and the existing unions that represent certain of them) are generally good, the Company cannot predict the effect continued union representation or organizational activities will have on the Company's future activities. There can be no assurance that continued union representation and organizational activities will not result in material work stoppages, which could have a material adverse effect on the Company's operations. There are various lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. 6. STOCKHOLDERS' EQUITY The Company had 300,000,000 shares of authorized $.10 par value common stock ("Common Stock") at December 31, 1996 and 1995. The Company is subject to certain restrictions under its long-term debt agreements related to the payment of cash dividends on its Common Stock. The Company had 25,000,000 shares of authorized $1 par value preferred stock at December 31, 1996 and 1995, all of which remained unissued. The Board of Directors has authority, without further stockholder action, to set rights, privileges and preferences for any unissued shares of preferred stock. In June 1996, the Company announced that its Board of Directors had authorized a stock repurchase program whereby the Company may repurchase, from time to time on the open market, up to a total of 10,000,000 shares of its outstanding Common Stock. During 1996, the Company repurchased approximately 1,500,000 shares of its Common Stock at a cost of approximately $17,800,000. The repurchases were financed primarily through proceeds from dispositions and borrowings under the Company's Revolver/LOC Facility. F-27 111 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. STOCKHOLDERS' EQUITY -- (CONTINUED) During 1994, the Board of Directors of the Company adopted a Stockholder Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution of one Common Stock Purchase Right (the "Rights") for each share of Common Stock outstanding at the close of business on November 2, 1994. Under certain circumstances, the Rights become exercisable to purchase shares of Common Stock, or securities of an acquiring entity, at one-half of market value. The Rights are designed to protect stockholders in the event of an unsolicited attempt to acquire the Company and to deal with the possibility of unilateral actions by hostile acquirors. These Rights are redeemable at the option of the Company at $.01 per Right. The issuance of the Rights has no dilutive effect on the Company's earnings per share. During 1996, the Beverly Enterprises, Inc. 1996 Long-Term Incentive Plan was approved (the "1996 Long-Term Incentive Plan"). Such plan became effective July 1, 1996 and will remain in effect until December 31, 2006, subject to the earlier termination by the Board of Directors. The Company has 4,000,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under the 1996 Long-Term Incentive Plan in the form of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance awards and other stock unit awards. Nonqualified and incentive stock options must be granted at a purchase price equal to market price on the date of grant. All options are exercisable no sooner than six months from the grant date 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 are exercisable no sooner than six months from the grant date 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 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 Compensation Committee of the Board of Directors is responsible for administering the 1996 Long-Term Incentive Plan and will have complete discretion in determining the number of shares or units to be granted, in setting performance goals and in applying other restrictions to awards, as needed, under the plan. The Company has 200,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under its Nonemployee Directors' Plan. The Nonemployee Directors' Plan provides that 2,500 nonqualified stock options be granted to each nonemployee director on June 1 of each year until the plan is terminated, subject to the availability of shares. Such nonqualified stock options are granted at a purchase price equal to fair market value on the date of grant, become exercisable one year after date of grant and expire ten years after date of grant. The Company has 3,000,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under its 1993 Incentive Stock Plan in the form of nonqualified stock options, incentive stock options, restricted stock, performance awards and other stock unit awards. Incentive stock options must be granted at a purchase price equal to market price on the date of grant. Nonqualified stock options may be granted at no less than 85% of market price on the date of grant. All grants made at less than market price must be in lieu of cash payments. All options are exercisable no sooner than one year from the grant date 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 and other stock unit awards, including phantom units, may be granted based on the achievement of certain performance or other goals and will carry certain restrictions, as defined. The Compensation Committee of the Board of Directors is responsible for administering the 1993 Incentive Stock Plan and will have 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. F-28 112 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. STOCKHOLDERS' EQUITY -- (CONTINUED) The Company has 2,400,000 shares of Common Stock authorized for issuance under its 1985 Nonqualified Stock Option Plan. Under the plan, options are granted at a purchase price equal to market price on the date of grant, become exercisable no sooner than one year after date of grant and expire no later than 12 years after date of grant, as determined by the Compensation Committee of the Board of Directors. In addition to options, the plan provides for outright grants of Common Stock, subject to forfeiture provisions. As a condition precedent to the release of such shares, the employee must be continuously employed with the Company from and after the date of grant and remain employed on share release dates. Commencing one year after the grant date, the shares will be released in accordance with a schedule determined at the time of grant. During 1995, in conjunction with the acquisition of PMSI, the Company assumed PMSI's 1990 Incentive and Non-statutory Stock Option Plan, as amended, (the "PMSI Plan") and issued options to purchase shares of the Company's Common Stock in exchange for each option then outstanding under the PMSI Plan. During 1994, in conjunction with the merger of ATH, the Company assumed ATH's 1993 Nonqualified Stock Option Plan (the "ATH Plan") and issued options to purchase shares of the Company's Common Stock in exchange for each option then outstanding under the ATH Plan. In addition, the Company signed an option agreement with an officer of ATH and issued options to purchase shares of ATH stock previously held by such officer. Also during 1994, in conjunction with the acquisition of Insta-Care, the Company issued options to purchase shares of its Common Stock in exchange for each option then outstanding under the Insta-Care Holdings, Inc. First Employees Stock Option Plan (the "Insta-Care Plan"). No options are available for grant under the PMSI Plan, the ATH Plan or the Insta-Care Plan. F-29 113 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. STOCKHOLDERS' EQUITY -- (CONTINUED) The following table summarizes stock option, restricted stock and other stock units data relative to the Company's 1996 Long-Term Incentive Plan, the Nonemployee Directors' Plan, the 1993 Incentive Stock Plan, the 1985 Nonqualified Stock Option Plan, the PMSI Plan, the ATH Plan and the Insta-Care Plan for the years ended December 31:
1996 1995 1994 ---------------------------- ---------------------------- ---------------------------- NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE --------- ---------------- --------- ---------------- --------- ---------------- Options outstanding at beginning of year...... 4,394,382 $ 9.02 4,375,441 $ 8.74 3,989,411 $ 8.26 Changes during the year: Granted................ 1,696,500 12.38 355,500 13.04 635,000 14.01 Acquired............... -- -- 342,311 6.17 269,620 1.22 Exercised.............. (833,587) 5.41 (416,010) 5.22 (375,369) 6.35 Cancelled.............. (348,568) 12.39 (262,860) 12.19 (143,221) 10.82 --------- --------- --------- Options outstanding at end of year............ 4,908,727(1) 10.55 4,394,382 9.02 4,375,441 8.74 ========= ========= ========= Options exercisable at end of year............ 2,560,209 8.75 3,028,903 7.52 2,340,512 7.24 ========= ========= ========= Options available for grant.................. 3,052,403 1,243,953 1,735,318 ========= ========= ========= Restricted stock outstanding at beginning of year...... 306,052 267,353 431,800 Changes during the year: Granted................ 29,000 236,555 14,553 Vested................. (148,352) (182,153) (167,000) Forfeited.............. (41,500) (15,703) (12,000) --------- --------- --------- Restricted stock outstanding at end of year................... 145,200 306,052 267,353 ========= ========= ========= Phantom units outstanding at beginning of year... 90,942 44,529 -- Changes during the year: Granted................ -- 54,110 44,529 Vested................. (6,982) -- -- Cancelled.............. (7,191) (7,697) -- --------- --------- --------- Phantom units outstanding at end of year......... 76,769 90,942 44,529 ========= ========= ========= Performance units outstanding at beginning of year...... -- -- -- Changes during the year: Granted................ 1,040,000 -- -- Cancelled.............. (48,000) -- -- --------- --------- --------- Performance units outstanding at end of year................... 992,000 -- -- ========= ========= =========
- --------------- (1) Exercise prices for options outstanding as of December 31, 1996 ranged from $0.83 to $18.63. The weighted-average remaining contractual life of these options is seven years. F-30 114 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. STOCKHOLDERS' EQUITY -- (CONTINUED) The Company accounts for its stock-based awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related Interpretations because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized for employee stock options under APB No. 25. The Company recognizes compensation expense for its restricted stock grants, performance unit grants (when the performance targets are achieved) and other stock unit awards. The total charges to the Company's consolidated statements of operations for the years ended December 31, 1996, 1995 and 1994 related to these stock-based awards were approximately $509,000, $3,065,000 and $1,189,000, respectively. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its 1996 and 1995 stock option and performance unit grants under the fair value method as prescribed by such statement. The fair value for stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 1996 and 1995, respectively: risk-free interest rates of 6.5% and 6.0%; volatility factors of the expected market price of the Company's Common Stock of .34 and .35; and a weighted-average expected life of the option of 10 years. The Company does not currently pay cash dividends on its Common Stock and no future dividends are currently planned. Such weighted-average assumptions resulted in a weighted average fair value of options granted during 1996 and 1995 of $7.30 per share and $7.65 per share, respectively. The fair value of the performance unit grants was based on the market value of the Company's Common Stock on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the stock options and performance units is amortized to expense over their respective vesting periods. The pro forma effects on reported net income (loss) and earnings per share assuming the Company had elected to account for its stock option and performance unit grants in accordance with SFAS No. 123 for the years ended December 31, 1996 and 1995, respectively, would have been net income of $48,964,000 or $.49 per share and net loss of $8,408,000 or $.17 per share. Such pro forma effects are not necessarily indicative of the effect on future years. The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and restated) enables all full-time employees having completed one year of continuous service to purchase shares of Common Stock at the current market price through payroll deductions. The Company makes contributions in the amount of 30% of the participant's contribution. Each participant specifies the amount to be withheld from earnings per two-week pay period, subject to certain limitations. The total charges to the Company's consolidated statements of operations for the years ended December 31, 1996, 1995 and 1994 related to this plan were approximately $2,258,000, $2,201,000 and $1,790,000, respectively. F-31 115 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 7. INCOME TAXES The provisions for taxes on income before extraordinary charge consist of the following for the years ended December 31 (in thousands):
1996 1995 1994 ------- -------- ------- Federal: Current............................................ $31,615 $ 17,518 $31,523 Deferred........................................... 29,466 (16,877) (2,824) State: Current............................................ 8,101 4,845 8,390 Deferred........................................... 4,299 (3,517) 793 ------- -------- ------- $73,481 $ 1,969 $37,882 ======= ======== =======
The Company had an annual effective tax rate of 59% for the year ended December 31, 1996, compared to a negative annual effective tax rate of 32% and an annual effective tax rate of 33% for the years ended December 31, 1995 and 1994, respectively. The annual effective tax rate in 1996 was different than the federal statutory rate primarily due to the impact of nondeductible goodwill associated with the MedView disposition (see Note 2). The annual effective tax rate in 1995 was different than the federal statutory rate primarily due to the impact of nondeductible goodwill included in the adjustments resulting from the adoption of SFAS No. 121. In addition, the Company's annual effective tax rate for 1994 was lower than the federal statutory rate primarily due to the utilization of certain tax credit carryforwards, partially offset by the impact of state income taxes. A reconciliation of the provision for (benefit from) income taxes, computed at the statutory rate, to the Company's annual effective tax rate is summarized as follows (dollars in thousands):
1996 1995 1994 -------------- -------------- --------------- AMOUNT % AMOUNT % AMOUNT % ------- --- ------- --- -------- --- Tax (benefit) at statutory rate........................... $43,927 35 $(2,154) 35 $ 40,178 35 General business tax credits..... -- -- (1,014) 17 (16,199) (14) State tax provision, net......... 8,060 6 863 (14) 6,130 5 Nondeductible intangibles........ 20,881 17 3,797 (62) 940 1 Other............................ 613 1 477 (8) 6,833 6 ------- -- ------- --- -------- --- $73,481 59 $ 1,969 (32) $ 37,882 33 ======= == ======= === ======== ===
F-32 116 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 7. INCOME TAXES -- (CONTINUED) Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary differences giving rise to the Company's deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995 --------------------- --------------------- ASSET LIABILITY ASSET LIABILITY -------- --------- -------- --------- Insurance reserves.............................. $ 55,540 $ -- $ 53,333 $ -- General business tax credit carryforwards....... 12,236 -- 20,784 -- Alternative minimum tax credit carryforwards.... 14,698 -- 15,129 -- Provision for dispositions...................... 11,009 6,152 17,825 6,771 Depreciation and amortization................... 1,401 141,804 25,395 143,267 Operating supplies.............................. -- 14,206 -- 13,378 Other........................................... 22,995 24,784 23,666 22,511 -------- -------- -------- -------- $117,879 $186,946 $156,132 $185,927 ======== ======== ======== ========
At December 31, 1996, the Company had general business tax credit carryforwards of $12,236,000 for income tax purposes which expire in years 2005 through 2011. For financial reporting purposes, the general business tax credit carryforwards have been utilized to offset existing net taxable temporary differences reversing during the carryforward periods. 8. FAIR VALUES OF FINANCIAL INSTRUMENTS Financial Accounting Standards Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates its fair value. Notes Receivable, Net (Including Current Portion) For variable-rate notes that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. F-33 117 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED) Beverly Indemnity Funds The fair value of the Beverly Indemnity funds is based on information obtained from the trustee and the manager of such funds. Such funds are included in the consolidated balance sheet captions "Prepaid expenses and other" and "Designated and restricted funds" based on when the corresponding claims are expected to be paid. These funds are invested primarily in United States government securities with maturity dates ranging primarily from one to five years. The Company intends to hold such securities to maturity. Investment in a Real Estate Mortgage Investment Conduit (REMIC) The fair value of the Company's REMIC investment, which is included in the consolidated balance sheet caption "Other, net," is based on information obtained from the REMIC servicer. The Company intends to convert the REMIC investment to notes receivable from the underlying note makers during 1997. Such conversion to notes in 1997 is not expected to have a material adverse effect on the carrying amount or fair value disclosed. Long-term Obligations (Including Current Portion) The carrying amounts of the Company's variable-rate borrowings approximate their fair values. The fair values of the remaining long-term obligations are estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1996 and 1995 are as follows (in thousands):
1996 1995 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------- ---------- ---------- ---------- Cash and cash equivalents......... $ 69,761 $ 69,761 $ 56,303 $ 56,303 Notes receivable, net (including current portion)................ 48,052 49,900 49,375 51,800 Beverly Indemnity funds........... 94,472 94,821 58,284 59,806 REMIC investment.................. 8,052 8,084 17,974 18,000 Long-term obligations (including current portion)................ 1,145,082 1,161,031 1,151,548 1,175,000
In order to consummate certain dispositions and other transactions, the Company has agreed to guarantee the debt assumed or acquired by the purchaser or the performance under a lease, by the lessor. It was not practicable to estimate the fair value of the Company's off-balance sheet guarantees (See Note 5). The Company does not charge a fee for entering into such agreements and contracting with a financial institution to estimate such amounts could not be done without incurring excessive costs. In addition, unlike the Company, a financial institution would not be in a position to assume the underlying obligations and operate the nursing facilities collateralizing the obligations, which would significantly impact the calculation of the fair value of such off-balance sheet guarantees. 9. ADDITIONAL INFORMATION Effective July 31, 1987, Beverly Enterprises, a California corporation ("Beverly California"), became a wholly-owned subsidiary of Beverly Enterprises, Inc., a Delaware corporation ("Beverly Delaware"). Effective F-34 118 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 9. ADDITIONAL INFORMATION -- (CONTINUED) January 1, 1995, Beverly California changed its name to Beverly Health and Rehabilitation Services, Inc. ("BHRS") and distributed certain of its wholly-owned subsidiaries to Beverly Delaware in an effort to better focus management's attention on specific services delivered by the Company within the long-term healthcare arena. Beverly Delaware (the parent) provides financial, administrative and legal services to its subsidiaries, including BHRS, for which it charges management fees. The following summarized financial information concerning BHRS is being reported because BHRS's 7 5/8% convertible subordinated debentures due March 2003 and its zero coupon notes (collectively, the "Debt Securities") are publicly-held. Beverly Delaware is co-obligor of these Debt Securities. Summary financial information for BHRS is as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Total revenues.......................................... $2,717,360 $2,797,348 $2,985,107 Total costs and expenses................................ 2,581,647 2,780,463 2,870,529 Income before extraordinary charge...................... 80,071 7,598 76,767 Net income.............................................. 78,345 7,598 74,777
AS OF AS OF DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ Current assets.......................................... $ 369,501 $ 421,641 Long-term assets........................................ 1,404,292 1,365,413 Current liabilities..................................... 184,887 367,074 Long-term liabilities................................... 795,593 709,515
F-35 119 BEVERLY ENTERPRISES, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
DUE TO BALANCE AT CHARGED ACQUISITIONS BALANCE BEGINNING (CREDITED) TO AND AT END OF DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS DISPOSITIONS OTHER YEAR ----------- ---------- ------------- ---------- ------------ -------- --------- Year ended December 31, 1996: Allowance for doubtful accounts: Accounts receivable -- patient.... $22,860 $ 28,637 $(29,163) $ 2,555 $ 729 $ 25,618 Accounts receivable -- nonpatient........ 813 56 (223) -- (9) 637* Notes receivable.................. 4,953 (149) (257) 24 380 4,951 ------- -------- -------- -------- -------- -------- $28,626 $ 28,544 $(29,643) $ 2,579 $ 1,100 $ 31,206 ======= ======== ======== ======== ======== ======== Year ended December 31, 1995: Allowance for doubtful accounts: Accounts receivable -- patient.... $28,293 $ 21,008 $(30,326) $ 3,885 $ -- $ 22,860 Accounts receivable -- non-patient....... 2,802 (1,919) (70) -- -- 813* Notes receivable.................. 6,429 (3,200) (61) 1,285 500 4,953 ------- -------- -------- -------- -------- -------- $37,524 $ 15,889 $(30,457) $ 5,170 $ 500 $ 28,626 ======= ======== ======== ======== ======== ======== Valuation allowance on deferred tax assets............................ $ 198 $ (198) $ -- $ -- $ -- $ -- ======= ======== ======== ======== ======== ======== Year ended December 31, 1994: Allowance for doubtful accounts: Accounts receivable -- patient.... $19,999 $ 18,124 $(20,109) $ 10,339 $ (60) $ 28,293 Accounts receivable -- nonpatient........ 343 233 (334) -- 2,560 2,802* Notes receivable.................. 10,440 (4,250) (58) -- 297 6,429 ------- -------- -------- -------- -------- -------- $30,782 $ 14,107 $(20,501) $ 10,339 $ 2,797 $ 37,524 ======= ======== ======== ======== ======== ======== Accrued restructuring costs......... $34,310 $ (2,400) $ -- $(15,684) $(16,226)(1) $ -- ======= ======== ======== ======== ======== ======== Valuation allowance on deferred tax assets............................ $15,097 $(14,899) $ -- $ -- $ -- $ 198 ======= ======== ======== ======== ======== ========
- --------------- * Includes amounts classified in long-term other assets as well as current assets. (1) Primarily relates to costs of relocating certain administrative, operations and management information system support functions. F-36 120 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholder Pharmacy Corporation of America We have audited the accompanying consolidated balance sheets of Pharmacy Corporation of America as of December 31, 1996 and 1995, and the related consolidated statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement Schedule II -- Valuation and Qualifying Accounts of Pharmacy Corporation of America. 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 generally accepted auditing standards. 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 Pharmacy Corporation of America at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP Little Rock, Arkansas April 18, 1997 F-37 121 PHARMACY CORPORATION OF AMERICA CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 7,575 $ 3,315 Accounts receivable, less allowance for doubtful accounts: 1996 -- $13,070, 1995 -- $17,913....................... 93,078 84,651 Notes and other receivables, less allowance for doubtful accounts: 1996 -- $820, 1995 -- $352................... 1,383 2,892 Inventory................................................. 22,025 25,175 Prepaid expenses and other................................ 335 298 -------- -------- Total current assets.............................. 124,396 116,331 Property and equipment, net (Note 3)........................ 32,698 28,551 Other assets: Goodwill, net............................................. 276,430 277,360 Systems development, net.................................. 4,837 4,627 Other, net................................................ 3,215 2,003 -------- -------- Total other assets................................ 284,482 283,990 -------- -------- $441,576 $428,872 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable.......................................... $ 18,017 $ 25,039 Accrued wages and related liabilities..................... 6,656 4,212 Other accrued liabilities................................. 6,621 8,938 Current portion of long-term obligations (Note 4)......... 968 630 -------- -------- Total current liabilities......................... 32,262 38,819 Long-term obligations (Note 4).............................. 1,334 125 Deferred income taxes....................................... 3,980 -- Due to Parent (Notes 4, 6, 9 and 10)........................ 312,395 318,610 Commitments and contingencies (Note 5) Stockholder's equity: Common stock, $1.00 par value, 1,000 shares authorized, issued and outstanding................................. 1 1 Additional paid-in capital................................ 3,866 3,866 Retained earnings......................................... 87,738 67,451 -------- -------- Total stockholder's equity........................ 91,605 71,318 -------- -------- $441,576 $428,872 ======== ========
See accompanying notes. F-38 122 PHARMACY CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 -------- -------- -------- (IN THOUSANDS) Revenues: Non-affiliates............................................ $434,317 $377,664 $170,299 Affiliates (Note 9)....................................... 82,083 74,021 77,213 -------- -------- -------- Total revenues.................................... 516,400 451,685 247,512 Cost of goods sold.......................................... 280,468 242,761 117,045 -------- -------- -------- Gross profit................................................ 235,932 208,924 130,467 Operating expenses: Wages and related......................................... 118,888 106,742 61,619 Selling, general and administrative....................... 50,377 48,334 28,302 Provision for doubtful accounts........................... 13,500 17,679 7,388 Depreciation and amortization............................. 16,392 13,219 5,734 Management fees (Note 9).................................. 1,820 2,844 2,075 Impairment of long-lived assets (Note 1): Adoption of SFAS No. 121............................... -- 5,392 -- Development costs...................................... -- 4,151 -- -------- -------- -------- Total operating expenses.......................... 200,977 198,361 105,118 -------- -------- -------- Income before provision for income taxes.................... 34,955 10,563 25,349 Provision for income taxes (Note 6)......................... 14,668 5,977 10,291 -------- -------- -------- Net income.................................................. 20,287 4,586 15,058 Retained earnings, beginning of year........................ 67,451 62,865 47,807 -------- -------- -------- Retained earnings, end of year.............................. $ 87,738 $ 67,451 $ 62,865 ======== ======== ========
See accompanying notes. F-39 123 PHARMACY CORPORATION OF AMERICA CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 -------- -------- --------- (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 20,287 $ 4,586 $ 15,058 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 16,392 13,219 5,734 Impairment of long-lived assets........................ -- 9,543 -- Gain on dispositions of assets......................... (250) -- -- Provision for doubtful accounts........................ 13,500 17,679 7,388 Deferred income taxes (benefit)........................ 4,159 (909) 635 Change in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable.................................. (21,474) (22,489) (14,972) Inventory............................................ 3,510 2,282 (1,173) Prepaid expenses and other receivables............... (44) 614 147 Accounts payable and accrued expenses................ (7,498) (2,836) 6,595 -------- -------- --------- Total adjustments................................. 8,295 17,103 4,354 -------- -------- --------- Net cash provided by operating activities......... 28,582 21,689 19,412 Cash flows from investing activities: Payments for acquisitions, net of cash acquired........... (10,835) (2,151) (223,435) Proceeds from dispositions................................ 2,152 -- -- Capital expenditures...................................... (7,803) (10,497) (6,903) Systems development....................................... (1,813) (2,601) (504) Other, net................................................ 329 1,852 (11) -------- -------- --------- Net cash used for investing activities............ (17,970) (13,397) (230,853) Cash flows from financing activities: Advances (to) from Parent, net............................ (5,064) (9,716) 216,735 Proceeds from issuance of long-term obligations........... -- 143 -- Repayments of long-term obligations....................... (1,288) (877) (1,079) -------- -------- --------- Net cash provided by (used for) financing activities...................................... (6,352) (10,450) 215,656 -------- -------- --------- Net increase (decrease) in cash and cash equivalents........ 4,260 (2,158) 4,215 Cash and cash equivalents at beginning of year.............. 3,315 5,473 1,258 -------- -------- --------- Cash and cash equivalents at end of year.................... $ 7,575 $ 3,315 $ 5,473 ======== ======== ========= Supplemental schedule of cash flow information: Cash paid during the year for: Interest............................................... $ 11 $ 35 $ 517
See accompanying notes. F-40 124 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Pharmacy Corporation of America (the "Company") is a wholly-owned subsidiary of Beverly Enterprises, Inc. ("Beverly"). The Company is one of the nation's largest institutional pharmacies delivering drugs and related products and services, infusion therapy and other healthcare products (enteral and urological) to nursing facilities, acute care and transitional care hospitals, home care providers, psychiatric facilities, correctional facilities, assisted living centers, retirement homes and their patients. The Company also provides consultant pharmacist services, which include evaluations of patient drug therapy, and drug handling, distribution and administration within a nursing facility as well as assistance with state and federal regulatory compliance. The Company's mail service pharmacy delivers drugs and medical equipment to workers' compensation payors, claimants and employers. As of December 31, 1996, the Company operated 57 pharmacies and pharmacy-related outlets located in 25 states. All references to the Company shall mean Pharmacy Corporation of America and its consolidated subsidiaries. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated. (See Note 10.) USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less. INVENTORY Inventory, consisting of pharmaceuticals and other products held for resale, are carried primarily at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment is stated at cost less accumulated depreciation or, where appropriate, the present value of the related capital lease obligation less accumulated amortization. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets. INTANGIBLES Goodwill (stated at cost less accumulated amortization of approximately $17,865,000 and $10,586,000 in 1996 and 1995, respectively) is being amortized over 40 years using the straight-line method. Software development (stated at cost less accumulated amortization of approximately $5,674,000 and $4,068,000 in 1996 and 1995, respectively) is being amortized over five years using the straight-line method. Software development costs consist of incremental wages and related costs as well as travel expenses directly attributable to the development of software to be used in the operations of the Company and the cost of any purchased software packages. On an ongoing basis, the Company reviews the carrying value of its intangible assets in light of any events or circumstances that indicate they may be impaired or that the amortization period may need to be adjusted. If such circumstances suggest the intangible value cannot be recovered, calculated based on undiscounted cash flows over the remaining amortization period, the carrying value of the intangible will be reduced by such F-41 125 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) shortfall. As of December 31, 1996, the Company does not believe there is any indication that the carrying value or the amortization period of its intangibles needs to be adjusted. IMPAIRMENT OF LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board issued 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") which requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows are not sufficient to recover the assets' carrying amounts. The impairment loss is measured by comparing the fair value of an asset to its carrying amount. In 1995, the Company recorded an impairment loss of approximately $5,392,000 upon adoption of SFAS No. 121. The impairment indicators which led to recording this loss were as follows: two pharmacies, purchased by the Company in late 1994, had operating losses in 1995, and the Company anticipated future operating losses for these facilities primarily related to Beverly's lack of presence in the markets; one pharmacy, located in a state where Beverly had recently sold all of its interest, began to lose the contracts that had been assumed by the new owners, and it became apparent that the operations would not recover to their previous level; and, lastly, the Company operates a medical records servicing business which lost approximately half of its business in 1995 when Beverly pursued a different vendor for this service. Accordingly, management estimated the undiscounted future cash flows to be generated by each business. The undiscounted future cash flow estimates were less than the carrying value of such businesses, so management estimated the fair value of such businesses and wrote the carrying values down to their estimates of fair value. Management calculated the fair values of the impaired businesses by using the present values of estimated future cash flows. In addition to the SFAS No. 121 charge, the Company recorded an impairment loss in 1995 of approximately $4,151,000 primarily related to the write-off of software costs. In conjunction with the Company's 1995 acquisition of Prescription Management Services, Inc. ("PMSI") (see Note 2), PMSI's Vice President of Management Information Systems assumed the management information systems' functions for the Company and redirected the Company's systems development initiatives, which caused a write-off of certain software and systems development costs. INSURANCE The Company is insured for general liability and workers' compensation risks through Beverly's self-insurance programs. Beverly allocates expense to the Company based on the relative percentage of insurance costs incurred by Beverly on behalf of the Company. Total insurance allocations to the Company were approximately $1,829,000, $1,409,000 and $919,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Management believes these charges represent a reasonable allocation of the costs incurred by Beverly on behalf of the Company. STOCK-BASED AWARDS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") which encourages, but does not require, companies to recognize compensation expense for stock-based awards based on their fair value on the date of grant. The Company has elected to continue to account for stock-based awards in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," F-42 126 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) and, accordingly, recognizes no compensation expense for stock option grants. See Note 7 for the pro forma effects on the Company's reported net income assuming the election had been made to recognize compensation expense on stock-based awards in accordance with SFAS No. 123. REVENUES The Company's revenues are derived primarily from providing pharmaceuticals and related healthcare products and services to long-term care facilities, acute care and transitional care hospitals, home care providers, psychiatric facilities, correctional facilities and their patients. The Company's mail service pharmacy delivers drugs and medical equipment to workers' compensation payors, claimants and employers. The Company records fees at the time the services or products are provided. These revenues are reported at the estimated net amounts to be received from individuals, third party payors, nursing facilities and others. Approximately 37%, 41% and 41% of the Company's operating revenues for 1996, 1995 and 1994, respectively, were derived from funds under federal and state medical assistance programs, and approximately 43% of the Company's net accounts receivable at December 31, 1996 and 1995 are due from such programs. Concentration of Credit Risk The Company has significant accounts receivable whose collectibility or realizability is dependent upon the performance of certain governmental programs, primarily Medicaid and Medicare. These receivables represent the only concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an adequate provision has been made for the possibility of these receivables proving uncollectible and continually monitors and adjusts these allowances as necessary. See also Note 9 for a discussion of business with Beverly. 2. ACQUISITIONS During 1996, the Company acquired three institutional pharmacies for cash of approximately $10,835,000 and disposed of one institutional pharmacy for cash proceeds of approximately $2,152,000. The acquisitions were accounted for as purchases. In June 1995, Beverly acquired Pharmacy Management Services, Inc. ("PMSI") in exchange for approximately 12,361,000 shares of Beverly common stock, plus closing and related costs, for a total purchase price of approximately $162,900,000. As a leading independent nationwide provider of medical cost containment and managed care services to workers' compensation payors and claimants, PMSI's services included pharmacy benefit management through both a national retail pharmacy network and home delivery of prescription drugs, medical supplies and medical equipment ("mail service business") as well as workers' compensation preferred provider organization ("PPO business"). The mail-service business was contributed by Beverly to the Company in June 1995, and has been operated by the Company since that time. The PPO business was transferred to another of Beverly's wholly-owned subsidiaries. Beverly's acquisition of PMSI was accounted for as a purchase and resulted in additional goodwill to Beverly of approximately $139,600,000. Based on the fair value of the mail service net assets, Beverly allocated approximately $97,700,000 of the PMSI purchase price to the Company, including goodwill of approximately $83,800,000. The Company also purchased one institutional pharmacy during 1995 for cash of approximately $2,492,000. This acquisition was accounted for as a purchase. In November 1994, the Company acquired Insta-Care Holdings, Inc., ("Insta-Care") for cash of approximately $112,000,000 as well as other costs incurred totaling approximately $8,600,000. Insta-Care provided pharmaceutical dispensing services in six states to approximately 65,000 patients in nursing homes F-43 127 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 2. ACQUISITIONS -- (CONTINUED) and correctional facilities. In December 1994, the Company acquired three institutional pharmacy subsidiaries of Synetic, Inc., ("Synetic") for cash of approximately $107,300,000, as well as other costs incurred totaling approximately $6,000,000. The Synetic businesses provided pharmaceutical dispensing services in New England and Indiana to approximately 45,000 patients in various institutions, including nursing homes, transitional care facilities, correctional facilities and group homes. These acquisitions were accounted for as purchases and resulted in additional goodwill for the Company of approximately $95,100,000 related to Insta-Care and approximately $90,800,000 related to Synetic. The Company consummated such transactions with funds provided by Beverly. Beverly borrowed such funds through banking arrangements (see Note 4). The Company also purchased one institutional pharmacy during 1994 for cash of approximately $782,000. This acquisition was accounted for as a purchase. Summarized below are the unaudited proforma consolidated results of operations of the Company for the years ended December 31, 1995 and 1994, assuming the PMSI, Insta-Care and Synetic transactions discussed above had occurred as of January 1, 1994. The operations of all of the other pharmacies acquired or disposed of during 1996, 1995 and 1994 were immaterial to the Company's financial position and results of operations. These unaudited proforma consolidated results of operations have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had those transactions been made at January 1, 1994, or of results which may occur in the future.
YEARS ENDED DECEMBER 31, ----------------------------------- 1995 1994 -------- ------------------------ INSTA-CARE, INSTA-CARE SYNETIC PMSI & SYNETIC & PMSI -------- ---------- ----------- Revenues.................................................... $493,262 $421,379 $505,350 Income before provision for income taxes.................... 12,827 30,217 35,863 Net income.................................................. 5,567 17,950 21,304
3. PROPERTY AND EQUIPMENT Following is a summary of property and equipment and related accumulated depreciation and amortization by major classifications at December 31 (in thousands):
TOTAL OWNED LEASED ----------------- ----------------- --------------- 1996 1995 1996 1995 1996 1995 ------- ------- ------- ------- ------ ------ Leasehold improvements..................... $11,460 $ 9,941 $11,460 $ 9,941 $ -- $ -- Furniture and equipment.................... 44,156 34,859 39,764 33,146 4,392 1,713 Construction in progress................... 345 550 345 550 -- -- ------- ------- ------- ------- ------ ------ 55,961 45,350 51,569 43,637 4,392 1,713 Less: accumulated depreciation and amortization......................... 23,263 16,799 21,238 15,456 2,025 1,343 ------- ------- ------- ------- ------ ------ $32,698 $28,551 $30,331 $28,181 $2,367 $ 370 ======= ======= ======= ======= ====== ======
The estimated useful lives of the assets are as follows: leasehold improvements 5 to 20 years or term of lease, if less; furniture and equipment 5 to 15 years. Capitalized lease assets are amortized over the initial terms of the leases. Depreciation and amortization expense related to property and equipment for the years ended December 31, 1996, 1995 and 1994 was approximately $6,737,000, $4,534,000 and $3,363,000, respectively. F-44 128 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 4. LONG-TERM OBLIGATIONS Long-term obligations consist of the following at December 31 (in thousands):
1996 1995 ------ ---- Present value of capital lease obligations, at effective interest rates of 6.25% to 9.25%.......................... $2,262 $412 Non-interest bearing note due July 1996..................... -- 250 Other notes payable......................................... 40 93 ------ ---- 2,302 755 Less amounts due within one year............................ 968 630 ------ ---- $1,334 $125 ====== ====
Scheduled maturities of long-term obligations, including capital leases, for the years ending December 31 are as follows (in thousands):
1997 1998 1999 2000 2001 THEREAFTER TOTAL ------ ---- ---- ---- ---- ---------- ------ Future minimum lease payments................ $1,088 $983 $440 $4 $4 $1 $2,520 Less interest................................ 157 82 18 1 -- -- 258 ------ ---- ---- -- -- --- ------ Net present value of future minimum lease payments................................... 931 901 422 3 4 1 2,262 Notes payable................................ 37 3 -- -- -- -- 40 ------ ---- ---- -- -- --- ------ $ 968 $904 $422 $3 $4 $1 $2,302 ====== ==== ==== == == === ======
Included in the Company's "Due to Parent" account at December 31, 1996 and 1995 is a $225,000,000 obligation to repay Beverly for certain bank debt, as discussed below. Beverly executed a credit agreement on November 1, 1994, which provided for, among other things, a $225,000,000 Term Loan (the "Term Loan"). The proceeds from the Term Loan were used to consummate the Insta-Care and Synetic acquisitions (as previously discussed). No interest has been charged to the Company related to this debt obligation or any other amounts included in the "Due to Parent" account. In December 1996, Beverly repaid the Term Loan with the net proceeds from a $375,000,000 Amended and Restated Credit Agreement. Such credit agreement provides for a Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). Borrowings under the Revolver/LOC Facility bear interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the adjusted CD rate, as defined, plus 1%, at Beverly's option. Such interest rates may be adjusted quarterly based on certain financial ratio calculations. The Revolver/LOC Facility is secured by a security interest in the stock of the Company and matures on December 31, 2001. F-45 129 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 5. COMMITMENTS AND CONTINGENCIES The future minimum rental commitments required by noncancelable operating leases on the Company's pharmacy locations with initial or remaining terms in excess of one year as of December 31, 1996, are as follows (in thousands):
YEAR ENDING DECEMBER 31, ------------ 1997...................................................... $ 3,830 1998...................................................... 3,215 1999...................................................... 2,586 2000...................................................... 1,895 2001...................................................... 1,493 Thereafter................................................ 3,610 ------- $16,629 =======
The Company leases all of its pharmacy locations and certain of its equipment primarily under operating leases. Rent expense on operating leases for the years ended December 31 was as follows: 1996 -- $12,142,000; 1995 -- $13,005,000; 1994 -- $8,037,000. Contingent rent, based primarily on increases in the consumer price index, was approximately $343,000, $437,000 and $511,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The Company's capital and operating leases primarily have initial terms of five years with renewal options (which could extend the term of the leases by up to five years), contain escalation clauses and have provisions for payments by the Company of real estate taxes, insurance and maintenance costs. The Company is contingently liable for Beverly's $180,000,000 of 9% Senior Notes due February 15, 2006 (the "Senior Notes"). Beverly issued the Senior Notes in February 1996 through a public offering and used the net cash proceeds to repay indebtedness. The Senior Notes are unsecured obligations of Beverly, guaranteed by substantially all of Beverly's present and future subsidiaries and impose certain restrictive covenants. There are various lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. F-46 130 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 6. INCOME TAXES The Company joins with Beverly in the filing of consolidated income tax returns. The tax provisions for Beverly subsidiaries, including the Company, are determined on a separate company basis, as required. The resultant income taxes payable to, or tax benefit receivable from, Beverly flows through the "Due to Parent" account. Beverly accounts for income taxes using the liability method required by Financial Accounting Standards Statement No. 109, "Accounting for Income Taxes." The Company's provision for income taxes consists of the following for the years ended December 31 (in thousands):
1996 1995 1994 ------- ------ ------- Federal: Current.................................................. $ 8,649 $5,667 $ 7,946 Deferred................................................. 3,423 (748) 523 State: Current.................................................. 1,860 1,219 1,710 Deferred................................................. 736 (161) 112 ------- ------ ------- $14,668 $5,977 $10,291 ======= ====== =======
The Company's annual effective tax rate was approximately 42%, 56.6% and 40.6% for the years ended December 31, 1996, 1995 and 1994, respectively. A reconciliation of the provision for income taxes, computed at the statutory rate, to the Company's annual effective tax rate is summarized as follows (dollars in thousands):
1996 1995 1994 -------------- ------------- -------------- AMOUNT % AMOUNT % AMOUNT % ------- ---- ------ ---- ------- ---- Tax at statutory rate.................. $12,234 35.0 $3,697 35.0 $ 8,872 35.0 State tax provision.................... 1,688 4.8 688 6.5 1,185 4.7 Amortization of intangibles............ 561 1.6 1,519 14.4 182 0.7 Other.................................. 185 0.6 73 0.7 52 0.2 ------- ---- ------ ---- ------- ---- $14,668 42.0 $5,977 56.6 $10,291 40.6 ======= ==== ====== ==== ======= ====
In accordance with Statement No. 109, deferred income taxes for 1996, 1995 and 1994 reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary differences giving rise to the Company's deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------- ------------------- ASSET LIABILITY ASSET LIABILITY ------ --------- ------ --------- Provision for bad debts...................... $5,014 $ -- $6,582 $ -- Uniform capitalization of inventory.......... 363 -- 363 -- Depreciation and amortization................ -- 9,569 -- 7,230 Other........................................ 212 -- 464 -- ------ ------ ------ ------ $5,589 $9,569 $7,409 $7,230 ====== ====== ====== ======
Due to Parent includes cumulative amounts for current and deferred income taxes as follows (in thousands):
DECEMBER 31, ----------------- 1996 1995 ------- ------- Current taxes payable....................................... $56,700 $46,191 Deferred taxes payable (receivable)......................... 3,980 (179) ------- ------- $60,680 $46,012 ======= =======
F-47 131 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 7. STOCK-BASED AWARDS The Company accounts for stock-based awards granted to its employees by Beverly in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and related Interpretations because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Since the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized for employee stock options under APB No. 25. The Company recognizes compensation expense for its restricted stock grants, performance unit grants (when the performance targets are achieved) and other stock unit awards. The total charges to the Company's consolidated statements of income and retained earnings for the years ended December 31, 1996, 1995 and 1994 related to these stock-based awards were approximately $24,000, $616,000 and $104,000, respectively. Pro forma information regarding net income is required by SFAS No. 123, and has been determined as if the Company had accounted for its 1996 and 1995 stock option and performance unit grants under the fair value method as prescribed by such statement. The fair value for stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 1996 and 1995, respectively: risk-free interest rates of 6.5% and 6.0%; volatility factors of the expected market price of Beverly's common stock of .34 and .35; and a weighted-average expected life of the option of 10 years. Beverly does not currently pay cash dividends on its common stock and no future dividends are currently planned. Such weighted-average assumptions resulted in a weighted average fair value of options granted during 1996 and 1995 of $7.11 per share and $7.31 per share, respectively. The fair value of the performance unit grants was based on the market value of Beverly's common stock on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because Beverly's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of employee stock options and performance units granted by Beverly to employees of the Company is amortized to expense over their respective vesting periods. Pro forma net income, assuming the Company had elected to account for these stock option and performance unit grants in accordance with SFAS No. 123, would have been approximately $19,987,000 and $4,577,000 for the years ended December 31, 1996 and 1995, respectively. Such pro forma effects are not necessarily indicative of the effects on future years. 8. FAIR VALUES OF FINANCIAL INSTRUMENTS Financial Accounting Standards Statement No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation 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 F-48 132 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED) instrument. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The Company used the following methods and assumptions in estimating its fair value disclosures for financial instruments. The carrying amount of cash and cash equivalents reported in the consolidated balance sheets approximates its fair value. The fair value of notes receivable, net, which are included in the consolidated balance sheet captions "Notes and other receivables" and "Other, net" was estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The fair value of long-term obligations was estimated using discounted cash flow analyses based on the Company's incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1996 and 1995 are as follows (in thousands):
1996 1995 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------ Cash and cash equivalents.......................... $7,575 $7,575 $3,315 $3,315 Notes receivable, net.............................. 1,163 1,163 1,735 1,701 Long-term obligations.............................. 2,302 2,274 755 730
It was not practicable to estimate the fair value of the "Due to Parent" account as no formal agreement exists for repayment of the balance. It was also not practicable to estimate the fair value of the Company's off-balance sheet guarantee of Beverly's Senior Notes (see Note 4) since the Company did not charge a fee for entering into this agreement and contracting with a financial institution to estimate such amount could not be done without incurring excessive costs. 9. RELATED PARTY TRANSACTIONS The Company provides its pharmaceutical dispensing, infusion therapy products and services and its pharmacy and nursing consulting services to nursing facilities operated by Beverly, and to the residents of Beverly facilities. Revenues from sales directly to Beverly nursing facilities were approximately $82,083,000, $74,021,000 and $77,213,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Revenues from sales to residents of Beverly facilities, which are not considered by the Company to be revenues from affiliates, are estimated to be approximately $78,000,000, $89,000,000 and $80,000,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Beverly provides certain administrative services to the Company. These services have included, among others, cash management, finance, legal, tax, financial reporting, executive management, payroll and payables processing and employee benefit plans maintenance. The responsibility for certain of these services, including finance, tax and payables processing was transferred to the Company in mid-1996 as part of a consolidation and reorganization of the Company's accounting and related functions. Substantially all cash received by the Company is deposited daily and wired to Beverly's corporate cash account. In turn, all of the Company's operating expenses, capital expenditures and other cash needs are paid by Beverly, and charged back to the Company along with a management fee for handling such services. Fees for these services amounted to approximately $1,820,000, $2,844,000 and $2,075,000 for the years ended December 31, 1996, 1995, and 1994, respectively. See Note 1 for a description of the charges for insurance. The Company believes that the charges for services provided by Beverly to the Company are a reasonable allocation of the costs incurred by Beverly F-49 133 PHARMACY CORPORATION OF AMERICA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 9. RELATED PARTY TRANSACTIONS -- (CONTINUED) on behalf of the Company in providing these services; however, such costs are not necessarily indicative of the costs that would have been incurred if the Company operated as a stand-alone entity. The net result of all intercompany transactions between the Company and Beverly are recorded in the "Due to Parent" account in the accompanying consolidated balance sheets. As of December 31, 1996, 1995 and 1994, the Company's intercompany balances were $312,395,000, $318,610,000 and $225,006,000, respectively. The average of such intercompany balances were approximately $315,500,000, $272,900,000 and $34,100,000, for the years ended December 31, 1996, 1995 and 1994, respectively. There are currently no required repayment terms for this account nor do such amounts bear interest. The net increase in the Company's intercompany balance for the year ended December 31, 1994 was due to the following: approximately $234,000,000 due to the pushdown of the Insta-Care and Synetic acquisitions; approximately $10,300,000 due to the allocation of current and deferred income taxes; and approximately $2,100,000 due to fees charged by Beverly for certain administrative and management services provided to the Company as discussed above. These increases in the Company's intercompany balance were partially offset by approximately $28,700,000 due primarily to net cash transfers from the Company to Beverly and fees charged to Beverly's nursing facilities for products and services provided by the Company. The net increase in the Company's intercompany balance for the year ended December 31, 1995 was due to the following: approximately $100,200,000 due to the pushdown of the PMSI acquisition and the acquisition of one institutional pharmacy; approximately $6,000,000 due to the allocation of current and deferred income taxes; and approximately $2,800,000 due to fees charged by Beverly for certain administrative and management services provided to the Company. These increases in the Company's intercompany balance were partially offset by approximately $15,400,000 due primarily to net cash transfers from the Company to Beverly and fees charged to Beverly's nursing facilities for products and services provided by the Company. The net decrease in the Company's intercompany balance for the year ended December 31, 1996 was due to the following: approximately $31,300,000 due primarily to net cash transfers from the Company to Beverly and fees charged to Beverly's nursing facilities for products and services provided by the Company; and approximately $2,200,000 due to the disposition of one institutional pharmacy. These decreases in the Company's intercompany balance were partially offset by approximately $10,800,000 due to the pushdown of the acquisition of three institutional pharmacies; approximately $14,700,000 due to the allocation of current and deferred income taxes; and approximately $1,800,000 due to fees charged by Beverly for certain administrative and management services provided to the Company. 10. SUBSEQUENT EVENTS In January 1997, the Company purchased 12 pharmacies from Interstate Pharmacy Corporation for cash of approximately $19,800,000. The acquisition was accounted for as a purchase and was not material to the Company's financial position or results of operations. In April 1997, Beverly signed a definitive agreement to combine the Company with Capstone Pharmacy Services, Inc. ("Capstone"), which will create one of the nation's largest independent institutional pharmacy companies. Capstone will issue approximately 50,000,000 shares of its common stock to Beverly stockholders and Beverly will be repaid approximately $275,000,000 of the Company's "Due to Parent," with any remaining balance contributed to capital. Beverly stockholders will own a majority of the combined pharmacy company after the combination; however, Beverly will not retain any ownership interest. The exact conversion ratio of Beverly to Capstone shares will be determined based on the total number of shares of Beverly stock outstanding on the record date of this transaction. The record date has not yet been set. The transaction is subject to approval by the stockholders of both Beverly and Capstone, as well as to approvals by various government agencies. It is expected to close by year-end 1997. F-50 134 PHARMACY CORPORATION OF AMERICA SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
DUE TO BALANCE AT ACQUISITIONS BALANCE BEGINNING CHARGED TO AND AT END DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS, NET DISPOSITIONS OTHER OF YEAR ----------- ---------- ---------- --------------- ------------ ----- ------- Year ended December 31, 1996: Allowance for doubtful accounts: Accounts receivable -- patient....... $17,913 $12,840 $(17,304) $ (8) $(371) $13,070 Notes and other receivables... 995 660 (371) 0 371 1,655* ------- ------- -------- ------ ----- ------- $18,908 $13,500 $(17,675) $ (8) $ 0 $14,725 ======= ======= ======== ====== ===== ======= Year ended December 31, 1995: Allowance for doubtful accounts: Accounts receivable -- patient....... $11,469 $17,679 $(10,966) $ 459 $(728) $17,913 Notes and other receivables... 92 -- 175 -- 728 995* ------- ------- -------- ------ ----- ------- $11,561 $17,679 $(10,791) $ 459 $ 0 $18,908 ======= ======= ======== ====== ===== ======= Year ended December 31, 1994: Allowance for doubtful accounts: Accounts receivable -- patient....... $ 2,671 $ 7,362 $ (6,453) $7,949 $ (60) $11,469 Notes and other receivables... 66 26 (60) -- 60 92* ------- ------- -------- ------ ----- ------- $ 2,737 $ 7,388 $ (6,513) $7,949 $ 0 $11,561 ======= ======= ======== ====== ===== =======
- --------------- * Includes amounts classified in long-term other assets as well as current assets. F-51 135 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholder New Beverly Holdings, Inc. We have audited the accompanying balance sheet of New Beverly Holdings, Inc. as of May 31, 1997. This balance sheet is the responsibility of the Company's management. Our responsibility is to express an opinion on this balance sheet based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of New Beverly Holdings, Inc. at May 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Little Rock, Arkansas June 2, 1997 F-52 136 NEW BEVERLY HOLDINGS, INC. (A WHOLLY-OWNED SUBSIDIARY OF BEVERLY ENTERPRISES, INC.) BALANCE SHEET MAY 31, 1997 ASSETS Cash.................................... $100 ---- Total assets.................. $100 ==== STOCKHOLDER'S EQUITY Stockholder's equity: Common stock, $.10 par value; 3,000 shares authorized; 1,000 shares issued and outstanding............. $100 ---- Total stockholder's equity.... $100 ====
See accompanying note. F-53 137 NOTE TO BALANCE SHEET MAY 31, 1997 New Beverly Holdings, Inc. ("New Beverly") was incorporated in the state of Delaware on April 15, 1997, as a wholly-owned subsidiary of Beverly Enterprises, Inc. ("Beverly"). New Beverly was formed in connection with the execution of an Agreement and Plan of Distribution (the "Distribution Agreement") by and between Beverly and New Beverly dated April 15, 1997. Under the Distribution Agreement, Beverly will transfer all of its skilled nursing and rehabilitation facilities, transitional acute care hospitals, outpatient therapy clinics, assisted living facilities, hospice and home health agencies and other health care and related services and businesses, other than its institutional and mail service pharmacy business currently operated by Pharmacy Corporation of America ("PCA"), to New Beverly, and shares of New Beverly will be distributed to the Beverly stockholders in a tax-free spin-off. Beverly, then consisting solely of the institutional and mail service pharmacy business operated by PCA, will merge into and be acquired by Capstone Pharmacy Services, Inc. ("Capstone") through a tax-free exchange of shares of common stock of Capstone for Beverly common shares (the "Merger"), all as contemplated by an Agreement and Plan of Merger dated April 15, 1997 (the "Merger Agreement"). New Beverly will become a public company upon the effectiveness of this registration statement, will change its name to Beverly Enterprises, Inc. and will be treated as the continuation of Beverly. Closing under the Merger Agreement is subject to certain conditions, including but not limited to the approvals of both Beverly and Capstone stockholders, completion of all requirements under the Distribution Agreement, customary regulatory approvals and the receipt, at the option of Beverly, of either a favorable tax ruling from the Internal Revenue Service or an opinion of counsel or Ernst & Young LLP concerning the tax-free nature of the transaction. For accounting and financial reporting purposes, such transactions will be treated as the spin-off of PCA and a reorganization/recapitalization of Beverly into New Beverly since New Beverly will continue the majority of the Beverly businesses. No gain will be recognized as a result of the spin-off for the difference between the market value of the Capstone shares received and the carrying value of the net assets of PCA. In addition, since Beverly stockholders will own a majority of the outstanding shares of Capstone after the Merger, the Merger transaction will be accounted for as a reverse acquisition of Capstone by PCA. New Beverly has had no operations from its inception through May 31, 1997. Therefore, the Statement of Operations and the Statement of Cash Flows have been omitted from these financial statements. F-54 138 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Registration fee............................................ 100.00 ------- Printing and engraving expenses............................. +* Transfer agent fees......................................... +* Legal fees and expenses..................................... +* Accounting fees and expenses................................ +* Blue Sky fees and expenses.................................. +* New York Stock Exchange listing fee......................... +* Miscellaneous expense....................................... +* Total............................................. +* ------- $ +* =======
- --------------- * Estimated + To be completed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's Certificate of Incorporation and Bylaws and the indemnification agreements between the Registrant and its officers and directors contain provisions regarding the indemnification of officers and directors. The Registrant's Certificate of Incorporation and Bylaws provide that the Registrant, to the fullest extent permitted, and in the manner required by the laws of the State of Delaware as in effect at the time of the adoption of the Certificate of Incorporation and Bylaw provisions regarding indemnification or as the same may be amended from time to time, shall (i) indemnify any person (and the heirs and legal representatives of such person) who is made or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether in nature civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director officer, employee or agent of the Registrant or of any constituent corporation absorbed into the Registrant by consolidation or merger, or serves or served with another corporation, partnership, joint venture, trust or enterprise, or non-profit entity, including service with respect to employee benefit plans, at the request of the Registrant or of any such constituent corporation against all liability and (ii) provide to any such person (and the heirs and legal representatives of such person) advances for expenses incurred in defending any such action, suit or proceeding, upon receipt of an undertaking by or on behalf of such person (and the heirs and legal representatives of such person) to repay such advances unless it is ultimately determined that he or she is not entitled to indemnification by the Registrant. Section 145 of the Delaware General Corporation Law ("DGCL") applies to the Company and the relevant portion of the DGCL provides as follows: 145. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE. (a) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding II-1 139 by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. (b) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made (1) by a majority vote of the directors who were not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and II-2 140 authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with the exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation's obligation to advance expenses (including attorneys' fees). The Certificate of Incorporation limits the liability of directors (in their capacity as directors, but not in their capacity as officers) to the Registrant or its stockholders to the fullest extent permitted by the DGCL, as amended. Specifically, no director of the Registrant will be personally liable to the Registrant or its stockholders for monetary damages for breach of the director's fiduciary duty as a director, except as provided in Section 102 of the DGCL for liability: (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders; (ii) for acts or omissions not in good faith and which involve intentional misconduct or knowing violation of law; (iii) under Section 174 of the DGCL, which relates to unlawful payments of dividends or unlawful stock repurchases or redemptions; or (iv) for any transaction from which the director derived an improper personal benefit. The inclusion of this provision in the Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such action, if successful, might otherwise have benefitted the Registrant and its stockholders. Under the Certificate of Incorporation and in accordance with Section 145 of the DGCL, the Registrant will indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than a "derivative" action by or in the right of the Registrant) by reason of the fact that such person was or is a director or officer of the Registrant, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such acts were unlawful. A similar standard of care is applicable in the case of derivative actions, except that indemnification only extends to expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of such an action and then, where the person is adjudged to be liable to the Registrant, only if and to the extent that the Court of Chancery of the State of Delaware or the court in which such action was brought determines that such person is fairly and reasonably entitled to such indemnity and then only for such expenses as the court deems proper. The Registrant will indemnify, pursuant to the standard enumerated in Section 145 of the DGCL, any past or present officer or II-3 141 director who was or is a party, or is threatened to be made a party, to any threatened, pending or completed derivative action by or in the right of the Registrant. The Certification of Incorporation of the Registrant provides that the Registrant may pay for the expenses incurred by an indemnified director or officer in defending the proceedings specified above in advance of their final disposition, provided that, if the DGCL so requires, such indemnified person agrees to reimburse the Registrant if it is ultimately determined that such person is not entitled to indemnification. The Registrant's Certificate of Incorporation also allows the Registrant, in its sole discretion, to indemnify any person who is or was one of its employees and agents to the same degree as the foregoing indemnification of directors and officers. To the extent that a director, officer, employee or agent of the Registrant has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145 of the DGCL, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. In addition, the Registrant may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Registrant or another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against and incurred by such person in such capacity, or arising out of the person's status as such whether or not the Registrant would have the power or obligation to indemnify such person against such liability under the provisions of the DGCL. The Registrant maintains insurance for the benefit of the Registrant's officers and directors insuring such persons against certain liabilities, including civil liabilities under the securities laws. Additionally, the Registrant has entered into indemnification agreements with each of the Directors of the Registrant, which, among other things, provides that the Registrant will indemnify such Directors to the fullest extent permitted by the Certificate of Incorporation and the DGCL and will advance expenses of defending claims against such Directors. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES None ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following exhibits are filed as part of the Registration Statement.
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Agreement and Plan of Merger dated April 15, 1997 by and between Beverly Enterprises, Inc. and Capstone Pharmacy Services, Inc. (incorporated by reference to Exhibit 2.1 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated April 15, 1997). 2.2 -- Agreement and Plan of Distribution by and among Beverly Enterprises, Inc., New Beverly Holdings, Inc. and Capstone Pharmacy Services, Inc. dated as of April 15, 1997 (incorporated by reference to Exhibit 2.2 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated April 15, 1997). 3.1* -- Certificate of Incorporation of New Beverly Holdings, Inc. dated April 15, 1997. 3.2* -- Amended Certificate of Incorporation of New Beverly Holdings, Inc. dated May 29, 1997. 3.3*** -- Amended and Restated Certificate of Incorporation of New Beverly Holdings, Inc. dated , 1997. 3.4* -- Bylaws of New Beverly Holdings, Inc. 4.1 -- Indenture dated as of February 1, 1996 between Beverly Enterprises, Inc. and Chemical Bank, as Trustee, with respect to Beverly Enterprises, Inc.'s 9% Senior Notes due February 15, 2006 (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995).
II-4 142
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.2 -- Indenture dated as of April 1, 1993 (the "First Mortgage Bond Indenture"), among Beverly Enterprises, Inc., Delaware Trust Company, as Corporate Trustee, and Richard N. Smith, as Individual Trustee, with respect to First Mortgage Bonds (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 4.3 -- First Supplemental Indenture dated as of April 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 3/4% First Mortgage Bonds due 2008 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 4.4 -- Second Supplemental Indenture dated as of July 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 5/8% First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated July 15, 1993) (incorporated by reference to Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.5 -- Indenture dated as of December 30, 1993 (the "Notes Indenture"), between Beverly Enterprises, Inc. and Boatmen's Trust Company, as Trustee, with respect to the 8.75% Notes (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-3 filed on November 9, 1993 (File No. 33-50965)). 4.6 -- First Supplemental Indenture dated as of December 30, 1993 to the Notes Indenture, with respect to 8 3/4% Notes due 2003 (incorporated by reference to Exhibit 4.4 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated January 4, 1994). 4.7 -- Rights Agreement dated as of September 29, 1994, between Beverly Enterprises, Inc. and The Bank of New York, as Rights Agent (incorporated by reference to Exhibit 1 to Beverly Enterprises, Inc.'s Registration Statement on Form 8-A filed on October 18, 1994). 4.8 -- Amendment, dated as of April 6, 1995, to the Rights Agreement between Beverly Enterprises, Inc. and The Bank of New York, as Rights Agent (incorporated by reference to Exhibit 4.20 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). In accordance with item 601(b)(4)(iii) of Regulation S-K, certain instruments pertaining to Beverly Enterprises, Inc.'s long-term obligations have not been filed; copies thereof will be furnished to the Securities and Exchange Commission upon request. 5.1** -- Opinion of Giroir, Gregory, Holmes & Hoover, PLC as to certain legal matters. 5.2*** -- Opinion of John W. MacKenzie as to certain legal matters. 10.1 -- Executive Medical Reimbursement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987). 10.2 -- Amended and Restated Beverly Enterprises, Inc. Executive Life Insurance Plan and Summary Plan Description (the "Executive Life Plan") assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993). 10.3 -- Amendment No. 1, effective September 29, 1994, to the Executive Life Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.4 -- Executive Physicals Policy assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993).
II-5 143
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.5 -- Amended and Restated Deferred Compensation Plan effective July 18, 1991 assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991). 10.6 -- Amendment No. 1, effective September 29, 1994, to the Deferred Compensation Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.7 -- Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987). 10.8 -- Amendment No. 1, effective as of July 1, 1991, to the Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991). 10.9 -- Amendment No. 2, effective as of December 12, 1991, to the Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991). 10.10 -- Amendment No. 3, effective as of July 31, 1992, to the executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992). 10.11 -- Amendment No. 4, effective as of January 1, 1993, to the Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994). 10.12 -- Amendment No. 5, effective as of September 29, 1994, to the Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994). 10.13 -- Beverly Enterprises, Inc. Executive Deferred Compensation Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.23 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 10.14 -- Beverly Enterprises, Inc. Supplemental Long-Term Disability Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 10.15 -- Severance Plan for Corporate and Regional Employees effective December 1, 1989 assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.21 to Amendment No. 1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on February 26, 1990 (File No. 33-33052)). 10.16 -- Employment Contract, made as of December 8, 1995, between Beverly Enterprises, Inc. and David R. Banks (incorporated by reference to Exhibit 10.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
II-6 144
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.17** -- Employment Contract, made as of August 22, 1997 between New Beverly Holdings, Inc. and David R. Banks. 10.18 -- Employment Contract, made as of December 8, 1995, between Beverly Enterprises, Inc. and Boyd W. Hendrickson (incorporated by reference to Exhibit 10.3 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.19 -- Form of Change In Control Severance Agreement, made as of December 8, 1995, between Beverly Enterprises, Inc. and its Executive Vice Presidents (incorporated by reference to Exhibit 10.31 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995). 10.20** -- Form of Employment Contract, made as of August 22, 1997 between New Beverly Holdings, Inc. and certain officers. 10.21 -- Form of Change In Control Severance Agreement, made as of December 8, 1995, between Beverly Enterprises, Inc. and certain of its officers (incorporated by reference to Exhibit 10.32 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995). 10.22** -- Form of Severance Agreement made as of August 26, 1997 between New Beverly Holdings, Inc. and certain officers. 10.23** -- Amended and Restated Credit Agreement, dated as of August 20, 1997, among Beverly Enterprises, Inc., the Banks listed therein, and Morgan Guaranty Trust Company of New York, as Issuing Bank and as Agent. 10.24 -- Trust Indenture dated as of December 1, 1994 from Beverly Funding Corporation, as Issuer, to Chemical Bank, as Trustee (the "Chemical Indenture") (incorporated by reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.25 -- Series Supplement dated as of December 1, 1994 to the Chemical Indenture (incorporated by reference to Exhibit 10.46 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.26 -- Data Processing Agreement, dated as of August 1, 1992, by and between Systematics Telecommunications Services, Inc. and Beverly California Corporation (incorporated by reference to Exhibit 10 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1992). 10.27 -- Form of Irrevocable Trust Agreement for the Beverly Enterprises, Inc. Executive Benefits Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.28 -- Form of Indemnification and Pledge Agreement assumed by New Beverly Holdings, Inc. (Incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). 10.29 -- Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
II-7 145
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.30*** -- Participation Agreement, dated as of March 21, 1997, among Vantage Healthcare Corporation, Petersen Health Care, Inc., Beverly Savana Cay Manor, Inc., Beverly Enterprises-Georgia, Inc., and Beverly Enterprises-California, Inc. as Lessees and Structural Guarantors; Beverly Enterprises, Inc. as Representative, Construction Agent and Parent Guarantor; BMO Leasing (U.S.), Inc. as Agent Lessor and Lessor; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency and Bank of Montreal, as Lenders; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency as Arranger and Administrative Agent for the Lenders; and Bank of Montreal as Co-Arranger and Syndication Agent with respect to the Lease Financing of Assisted Living and Nursing Facilities for Beverly Enterprises, Inc. (incorporated by reference to Exhibit 10.2 of Beverly Enterprises, Inc., Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.31** -- Amendment No. 1 and Waiver to Participation Agreement, dated as of May 27, 1997. 10.32** -- Amendment No. 2 to Participation Agreement, dated as of August 20, 1997. 11.1 -- Computation of Net Income (Loss) Per Share for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 (incorporated by reference to Exhibit 11.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 21.1*** -- Subsidiaries of Registrant. 23.1** -- Consent of Ernst & Young LLP, Independent Auditors. 23.2** -- Consent of Giroir, Gregory, Holmes & Hoover, PLC (included as part of Exhibit 5.1). 24.1* -- Power of Attorney. 27.1* -- New Beverly Holdings, Inc. Financial Data Schedule.
- --------------- * Filed by the registrant on June 4, 1997. ** Filed herewith. *** To be filed by amendment. (b) Accounting schedules: Schedule II -- Valuation and Qualifying Accounts Beverly Enterprises, Inc. Pharmacy Corporation of America ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes: 1. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-8 146 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Fort Smith, State of Arkansas, on the th day of September, 1997. NEW BEVERLY HOLDINGS, INC. By: /s/ SCOTT M. TABAKIN ---------------------------------- Scott M. Tabakin Executive Vice President, Chief Financial Officer and Director Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed on the dates indicated by the following persons in the capacities indicated.
SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board, - ----------------------------------------------------- Chief Executive Officer David R. Banks and Director September , 1997 * President, Chief Operating - ----------------------------------------------------- Officer and Director Boyd W. Hendrickson September , 1997 * Executive Vice President, - ----------------------------------------------------- General Counsel, Robert W. Pommerville Secretary and Director September , 1997 * Executive Vice President -- - ----------------------------------------------------- Asset Management and Bobby W. Stephens Director September , 1997 /s/ SCOTT M. TABAKIN Executive Vice President, - ----------------------------------------------------- Chief Financial Officer Scott M. Tabakin and Director September , 1997 * Vice President, Controller - ----------------------------------------------------- and Chief Accounting Pamela H. Daniels Officer September , 1997 /s/ *JOHN W. MACKENZIE - ----------------------------------------------------- As Attorney-in-Fact
II-9 147 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2.1 -- Agreement and Plan of Merger dated April 15, 1997 by and between Beverly Enterprises, Inc. and Capstone Pharmacy Services, Inc. (incorporated by reference to Exhibit 2.1 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated April 15, 1997). 2.2 -- Agreement and Plan of Distribution by and among Beverly Enterprises, Inc., New Beverly Holdings, Inc. and Capstone Pharmacy Services, Inc. dated as of April 15, 1997 (incorporated by reference to Exhibit 2.2 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated April 15, 1997). 3.1* -- Certificate of Incorporation of New Beverly Holdings, Inc. dated April 15, 1997. 3.2* -- Amended Certificate of Incorporation of New Beverly Holdings, Inc. dated May 29, 1997. 3.3*** -- Amended and Restated Certificate of Incorporation of New Beverly Holdings, Inc. dated , 1997. 3.4* -- Bylaws of New Beverly Holdings, Inc. 4.1 -- Indenture dated as of February 1, 1996 between Beverly Enterprises, Inc. and Chemical Bank, as Trustee, with respect to Beverly Enterprises, Inc.'s 9% Senior Notes due February 15, 2006 (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995). 4.2 -- Indenture dated as of April 1, 1993 (the "First Mortgage Bond Indenture"), among Beverly Enterprises, Inc., Delaware Trust Company, as Corporate Trustee, and Richard N. Smith, as Individual Trustee, with respect to First Mortgage Bonds (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 4.3 -- First Supplemental Indenture dated as of April 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 3/4% First Mortgage Bonds due 2008 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 4.4 -- Second Supplemental Indenture dated as of July 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 5/8% First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated July 15, 1993) (incorporated by reference to Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 4.5 -- Indenture dated as of December 30, 1993 (the "Notes Indenture"), between Beverly Enterprises, Inc. and Boatmen's Trust Company, as Trustee, with respect to the 8.75% Notes (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-3 filed on November 9, 1993 (File No. 33-50965)). 4.6 -- First Supplemental Indenture dated as of December 30, 1993 to the Notes Indenture, with respect to 8 3/4% Notes due 2003 (incorporated by reference to Exhibit 4.4 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated January 4, 1994). 4.7 -- Rights Agreement dated as of September 29, 1994, between Beverly Enterprises, Inc. and The Bank of New York, as Rights Agent (incorporated by reference to Exhibit 1 to Beverly Enterprises, Inc.'s Registration Statement on Form 8-A filed on October 18, 1994).
148
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.8 -- Amendment, dated as of April 6, 1995, to the Rights Agreement between Beverly Enterprises, Inc. and The Bank of New York, as Rights Agent (incorporated by reference to Exhibit 4.20 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1995). In accordance with item 601(b)(4)(iii) of Regulation S-K, certain instruments pertaining to Beverly Enterprises, Inc.'s long-term obligations have not been filed; copies thereof will be furnished to the Securities and Exchange Commission upon request. 5.1** -- Opinion of Giroir, Gregory, Holmes & Hoover, PLC as to certain legal matters. 5.2*** -- Opinion of John W. MacKenzie as to certain legal matters. 10.1 -- Executive Medical Reimbursement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987). 10.2 -- Amended and Restated Beverly Enterprises, Inc. Executive Life Insurance Plan and Summary Plan Description (the "Executive Life Plan") assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993). 10.3 -- Amendment No. 1, effective September 29, 1994, to the Executive Life Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.4 -- Executive Physicals Policy assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.5 -- Amended and Restated Deferred Compensation Plan effective July 18, 1991 assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991). 10.6 -- Amendment No. 1, effective September 29, 1994, to the Deferred Compensation Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.7 -- Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987). 10.8 -- Amendment No. 1, effective as of July 1, 1991, to the Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991). 10.9 -- Amendment No. 2, effective as of December 12, 1991, to the Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991). 10.10 -- Amendment No. 3, effective as of July 31, 1992, to the executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992).
149
EXHIBIT NUMBER DESCRIPTION - ------------------------ ------------------------------------------------------------------------------------------ 10.11 -- Amendment No. 4, effective as of January 1, 1993, to the Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994). 10.12 -- Amendment No. 5, effective as of September 29, 1994, to the Executive Retirement Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994). 10.13 -- Beverly Enterprises, Inc. Executive Deferred Compensation Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.23 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 10.14 -- Beverly Enterprises, Inc. Supplemental Long-Term Disability Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996). 10.15 -- Severance Plan for Corporate and Regional Employees effective December 1, 1989 assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.21 to Amendment No. 1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on February 26, 1990 (File No. 33-33052)). 10.16 -- Employment Contract, made as of December 8, 1995, between Beverly Enterprises, Inc. and David R. Banks (incorporated by reference to Exhibit 10.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.17** -- Employment Contract, made as of August 22, 1997 between New Beverly Holdings, Inc. and David R. Banks. 10.18 -- Employment Contract, made as of December 8, 1995, between Beverly Enterprises, Inc. and Boyd W. Hendrickson (incorporated by reference to Exhibit 10.3 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 10.19 -- Form of Change In Control Severance Agreement, made as of December 8, 1995, between Beverly Enterprises, Inc. and its Executive Vice Presidents (incorporated by reference to Exhibit 10.31 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995). 10.20** -- Form of Employment Contract, made as of August 22, 1997 between New Beverly Holdings, Inc. and certain officers. 10.21 -- Form of Change In Control Severance Agreement, made as of December 8, 1995, between Beverly Enterprises, Inc. and certain of its officers (incorporated by reference to Exhibit 10.32 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995). 10.22** -- Form of Severance Agreement made as of August 26, 1997 between New Beverly Holdings, Inc. and certain officers. 10.23** -- Amended and Restated Credit Agreement, dated as of August 20, 1997, among Beverly Enterprises, Inc., the Banks listed therein, and Morgan Guaranty Trust Company of New York, as Issuing Bank and as Agent.
150
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.24 -- Trust Indenture dated as of December 1, 1994 from Beverly Funding Corporation, as Issuer, to Chemical Bank, as Trustee (the "Chemical Indenture") (incorporated by reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.25 -- Series Supplement dated as of December 1, 1994 to the Chemical Indenture (incorporated by reference to Exhibit 10.46 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.26 -- Data Processing Agreement, dated as of August 1, 1992, by and between Systematics Telecommunications Services, Inc. and Beverly California Corporation (incorporated by reference to Exhibit 10 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1992). 10.27 -- Form of Irrevocable Trust Agreement for the Beverly Enterprises, Inc. Executive Benefits Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)). 10.28 -- Form of Indemnification and Pledge Agreement assumed by New Beverly Holdings, Inc. (Incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1997). 10.29 -- Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.30*** -- Participation Agreement, dated as of March 21, 1997, among Vantage Healthcare Corporation, Petersen Health Care, Inc., Beverly Savana Cay Manor, Inc., Beverly Enterprises-Georgia, Inc., and Beverly Enterprises-California, Inc. as Lessees and Structural Guarantors; Beverly Enterprises, Inc. as Representative, Construction Agent and Parent Guarantor; BMO Leasing (U.S.), Inc. as Agent Lessor and Lessor; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency and Bank of Montreal, as Lenders; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency as Arranger and Administrative Agent for the Lenders; and Bank of Montreal as Co-Arranger and Syndication Agent with respect to the Lease Financing of Assisted Living and Nursing Facilities for Beverly Enterprises, Inc. (incorporated by reference to Exhibit 10.2 of Beverly Enterprises, Inc., Quarterly Report on Form 10-Q for the quarter ended June 30, 1997). 10.31** -- Amendment No. 1 and Waiver to Participation Agreement, dated as of May 27, 1997. 10.32** -- Amendment No. 2 to Participation Agreement, dated as of August 20, 1997. 11.1 -- Computation of Net Income (Loss) Per Share for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 (incorporated by reference to Exhibit 11.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996).
151
EXHIBIT NUMBER DESCRIPTION ------- ----------- 21.1*** -- Subsidiaries of Registrant. 23.1** -- Consent of Ernst & Young LLP, Independent Auditors. 23.2** -- Consent of Giroir, Gregory, Holmes & Hoover, PLC (included as part of Exhibit 5.1). 24.1* -- Power of Attorney. 27.1* -- New Beverly Holdings, Inc. Financial Data Schedule.
- --------------- * Filed by the registrant on June 4, 1997. ** Filed herewith. *** To be filed by amendment. EX-5.1 2 OPINION/CONSENT OF GIROIR GREGORY HOLMES & HOOVER 1 EXHIBIT 5.1 [LETTERHEAD] August 22, 1997 Board of Directors New Beverly Holdings, Inc. 5111 Rogers Avenue -- Suite 40A Fort Smith, Arkansas 72919-0155 Re: Form S-1 Registration Statement Commission File No. 333-28521 Gentlemen: As counsel for New Beverly Holdings, Inc. (the "Company"), we have participated in the preparation of the Company's referenced Registration Statement on Form S-1 as filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, relating to the issuance by the Company of up to 110,424,677 shares (the "Shares") of the Company's Common Stock (the "Common Stock"), to stockholders of Beverly Enterprises, Inc. ("Beverly") as part of a Plan of Distribution (the "Distribution") approved by the Board of Directors of Beverly in connection with approval of an Agreement and Plan of Merger dated as of April 15, 1997 between Beverly and Capstone Pharmacy Services, Inc. ("Capstone"). As counsel for the Company, we have examined such corporate records, certificates and other documents of the Company and such questions of law, and have made inquiry of such officers of the Company, as we have deemed necessary or appropriate for the purposes of this opinion, and on the basis of such examination, we are of the opinion that: 1. The Company has been duly incorporated and is validly existing under the laws of the State of Delaware. 2. The Shares, when issued and delivered in the Distribution in the manner set forth in the Registration Statement relating to the Shares, will be duly authorized, validly issued, fully paid and non-assessable shares of the Common Stock of the Company. We hereby consent to the inclusion of this opinion as an exhibit to the Registration Statement on Form S-1 filed by the Company and the reference to our firm in the prospectus contained therein, under the caption "Legal Matters." Very truly yours, GIROIR, GREGORY, HOLMES & HOOVER, PLC EX-10.17 3 EMPLOYMENT CONTRACT - DAVID R. BANKS 1 EXHIBIT 10.17 EMPLOYMENT CONTRACT AGREEMENT made as of August 22, 1997 between NEW BEVERLY HOLDINGS, INC., a Delaware corporation (the "Company"), and DAVID R. BANKS (the "Executive"), but to be effective as of the Effective Date. WHEREAS, Executive is currently employed by Beverly Enterprises, Inc. ("Beverly") and the Company is a wholly-owned subsidiary of Beverly; and WHEREAS, the Company, Beverly, and Capstone Pharmacy Services, Inc. ("Capstone") have entered into an Agreement and Plan of Distribution dated as of April 15, 1997 whereby Beverly intends to transfer all of its business except the institutional pharmacy business to the Company and the Company will be spun-off as a separate public corporation (the "Distribution"), and immediately thereafter Beverly will merge with and into Capstone (the "Merger") pursuant to an Agreement and Plan of Merger dated as of April 15, 1997 (the "Merger Agreement"), and the Company will change its name to Beverly Enterprises, Inc.; and WHEREAS, as a result of the Distribution, the Executive will become an employee of the Company or one of its wholly-owned consolidated subsidiaries; and WHEREAS, in connection with this Agreement and in exchange for the consideration described herein (the receipt and sufficiency of which is hereby acknowledged), the Executive has agreed to waive any rights he may currently have under any change in control, severance, or employment agreement or other compensation or employee benefit plan with or previously assumed by Beverly and has agreed to waive any claim that either the Distribution or the Merger constitutes a "Change in Control" under any such agreements or other employee benefit or compensation plans under this Agreement; and WHEREAS, the Company desires to assure itself of the management services of the Executive by directly engaging the Executive as the Chairman and Chief Executive Officer of the Company; and WHEREAS, the Company recognizes that the Executive's contribution to the Company's growth and success after the Distribution 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 not for Cause or a voluntary Termination of Employment for Good Reason within the Term of this Agreement, whether or not in connection with a Change in Control (other than a Change in Control in connection with the Distribution or Merger); NOW, THEREFORE, in consideration of the mutual agreements and understandings set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Company and the Executive hereby agrees as follows: 1. Definitions. (a) "Base Salary" shall mean the Executive's regular annual rate of base pay, as set forth in Paragraph 4(a), as of the date in question. 2 (b) The "Benefit Multiplier" shall be equal to 2.0 except that if Executive's Termination of Employment is pursuant to 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, after the Distribution and Merger: (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 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 (a) the Distribution or Merger, or (b) 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. 2 3 (h) The "Competitive Businesses" shall mean any of the health care businesses in which the Company is engaged on the effective date of the Distribution. Executive's serving on the Board of Directors of Capstone is specifically excluded from the definition of competitive businesses. (i) "Effective Date" shall mean the effective date of the Distribution; provided, however, that (a) in the event the Merger Agreement is terminated prior to consummation of the Merger, or (b) all of the Enumerated Executives do not enter into employment agreements with the Company on or before the effective date of the Distribution, then this Agreement shall be null and void ab initio and of no effect. For purposes hereof, the "Enumerated Executives" consist of David R. Banks, Boyd W. Hendrickson, William A. Mathies, T. Jerald Moore, Robert W. Pommerville, Bobby W. Stephens, Scott M. Tabakin, Mark D. Wortley, Schuyler Hollingsworth, Jr., Phillip W. Small and David G. Merrell. (j) 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 18 hereof; or (viii) the Company breaches any of the provisions of this Agreement. (k) "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). (l) "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." (m) "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. 3 4 2. Term. The initial term of this Agreement shall be for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date. The 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 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 $700,000 per annum through December 31, 1997 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. Executive shall be 100% vested in his current stock option, restricted stock, phantom stock, and performance share awards issued by Beverly prior to the Distribution, and hereby agrees to a substitution for all such stock options by a new grant of similar Company stock options, as adjusted in number of shares and exercise price to take into account the effect of the Distribution. (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 Retirement Plan, pursuant to its terms; (v) $600,000 of individual life insurance coverage under the Company's Executive Split Dollar Life Insurance Plan; (vi) $700,000 (or such greater amount as the Company may make available to its senior executives generally) of group term life insurance coverage; (vii) $100,000 (or such greater amount as the Company may make available to its senior executives generally) of business travel accident insurance coverage when traveling on Company business; 4 5 (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 Board of Directors 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 to any other person any information or fact relating to the management, 5 6 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 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: 6 7 (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 all of the Company's long- term incentive plans shall be fully vested. Any and all (i) options to purchase Company stock and (ii) restricted stock of the Company, owned by the Executive shall be fully vested. (c) Continuation of Benefits. (i) For the Benefit Period, the Executive shall be treated as if he had continued to be an executive employee for all purposes under the Company's Medical Plan, Executive Medical Reimbursement Plan and Dental Plan, as described in Paragraph 4(b). Following this period, the Executive shall be entitled to receive continuation coverage under Part Six of Title I of ERISA ("COBRA Benefits") treating the end of this period as a termination of the Executive's employment (other than for gross misconduct). (ii) The Company shall fully vest and maintain in force, at its own expense, for the remainder of the Executive's life, the life insurance in effect under the Company's Executive Split Dollar Life Insurance Plan (as described in Paragraph 4(b)) as of the Change in Control Date or as of the date of Termination of Employment, whichever is greater. (d) Relocation Benefit; Office. (i) If, within three years after the Executive's Termination of Employment with the Company, the Executive gives the Company written notice that 7 8 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. (ii) For the lesser of the Benefit Period or the date Executive commences employment which provides an office to Executive, the Company shall provide Executive with first-class office space of not more than 800 square feet in a city to be selected by the Executive and approved by the Company (with such approval not to be unreasonably withheld). (e) Executive Retirement Plan. For the year of the Executive's Termination of Employment, the Company will make the contribution to the Executive Retirement 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 Retirement Plan) and the percentage of such Compensation that the Executive 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 contribution percentage shall be contributed to the Executive Retirement 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 as described in Paragraph 4(b) applicable to Executive on the date of Termination of Employment, or, at the Executive's election, the plan or plans applicable to Executive as of the Change in Control Date. Should Executive become disabled during such period, Executive shall be entitled to receive such benefits, and for such duration, as the applicable plan(s) provide. (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 9 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 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 either Beverly or 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 Beverly was a party or which was assumed by Beverly), 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. 9 10 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. Trust. Any payments or installments that may be required to be made to Executive under this Agreement shall be funded immediately prior to any Change in Control Date (or, if earlier, within ten (10) days after any Termination of Employment) by a contribution by the Company of the necessary amount of cash, as determined by independent actuaries acceptable to both Executive and the Company, to the irrevocable grantor trust created for such purpose by Beverly and assumed by and transferred to the Company in connection with the Distribution, with Chemical Bank as Trustee, a copy of which Trust Agreement may be obtained from the Company or the Trustee. 15. Letter of Credit for Legal Fees. In order to ensure the benefits intended to be provided to the Executive hereunder, immediately prior to any Change in Control Date the Company shall establish and hereby agrees to maintain throughout the remaining Term an irrevocable standby Letter of Credit in favor of the Executive and each other person who is named an Executive under similar agreements, drawn on a bank selected by the Company (the "Letter of Credit") which provides for a credit amount of $250,000 being made available to the Executive against presentation at any time and from time to time of his clean sight drafts, accompanied by statements of his counsel for fees and expenses, in an aggregate amount not to exceed $250,000, unless a larger amount is authorized by either the Chief Executive Officer, General Counsel, Chief Financial Officer, or an Executive Vice President of the Company. 16. Waiver of Rights with Respect to Beverly Enterprises, Inc. Executive hereby waives any rights against Beverly, 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; or any rights he may have by virtue of the Distribution or Merger constituting a Change in Control under any such agreement or plan or any other Beverly compensation or employee benefit plan. Executive also agrees to the cancellation of his Beverly stock options and the substitution of such options with new stock options to be issued by the Company with similar terms and conditions (including 100% vesting) as the prior options, other than an increase in the number of such options and a decrease in the exercise price thereof in order to take into account the effect of the Distribution. Executive also waives any rights against the Company or Capstone which he might otherwise have by virtue of the Distribution or Merger constituting a Change in Control under any such aforementioned Beverly agreements or plans. 17. 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 10 11 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 17(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 17(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. 11 12 18. 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 18. 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. 19. 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. 12 13 20. 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. 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. 21. 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. 22. 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. 23. 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 either the Company or Beverly, 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. 24. 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. 13 14 The parties have duly executive this Agreement as of the date first written above. NEW BEVERLY HOLDINGS, INC. EXECUTIVE By: ------------------------------------- ---------------------------------- Beryl F. Anthony, Jr. David R. Banks Chairman, Compensation Committee 3421 Free Ferry Board of Directors Fort Smith, AR 72903 By: ------------------------------------- Robert W. Pommerville Agreed as to those provisions Secretary relating to or affecting Beverly Enterprises, Inc. 5111 Rogers Avenue, Suite 40-A BEVERLY ENTERPRISES, INC. Fort Smith, AR 72919 Attention: Secretary By: ------------------------------ Beryl F. Anthony, Jr. Chairman, Compensation Committee Board of Directors By: ------------------------------ Robert W. Pommerville Secretary 14 EX-10.20 4 FORM OF EMPLOYMENT CONTRACT - CERTAIN OFFICERS 1 EXHIBIT 10.20 EMPLOYMENT CONTRACT AGREEMENT made as of August 22, 1997 between NEW BEVERLY HOLDINGS, INC., a Delaware corporation (the "Company"), and Name1~ (the "Executive"), but to be effective as of the Effective Date. WHEREAS, Executive is currently employed by Beverly Enterprises, Inc. ("Beverly") and the Company is a wholly-owned subsidiary of Beverly; and WHEREAS, the Company, Beverly, and Capstone Pharmacy Services, Inc. ("Capstone") have entered into an Agreement and Plan of Distribution dated as of April 15, 1997 whereby Beverly intends to transfer all of its business except the institutional pharmacy business to the Company and the Company will be spun-off as a separate public corporation (the "Distribution"), and immediately thereafter Beverly will merge with and into Capstone (the "Merger") pursuant to an Agreement and Plan of Merger dated as of April 15, 1997 (the "Merger Agreement"), and the Company will change its name to Beverly Enterprises, Inc.; and WHEREAS, as a result of the Distribution, the Executive will become an employee of the Company or one of its wholly-owned consolidated subsidiaries; and WHEREAS, in connection with this Agreement and in exchange for the consideration described herein (the receipt and sufficiency of which is hereby acknowledged), the Executive has agreed to waive any rights he may currently have under any change in control, severance, or employment agreement or other compensation or employee benefit plan with or previously assumed by Beverly and has agreed to waive any claim that either the Distribution or the Merger constitutes a "Change in Control" under any such agreements or other employee benefit or compensation plans under this Agreement; and WHEREAS, the Company desires to assure itself of the management services of the Executive by directly engaging the Executive as the Title~ of the Company; and WHEREAS, the Company recognizes that the Executive's contribution to the Company's growth and success after the Distribution 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 not for Cause or a voluntary Termination of Employment for Good Reason within the Term of this Agreement, whether or not in connection with a Change in Control (other than a Change in Control in connection with the Distribution or Merger); NOW, THEREFORE, in consideration of the mutual agreements and understandings set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Company and the Executive hereby agrees as follows: 1. Definitions. (a) "Base Salary" shall mean the Executive's regular annual rate of base pay, as set forth in Paragraph 4(a), as of the date in question. 2 (b) The "Benefit Multiplier" shall be equal to 2.0 except that if Executive's Termination of Employment is pursuant to 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, after the Distribution and Merger: (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 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 (a) the Distribution or Merger, or (b) 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. 2 3 (h) The "Competitive Businesses" shall mean any of the health care businesses in which the Company is engaged on the effective date of the Distribution. Executive's serving on the Board of Directors of Capstone is specifically excluded from the definition of competitive businesses. (i) "Effective Date" shall mean the effective date of the Distribution; provided, however, that (a) in the event the Merger Agreement is terminated prior to consummation of the Merger, or (b) all of the Enumerated Executives do not enter into employment agreements with the Company on or before the effective date of the Distribution, then this Agreement shall be null and void ab initio and of no effect. For purposes hereof, the "Enumerated Executives" consist of David R. Banks, Boyd W. Hendrickson, William A. Mathies, T. Jerald Moore, Robert W. Pommerville, Bobby W. Stephens, Scott M. Tabakin, Mark D. Wortley, Schuyler Hollingsworth, Jr., Phillip W. Small and David G. Merrell. (j) 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 18 hereof; or (viii) the Company breaches any of the provisions of this Agreement. (k) "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). (l) "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." (m) "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. 3 4 2. Term. The initial term of this Agreement shall be for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date. The 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 Title 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 Duties of the Company. 4. Compensation and Related Matters. (a) Annual Base Salary. The Executive shall receive a Base Salary at a rate of Salary per annum through December 31, 1997 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. Executive shall be 100% vested in his current stock option, restricted stock, phantom stock, and performance share awards issued by Beverly prior to the Distribution, and hereby agrees to a substitution for all such stock options by a new grant of similar Company stock options, as adjusted in number of shares and exercise price to take into account the effect of the Distribution. (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 Retirement Plan, pursuant to its terms; (v) Life of individual life insurance coverage under the Company's Executive Split Dollar Life Insurance Plan; (vi) Group (or such greater amount as the Company may make available to its senior executives generally) of group term life insurance coverage; (vii) $100,000 (or such greater amount as the Company may make available to its senior executives generally) of business travel accident insurance coverage when traveling on Company business; 4 5 (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 Reports 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. 5 6 (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 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 6 7 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 all of the Company's long- term incentive plans shall be fully vested. Any and all (i) options to purchase Company stock and (ii) restricted stock of the Company, owned by the Executive shall be fully vested. (c) Continuation of Benefits. (i) For the Benefit Period, the Executive shall be treated as if he had continued to be an executive employee for all purposes under the Company's Medical Plan, Executive Medical Reimbursement Plan and Dental Plan, as described in Paragraph 4(b). Following this period, the Executive shall be entitled to receive continuation coverage under Part Six of Title I of ERISA ("COBRA Benefits") treating the end of this period as a termination of the Executive's employment (other than for gross misconduct). (ii) The Company shall fully vest and maintain in force, at its own expense, for the remainder of the Executive's life, the life insurance in effect under the Company's Executive Split Dollar Life Insurance Plan (as described in Paragraph 4(b)) 7 8 as of the Change in Control Date or as of the date of Termination of Employment, whichever is greater. (d) Relocation Benefit. If, within three years after the Executive's Termination of Employment with the Company, the Executive gives the Company written notice that he desires to relocate within the continental United States, the Company will reimburse the Executive for any reasonable relocation expenses (in accordance with the Company's general relocation policy for executives as then in effect, or, at the Executive's election, as in effect on the Change in Control Date) in connection with such relocation. (e) Executive Retirement Plan. For the year of the Executive's Termination of Employment, the Company will make the contribution to the Executive Retirement 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 Retirement Plan) and the percentage of such Compensation that the Executive 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 contribution percentage shall be contributed to the Executive Retirement 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 as described in Paragraph 4(b) applicable to Executive on the date of Termination of Employment, or, at the Executive's election, the plan or plans applicable to Executive as of the Change in Control Date. Should Executive become disabled during such period, Executive shall be entitled to receive such benefits, and for such duration, as the applicable plan(s) provide. (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 8 9 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 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 either Beverly or 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 Beverly was a party or which was assumed by Beverly), 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. 9 10 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. Trust. Any payments or installments that may be required to be made to Executive under this Agreement shall be funded immediately prior to any Change in Control Date (or, if earlier, within ten (10) days after any Termination of Employment) by a contribution by the Company of the necessary amount of cash, as determined by independent actuaries acceptable to both Executive and the Company, to the irrevocable grantor trust created for such purpose by Beverly and assumed by and transferred to the Company in connection with the Distribution, with Chemical Bank as Trustee, a copy of which Trust Agreement may be obtained from the Company or the Trustee. 15. Letter of Credit for Legal Fees. In order to ensure the benefits intended to be provided to the Executive hereunder, immediately prior to any Change in Control Date the Company shall establish and hereby agrees to maintain throughout the remaining Term an irrevocable standby Letter of Credit in favor of the Executive and each other person who is named an Executive under similar agreements, drawn on a bank selected by the Company (the "Letter of Credit") which provides for a credit amount of $250,000 being made available to the Executive against presentation at any time and from time to time of his clean sight drafts, accompanied by statements of his counsel for fees and expenses, in an aggregate amount not to exceed $250,000, unless a larger amount is authorized by either the Chief Executive Officer, General Counsel, Chief Financial Officer, or an Executive Vice President of the Company. 16. Waiver of Rights with Respect to Beverly Enterprises, Inc. Executive hereby waives any rights against Beverly, 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; or any rights he may have by virtue of the Distribution or Merger constituting a Change in Control under any such agreement or plan or any other Beverly compensation or employee benefit plan. Executive also agrees to the cancellation of his Beverly stock options and the substitution of such options with new stock options to be issued by the Company with similar terms and conditions (including 100% vesting) as the prior options, other than an increase in the number of such options and a decrease in the exercise price thereof in order to take into account the effect of the Distribution. Executive also waives any rights against the Company or Capstone which he might otherwise have by virtue of the Distribution or Merger constituting a Change in Control under any such aforementioned Beverly agreements or plans. 17. 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 10 11 "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 17(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 17(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 11 12 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. 18. 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 18. 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. 19. 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 12 13 Executive's signature, or at any such other address as either party shall have specified by notice in writing to the other. 20. 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. 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. 21. 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. 22. 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. 23. 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 either the Company or Beverly, 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. 24. 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. 13 14 The parties have duly executive this Agreement as of the date first written above. NEW BEVERLY HOLDINGS, INC. EXECUTIVE By: -------------------------------------- --------------------------------- David R. Banks Name Chairman and Chief Executive Address Officer State zip By: -------------------------------------- Robert W. Pommerville Agreed as to those provisions Executive Vice President, relating to or affecting Beverly General Counsel and Secretary Enterprises, Inc. 5111 Rogers Avenue, Suite 40-A BEVERLY ENTERPRISES, INC. Fort Smith, AR 72919 Attention: Secretary By: ------------------------------ David R. Banks Chairman and Chief Executive Officer By: ------------------------------ Robert W. Pommerville Executive Vice President, General Counsel and Secretary 14 EX-10.22 5 FORM OF SEVERANCE AGREEMENT - CERTAIN OFFICERS 1 EXHIBIT 10.22 SEVERANCE AGREEMENT AGREEMENT made as of August 26, 1997 between NEW BEVERLY HOLDINGS, INC., a Delaware corporation (the "Company"), and (the "Executive"), but to be effective as of the Effective Date. WHEREAS, the Executive is employed by Beverly Enterprises, Inc. ("Beverly"), or by one of its wholly-owned consolidated subsidiaries, and the Company is a wholly-owned subsidiary of Beverly; and WHEREAS, the Company, Beverly, and Capstone Pharmacy Services, Inc. ("Capstone") have entered into an Agreement and Plan of Distribution dated as of April 15, 1997 whereby Beverly intends to transfer all of its business except the institutional pharmacy business to the Company and the Company will be spun-off as a separate public corporation (the "Distribution"), and immediately thereafter Beverly will merge with and into Capstone (the "Merger") pursuant to an Agreement and Plan of Merger dated as of April 15, 1997 (the "Merger Agreement"), and the Company will change its name to Beverly Enterprises, Inc.; and WHEREAS, as a result of the Distribution, the Executive will become an employee of the Company or one of its wholly-owned consolidated subsidiaries; and WHEREAS, in connection with this Agreement and in exchange for the consideration described herein (the receipt and sufficiency of which is hereby acknowledged), the Executive has agreed to waive any rights he may currently have under any change in control, severance, or employment agreement or other compensation or employee benefit plan with or previously assumed by Beverly and has agreed to waive any claim that either the Distribution or the Merger constitutes a "Change in Control" under any such agreements or other employee benefit or compensation plans under this Agreement; and WHEREAS, the Company desires to assure itself of the management services of the Executive by directly engaging the Executive as the of the Company; and WHEREAS, the Company recognizes that the Executive's contribution to the Company's growth and success after the Distribution 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 not for Cause or a voluntary Termination of Employment for Good Reason within the Term of this Agreement, whether or not in connection with a Change in Control (other than a Change in Control in connection with the Distribution or Merger); 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: 2 1. Definitions. (a) "Base Salary" shall mean the Executive's regular annual rate of base pay as of the date in question. (b) The "Benefit Multiplier" shall be equal to 1.0 except that if Executive's Termination of Employment is pursuant to paragraph 3(b), it shall be equal to Multiplier. (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, 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 such notices and cure periods as are provided for by the Company's disciplinary process. (e) A "Change in Control" shall be deemed to have taken place if, after the Distribution and Merger: (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 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 (a) the Distribution or Merger, or (b) 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. 2 3 (f) The "Change in Control Date" shall mean the date immediately prior to the effectiveness of the Change in Control. (g) The "Committee" shall mean the Compensation Committee of the Company's Board of Directors. (h) The "Competitive Businesses" shall mean any of the health care businesses in which the Company is engaged on the effective date of the Distribution. (i) "Effective Date" shall mean the effective date of the Distribution; provided, however, that in the event the Merger Agreement is terminated prior to consummation of the Merger, then this Agreement shall be null and void ab initio and of no effect. (j) 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. (k) "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). (l) "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." (m) "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. 3 4 2. Term. The initial term of this Agreement shall be for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date. The 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. Eligibility for Severance Benefits. The Executive shall be eligible for the benefits described in Paragraph 4 (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, subsection (b) does not apply; or (b) during the Term (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 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 the definition of "Good Reason" and in Paragraph 4 hereof). 4. Severance Benefit. Upon satisfaction of the requirements set forth in Paragraph 3, and subject to Paragraphs 5 and 9, 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. 4 5 (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 or she 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 Life Insurance Plan 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 or she 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 Retirement Plan. For the year of the Executive's Termination of Employment, the Company will make the contribution to its Executive Retirement Plan (the "Retirement Plan") 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 Retirement Plan) and the percentage of such Compensation that the Executive is contributing to the 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 contribution percentage shall be paid to the Executive immediately upon his Termination of Employment and any additional contribution shall be paid as soon as it 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. 5 6 (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 4 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. 5. 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 4 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 4, (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 4, 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 8, and if Paragraph 9 applies, any reference in this Paragraph to Paragraph 4 shall also be deemed to include a reference to Paragraph 9 as well. 6. 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. 6 7 (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 6 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. 7. 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 either Beverly or 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 Beverly was a party or which was assumed by Beverly), except those benefits which are to be made available to the Executive as required by applicable law. 8. 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. 9. 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 4 and/or 5 hereof, then the benefits under Paragraph 4(a) shall be increased and the benefits under Paragraphs 4(c), 4(d), and 4(g) shall each be continued by one additional day for each day of any such failure or refusal of the Company to pay. In 7 8 addition, any Gross-Up Payment due under Paragraph 5 shall be increased to take into account any increased benefits under this Paragraph. 10. 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. 11. 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. 12. Trust. Any payments or installments that may be required to be made to Executive under this Agreement shall be funded immediately prior to any Change in Control Date (or, if earlier, within ten (10) days after any Termination of Employment) by a contribution by the Company of the necessary amount of cash, as determined by independent actuaries acceptable to both Executive and the Company, to the irrevocable grantor trust created for such purpose by the Company, with Chemical Bank as Trustee, dated July 18, 1995, a copy of which Trust Agreement may be obtained from the Company or the Trustee. 13. Letter of Credit for Legal Fees. In order to ensure the benefits intended to be provided to the Executive hereunder, immediately prior to any Change in Control Date the Company shall establish and hereby agrees to maintain throughout the remaining Term an irrevocable standby Letter of Credit in favor of the Executive and each other person who is named an Executive under similar agreements, drawn on a bank selected by the Company (the "Letter of Credit") which provides for a credit amount of $250,000 being made available to the Executive against presentation at any time and from time to time of his clean sight drafts, accompanied by statements of his counsel for fees and expenses, in an aggregate amount not to exceed $250,000, unless a larger amount is authorized by either the Chief Executive Officer, General Counsel, Chief Financial Officer, or an Executive Vice President of the Company. 14. Waiver of Rights with Respect to Beverly Enterprises, Inc. Executive hereby waives any rights against Beverly, 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; or any rights he may have by virtue of the Distribution or Merger constituting a Change in Control under any such agreement or plan or any other Beverly compensation or employee benefit plan. Executive also agrees to the cancellation of his Beverly stock options and the substitution of such options with new stock options to be issued by the Company with similar terms and conditions (including 100% vesting) as the prior options, other than an increase in the number of such options and a decrease in the exercise price thereof in order to take into account the effect of the Distribution. Executive also waives any rights against the Company or Capstone which he might otherwise have by virtue of the Distribution or Merger constituting a Change in Control under any such aforementioned Beverly agreements or plans. 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 8 9 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 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 9 10 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; (b) If to the Executive, to him or her 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. 10 11 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. 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. 11 12 The parties have duly executed this Agreement as of the date first written above. NEW BEVERLY HOLDINGS, INC. EXECUTIVE By: ----------------------------------- ------------------------------ David R. Banks Name Chairman and Chief Executive Officer Address State zip By: ----------------------------------- Robert W. Pommerville Agreed as to those provisions Executive Vice President, relating to or affecting General Counsel and Secretary Beverly Enterprises, Inc. 5111 Rogers Avenue, Suite 40-A BEVERLY ENTERPRISES, INC. Fort Smith, AR 72919 Attention: Secretary By: ---------------------------- David R. Banks Chairman and Chief Executive Officer By: ---------------------------- Robert W. Pommerville Executive Vice President, General Counsel and Secretary 12 EX-10.23 6 AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.23 [CONFORMED COPY] $375,000,000 AMENDED AND RESTATED CREDIT AGREEMENT dated as of December 20, 1996 among BEVERLY ENTERPRISES, INC. The BANKS Listed Herein MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 Definitions Section 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.02. Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 1.03. Types of Loans and Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE 2 The Credits Section 2.01. The Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.02. Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.03. Notice to Banks; Funding of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Section 2.04. Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 2.05. Maturity of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.06. Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.07. Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 2.08. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Section 2.09. Optional Termination or Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . 33 Section 2.10. Mandatory Termination of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 2.11. Method of Electing Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 2.12. Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 2.13. General Provisions as to Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 2.14. Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.15. Computation of Interest, Fees and Commissions . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.16. Withholding Tax Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Section 2.17. Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 ARTICLE 3 Conditions Section 3.01. Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 3.02. Borrowings and Letter of Credit Issuances . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE 4 Representations and Warranties Section 4.01. Corporate Existence and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 4.02. Corporate and Governmental Authorization; No Contravention . . . . . . . . . . . . . . . . . 42 Section 4.03. Binding Effect; Liens of Pledge Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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PAGE ---- Section 4.04. Financial Information; Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 4.05. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 4.06. Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 4.07. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 4.08. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 4.09. Title to and Condition of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 4.10. Not an Investment Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 Section 4.11. Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 4.12. Representations in Subsidiary Guaranty and Pledge Agreement . . . . . . . . . . . . . . . . . 45 Section 4.13. Existing Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE 5 Covenants Section 5.01. Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Section 5.02. Maintenance of Property; Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 5.03. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 5.04. Inspection of Property, Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 5.05. Minimum Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 5.06. Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 5.07. Adjusted Consolidated Debt Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 5.08. Ownership of Stock of Wholly-Owned Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 50 Section 5.09. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 5.10. Restricted Payments on Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 5.11. Negative Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Section 5.12. Consolidations, Mergers and Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 5.13. Incurrence of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 5.14. Use of Proceeds and Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 5.15. Additional Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 5.16. Lease Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 5.17. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 ARTICLE 6 Defaults Section 6.01. Events of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 6.02. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 ARTICLE 7 The Agent
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PAGE ---- Section 7.01. Appointment and Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 7.02. Agent and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 7.03. Action by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 7.04. Consultation with Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.05. Liability of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.06. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.07. Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.08. Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 7.09. Agent's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 ARTICLE 8 Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair . . . . . . . . . . . . . . . . . . 64 Section 8.02. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 8.03. Increased Cost and Reduced Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans . . . . . . . . . . . . . . . . . . 68 ARTICLE 9 Miscellaneous Section 9.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 9.02. No Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 9.03. Expenses; Documentary Taxes; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 9.04. Sharing of Set-Offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 9.05. Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 9.06. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 9.07. Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 9.08. GOVERNING LAW; SUBMISSION TO JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 9.09. Consent to Execution and Delivery of Certain Financing Documents . . . . . . . . . . . . . . 73 Section 9.10. Counterparts; Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 9.11. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 9.12. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
iii 5 Schedule I - Pricing Schedule Schedule II - Commitment Schedule Schedule III - Existing Subsidiary Debt Schedule IV - Subsidiaries of the Borrower Schedule V - Existing Letters of Credit Exhibit A Note Exhibit B Form of Pledge and Security Agreement Exhibit C Form of Subsidiary Guaranty Exhibit D Opinion of Special New York Counsel to the Borrower Exhibit E Opinion of Vice President and Deputy General Counsel of the Borrower Exhibit F Opinion of Special Counsel to the Agent Exhibit G Form of Assignment and Assumption Agreement
iv 6 AMENDED AND RESTATED CREDIT AGREEMENT AGREEMENT dated as of December 20, 1996 among BEVERLY ENTERPRISES, INC. (with its successors, the "Borrower"), a Delaware corporation, the BANKS listed on the signature pages hereof, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (with its successors in such capacity, the "Agent"), amending and restating the Credit Agreement dated as of November 1, 1994 (as amended, the "Existing Credit Agreement") among Beverly California Corporation, the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as issuing bank and as agent. WHEREAS, Beverly California Corporation has changed its name to Beverly Health and Rehabilitation Services, Inc. ("Beverly Health"); WHEREAS, the Borrower and Beverly Health have requested that certain provisions of the Existing Credit Agreement be amended, and the Banks and the Agent have agreed to such amendments, subject to the satisfaction of the terms and conditions set forth herein, which amendments shall become effective only at such time as this Agreement becomes effective in accordance with Section 3.01; WHEREAS, the parties have agreed that Beverly Enterprises, Inc., the guarantor under the Existing Credit Agreement, shall become the borrower under the Credit Agreement and shall assume all the obligations of Beverly Health with respect to the Loans and Letters of Credit under the Existing Credit Agreement; WHEREAS, Beverly Health, the borrower under the Existing Credit Agreement, shall sign a Subsidiary Guaranty Agreement as of the date hereof and become a Subsidiary Guarantor under the Credit Agreement; WHEREAS, the parties have agreed that on the Effective Date, (i) all outstanding Loans made pursuant to the Existing Credit Agreement, all outstanding "Nippon Loans" made pursuant to the Nippon Credit Agreement and all outstanding "LTCB Loans" made pursuant to the LTCB Credit Agreement will be repaid, (ii) certain of the banks party to the Nippon Credit Agreement and the LTCB Credit Agreement will become parties hereto and (iii) the revolving Commitments will be increased to $375 million and allocated among the Banks as set forth in the Commitment Schedule herein; 7 WHEREAS, the parties have agreed that, upon the effectiveness of this Agreement, any outstanding "Letters of Credit" issued pursuant to the Existing Credit Agreement shall constitute "Letters of Credit" hereunder and shall be governed by the terms and conditions of this Agreement; and WHEREAS, in order to set forth in one document, for the convenience of the parties, the text of the Existing Credit Agreement as amended by the amendments to be made upon the effectiveness hereof, the Existing Credit Agreement will upon satisfaction of the conditions set forth in Section 3.01 hereof, be amended and restated to read in full as set forth herein; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 Definitions Section 1.01. Definitions. The following terms, as used herein, have the following meanings: "Adjusted CD Rate" has the meaning set forth in Section 2.06(b). "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" and "long-term obligations" on the consolidated balance sheet included in the Base Financials (including any Subordinated Notes), (ii) all guarantees at such date of obligations of other issuers (other than guarantees outstanding on the date hereof of obligations outstanding on the date hereof, in amounts not in excess of $110,901,000 and reported in the Base Financials) 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. "Adjusted London Interbank Offered Rate" has the meaning set forth in Section 2.06(c). "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. 2 8 "Affiliate" means any Person (other than the Borrower, any Subsidiary of the Borrower or any Bank) (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Borrower or (b) which is the Beneficial Owner of 10% or more of any class of the Voting Stock of the Borrower. As used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting stock, by contract or otherwise. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Banks hereunder, and its successors in such capacity. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "Appraised Value" means, with respect to any asset subjected to or released from any Lien, the value of such asset as determined by an independent appraisal performed within 90 days of, and as of a date not less than 90 days prior to, the date upon which such asset is subjected to or released from such Lien. "Assessment Rate" has the meaning set forth in Section 2.06(b). "Assignee" has the meaning set forth in Section 9.06(c). "Authorized Financial Officer" of any Person means the Chief Financial Officer, Treasurer or Controller of such Person. "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "Base Financials" means the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, together with the notes thereto, included in the Borrower's 1995 Form 10-K and reported on without qualification by Ernst & Young LLP. 3 9 "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means (i) a Loan which bears interest at the Base Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or the provisions of Article 8 or (ii) an overdue amount that was a Base Rate Loan immediately before it became overdue. "Base Rate Margin" has the meaning set forth in Section 2.06(a). "Beneficial Owner" means a Person who is deemed to be the "Beneficial Owner" of securities pursuant to Rule 13d-3 or 13d-5 of the Securities Exchange Act of 1934 (as in effect on the date hereof). "Beverly Health" means Beverly Health and Rehabilitation Services, Inc., formerly known as Beverly California Corporation, a California corporation, and its successors. "Borrower" means Beverly Enterprises, Inc., a Delaware corporation, and its successors. "Borrower's 1995 Form 10-K" means the Borrower's annual report on Form 10-K for 1995, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. "Borrowing" has the meaning set forth in Section 1.03. "CD Base Rate" has the meaning set forth in Section 2.06(b). "CD Loan" means (i) a Loan which bears interest at a CD Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or (ii) an overdue amount that was a CD Loan immediately before it became overdue. "CD Margin" has the meaning set forth in Section 2.06(b). "CD Rate" means a rate of interest determined pursuant to Section 2.06(b) on the basis of an Adjusted CD Rate. "CD Reference Banks" means PNC Bank, National Association, NationsBank, N.A. and Morgan Guaranty Trust Company of New York. 4 10 "Collateral" means the property in which the Agent is granted, or is purported to be granted, a lien or security interest from time to time under the Pledge Agreement, which lien or security interest has not been released in accordance with the terms hereof or thereof. "Commitment" means, with respect to any Bank, the amount set forth opposite the name of such Bank as such Bank's Commitment on the Commitment Schedule, as such amount may be reduced from time to time pursuant to Section 2.09. "Commitment Fee Rate" has the meaning set forth in Section 2.08(a). "Commitment Schedule" means Schedule II attached hereto. "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 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. "Consolidated EBITDAR" means, for any period, the sum of Consolidated EBITDA and Consolidated Rental Expense for such period. "Consolidated Gross Capital Expenditures" means, for any period the total amount of additions to property and equipment, other than software development costs, of the Borrower and its Consolidated Subsidiaries during such period of the types classified as "Capital Expenditures" on the consolidated statement of cash flows included in the Base Financials. "Consolidated Interest Charges" means, for any period, all items for such period of the types classified as "interest" on the consolidated statement of operations included in the Base Financials. "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 any extraordinary or other material non-recurring gain or loss outside the ordinary course of business) of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. 5 11 "Consolidated Net Worth" means at any date the consolidated stockholders' equity of the Borrower and its Consolidated Subsidiaries at such date. "Consolidated Rental Expense" means, for any period, the rental expense (net of sublease income) of the Borrower and its Consolidated Subsidiaries for such period. "Consolidated Subsidiary" means, with respect to any Person and at any date, any of its Subsidiaries or any other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "Consolidated Tax Charges" means, for any period, all items for such period of the types classified as "provision for income taxes" on the consolidated statement of operations included in the Base Financials. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all obligations of such Person with respect to letters of credit and similar instruments, including, without limitation, obligations under reimbursement agreements, (vi) all mandatorily redeemable preferred stock of such Person, (vii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (viii) all Debt of others Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. 6 12 "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.06(b). "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment, including, without limitation, ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Borrower and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. 7 13 "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "Euro-Dollar Loan" means (i) a Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or (ii) an overdue amount that was a Euro-Dollar Loan immediately before it became overdue. "Euro-Dollar Margin" has the meaning set forth in Section 2.06(c). "Euro-Dollar Rate" means a rate of interest determined pursuant to Section 2.06(c) on the basis of an Adjusted London Interbank Offered Rate. "Euro-Dollar Reference Banks" means the principal Nassau office of PNC Bank, National Association and the principal London offices of NationsBank, N.A. and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.06(c). "Event of Default" has the meaning set forth in Section 6.01. "Existing Bank" means a Bank (as defined in the Existing Credit Agreement). "Existing Credit Agreement" means the Credit Agreement dated as of November 1, 1994 among Beverly Health, the Borrower, the banks listed on the signature pages thereof, and Morgan Guaranty Trust Company of New York, as issuing bank and as agent, as the same has been amended on or prior to the Effective Date. "Existing Financing Documents" means the Financing Documents (as defined in the Existing Credit Agreement). "Existing Letter of Credit" means a Letter of Credit (as defined in the Existing Credit Agreement). "Existing Loan" means a Loan (as defined in the Existing Credit Agreement). 8 14 "Exposure" means, for any day and with respect to any Bank, the sum on such day of the Letter of Credit Exposure of such Bank and the aggregate outstanding principal amount of the Loans of such Bank. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%) 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 Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions, as determined by the Agent. "Financing Documents" means this Agreement, the Notes, the Subsidiary Guaranty and the Pledge Agreement. "Fixed Charge Coverage Ratio" means, on any date, the ratio of (i) Consolidated EBITDAR minus Consolidated Gross Capital Expenditures 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 four fiscal quarters. "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or both. "Former Borrower" means Beverly Health. "Group of Loans" means at any time a group of Loans consisting of (i) all Loans that are Base Rate Loans at such time or (ii) all Loans that are Fixed Rate Loans of the same type having the same Interest Period at such time; provided that, if a Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Section 8.02 or 8.04, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to 9 15 purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Hazardous Substance" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "Interest Period" means: (1) with respect to each Euro-Dollar Loan, a period commencing on the date of borrowing specified in the applicable Notice of Borrowing or the date specified in the applicable Notice of Interest Rate Election and ending one week or one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing or Notice of Interest Rate Election; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (c)(i) below) that would otherwise end on a day that is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless, in the case of any Interest Period other than a one-week Interest Period, such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period (other than an Interest Period of one week or an Interest Period determined pursuant to clause (c) below) that begins on the last Euro-Dollar 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 Euro-Dollar Business Day of a calendar month; and (c) if any Interest Period includes a date on which a payment of principal of the Loans is required to be made under Section 2.05 but does not end on such date, then (i) the principal amount (if any) of each Euro-Dollar Loan required to be repaid on such date shall 10 16 have an Interest Period ending on such date and (ii) the remainder (if any) of each such Euro-Dollar Loan shall have an Interest Period determined as set forth above; and (2) with respect to each CD Loan, a period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing or Notice of Interest Rate Election; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b)(i) below) that would otherwise end on a day that is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) if any Interest Period includes a date on which a payment of principal of the Loans is required to be made under Section 2.05 but does not end on such date, then (i) the principal amount (if any) of each CD Loan required to be repaid on such date shall have an Interest Period ending on such date and (ii) the remainder (if any) of each such CD Loan shall have an Interest Period determined as set forth above. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "Investment" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "Issuing Bank" means Morgan Guaranty Trust Company of New York in its capacity as issuer of the Letters of Credit, and its successors in such capacity. "Lease Cancellation Payment" means any payment made to cancel or terminate a lease of a facility and related property prior to the end of its term. "Lease Conversion" means any acquisition by the Borrower or any of its Subsidiaries of a facility and related property that had theretofore been leased by the Borrower or any such Subsidiary and that the Borrower or any of its Subsidiaries continues to operate. "Letter of Credit" means a letter of credit issued, or deemed to have been issued, by the Issuing Bank pursuant to Section 2.07(a). 11 17 "Letter of Credit Commission Rate" has the meaning set forth in Section 2.07(f). "Letter of Credit Commitment" means, with respect to any Bank at any time, an amount equal to the lesser of (i) such Bank's Commitment at such time and (ii) the product of $100,000,000 multiplied by a fraction, the numerator of which is such Bank's Commitment at such time and the denominator of which is the aggregate Commitments of all Banks at such time. "Letter of Credit Exposure" means, with respect to any Bank at any time, the sum of (i) its participation in the undrawn amount which is then, or may thereafter become, available for drawing under each outstanding Letter of Credit and (ii) its participation in the amount of each unpaid Reimbursement Obligation for drawings theretofore made under any Letter of Credit. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any of its Subsidiaries shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a loan made by a Bank pursuant to Section 2.01; provided that if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "London Interbank Offered Rate" has the meaning set forth in Section 2.06(c). "LTCB Agent" means the Agent (as defined in the LTCB Credit Agreement). "LTCB Collateral" means the real property and related personal property which constitute Collateral (as defined in the LTCB Credit Agreement) immediately prior to the Effective Date. "LTCB Credit Agreement" means that certain Credit Agreement, dated as of March 24, 1992, among Beverly Health, the Borrower, the lenders party thereto 12 18 (the "LTCB Lenders"), Bank of Montreal, as co-agent, and The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency, as agent, as amended, supplemented or modified. "LTCB Financing Documents" means the LTCB Credit Agreement, the LTCB Notes and the LTCB Mortgages. "LTCB Loan" means a Loan (as defined in the LTCB Credit Agreement). "LTCB Mortgages" means the Mortgages (as defined in the LTCB Credit Agreement). "LTCB Notes" means the Notes (as defined in the LTCB Credit Agreement) in favor of the LTCB Lenders. "Material Commitment" means an outstanding commitment by a financial institution or a syndicate of financial institutions to provide financial accommodations to the Borrower and/or one or more of its Subsidiaries, arising in one or more related transactions, in an amount equal to or exceeding in the aggregate $50,000,000. "Material Financial Obligations" means a principal or face amount of Debt and/or (in the case of Section 6.01(f)) payment obligations in respect of, or (in the case of Section 6.01(g)) mark-to-market value of, Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $20,000,000. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $1,000,000. "Material Subsidiary" means, at any time, any Subsidiary of the Borrower that at such time constitutes a "significant subsidiary" of the Borrower within the meaning of Regulation S-X promulgated by the Securities and Exchange Commission; provided that for purposes of this definition of the term "Material Subsidiary" each reference to "10 percent" contained in the definition of "significant subsidiary" set forth in Regulation S-X shall be replaced by "5 percent". "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. 13 19 "Nippon" means The Nippon Credit Bank, Ltd. and its successors. "Nippon Agent" means the Agent (as defined in the Nippon Credit Agreement). "Nippon Collateral" means the real property and related personal property which constitute Collateral (as defined in the Nippon Credit Agreement) immediately prior to the Effective Date. "Nippon Credit Agreement" means that certain Credit Agreement, dated as of March 2, 1993, among Beverly Health, the Borrower, the lenders party thereto (the "Nippon Lenders") and Nippon, as agent, as amended, supplemented or modified. "Nippon Financing Documents" means the Nippon Credit Agreement, the Nippon Notes and the Nippon Mortgages. "Nippon Loan" means a Loan (as defined in the Nippon Credit Agreement). "Nippon Mortgages" means the Mortgages (as defined in the Nippon Credit Agreement). "Nippon Notes" means the Notes (as defined in the Nippon Credit Agreement) in favor of the Nippon Lenders. "Notes" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" has the meaning set forth in Section 2.02. "Notice of Interest Rate Election" has the meaning set forth in Section 2.11(a). "Notice of Issuance" has the meaning set forth in Section 2.07(b). "Other Plan" means an employee pension benefit plan (other than a Plan or a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code. 14 20 "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section 9.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Permitted Receivables Financing Securities" means debt securities or preferred stock issued by a Special Purpose Receivables Financing Subsidiary pursuant to a Receivables Financing Program and borrowings by a Special Purpose Receivables Financing Subsidiary under a related Receivables Financing Backstop Facility. "Permitted Preferred Stock" means preferred stock of the Borrower that has no mandatory redemption or redemption at the option of the holder thereof prior to the first anniversary of the Termination Date and no required increase in the rate of dividends payable thereon prior to such first anniversary other than increases arising from the resetting of the rate of dividends on the basis of a reasonable market or other similar index or a market interest rate. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Pharmacy" means Pharmacy Corporation of America, a California corporation, and its successors. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group. "Pledge Agreement" means the Amended and Restated Pledge and Security Agreement dated as of the date hereof among the Borrower, Pharmacy and the Agent, substantially in the form of Exhibit B hereto, as the same may be amended from time to time. "Pledged Stock" has the meaning set forth in the Pledge Agreement. 15 21 "Pricing Ratio" has the meaning set forth in the Pricing Schedule attached hereto. "Pricing Schedule" means Schedule I attached hereto. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "Quarterly Date" means any March 31, June 30, September 30 or December 31 or, in the case of any such date that is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Receivables Financing Backstop Facility" means a credit facility entered into by a Special Purpose Receivables Financing Subsidiary for the purposes of providing liquidity with respect to securities issued by such Special Purpose Receivables Financing Subsidiary and of financing transactions of the type intended to be financed with the proceeds of such securities. "Receivables Financing Program" means a program pursuant to which a Special Purpose Receivables Financing Subsidiary issues debt securities or preferred stock secured by (i) Medicaid, Medicare or other patient accounts receivable or Permitted Receivables Financing Securities purchased from the Borrower and its Subsidiaries or (ii) security interests in Medicaid, Medicare or other patient accounts receivable or Permitted Receivables Financing Securities granted by the Borrower and its Subsidiaries. "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Refinanced Debt" has the meaning set forth in clause (v) of Section 5.13(a). "Refinancing Debt" has the meaning set forth in clause (v) of Section 5.13(a). "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. 16 22 "Reimbursement Obligation" means an obligation of the Borrower to reimburse the Issuing Bank pursuant to Section 2.07(d) for the amount of a drawing under a Letter of Credit. "Relevant Debt" has the meaning set forth in Section 9.04. "Required Banks" means at any time Banks having at least 66 2/3% of the aggregate Total Exposures of all Banks. "Secured Obligations" has the meaning set forth in the Pledge Agreement. "Secured Parties" has the meaning set forth in the Pledge Agreement. "Segregated Collateral Account" has the meaning set forth in the Pledge Agreement. "Senior Note Agreement" means that certain Indenture, dated as of February 1, 1996, among the Borrower, the corporations listed on the signature pages thereto and The Chase Manhattan Bank, formerly known as Chemical Bank, as Trustee, as amended, modified or supplemented. "Special Purpose Receivables Financing Subsidiary" means a Wholly-Owned Subsidiary of the Borrower the sole purpose of which is to issue debt securities and/or preferred stock and to purchase Medicare, Medicaid or other patient accounts receivable of the Borrower and its Subsidiaries and/or Permitted Receivables Financing Securities and make advances to the Borrower and its Subsidiaries secured by security interests in such Medicare, Medicaid or other patient accounts receivable and/or Permitted Receivables Financing Securities, which accounts receivable, Permitted Receivables Financing Securities and/or security interests therein may be pledged to secure such debt securities and/or preferred stock and/or borrowings by such Special Purpose Receivables Financing Subsidiary under a Receivables Financing Backstop Facility. "Subordinated Notes" means the Borrower's 5 1/2% Convertible Subordinated Debentures issued from time to time in exchange for the Borrower's $2.75 Cumulative Convertible Exchangeable Preferred Stock. "Subsidiary" means, with respect to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; provided that, with respect to the Borrower, Subsidiary shall not (except for 17 23 financial reporting purposes and determination of compliance with financial covenants) include any corporations or other entities (i) which are inactive, (ii) each of which has neither assets nor liabilities, calculated on a consolidated basis for each such corporation or other entity, of $1,600,000 or more and (iii) which taken together have neither aggregate assets nor aggregate liabilities, calculated on a consolidated basis, of $3,000,000 or more. "Subsidiary Guarantor" means, at any time, a Subsidiary of the Borrower party to the Subsidiary Guaranty at such time. "Subsidiary Guaranty" means the Amended and Restated Subsidiary Guaranty dated as of the date hereof by the Borrower and the Subsidiaries of the Borrower parties thereto in favor of the Banks, the Agent and the Issuing Bank, substantially in the form of Exhibit C hereto, as the same may be amended from time to time. "Temporary Cash Investment" means any Investment in (i) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, (ii) commercial paper with maturities of not more than 180 days rated at least P-1 by Moody's Investors Service, Inc. or A-1 by Standard & Poor's Ratings Group, (iii) deposit accounts in, and certificates of deposit, repurchase agreements and bankers' acceptances of, United States branches of commercial banks whose unsecured senior long-term debt is rated A or better by Moody's Investors Service, Inc. or Standard & Poor's Ratings Group, in each case maturing within one year from the date of acquisition thereof or (iv) in addition to the accounts and instruments referred to in clause (iii), deposit accounts and certificates of deposit in United States branches of banks insured by the Federal Deposit Insurance Corporation which do not aggregate more than $100,000 in any one bank. "Termination Date" means December 31, 2001. "Total Exposure" means, for any day and with respect to any Bank, the greater of (x) the Commitment of such Bank and (y) the Exposure of such Bank. "Unfunded Liabilities" means, with respect to any employee pension benefit plan which is covered by Title IV of ERISA, or subject to the minimum funding standards under Section 412 of the Internal Revenue Code, at any time, the amount (if any) by which (i) the present value of all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) under such plan exceeds (ii) the fair market value of all plan assets allocable to such benefit liabilities (excluding any accrued but unpaid contributions), all determined as of the then most recent 18 24 valuation date for such plan in accordance with the relevant provisions of Title IV of ERISA and regulations promulgated thereunder, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Voting Stock" means capital stock of any class or classes (however designated) having ordinary voting power for the election of directors of the Borrower, other than stock having such power only by reason of the happening of a contingency. "Wholly-Owned Subsidiary" means, with respect to any Person, any Subsidiary of such Person all of the shares of Voting Stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person. "Workout Transaction" means any adjustment, renegotiation, exchange, subordination, amendment, sale or other disposition of any note receivable, Investment or other similar asset of the Borrower or any of its Subsidiaries, any release, subordination, renegotiation or other adjustment or any Lien securing any Debt or other obligation of any Person held by or owed to the Borrower or any of its Subsidiaries, any acquisition of any asset by the Borrower or any of its Subsidiaries or the making of any Investment by the Borrower or any of its Subsidiaries, in each case in connection with (i) the foreclosure, enforcement or realization by the Borrower or any such Subsidiary on any Lien securing any Debt or other obligation of any Person held by or owed to the Borrower or any such Subsidiary or (ii) any renegotiation, composition, adjustment, amendment or restructuring of, or any other similar arrangement with respect to, any such Debt or obligation, in each case in connection with the bankruptcy, insolvency, financial distress or other similar condition of such Person; provided that any such adjustment, renegotiation, exchange, subordination, amendment, sale, disposition, release or acquisition or the making of any such Investment (A) will, in the reasonable opinion of an Authorized Financial Officer of the Borrower, in light of the circumstances affecting the relevant obligor, be likely to maximize the amount to be realized by the Borrower and its Subsidiaries with respect to such Debt or other obligation or (B) is imposed on the Borrower or any of its Subsidiaries pursuant to voting arrangements mandated by any law or contract arrangements binding upon the Borrower or such Subsidiary. Section 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally 19 25 accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the Base Financials; provided that if any change in generally accepted accounting principles after December 31, 1995 in itself materially affects the calculation of any financial covenant in Article 5, the Borrower may by notice to the Agent, or the Agent (at the request of the Required Banks) may by notice to the Borrower, require that such covenant thereafter be calculated in accordance with generally accepted accounting principles as in effect, and applied by the Borrower, immediately before such change in generally accepted accounting principles occurs. If such notice is given, the compliance certificates delivered pursuant to Section 5.01(d) after such change occurs shall be accompanied by reconciliations of the difference between the calculation set forth therein and a calculation made in accordance with generally accepted accounting principles as in effect from time to time after such change occurs. Section 1.03. Types of Loans and Borrowings. The term "Borrowing" denotes the aggregation of Loans made to the Borrower pursuant to Article 2 on a single date and, in the case of a Borrowing consisting of Fixed Rate Loans, for a single Interest Period. Loans and Borrowings are distinguished by "type". The "type" of a Loan (or a Borrowing consisting of such Loans) refers to the pricing of the Loans, whether such Loan is a Euro-Dollar Loan, a CD Loan or a Base Rate Loan, each of which constitutes a type. ARTICLE 2. The Credits Section 2.01. The Loans. (a) Repayment of Existing Loans, Nippon Loans and LTCB Loans. Prior to the Effective Date, each Existing Bank, Nippon Lender and LTCB Lender has made Existing Loans, Nippon Loans and LTCB Loans, respectively, to the Former Borrower guaranteed by the Borrower pursuant to the Existing Credit Agreement, the Nippon Credit Agreement and the LTCB Credit Agreement. On the Effective Date, the Former Borrower shall repay all Existing Loans, all Nippon Loans and all LTCB Loans outstanding under the Existing Credit Agreement, the Nippon Credit Agreement and the LTCB Credit Agreement. (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 Commitment. Each Borrowing under this Section 2.01(b) shall be in an aggregate principal amount of 20 26 $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 from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section 2.01(b), prepay loans to the extent permitted by Section 2.12, and reborrow pursuant to this Section 2.01(b). Section 2.02. Notice of Borrowing. The Borrower shall give the Agent notice (a "Notice of Borrowing") not later than (x) 12:00 Noon (New York City time) on the date of each Base Rate Borrowing, (y) 12:00 Noon (New York City time) on the second Domestic Business Day before each CD Borrowing and (z) 12:00 Noon (New York City time) on the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to bear interest initially calculated on the basis of the Base Rate, a CD Rate or a Euro-Dollar Rate, (d) in the case of a Borrowing consisting of Fixed Rate Loans, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. Section 2.03. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 3:00 P.M. (New York City time) on the date of each Borrowing, each Bank shall (except as provided in subsection (c) below) make available its ratable share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Agent will promptly 21 27 make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (c) If any Bank that makes any Loan on the Effective Date is the holder, on the Effective Date, of any Existing Loan that is to be repaid on the Effective Date, such Bank shall apply the proceeds of its Loan to make such repayment and only an amount equal to the difference (if any) between the amount of the Loan being borrowed and the amount of such Existing Loan to be so repaid shall be made available by the Bank to the Agent as provided in subsection (b) or remitted by the Borrower to such Bank as provided in the Existing Credit Agreement. (d) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.03 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate then applicable to the Loans contained in such Borrowing pursuant to Section 2.06 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. Section 2.04. Notes. (a) In connection with the effectiveness of the Existing Credit Agreement, the Former Borrower delivered to the Agent, for the account of each Existing Bank, duly executed "Notes" substantially in the form of Exhibit A to the Existing Credit Agreement (collectively, the "Existing Notes") to evidence the Existing Loans of each bank under the Existing Credit Agreement. In connection with the effectiveness of the Nippon Credit Agreement and the LTCB Credit Agreement, the Former Borrower delivered to the Nippon Agent and the LTCB Agent, respectively, the Nippon Notes and the LTCB Notes to evidence the Nippon Loans and the LTCB Loans, respectively, of each bank under the Nippon Credit Agreement and the LTCB Credit Agreement. On or prior to the Effective Date, the Borrower shall deliver to the Agent, for the account of each Bank, duly 22 28 executed Notes, substantially in the form of Exhibit A hereto. On the Effective Date, each Bank's Existing Note, Nippon Note or LTCB Note shall be automatically canceled, and from and after the Effective Date, the Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. On or promptly after the Effective Date, each Existing Bank, Nippon Lender and LTCB Lender shall deliver to the Agent, the Nippon Agent or the LTCB Agent, as the case may be, for delivery to the Borrower its Existing Note, Nippon Note or LTCB Note (or in the case of loss thereof, a written agreement of indemnity by such Bank for such loss in customary form and executed by such Bank) marked "CANCELED". (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of its Loans of such type. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(b), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount and type of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and prior to any transfer of its Note may endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or of the Borrower under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. Section 2.05. Maturity of Loans. Each Loan shall mature, and the principal amount thereof shall be due and payable in full, on the Termination Date. Section 2.06. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Loan is made to but excluding the date it becomes due, at a rate per annum equal to the sum of the Base Rate Margin for such day plus the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Date and, with respect to the principal amount of any Base Rate Loan converted 23 29 to a Fixed Rate Loan, on each day a Base Rate Loan is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day from and including the date upon which it becomes due to but excluding the date upon which it is paid, at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. "Base Rate Margin" means a rate per annum determined in accordance with the Pricing Schedule. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD Loan or any portion thereof shall, as a result of clause (2)(b)(i) of the definition of Interest Period, have an Interest Period of less than 30 days, such portion shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus (i) for each day during such Interest Period, the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Loan, and (ii) for each day after the end of such Interest Period, the rate applicable to Base Rate Loans for such day. "CD Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]* ACDR = [ -------------- ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate __________ * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% 24 30 The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. Section 327.3(e) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. 25 31 The "Adjusted London Interbank Offered Rate" applicable to any Interest Period means the rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. "Euro-Dollar Margin" means a rate per annum determined in accordance with the Pricing Schedule. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date upon which it becomes due to but excluding the date upon which it is paid, at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Loan at the date such payment was due and (ii) the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such 26 32 Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the Banks by telex, cable or facsimile transmission of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (f) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Reference Banks, or if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. Section 2.07. Letters of Credit. (a) Commitment to Issue Letters of Credit. (i) The Borrower may from time to time request that the Issuing Bank issue a letter of credit pursuant to which the Issuing Bank shall be obligated to the beneficiary to pay any drawings made thereunder and the Banks shall be obligated to the Issuing Bank to participate ratably in such drawings in proportion to their respective Commitments as hereinafter provided. (ii) Subject to Section 2.07(a)(iv) below, and in accordance with its customary procedures (to the extent such procedures are not inconsistent with the terms of this Agreement), the Issuing Bank agrees, on the terms and conditions set forth in this Agreement and at the request of the Borrower, to issue Letters of Credit for the account of the Borrower or any of its Subsidiaries from time to time prior to the Termination Date. Each Bank agrees to participate ratably in proportion to its Commitment in any drawings made under each Letter of Credit. (iii) Notwithstanding any reference in any Existing Letter of Credit to the Existing Credit Agreement, on and as of the Effective Date, each Existing Letter of Credit shall be deemed to be a Letter of Credit and to have been issued pursuant to clause (ii) above on the Effective Date. 27 33 (iv) In addition to the conditions precedent set forth in Article 3, the obligations of the Issuing Bank to issue Letters of Credit pursuant to clause (ii) above are subject to the additional conditions that: (A) no Letter of Credit shall have an expiry date later than one Domestic Business Day prior to the Termination Date; provided that with respect to a Letter of Credit issued for the purpose of providing credit support for obligations of the Borrower or any of its Subsidiaries in connection with self-insurance provided by or insurance procured on behalf of the Borrower and its Subsidiaries, it shall not be a violation of the condition set forth in this clause (iv) if such Letter of Credit (1) is certified by an Authorized Officer of the Borrower to be required by applicable insurance law or regulation to provide, and does provide, that if there shall occur with respect to the Issuing Bank one of the events described in Article 17 of the 1993 revision of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication No. 500), as the same may be revised, amended, supplemented or superseded, the expiry date shall be extended until not later than a specified number of days (the "Extension Period") after the resumption of business of the Issuing Bank following such event and (2) provides for an expiry date prior to the Termination Date by at least 30 days more than the number of days included in the Extension Period; and (B) the fact that, immediately after the issuance of such Letter of Credit, no Bank's Letter of Credit Exposure will exceed such Bank's Letter of Credit Commitment. (b) Notice of Issuance. Except in the case of Letters of Credit deemed, pursuant to clause (iii) of Section 2.07(a) above, to be issued on the Effective Date, the Borrower shall give the Agent and the Issuing Bank notice (a "Notice of Issuance") at least three Domestic Business Days before each Letter of Credit is to be issued, specifying: (i) the date of issuance and expiry date of such Letter of Credit, (ii) the proposed terms of such Letter of Credit, including the face amount thereof and (iii) the transaction that is to be supported or financed by such Letter of Credit. Upon receipt of a Notice of Issuance, the Issuing Bank shall promptly notify each Bank and the Agent of the contents thereof and of the amount of such 28 34 Bank's participation in such Letter of Credit and such Notice of Issuance shall not thereafter be revocable by the Borrower. (c) Drawings under Letters of Credit. (i) Upon receipt from the beneficiary of any Letter of Credit of demand for payment under such Letter of Credit, the Issuing Bank shall determine in accordance with the terms of such Letter of Credit whether such demand for payment should be honored. (ii) If the Issuing Bank determines that a demand for payment by the beneficiary of a Letter of Credit should be honored, the Issuing Bank shall make available to the beneficiary in accordance with the terms of such Letter of Credit the amount of the drawing under such Letter of Credit. The Issuing Bank shall thereupon notify the Borrower, the Agent and each Bank of the amount of such drawing paid by it and the amount of each Bank's participation therein. (d) Reimbursement and Other Payments by the Borrower. (i) If any amount is drawn under any Letter of Credit, the Borrower irrevocably and unconditionally agrees to reimburse the Issuing Bank for all amounts paid by the Issuing Bank upon such drawing, together with any and all reasonable charges and expenses which any Bank or the Issuing Bank may pay or incur relative to such drawing and interest on the amount drawn at the average rate charged to the Issuing Bank on overnight Federal funds transactions for each day from and including the date such amount is drawn to but excluding the date such reimbursement payment is due and payable. Such reimbursement payment shall be due and payable (x) not later than 12:00 Noon (New York City time) on the date the Issuing Bank notifies the Borrower of such drawing, if such notice is given at or before 10:00 A.M. (New York City time) on such date, or (y) not later than 12:00 Noon (New York City time) on the first Domestic Business Day succeeding the date such notice is given, if such notice is given after 10:00 A.M. (New York City time); provided that no payment otherwise required by this sentence to be made by the Borrower not later than 12:00 Noon (New York City time) on any day shall be overdue hereunder if arrangements for such payment satisfactory to the Issuing Bank, in its sole discretion, shall have been made by the Borrower not later than 12:00 Noon (New York City time) on such day and such payment is actually made not later than 3:00 P.M. (New 29 35 York City time) on such day. The Issuing Bank shall provide a copy of any such notice to the Agent. (ii) In addition, the Borrower agrees to pay to the Issuing Bank (A) interest on any and all amounts unpaid by the Borrower when due hereunder with respect to a Letter of Credit, for each day from and including the date when such amount becomes due to but excluding the date such amount is paid in full, whether before or after judgment, payable on demand, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day, and (B) upon each transfer of any Letter of Credit in accordance with its terms, a sum equal to such amount as shall be necessary to cover the reasonable costs and expenses of the Issuing Bank incurred in connection with such transfer. (iii) Each payment to be made by the Borrower pursuant to this Section 2.07(d) shall be made, in Federal or other funds immediately available in New York City, to the Issuing Bank at its address referred to in or pursuant to Section 9.01. (e) Payments by Banks with Respect to Letters of Credit. (i) Each Bank shall make available an amount equal to its ratable share of any drawing under a Letter of Credit, in Federal or other funds immediately available in New York City, to the Issuing Bank by 3:00 P.M. (New York City time) on the Domestic Business Day following such drawing, together with interest on such amount at the average rate charged to the Issuing Bank on overnight Federal funds transactions on the date of such drawing as determined by the Issuing Bank, at the Issuing Bank's address specified in or pursuant to Section 9.01; provided that each Bank's obligation shall be reduced by its pro rata share of any reimbursement theretofore paid by the Borrower in respect of such drawing pursuant to Section 2.07(d)(i). The Issuing Bank shall notify each Bank and the Agent of the amount of such Bank's obligation in respect of any drawing under a Letter of Credit not later than 1:00 P.M. (New York City time) on the day such payment by such Bank is due. Each Bank shall be subrogated to the rights of the Issuing Bank against the Borrower to the extent of all amounts due from such Bank to the Issuing Bank, plus interest thereon, for each day from and including the day such amount is due from such Bank to the Issuing Bank to but excluding the day the Borrower makes payment to the Issuing Bank pursuant to Section 2.07(d) above, whether before or after judgment, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day. 30 36 (ii) If any Bank fails to pay any amount required pursuant to clause (i) of this subsection on the date on which such payment is due, interest shall accrue on such Bank's obligation to make such payment, for each day from and including the date such payment becomes due to but excluding the date such Bank makes such payment, whether before or after judgment, at a rate per annum equal to (A) in the case of each day from and including the day such payment is due through and including the first succeeding Domestic Business Day (and any intervening days), the average rate charged to the Issuing Bank on overnight Federal funds transactions for each such day as determined by the Issuing Bank and (B) thereafter, the sum of 2% plus the rate applicable to Base Rate Loans for such day. Any payment made by any Bank after 3:00 P.M., New York City time, on any Domestic Business Day shall be deemed for purposes of the preceding sentence to have been made on the next succeeding Domestic Business Day. (iii) If the Borrower shall reimburse the Issuing Bank for any drawing under a Letter of Credit after the Banks shall have made funds available to the Issuing Bank with respect to such drawing in accordance with clause (i) of this subsection, the Issuing Bank shall promptly upon receipt of such reimbursement distribute to each Bank its pro rata share thereof, including interest, to the extent received by the Issuing Bank. (f) Letter of Credit Commission; Fronting Fee. (i) The Borrower shall pay to the Agent for the account of the Banks, ratably in proportion to their Commitments or, if all Commitments have been terminated, in proportion to their Commitments immediately before such termination, a letter of credit commission at a rate per annum (the "Letter of Credit Commission Rate") determined daily in accordance with the Pricing Schedule on the daily average amount available for drawing (whether or not any conditions to drawing can then be met) on all outstanding Letters of Credit. Such letter of credit commission shall accrue from and including the Effective Date to but excluding the Termination Date (or later date of expiration or termination of the last Letter of Credit to expire or be terminated) and shall be payable quarterly in arrears on each Quarterly Date, on the date of termination of the Commitments in their entirety and, if later, on the date of expiration or termination of the last Letter of Credit to expire or be terminated. 31 37 (ii) The Borrower agrees to pay to the Agent for the account of the Issuing Bank a fronting fee in the amounts and at the times previously agreed between the Borrower and the Issuing Bank. (g) Payment upon Acceleration. If the Commitments shall be terminated or the principal of the Notes shall become immediately due and payable pursuant to Section 6.01, the Borrower shall pay to the Agent for deposit in the Segregated Collateral Account an amount equal to the aggregate amount which is then, or may thereafter become, available for drawing under all outstanding Letters of Credit. (h) Limited Liability of the Issuing Bank. The Borrower assumes all risks of the acts or omissions of any beneficiary and any transferee of any Letter of Credit with respect to its use of such Letter of Credit. The Banks, the Issuing Bank and their respective officers, directors, employees and agents shall not be liable or responsible for, and the obligations of each Bank to make payments (other than obligations of such Bank resulting solely from the gross negligence or willful misconduct of the Issuing Bank), and of the Borrower to reimburse the Issuing Bank for payments, pursuant to this Section shall not be excused by, any action or inaction of any Bank or the Issuing Bank related to (i) the use which may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (ii) the validity, sufficiency or genuineness of documents presented under any Letter of Credit, or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; or (iii) payment by the Issuing Bank against presentation of documents to the Issuing Bank which do not comply with the terms of any Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit. Notwithstanding the foregoing, the Borrower shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which were caused by (i) the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit comply with the terms thereof or (ii) the Issuing Bank's willful failure to pay under any Letter of Credit after the presentation to the Issuing Bank by any beneficiary (or a successor beneficiary to whom such Letter of Credit has been transferred in accordance with its terms) of documents strictly complying with the terms and conditions of such Letter of Credit. Subject to the preceding sentence, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary unless any beneficiary (or a successor beneficiary to whom such Letter of Credit has been transferred in accordance with its terms) and 32 38 the Borrower shall have notified the Issuing Bank that such documents do not comply with the terms and conditions of such Letter of Credit. Each Bank shall, ratably in accordance with its Commitment, indemnify the Issuing Bank (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Issuing Bank's gross negligence or willful misconduct) that the Issuing Bank may suffer or incur in connection with this Agreement or any action taken or omitted by the Issuing Bank hereunder. Section 2.08. Fees. (a) The Borrower shall pay to the 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 daily in accordance with the Pricing Schedule on the daily average amount by which the aggregate amount of the Commitments exceeds the aggregate Exposure. Such commitment fee 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). (b) On the Effective Date, the Borrower shall pay to J.P. Morgan Securities Inc., for its own account, an arrangement fee in the amount previously agreed between the Borrower and the Agent. (c) Accrued fees under Section 2.08(a) above shall be payable quarterly in arrears on each Quarterly Date and upon the date of termination of the Commitments in their entirety. Section 2.09. Optional Termination or Reduction of Commitments. (a) The Borrower may, upon at least three Domestic Business Days' notice to the Agent, (i) terminate the Commitments at any time, if the aggregate Exposures of all Banks shall be zero at the time of such termination, or (ii) ratably reduce from time to time by an aggregate amount of $5,000,000 or any larger multiple of $1,000,000, the aggregate amount of the Commitments in excess of the aggregate Exposures of all Banks.. (b) Each reduction of the Commitments pursuant to this Section 2.09 shall be applied ratably to the respective Commitments of all Banks. Section 2.10. Mandatory Termination of Commitments. All Commitments shall terminate in their entirety on the Termination Date. 33 39 Section 2.11. Method of Electing Interest Rates. (a) The Loans included in each Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to CD Loans as of any Domestic Business Day or to Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are CD Loans, the Borrower may elect to convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to continue such Loans as CD Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans; and (iii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or CD Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "Notice of Interest Rate Election") to the Agent not later than 12:00 Noon (New York City time) (x) if the relevant Loans are to be converted to Domestic Loans or continued as Domestic Loans for an additional Interest Period, the second Domestic Business Day before such conversion or continuation is to be effective and (y) if the relevant Loans are to be converted to Euro-Dollar Loans or continued as Euro-Dollar Loans for an additional Interest Period, the third Euro-Dollar Business Day before such conversion or continuation is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group of Loans and (ii) the portion to which such Notice of Interest Rate Election applies, and the remaining portion to which it does not apply, are each at least $1,000,000 and not more than one of such portions is other than a multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; 34 40 (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of Section 2.11(a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if such new Loans are Fixed Rate Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as Fixed Rate Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to Section 2.11(a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Group of Fixed Rate Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. Section 2.12. Optional Prepayments. (a) The Borrower may, upon notice to the Agent not later than 11:00 A.M. (New York City time) on the date of such prepayment, prepay a Group of Base Rate Loans in whole at any time, or from time to time in part in amounts aggregating $1,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. (b) The Borrower may, upon at least three Domestic Business Days' notice to the Agent, in the case of a Group of CD Loans, or upon at least three Euro-Dollar Business Days' notice to the Agent, in the case of a Group of Euro-Dollar Loans, prepay the Loans comprising such Group in whole at any time, or from time to time in part in amounts aggregating $1,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment; provided that the Borrower shall reimburse each Bank for any loss or expense incurred by it as a result of any such prepayment in accordance with Section 2.14. 35 41 (c) Each prepayment of all or part of a Group of Loans pursuant to this Section 2.12 shall be applied to prepay ratably the Loans of the several Banks included in such Group. (d) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. Section 2.13. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of commissions and fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in or pursuant to Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of commissions or fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from and including the date such amount is distributed to such Bank to but excluding the date such Bank repays such amount to the Agent, at the Federal Funds Rate. 36 42 Section 2.14. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a Base Rate Loan (whether such payment or conversion is pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.06(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.03(a) or 2.12(d), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties or terminating, covering, reversing or closing out interest rate swap agreements with third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow or prepay; provided that such Bank shall have promptly delivered to the Borrower a certificate as to the amount of such loss or expense (setting forth in reasonable detail, if the Borrower so requests, the calculation thereof), which certificate shall be conclusive in the absence of manifest error. Section 2.15. Computation of Interest, Fees and Commissions. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest, fees and commissions shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Section 2.16. Withholding Tax Exemption. At least five Domestic Business Days prior to the first date on which interest, fees or commissions are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Borrower and the Agent (and, in the case of any Bank with any Letter of Credit Exposure, the Issuing Bank) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent (and, in the case of any Bank with any Letter of Credit Exposure, the Issuing Bank) two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent (or, in the case of any Bank with any Letter of Credit Exposure, the Issuing Bank), 37 43 in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including, without limitation, any change in any treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrower and the Agent (and, in the case of any Bank with any Letter of Credit Exposure, the Issuing Bank) that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. Section 2.17. Maximum Interest Rate. (a) Nothing contained in this Agreement or the Notes shall require the Borrower to pay interest at a rate exceeding the maximum rate permitted by applicable law. Neither this Section nor Section 9.08 is intended to limit the rate of interest payable for the account of any Bank or the Issuing Bank, as the case may be, to the maximum rate permitted by the laws of the State of New York if a higher rate is permitted with respect to such Bank or the Issuing Bank, as the case may be, by supervening provisions of United States federal law. (b) If the amount of interest payable for the account of any Bank or the Issuing Bank, as the case may be, on any date in respect of the immediately preceding interest computation period, computed pursuant to Section 2.06 or, in the case of interest on Reimbursement Obligations or other amounts payable in respect of Letters of Credit, Section 2.07, would exceed the maximum amount permitted by applicable law to be charged by such Bank or the Issuing Bank, as the case may be, the amount of interest payable for its account on such date shall be automatically reduced to such maximum permissible amount. (c) If the amount of interest payable for the account of any Bank or the Issuing Bank, as the case may be, in respect of any interest computation period is reduced pursuant to clause (b) of this Section and the amount of interest payable for its account in respect of any subsequent interest computation period, computed pursuant to Section 2.06 or, in the case of interest on Reimbursement Obligations or other amounts payable in respect of Letters of Credit, Section 2.07, would be less than the maximum permissible amount permitted by applicable law to be charged by such Bank or the Issuing Bank, as the case may be, then the amount of interest payable for its account in respect of such subsequent interest computation period shall be automatically increased to such maximum permissible amount; provided that at no time shall the aggregate amount by which interest paid for the account of any Bank or the Issuing Bank, as the case may be, has been increased 38 44 pursuant to this clause (c) exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to clause (b) of this Section. ARTICLE 3. Conditions Section 3.01. Effectiveness. This Agreement shall become effective on the date that each of the following conditions shall have been satisfied (or waived in accordance with Section 9.05): (a) receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any such party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex, facsimile transmission or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Agent for the account of each Bank of a duly executed Note dated on or before the Effective Date complying with the provisions of Section 2.04; (c) receipt by the Agent, with sufficient copies for each Bank, of opinions of Weil, Gotshal & Manges LLP, special New York counsel to the Borrower, and the Vice President and Deputy General Counsel of the Borrower, substantially in the forms of Exhibits D and E hereto, respectively, and in each case covering such additional matters relating to the transactions contemplated hereby as the Agent or the Required Banks may reasonably request; (d) receipt by the Agent, with sufficient copies for each Bank, of an opinion of Davis Polk & Wardwell, special counsel to the Agent, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Agent or the Required Banks may reasonably request; (e) receipt by the Agent of evidence satisfactory to it that Section 4.12 of the Senior Notes Agreement has been clarified to indicate that an increase in the dollar amount secured by a Lien existing on the date thereof does not cause the lien not to be a "Permitted Lien", as defined therein; 39 45 (f) receipt by the Agent of a certificate signed by the chief financial officer or treasurer of the Borrower to the effect set forth in subsections (c) and (d) of Section 3.02; (g) receipt by the Agent of duly executed counterparts of the Pledge Agreement, together with evidence satisfactory to the Agent that the securities required to be delivered to the Agent pursuant thereto have been so delivered; (h) receipt by the Agent of duly executed counterparts of the Subsidiary Guaranty duly executed by all Subsidiary Guarantors, including Beverly Health; (i) receipt by the Agent of evidence satisfactory to it that such action (including, without limitation, the filing of appropriately completed and duly executed Uniform Commercial Code financing statements) as may be necessary or as the Agent shall have reasonably requested to perfect the Liens created pursuant to the Pledge Agreement shall have been taken; (j) receipt by the Agent of evidence satisfactory to it of the fact that all amounts payable by the Borrower to the Agent or the Banks on or before such date shall have been paid or arrangements satisfactory to the Agent shall have been made for such payment; (k) the Agent shall have received a payoff letter, including an undertaking to release all liens, executed by each mortgagee along with an undertaking to file any document necessary to evidence and record the release of all Liens created under the Nippon Financing Documents and the LTCB Financing Documents; (l) receipt by the Agent and the Issuing Bank of evidence satisfactory to the Agent and the Issuing Bank that each Existing Letter of Credit shall have been amended to the extent, if any, necessary to reflect the fact that on and after the Effective Date such Letter of Credit shall be deemed to have been issued hereunder; (m) prior to or simultaneously with the transactions hereunder contemplated to take place on the Effective Date, (i) all "Loans" outstanding under the Existing Credit Agreement shall be repaid in full (with accrued interest thereon) and (ii) all other amounts payable under the Existing Credit Agreement , including without limitation "breakage costs" under Section 2.14 thereof, shall be paid in full; 40 46 (n) receipt by the Agent of evidence satisfactory to it of the termination of the commitments under the Nippon Credit Agreement and the LTCB Credit Agreement and that the outstanding loans (together with interest thereon) and all other amounts payable to the Nippon Lenders and the LTCB Lenders under the Nippon Credit Agreement and the LTCB Credit Agreement as of the Effective Date shall have been paid in full or will be paid in full with the proceeds of a Borrowing to be made on the Effective Date; (o) upon the effectiveness of this Agreement, the aggregate amount of the Letter of Credit Exposures shall not exceed the aggregate amount of the Letter of Credit Commitments; and (p) receipt by the Agent of all documents it may reasonably request relating to the existence of the Borrower and each of its Subsidiaries party to any Financing Document, the corporate authority for and the validity of the Financing Documents, and any other matters relevant hereto or thereto, all in form and substance satisfactory to the Agent; provided that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied not later than December 31, 1996. Prior to the effectiveness of this Agreement in accordance with this Section 3.01, none of the terms and conditions of the Existing Credit Agreement, Nippon Credit Agreement or LTCB Credit Agreement or any Existing Financing Document, Nippon Financing Document or LTCB Financing Document shall be amended, waived or otherwise modified by this Agreement and all such terms and conditions shall remain in full force and effect and are hereby ratified and confirmed in all respects. The Agent shall promptly notify the Borrower, the Issuing Bank and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. Section 3.02. Borrowings and Letter of Credit Issuances. The obligation of any Bank to make a Loan on the occasion of any Borrowing, and the obligation of the Issuing Bank to issue any Letter of Credit (including the deemed issuance of the initial Letters of Credit pursuant to Section 2.07(a)(iii)), are subject to the satisfaction of the following conditions: (a) except in the case of the deemed issuance of the initial Letters of Credit pursuant to Section 2.07(a)(iii), receipt by the Agent of a Notice of Borrowing or Notice of Issuance as required by Section 2.02 or 2.07(b), as the case may be; 41 47 (b) in the case of any Borrowing or the issuance of a 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 aggregate Commitments of all Banks; (c) the fact that, immediately before and after such Borrowing, or the issuance of such Letter of Credit, as the case may be, no Default shall have occurred and be continuing; and (d) the fact that the representations and warranties of the Borrower or any of its Subsidiaries contained in the Financing Documents shall be true in all material respects on and as of the date of such Borrowing or issuance, as the case may be. Each Borrowing and each issuance of a Letter of Credit hereunder shall be deemed to be a representation and warranty by the Borrower to the Agent, each of the Banks and, in the case of an issuance of a Letter of Credit, the Issuing Bank on the date of such Borrowing or issuance, as the case may be, as to the facts specified in clauses (b), (c) and (d) of this Section. ARTICLE 4. Representations and Warranties The Borrower hereby makes the following representations and warranties: Section 4.01. Corporate Existence and Power. Each of the Borrower and its Subsidiaries party to any Financing Document is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted except where the failure to obtain such governmental licenses, authorizations, consents and approvals would not materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries and would not in any manner draw into question the validity of any Financing Document. The Borrower has no Subsidiaries on the Effective Date other than those listed on Schedule IV hereto. Section 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each of the Borrower and its Subsidiaries of each Financing Document to which it is a party are within the Borrower's and each such Subsidiary's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, 42 48 or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or any such Subsidiary or of any agreement, judgment, injunction, order, decree or other instrument that is material, individually or in the aggregate, and that is binding upon the Borrower or any such Subsidiary or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries (except the Liens created pursuant to the Pledge Agreement). Section 4.03. Binding Effect; Liens of Pledge Agreement. (a) Each Financing Document other than the Notes constitutes a valid and binding agreement of the Borrower and each of the Subsidiaries party thereto, enforceable against them in accordance with its terms, and the Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower, enforceable against it in accordance with their terms. (b) The Pledge Agreement creates valid security interests in the Collateral purported to be covered thereby, which security interests are and will remain perfected security interests, prior to all Liens, subject, in the case of the Pledged Stock, to the Agent's maintaining possession thereof. Section 4.04. Financial Information; Valuations. (a) The Base Financials, copies of which have been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of December 31, 1995 and their consolidated results of operations and cash flows for the fiscal year of the Borrower then ended. (b) The unaudited condensed consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of September 30, 1996 and the related unaudited condensed consolidated statements of income and cash flows for the nine months then ended, set forth in the Borrower's quarterly report for the fiscal quarter ended September 30, 1996 as filed with the Securities and Exchange Commission on Form 10-Q, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles applied on a basis consistent with the Base Financials, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such nine month period (subject to normal year-end adjustments, the absence of footnote disclosure and condensation pursuant to the rules of the Securities and Exchange Commission). 43 49 (c) Since September 30, 1996, there has been no material adverse change in the business, financial position, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. Section 4.05. Litigation. Except as disclosed in the Borrower's 1995 Form 10-K or the Borrower's quarterly report for the fiscal quarter ended September 30, 1996 as filed with the Securities and Exchange Commission on Form 10-Q, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries or which in any manner draws into question the validity of any Financing Document. Section 4.06. Compliance with ERISA. Each member of the ERISA Group has complied with its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standards under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan, or made any amendment to any Plan, which has resulted or could reasonably be expected to result, prior to the first anniversary of the Termination Date, in the imposition of a Lien or the posting of a bond or other security under Section 302(f) of ERISA or Section 401(a)(29) or 412(n) of the Internal Revenue Code, (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA or (iv) within the preceding five plan years, with respect to any Other Plan, engaged in any transaction described in Section 4069 or Section 4212(c) of ERISA. Section 4.07. Environmental Matters. (a) In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs. On the basis of this review, the Borrower has reasonably concluded that Environmental Laws are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. 44 50 (b) As of the Effective Date, to the knowledge of the Borrower and its Subsidiaries no material claim, investigation or written inquiry has been made, and the Borrower is not aware of any circumstance which would warrant or give rise to such a claim, investigation or inquiry, with regard to the Borrower or any of its Subsidiaries, in respect of any facility owned, or to the knowledge of the Borrower and its Subsidiaries, leased or operated, either now or in the past, by the Borrower or any of its Subsidiaries, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended and in effect, or pursuant to any other Environmental Law, or by the Environmental Protection Agency or by any state, local, municipal or foreign enforcement agency having jurisdiction over the protection of the environment, or by any other Person in respect of or under any Environmental Law. Section 4.08. Taxes. United States federal income tax returns of the Borrower and its Subsidiaries have been closed through the fiscal year ended December 31, 1992. The Borrower and its Subsidiaries have filed all United States federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries other than any such taxes the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with generally accepted accounting principles have been established. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. Section 4.09. Title to and Condition of Properties. As of the Effective Date (a) the Borrower and its Subsidiaries have good and marketable title to all of the properties and other assets (real or personal, tangible, intangible or mixed) they own or purport to own and (b) all leases to which the Borrower or any of its Subsidiaries is a party as lessee or sublessee are in full force and effect, except for such defects in title and such invalidity or unenforceability of leases as, in the aggregate, could not materially adversely affect the condition (financial or otherwise), earnings, business affairs or business prospects of the Borrower and its Subsidiaries taken as a whole. Section 4.10. Not an Investment Company. Neither the Borrower nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 45 51 Section 4.11. Full Disclosure. All information heretofore furnished in writing by the Borrower to the Agent, the Issuing Bank or any Bank or otherwise to the Banks generally for purposes of or in connection with this Agreement or any transaction contemplated hereby was true and accurate in all material respects on the date as of which such information was stated or certified. The Borrower has disclosed to the Agent, the Issuing Bank and the Banks in writing any and all facts which materially and adversely affect, or may so affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower or any of its Subsidiaries party to any of the Financing Documents to perform its obligations under any Financing Document to which it is a party. Section 4.12. Representations in Subsidiary Guaranty and Pledge Agreement. Each representation and warranty contained in the Subsidiary Guaranty or the Pledge Agreement is true and correct. Section 4.13. Existing Letters of Credit. Schedule V hereto identifies each Existing Letter of Credit outstanding as of November 30, 1996. ARTICLE 5. Covenants The Borrower agrees that, so long as any Bank has any Commitment or Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid: Section 5.01. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations, stockholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by Ernst & Young LLP or other independent public accountants of nationally recognized standing and certified as to consistency in compliance with Section 1.02 by an Authorized Financial Officer of the Borrower; 46 52 (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, condensed consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related condensed consolidated statements of income and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments and condensation pursuant to the rules of the Securities and Exchange Commission) as to fairness of presentation and consistency in compliance with Section 1.02 by an Authorized Financial Officer of the Borrower; (c) as soon as available and in any event within 30 days after the end of each calendar month, consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as of the end of such month and the related consolidated statements of operations, stockholders' equity and cash flows for such month and for the portion of the Borrower's fiscal year ending at the end of such month, setting forth in each case in comparative form the figures for the corresponding month and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation and consistency in compliance with Section 1.02 by an Authorized Financial Officer of the Borrower; (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 and 5.13 hereof and Section 5(C) of the Pledge Agreement on the date of such financial statements, (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, provided that a certificate signed by an Authorized Financial Officer of the Borrower setting forth the information in this clause (ii) will be delivered by February 15, 1997 for the fiscal quarter ending December 31, 1996, and (iii) 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; (e) promptly upon the occurrence of any Default, a certificate of an Authorized Financial Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; 47 53 (f) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) provides or is required to provide notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has provided or is required to provide notice of any such reportable event, a copy of the notice of such reportable event provided or required to be provided to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standards under Section 412 of the Internal Revenue Code with respect to any Plan, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and such other information as is filed with the PBGC in connection therewith; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; (vii) receives notice from the PBGC or any plan administrator of an intent to impose liability on any member of the ERISA Group with respect to any Other Plan on account of a transaction described in Section 4069 or 4212(c) of ERISA, a copy of such notice; (viii) receives notice from the PBGC or any plan administrator of an intent to impose liability on any member of the ERISA Group with respect to any Other Plan on the basis that such member of the ERISA Group is a member of the "controlled group" with respect to such Other Plan under Section 412(c)(11) of the Internal Revenue Code or Section 4001(a)(14) of ERISA, a copy of such notice; or (ix) fails to make any payment or contribution to any Plan or Multiemployer Plan or makes any amendment to any Plan which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under Section 302(f) of ERISA or Section 401(a)(29) or 412(n) of the Internal Revenue Code, a certificate of an Authorized Financial Officer of the Borrower setting forth all material and relevant details as to such occurrence or event and 48 54 the action, if any, which the Borrower, the Borrower or the applicable member of the ERISA Group proposes or, after consultation with counsel, believes that it is required to take; and (i) from time to time such additional information regarding the financial position or business of the Borrower or any of its Subsidiaries as any Bank may reasonably request. Section 5.02. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each of its Subsidiaries to keep, all property necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will, and will cause each of its Subsidiaries to, maintain (either in the name of the Borrower or in such Subsidiary's own name) with financially sound and responsible insurance companies, insurance on all their respective properties in at least such amounts and against at least such risks (and with such risk retention and self insurance) as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business at a substantial number of different facilities. The Borrower will furnish to the Banks, upon request from the Agent, information presented in reasonable detail as to the insurance so carried. Section 5.03. Compliance with Laws. The Borrower will comply, and will cause each of its Subsidiaries to comply, with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) (except (i) where the failure to so comply would not materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Subsidiaries and would not in any manner draw into question the validity of any Financing Document or (ii) where the necessity of compliance therewith is contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with generally accepted accounting principles) and will maintain and cause each of its Subsidiaries to maintain all governmental licenses, approvals, authorizations and consents necessary for the conduct of the business of the Borrower and its Subsidiaries (except where the failure to maintain such governmental licenses, approvals, authorizations and consents would not materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Subsidiaries and would not in any manner draw into question the validity of any Financing Document). 49 55 Section 5.04. Inspection of Property, Books and Records. The Borrower will keep, and will cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities and will permit, and will cause each such Subsidiary to permit, representatives of any Bank to visit and inspect any of its properties, to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers, employees and independent public accountants, all at such reasonable times and upon reasonable notice to the Borrower and as often as may reasonably be desired; provided that (i) subject to the provisions of Section 9.03(a), the Borrower shall not be obligated to pay the expenses of the Banks' respective representatives and (ii) the Borrower will have an opportunity to participate in any discussions that take place between representatives of any Bank and the Borrower's independent public accountants. Section 5.05. Minimum Consolidated Net Worth. Consolidated Net Worth shall be at least $715,000,000 plus 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, 1996. Section 5.06. Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio at any date shall not be less than the ratio set forth below opposite the period in which such date falls:
Period Ratio ------ ----- Effective Date through March 30, 1998 . . . . . . . . . . . . . . . . 1.15 to 1.0 March 31, 1998 through March 30, 1999 . . . . . . . . . . . . . . . . 1.25 to 1.0 March 31, 1999 through March 30, 2000 . . . . . . . . . . . . . . . . 1.35 to 1.0 March 31, 2000 through March 30, 2001 . . . . . . . . . . . . . . . . 1.45 to 1.0 March 31, 2001 and thereafter . . . . . . . . . . . . . . . . . . . . 1.50 to 1.0
Section 5.07. Adjusted Consolidated Debt Ratio. The ratio at any date of (a) Adjusted Consolidated Debt to (b) Consolidated Net Worth shall not be more than the ratio set forth below opposite the period in which such date falls:
Period Ratio ------ ----- Effective Date through December 31, 1997 . . . . . . . . . . . . . . 2.55 to 1.0 January 1, 1998 through December 31, 1998 . . . . . . . . . . . . . . 2.45 to 1.0 January 1, 1999 through December 31, 1999 . . . . . . . . . . . . . . 2.35 to 1.0 January 1, 2000 through December 31, 2000 . . . . . . . . . . . . . . 2.25 to 1.0 January 1, 2001 and thereafter . . . . . . . . . . . . . . . . . . . 2.15 to 1.0
50 56 Section 5.08. Ownership of Stock of Wholly-Owned Subsidiaries. The Borrower will at all times maintain, or cause a Wholly-Owned Subsidiary of the Borrower to maintain, ownership of 100% of each class of voting securities of, and all other equity securities (except for directors' qualifying shares) in, each of its Subsidiaries that shall be a Wholly-Owned Subsidiary of the Borrower on the date hereof and each Person that shall become a Wholly-Owned Subsidiary of the Borrower after the date hereof, except in each case (i) any such Wholly-Owned Subsidiary (other than Pharmacy or any of its Subsidiaries) that shall hereafter be disposed of in its entirety, consolidated or merged with or into the Borrower or another such Wholly-Owned Subsidiary or liquidated or (ii) any Subsidiary of Pharmacy that shall hereafter be consolidated or merged with or into Pharmacy or any Wholly-Owned Subsidiary of Pharmacy or liquidated, in each case in accordance with the provisions hereof. Section 5.09. Investments. Neither the Borrower nor any of its Subsidiaries will make or acquire after the date hereof any Investment in any Person other than: (a) Investments in the Borrower or in Persons that are Subsidiaries of the Borrower on the date hereof; (b) Investments in Persons that are (i) primarily engaged in the health-care business and (ii) after the making of such Investment, are Subsidiaries of the Borrower; (c) Temporary Cash Investments; (d) extensions of credit or Guarantees of obligations of one or more other Persons (other than Encore Nursing Center Partners, Ltd.-85 and Encore Retirement Partners, Ltd.-85) as an integral part of the financing of the acquisition, construction, equipping or improving of facilities from which the Borrower or its Subsidiaries will provide medical or related services; (e) other miscellaneous Investments related to the acquisition and financing (in the ordinary course of the Borrower's business) of health-care facilities through industrial development revenue bonds issued for the benefit of the Borrower and its Subsidiaries; (f) capital contributions required to be made by the Borrower to Beverly Indemnity, Ltd. in accordance with applicable law and insurance regulations; 51 57 (g) stock, obligations or securities received from nursing home patients in the ordinary course of business of the Borrower and its Subsidiaries; (h) negotiable instruments endorsed for deposit or collection or similar instruments in the ordinary course of business; (i) promissory notes and other Investments received as consideration for facilities sold, provided that the aggregate net book value of all outstanding Investments permitted by this clause (i) shall not, at any time, exceed $25,000,000; (j) Guarantees permitted by Section 5.13; (k) any Investment made by the Borrower or any of its Subsidiaries in connection with and as part of a Workout Transaction; (l) Investments made by the Borrower or any of its Subsidiaries in one or more Special Purpose Receivables Financing Subsidiaries by means of the sale of, or the granting of security interests in, Medicare, Medicaid or other patient accounts receivable owing to the Borrower or such Subsidiary, in either case to such Special Purpose Receivables Financing Subsidiaries pursuant to a Receivables Financing Program, provided that the net amount of all uncollected accounts receivable owing to the Borrower or any of its Subsidiaries that have been so sold or in which a security interest has been so granted shall not exceed 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding; (m) Investments made in Beverly Japan Corporation in an aggregate amount outstanding at any time not to exceed $10,000,000; (n) Investments made in Persons that are primarily engaged in the health-care business, the consideration for which consists exclusively of common stock of the Borrower or Permitted Preferred Stock; and (o) any Investment not otherwise permitted by the foregoing clauses of this Section (other than promissory notes and other Investments received as consideration for facilities sold) in any Person engaged primarily in the health-care business if, immediately after such Investment is made or acquired, the 52 58 aggregate net book value of all such Investments then held by the Borrower or its Subsidiaries and permitted by this clause (o) does not exceed $75,000,000. Section 5.10. Restricted Payments on Stock. Neither the Borrower nor any of its Subsidiaries shall (x) declare or make any dividend payment or other distribution on any capital stock of the Borrower (other than dividends payable solely in shares of the Borrower's capital stock) or (y) declare or make any payment on account of the purchase, redemption, retirement or acquisition of the Borrower's capital stock; provided that, so long as at the time of and after giving effect to any such payment no Event of Default shall have occurred and be continuing, (i) the Borrower may make any such payment or distribution from the proceeds of the sale by the Borrower (other than a sale to a Subsidiary of the Borrower) after the date hereof of its common stock, (ii) the Borrower may make dividend payments with respect to its preferred stock (A) from any source in an amount not to exceed $2,500,000 in any fiscal quarter and (B) from proceeds of the sale by the Borrower (other than a sale to a Subsidiary of the Borrower) after the date hereof of Permitted Preferred Stock in any amount, (iii) the Borrower may make payments on account of the purchase, redemption, retirement or acquisition of its preferred stock from the proceeds of the sale by the Borrower (other than a sale to a Subsidiary of the Borrower) after the date hereof of any Permitted Preferred Stock, (iv) the Borrower may make odd-lot repurchases of its common stock for an aggregate consideration not exceeding $10,000 in any calendar year, and (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 February 9, 1996 (including, without limitation, any such payments or distributions permitted under subclause (ii)(A) or clause (iv) above) does not exceed the sum of $20,000,000 plus 50% of Consolidated Net Income for the period after December 31, 1995 through the date of such declaration, payment or distribution. Nothing in this Section shall prohibit the payment of any dividend or distribution within 45 days after the declaration thereof if such declaration was not prohibited by this Section. 53 59 Section 5.11. Negative Pledge. (a) Neither the Borrower nor any of its Subsidiaries will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (i) Liens existing on the Effective Date securing Debt and other obligations outstanding on the Effective Date; (ii) Liens created by the Pledge Agreement; (iii) any Lien on any asset of any corporation that becomes a Consolidated Subsidiary of the Borrower after the Effective Date that exists at the time such corporation becomes such a Consolidated Subsidiary and (other than in a Workout Transaction) not created in contemplation thereof; (iv) any Lien existing on any asset prior to the acquisition thereof, acquired after the Effective Date by the Borrower or a Subsidiary of the Borrower and (other than in a Workout Transaction) not created in contemplation thereof; (v) 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 such Lien attaches to such asset concurrently with or within one year after such acquisition, construction or reconstruction; (vi) any Lien on any asset securing Debt or lease obligations incurred or assumed for the purpose of improving or making any addition to such asset, provided that (A) such Lien attaches to such asset concurrently with or within one year after the completion of the improvement thereof or addition thereto and (B) the aggregate outstanding principal amount of all such Debt incurred after the date hereof secured by such Liens shall not, at any time, exceed $30,000,000; (vii) Liens securing Debt incurred in connection with Lease Cancellation Payments, provided that the aggregate amount of all such Debt incurred after the date hereof secured by such Liens shall not, at any time, exceed $20,000,000; (viii) Liens securing industrial development revenue bonds (or securing contingent obligations to issuers of letters of credit issued to 54 60 support industrial development revenue bonds) arising in connection with the conversion of the interest rate on such bonds from floating to long-term fixed rates or from fixed rates to other long-term fixed rates; (ix) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that the principal amount of such Debt is not increased and such Debt is not secured by any additional assets other than assets that relate directly to the facility subject to the original financing; (x) Liens on Medicare, Medicaid or other patient accounts receivable of the Borrower or any of its Subsidiaries, or on Permitted Receivables Financing Securities, granted to secure Permitted Receivables Financing Securities, provided that the net amount of all uncollected accounts receivable owing to the Borrower or any of its Subsidiaries over which such a Lien is granted, together, without duplication, with the net amount of all uncollected accounts receivable owing to the Borrower or any of its Subsidiaries that are assigned to secure such Permitted Receivables Financing Securities, shall not exceed, at any time, 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding; (xi) Liens incidental to the conduct of its business or the ownership of its assets which (A) do not secure Debt or Derivatives Obligations and (B) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (xii) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $10,000,000; (xiii) Liens on nursing homes and related real estate improvements and equipment ("Mortgage Assets") given in substitution for Liens on Mortgage Assets existing on the date hereof or for Liens on Mortgage Assets incurred pursuant to this clause (xiii) or clause (xiv) below, provided that the sum of (A) the excess of the Appraised Value of all Mortgage Assets subjected to Liens pursuant to this clause (xiii) over the Appraised Value of all such Mortgage Assets released from Liens on or after the date hereof and (B) all Debt incurred after the date hereof and 55 61 secured by Liens permitted under clause (xiv) below shall not at any time exceed $75,000,000; and (xiv) Liens not otherwise permitted under clauses (i) through (xiii) of this Section, provided that the sum of the amounts set forth in subclause (A) of clause (xiii) above and the aggregate principal amount of all Debt incurred after the date hereof and secured by Liens permitted under this clause (xiv) shall not at any time exceed $75,000,000. (b) The Borrower will not permit Pharmacy or any of its Subsidiaries to create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except (i) Liens permitted by clauses (i), (ii), (iii), (iv), (ix) (to the extent that it relates to the extension, renewal or refunding of Debt secured by any such Liens) and (xi) of Section 5.11(a) above, (ii) Liens on telephone, computer or other office equipment securing indebtedness incurred to finance such equipment, provided that the aggregate principal amount of Debt secured by Liens permitted under this clause (ii) shall not exceed $15,000,000, and (iii) Liens not otherwise permitted under this subsection, provided that the aggregate principal amount of all Debt secured by Liens permitted under this clause (iii) shall not at any time exceed $5,000,000. Section 5.12. Consolidations, Mergers and Sales of Assets. (a) Neither the Borrower nor any of its Subsidiaries will (i) 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, (ii) sell, lease or otherwise transfer all or any substantial part of the assets of the Borrower and its Subsidiaries, taken as a whole, to any other Person or (iii) sell, lease, transfer or otherwise dispose of any Pledged Stock, provided that (A) this Section shall not apply to mergers, dissolutions, reorganizations or liquidations of Subsidiaries of the Borrower that have disposed of all or substantially all of their assets and (B) the Borrower and its Subsidiaries (other than Pharmacy or any of 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). (b) The Borrower will not permit Pharmacy or any of its Subsidiaries to (i) consolidate or merge with or into any other Person, unless Pharmacy or, except 56 62 in the case of a merger or consolidation to which Pharmacy is a party, a Wholly-Owned Subsidiary of Pharmacy is the surviving corporation or (ii) sell, lease or otherwise transfer all or any substantial part of its assets to any Person other than Pharmacy or any of its Wholly-Owned Subsidiaries that is an Issuer (as defined in the Pledge Agreement). Section 5.13. Incurrence of Debt. (a) The Borrower will not permit any of its Subsidiaries to incur, assume or suffer to exist any Debt, except: (i) Debt outstanding on the date hereof and included in the Base Financials or listed in Schedule III hereto; (ii) Debt incurred after the date hereof in connection with Lease Cancellation Payments, provided that the aggregate principal amount of all such Debt outstanding at any time shall not exceed $20,000,000; (iii) Debt secured by a Lien permitted pursuant to clause (iv) of Section 5.11(a); (iv) Debt of any corporation that becomes a Consolidated Subsidiary of the Borrower after the Effective Date that exists at the time such corporation becomes such a Consolidated Subsidiary and (other than in a Workout Transaction) not created in contemplation thereof; (v) Debt ("Refinancing Debt") incurred to refinance Debt ("Refinanced Debt") permitted under clauses (i) through (iv) 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; (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 $150,000,000; (vii) Debt incurred under the Financing Documents; (viii) Guarantees by any Subsidiary of the Borrower of any obligation of the Borrower or any of its other Subsidiaries that such 57 63 guaranteeing Subsidiary would have been permitted to incur hereunder as a primary obligation; (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) Permitted Preferred Stock; and (xiii) Debt not otherwise permitted under clauses (i) through (xii) of this Section, provided that the aggregate principal amount of all Debt permitted under this clause (xiii) shall not at any time exceed $75,000,000. (b) The Borrower will not permit Pharmacy or any of its Subsidiaries to incur, assume or suffer to exist Debt, except (i) Debt permitted under clauses (i), (iii), (iv), (v) (to the extent the Refinanced Debt referred to therein is Debt referred to in clauses (i), (iii) and (iv)), (vii) and (ix) of subsection 5.13(a) above, (ii) Debt incurred to finance the acquisition of telephone, computer and other office equipment, provided that the aggregate outstanding principal amount of all Debt permitted under this clause (ii) shall not at any time exceed $15,000,000, (iii) Guarantees by Pharmacy or any of its Subsidiaries of any obligation of the Borrower or any of its Subsidiaries that Pharmacy or such guaranteeing Subsidiary would have been permitted to incur as a primary obligation under clause (i) of this subsection (b), and (iv) Debt not otherwise permitted under this subsection (b), provided that the aggregate outstanding principal amount of all Debt permitted under this clause (iv) shall not at any time exceed $5,000,000. 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 (i) the repayment or prepayment of loans made under the Existing Credit Agreement, the Nippon Credit Agreement and the LTCB Credit Agreement and (ii) general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. 58 64 Section 5.15. Additional Subsidiary Guarantors. The Borrower agrees to cause each Person, other than a Special Purpose Receivables Financing Subsidiary, that shall, at any time after the date hereof, become a Wholly-Owned Subsidiary of the Borrower to enter into the Subsidiary Guaranty. Section 5.16. Lease Conversions. The Borrower will not, and will not permit any of its Subsidiaries to, make any Lease Conversion in any calendar year unless: (i) the aggregate consideration paid or to be paid by the Borrower and its Subsidiaries in connection with the termination of leases or the acquisition of facilities and related property pursuant to such Lease Conversion and all other Lease Conversions made during such calendar year would not exceed $100,000,000; and (ii) to the extent such Lease Conversion is financed or will be financed with Debt of the Borrower or any of its Subsidiaries, such Debt is incurred within one year of such Lease Conversion. Section 5.17. Transactions with Affiliates. The Borrower will not, after the date hereof, and will not permit any of its Subsidiaries to, after the date hereof, enter into any transaction or arrangement with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate), except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's (as the case may be) business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would be obtained in a comparable arm's-length transaction with a Person other than an Affiliate. ARTICLE 6. Defaults Section 6.01. Events of Defaults. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) the Borrower shall fail to pay (i) on the date when due any principal of any Loan or any Reimbursement Obligation or (ii) within five Domestic Business Days after the date when due any interest on any Loan or Reimbursement Obligation or any fees, commissions or other amounts payable hereunder; 59 65 (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.05, 5.06, 5.07, 5.10, 5.12, 5.13, 5.14 or 5.16; (c) the Borrower shall fail to observe or perform any covenant contained in Sections 5.08, 5.09, 5.11 or 5.15 for 10 days after the Borrower shall have obtained actual knowledge of such failure or after written notice thereof has been given to the Borrower by the Agent at the request of any Bank; (d) the Borrower or any Subsidiary Guarantor shall fail to observe or perform any covenant or agreement contained herein or in the Subsidiary Guaranty (other than those covered by clause (a), (b) or (c) above) for 30 days after written notice thereof has been given to the Borrower by the Agent at the request of any Bank; (e) any representation, warranty, certification or statement made by the Borrower or any of its Subsidiaries in any Financing Document or in any certificate, financial statement or other document delivered pursuant to any Financing Document shall prove to have been incorrect in any material respect when made (or deemed made); (f) the Borrower or any of its Subsidiaries shall fail to make any payment in respect of any Material Financial Obligations when due or, if later, within any applicable grace period; (g) (i) any event or condition shall occur which results in the acceleration of the maturity, or requires the early redemption or prepayment, of any Material Financial Obligations or any event or condition shall occur and be continuing which enables (or, with the giving of notice or lapse of time or both, would enable) the holder of any Material Financial Obligations or any Person acting on such holder's behalf to accelerate the maturity, or require the early redemption or prepayment, of such Material Financial Obligations (unless such event or condition shall have been waived and any acceleration or required redemption or prepayment rescinded), provided that the fact that the interest paid on any industrial development revenue bonds ceases to be exempt from federal income taxation shall not constitute an Event of Default under this subsection (g) unless such industrial development revenue bonds are accelerated, redeemed or prepaid or the aggregate principal amount of industrial development revenue bonds subject to acceleration or early redemption or prepayment as a result of such event or condition shall be at least $15,000,000 or (ii) any event or condition constituting a default or event of default under the agreement, instrument or other document relating thereto shall occur which results in the termination of any 60 66 Material Commitment or any such event or condition shall occur and be continuing which enables (or with the giving of notice or lapse of time or both, would enable) the provider of any Material Commitment or any Person acting on such provider's behalf to require the early termination of such Material Commitment (unless such event or condition shall have been waived and any termination rescinded); (h) the Borrower or any Material Subsidiary (or any combination of Subsidiaries that, if treated as a single Subsidiary, would at such time constitute a Material Subsidiary) shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (i) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary (or any combination of Subsidiaries that, if treated as a single Subsidiary, would at such time constitute a Material Subsidiary) seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary (or any combination of Subsidiaries that, if treated as a single Subsidiary, would at such time constitute a Material Subsidiary) under the federal bankruptcy laws as now or hereafter in effect; (j) (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $1,000,000 which it shall have become liable to pay under Title IV of ERISA; or (ii) notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or (iii) any member of the ERISA Group has been notified in writing that the PBGC has instituted proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or (iv) a condition shall 61 67 exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or (v) any of the events described in clause (iii) above shall occur with respect to any Other Plan or Other Plans (other than a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA) (A) that have aggregate Unfunded Liabilities in excess of $1,000,000 and (B) with respect to which either (1) one or more members of the ERISA Group have engaged in a transaction or transactions described in Section 4069 of ERISA or (2) one or more members of the ERISA Group is a member of the "controlled group" under Section 412(c)(11) of the Internal Revenue Code or Section 4001(a)(14) of ERISA; or (vi) there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more (A) multiemployer plans, within the meaning of Section 4001(a)(3) of ERISA (which plans are not Multiemployer Plans), with respect to which a member of the ERISA Group shall have engaged, within the previous five plan years, in a transaction described in Section 4212(c) of ERISA, or (B) Multiemployer Plans, which could reasonably be expected to result in the incurrence by one or more members of the ERISA Group of a current payment obligation in excess of $1,000,000; provided that no Event of Default shall occur under clause (v) or (vi) if (A) the Unfunded Liabilities of the Other Plans in respect of which events described in clause (v) have occurred, together with the current payment obligations that could reasonably be expected to result from complete or partial withdrawals or defaults described in clause (vi), shall not exceed $2,500,000 and (B) each member of the ERISA Group that could reasonably be expected to be liable for such Unfunded Liabilities or current payment obligations is diligently contesting, in good faith, by appropriate proceedings, the imposition of such liabilities or obligations; (k) the Borrower or any of the Borrower's Subsidiaries party thereto shall fail to observe or perform any of its obligations under the Pledge Agreement; (l) (i) one or more judgments or orders for the payment, in the aggregate, of money in excess of $20,000,000 shall be rendered against the Borrower or any of its Subsidiaries and such judgments or orders shall continue unsatisfied and unstayed for a period of 30 days or (ii) one or more judgments or orders shall be rendered against the Borrower or any of its Subsidiaries, which judgments or orders shall be stayed on condition that a bond or collateral equal to or greater than, in the aggregate, $250,000,000 be posted or provided, and such judgments or orders shall not be overturned or lifted within a period of 10 days; (m) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the 62 68 Securities and Exchange Commission under said Act) of 25% or more of the outstanding shares of common stock of the Borrower; or (n) the Pledge Agreement shall at any time after the Effective Date, 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 to be secured thereby, subject to no other Liens other than Liens permitted under Section 5.11(a)(xi) as to which the Liens created under the Pledge Agreement have priority; then, and in every such event, the Agent shall (i) if requested by Banks having more than 66 2/3% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding more than 66 2/3% of the sum of (A) the aggregate principal amount of the Loans and (B) the aggregate Letter of Credit Exposures, by notice to the Borrower declare the Notes and any Reimbursement Obligations (together with accrued interest thereon and all fees, commissions and other amounts payable by the Borrower hereunder) to be, and the same shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (h) or (i) above with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes and any Reimbursement Obligations (together with accrued interest thereon and all fees, commissions and other amounts payable by the Borrower hereunder) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. Section 6.02. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(c) or 6.01(d) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks and the Issuing Bank thereof. 63 69 ARTICLE 7. The Agent Section 7.01. Appointment and Authorizations. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Financing Documents as are delegated to the Agent by the terms thereof, together with all such powers as are reasonably incidental thereto. Section 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under the Financing Documents as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent or the Issuing Bank, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent or the Issuing Bank hereunder. Section 7.03. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. Section 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 7.05. Liability of Agent. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (a) with the consent or at the request of the Required Banks or (b) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with the Financing Documents or any borrowing or letter of credit hereunder, (ii) the performance or observance of any of the covenants or agreements of the Borrower or any of its Subsidiaries party to any Financing Document, (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Agent, or (iv) the validity, effectiveness or genuineness of any Financing Document or any other instrument or writing furnished in connection therewith. The Agent shall not incur any liability by acting in reliance upon any 64 70 notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Section 7.06. Indemnification. Each Bank shall, ratably in accordance with its Total Exposure, indemnify the Agent (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with any Financing Document or any action taken or omitted by the Agent hereunder or thereunder. Section 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent, the Issuing Bank or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent, the Issuing Bank or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. Section 7.08. Successor Agent. The Agent may resign at any time, effective upon the appointment of a successor Agent and such successor Agent's acceptance of such appointment, by giving written notice thereof to the Banks, the Issuing Bank and the Borrower. Upon the giving of any such notice of resignation, the Required Banks (with, unless an Event of Default shall have occurred and be continuing, the written consent of the Borrower (which shall not be unreasonably withheld)) shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After the effectiveness of any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. 65 71 Section 7.09. Agent's Fee. The Borrower shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Agent. ARTICLE 8. Change in Circumstances Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Loan: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) Banks having 50% or more of the aggregate principal amount of the affected Loans advise the Agent that the Adjusted CD Rate or the Adjusted London Interbank Offered Rate, as the case may be, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, or to convert outstanding Loans into CD Loans or Euro-Dollar Loans shall be suspended and (ii) each outstanding CD Loan or Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. Section 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, 66 72 whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to convert outstanding Domestic Loans into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan to such day. Section 8.03. Increased Cost and Reduced Return. (a) If on or after the date hereof the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Bank (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans, or shall change the basis of taxation of payments to any Bank (or its Applicable Lending Office) of the principal of or interest on its Fixed Rate Loans or any other amounts due under this Agreement in respect of its Fixed Rate Loans or its obligation to make Fixed Rate Loans (except for changes in the rate of tax on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank's principal executive office or Applicable Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (A) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage or Assessment Rate and (B) with respect to any Euro-Dollar Loan any such requirement included in a Euro-Dollar Reserve Percentage) against assets 67 73 of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If, after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Issuing Bank or any Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System) against letters of credit issued by the Issuing Bank or participations in letters of credit by any Bank or (ii) impose on the Issuing Bank or any Bank any other condition (including, without limitation, any assessment for federal deposit insurance) regarding any Letter of Credit, the Issuing Bank's obligation to issue any Letter of Credit or any Bank's obligation to pay the Issuing Bank its ratable share of any drawing under any Letter of Credit, and the result of any event referred to in clause (i) or (ii) of this subsection is to increase the cost to the Issuing Bank or such Bank of issuing or maintaining any Letter of Credit or participating therein or making any payment under any Letter of Credit (which increase in cost shall be determined on the basis of the Issuing Bank's or such Bank's reasonable allocation of the aggregate of such cost increases resulting from such events), then, within 15 days after demand by the Issuing Bank or such Bank (with a copy to the Agent), the Borrower shall pay to the Issuing Bank or such Bank such additional amount or amounts as will compensate the Issuing Bank or such Bank for such increased cost. (c) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof 68 74 by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder or under or with respect to the Letters of Credit (including any participation therein) to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (d) Each of the Issuing Bank and the Banks will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section. Each Bank will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in its judgment, be otherwise disadvantageous to it. A certificate of the Issuing Bank or any Bank claiming compensation under this Section and setting forth in reasonable detail an explanation of the basis for requesting such compensation and stating the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, the Issuing Bank or such Bank may use any reasonable averaging and attribution methods. Section 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) with respect to its CD Loans or Euro-Dollar Loans or its obligation to make CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted to) CD Loans or Euro-Dollar Loans, as the case may be, shall instead be made as (or continued as or, effective (i) on the last day of the then current Interest Period applicable thereto unless clause (b) of the last 69 75 sentence of Section 8.02 shall apply or (ii) immediately upon the giving of notice referred to in such sentence if such clause (b) shall apply, converted to) Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the principal amount of each such Base Rate Loan shall be converted into a CD Loan or a Euro-Dollar Loan, as the case may be, on the first day of the next succeeding Interest Period applicable to the related CD Loans or Euro-Dollar Loans of the other Banks. ARTICLE 9. Miscellaneous Section 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower, the Issuing Bank or the Agent, at its address or telex or facsimile transmission number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telex or facsimile transmission number set forth in its Administrative Questionnaire or (z) in the case of any party, at such other address or telex or facsimile transmission number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in or pursuant to this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when such facsimile is transmitted to the facsimile transmission number specified in or pursuant to this Section and telephonic confirmation of receipt thereof is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in or pursuant to this Section; provided that notices to the Agent or the Issuing Bank under Article 2 or Article 8 shall not be effective until received. Section 9.02. No Waivers. No failure or delay by the Agent, the Issuing Bank or any Bank in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise 70 76 thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. Section 9.03. Expenses; Documentary Taxes; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent and the Issuing Bank, including reasonable fees and disbursements of any special counsel to the Agent, in connection with the preparation of the Financing Documents, any waiver or consent thereunder or any amendment thereof or any Default or alleged Default thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent, the Issuing Bank or any Bank, including reasonable fees and disbursements of counsel, including in-house counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. The Borrower shall indemnify each Bank, the Agent and the Issuing Bank against (A) any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Financing Documents and (B) all costs, expenses and taxes, assessments or other charges incurred in connection with any filing, registration, recording or perfection of any Lien contemplated by any of the Financing Documents or any document referred to therein or the filing or recording of any termination statement with respect to the release of any Lien on any Collateral. (b) The Borrower agrees to indemnify the Agent, each Bank and the Issuing Bank and hold the Agent, each Bank and the Issuing Bank harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by the Agent, any Bank or the Issuing Bank in connection with any investigative, administrative or judicial proceeding (whether or not the Agent, such Bank or the Issuing Bank shall be designated a party thereto) relating to or arising out of the Financing Documents or any actual or proposed use of Letters of Credit or proceeds of Loans hereunder; provided that neither the Agent nor the Issuing Bank or any Bank shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. Section 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it and its participation in any Reimbursement Obligation and interest (if any) thereon (collectively, its "Relevant Debt") which is greater than the proportion received by any other Bank in respect of the Relevant Debt of such 71 77 other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Relevant Debt of the other Banks, and such other adjustments shall be made, as may be required so that all such payments with respect to the Relevant Debt of the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its Relevant Debt. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note or Reimbursement Obligation, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. Section 9.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Issuing Bank or the Agent are affected thereby, by the Agent or the Issuing Bank, as the case may be); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease any Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or the rate of interest on any Loan or Reimbursement Obligation or any commissions or fees hereunder, (iii) postpone the date fixed pursuant to Section 2.05, 2.06, 2.07, 2.08 or 2.10 for any payment of principal of or interest on any Loan or Reimbursement Obligation or any commissions or fees hereunder or for the termination of any Commitment, (iv) agree to release all or substantially all of the Collateral, (v) release any Material Subsidiary from its obligations under the Subsidiary Guaranty (other than pursuant to the terms thereof) or (vi) change the percentage of the Commitments, the aggregate unpaid principal amount of the Notes or the Loans or of the aggregate Letter of Credit Exposures, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. Section 9.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of all Banks. 72 78 (b) Any Bank may, without the consent of the Borrower, the Agent or the Issuing Bank, upon notice to the Borrower, the Agent and, if any participating interest in any Letter of Credit or Commitment is to be so granted, the Issuing Bank, grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitments or any or all of its Loans or its participations in Letters of Credit; provided that each participating interest shall represent an aggregate interest therein of at least $1,000,000. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower, the Agent and the Issuing Bank, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower, the Agent and the Issuing Bank shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by Section 9.06(c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit G hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, the Agent and, if any participation in any Letter of Credit or Commitment is to be assigned, the Issuing Bank; provided that if an Assignee is, prior to such assignment, a Bank or an affiliate of a Bank, no such consent shall be required; and provided further that, (i) unless the Loans, Commitments and participations in Letters of Credit assigned shall constitute all Loans, Commitments and participations in Letters of Credit of such assignor Bank, the aggregate principal amount of the Loans, Commitments and participations in Letters of Credit assigned shall not be less than $10,000,000 and (ii) any such assignment shall include a pro rata portion of the assigning Bank's Commitment, Loans and participations in Letters of Credit. Upon the 73 79 execution and delivery of such instrument, payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee and delivery of notice to the Borrower, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with Commitments as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500; provided that no such fee shall be required if the Assignee is, prior to any such assignment, an affiliate of such Bank. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest, fees or commissions are payable hereunder for its account, deliver to the Borrower and the Agent (and, in the case of any such Assignee to whom any Letter of Credit Exposure or Commitment has been assigned, the Issuing Bank) certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 2.16. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. Section 9.07. Margin Stock. Each of the Banks represents to the Agent, the Issuing Bank and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. Section 9.08. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT AND EACH NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF 74 80 NEW YORK. THE BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. 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. Section 9.09. Consent to Execution and Delivery of Certain Financing Documents. The Issuing Bank, the Agent and the Banks each consents and agrees to the terms of the Pledge Agreement and the Subsidiary Guaranty. Section 9.10. Counterparts; Integration. This Agreement 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. This Agreement, the Subsidiary Guaranty and the Pledge Agreement constitute the entire agreement and understanding among the parties hereto and supersede any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. Section 9.11. Confidentiality. Each Bank agrees not to disclose to any Person other than the Agent or another Bank any information delivered or made available by the Borrower or any of its Subsidiaries to it and indicated in writing as confidential; provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Person who is a director, officer or employee of such Bank or any of its affiliates if reasonably incidental to the administration of the Loans, (b) upon the order of any court or administrative agency, (c) upon the request or demand of, or pursuant to any regulation of, any regulatory agency or authority, (d) which had been publicly disclosed other than as a result of a disclosure by the Agent or any Bank prohibited by this Agreement, (e) in connection with any litigation related to the transactions contemplated by the Financing Documents to which the Agent, any Bank or its subsidiaries or parent may be a party, (f) to the extent reasonably required in connection with the exercise of any remedy hereunder, (g) to such Bank's or Agent's legal counsel or independent auditors, and (h) to any actual or proposed Assignee or Participant of 75 81 all or part of its rights hereunder provided that such actual or proposed Assignee or Participant agrees in writing to be bound by the provisions of this Section. Section 9.12. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT, THE ISSUING BANK AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. 76 82 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE BORROWER ------------ BEVERLY ENTERPRISES By: /s/ Schuyler Hollingsworth Jr. --------------------------------- Title: Senior Vice President and Treasurer 5111 Rogers Avenue, Suite 40-A Fort Smith, Arkansas 72919-0155 Attention: Chief Financial Officer Telephone number: (501) 452-6712 Facsimile transmission number: (501) 484-8489 BANKS ----- MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ John M. Mikolay ------------------------------------ Title: Vice President THE CHASE MANHATTAN BANK By: /s/ Dawn Lee Lum ----------------------------------- Title: Vice President BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: /s/ Wyatt R. Ritchie ------------------------------------- Title: Managing Director 83 THE BANK OF NEW YORK By: /s/ Jonathan Rollins -------------------------------------- Title: Assistant Vice President THE BANK OF NOVA SCOTIA By: /s/ Dana Maloney ------------------------------------- Title: Relationship Manager THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY By: /s/ Genichi Imai --------------------------------------- Title: Joint General Manager NATIONSBANK OF TEXAS, N.A. By: /s/ Brad W. Despain ----------------------------------- Title: Vice President THE NIPPON CREDIT BANK, LTD., LOS ANGELES AGENCY By: /s/ Bernardo E. Correa-Henschke -------------------------------- Title: Vice President & Senior Manager PNC BANK, NATIONAL ASSOCIATION By: /s/ Karen M. George ------------------------------------- Title: AVP 84 BANK OF MONTREAL By: /s/ Peter W. Steelman ------------------------------------- Title: Director BANK OF HAWAII By: /s/ Kenneth M. Loveless ---------------------------------- Title: Assistant Vice President BHF - BANK AKTIENGESELLSCHAFT By: /s/ Paul Travers ------------------------------------------ Title: Vice President By: /s/ Evon Contos --------------------------------------- Title: Vice President UNITED STATES NATIONAL BANK OF OREGON By: /s/ Jonathan A. Horton ---------------------------------- Title: Vice President 85 AGENT ----- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By: /s/ John M. Mikolay ------------------------------------ Title: Vice President 60 Wall Street New York, New York 10260 Attention: Robert M. Osieski Telephone number: (212) 648-7173 Telex number: 177615 Facsimile transmission number: (212) 648-5014 ISSUING BANK ------------ MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank By: /s/ John M. Mikolay --------------------------------------- Title: Vice President c/o J.P. Morgan Services Inc. P.O. Box 6071 500 Stanton Christiana Road Newark, Delaware 19713 Attention: International Trade Services Standby Unit Telephone number: (302) 634-4234 Facsimile transmission number: (302) 634-4061 86 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:
Level I Level II Level III Level IV Level V Euro-Dollar Margin 0.500% 0.750% 0.875% 1.125% 1.500% CD Margin 0.625% 0.875% 1.000% 1.250% 1.625% Base Rate Margin 0.000% 0.000% 0.000% 0.500% 1.000% Letter of Credit Commission Rate 0.500% 0.750% 0.875% 1.125% 1.500% Commitment Fee Rate 0.175% 0.200% 0.225% 0.275% 0.350%
For purposes of this Pricing Schedule, the following terms have the following meanings: "Pricing Ratio" means the ratio of Consolidated EBITDAR to the sum of Consolidated Interest Charges and Consolidated Rental Expense. "Level I Pricing" applies on any day after December 31, 1996 if, as of the last day of the fiscal quarter of the Borrower most recently ended on or prior to such day and, except in respect of the fiscal quarter ending December 31, 1996, 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), the Pricing Ratio is greater than 2.50 to 1.0. "Level II Pricing" applies on any day after December 31, 1996 if, as of the last day of the fiscal quarter of the Borrower most recently ended on or prior to such day and, except in respect of the fiscal quarter ending December 31, 1996, 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 greater than 2.25 to 1.0 and (ii) Level I Pricing does not apply. 87 "Level III Pricing" applies on any day (a) from and including the Effective Date to and including December 31, 1996 and (b) if, as of the last day of the fiscal quarter of the Borrower most recently ended on or prior to such day and, except in respect of the fiscal quarter ending December 31, 1996, 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 greater than 2.00 to 1.0 and (ii) neither Level I Pricing nor Level II Pricing applies. "Level IV Pricing" applies on any day if, as of the last day of the fiscal quarter of the Borrower most recently ended on or prior to such day and, except in respect of the fiscal quarter ending December 31, 1996, 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 greater than 1.75 to 1.0 and (ii) none of Level I Pricing, Level II Pricing or Level III Pricing applies. "Level V Pricing" applies on any day if, on such day, no other Pricing Level applies. "Pricing Level" means any one of the five pricing levels denominated Level I Pricing, Level II Pricing, Level III Pricing, Level IV Pricing or Level V Pricing. 2 88 SCHEDULE II COMMITMENT SCHEDULE
Bank Commitments ---- ----------- Morgan Guaranty Trust Company of New York $40,000,000 The Chase Manhattan Bank $36,400,000 Bank of America National Trust & Savings Association $33,100,000 The Bank of New York $33,100,000 The Bank of Nova Scotia $33,100,000 The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency $33,100,000 NationsBank of Texas, N.A. $33,100,000 The Nippon Credit Bank, Ltd., Los Angeles Agency $33,100,000 PNC Bank, National Association $30,000,000 Bank of Montreal $25,000,000 Bank of Hawaii $15,000,000 BHF - BANK Aktiengesellschaft $15,000,000 United States National Bank of Oregon $15,000,000 =========== Total $375,000,000
89 SCHEDULE III EXISTING SUBSIDIARY DEBT(1)
TYPE BALANCE @ NOVEMBER 30, 1996 NOTES & MORTGAGES $163,210,500 TAX EXEMPT BONDS $204,125,000 MIFA TAXABLE BONDS $ 25,000,000 9% SENIOR NOTES $180,000,000 MORGAN TERM LOAN - A (2)(2) $ 56,222,000 MORGAN TERM LOAN - B (2) $ 23,000,000 MEDIUM TERM NOTES $ 50,000,000 LTCB TERM LOAN (2) $ 27,000,000 ATRS NOTES $ 22,821,000 BANK UNITED $ 19,872,500 NIPPON TERM LOAN (2) $ 11,250,000 DEPOSIT GUARANTY LOAN $ 10,500,000 7 5/8% CONV. SUBORDINATED DEB. $ 67,924,000 ZERO COUPON NOTES $ 1,164,000 CAPITAL LEASES $ 27,073,000 TOTAL $889,162,000
__________________________________ (1) Including debt guaranteed by Subsidiaries (2) (2) indicated loans to be repaid on Closing Date 2 90 SCHEDULE IV SUBSIDIARIES OF THE BORROWER A.B.C. Health Equipment Corp. AdviNet, Inc. AGI-Camelot, Inc. AGI-McDonald County Health Care, Inc. Alliance Health Services, Inc. Alliance Home Health Care, Inc. Amco Medical Service, Inc. American Transitional Care Centers of Texas, Inc. American Transitional Care Dallas - Ft. Worth, Inc. American Transitional Hospitals, Inc. American Transitional Hospitals of Indiana, Inc. American Transitional Hospitals of Oklahoma, Inc. American Transitional Hospitals of Tennessee, Inc. American Transitional Hospitals -- Texas Medical Center, Inc. ATH -- Clear Lake, Inc. ATH Columbus, Inc. ATH Del Oro, Inc. ATH Heights, Inc. ATH Oklahoma City, Inc. ATH Tucson, Inc. Beverly - Bella Vista Holding, Inc. Beverly - Missouri Valley Holding, Inc. Beverly - Rapid City Holding, Inc. Beverly Acquisition Corporation Beverly Assisted Living, Inc. Beverly Health and Rehabilitation Services, Inc. Beverly Enterprises - Alabama, Inc. Beverly Enterprises - Arizona, Inc. 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. 91 Beverly Enterprises - Hawaii, Inc. Beverly Enterprises - Idaho, Inc. Beverly Enterprises - Illinois, Inc. Beverly Enterprises - Indiana, Inc. Beverly Enterprises - Iowa, Inc. 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, 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 - Oklahoma, 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 Enterprises Japan Limited Beverly Enterprises Medical Equipment Corporation Beverly Enterprises Rehabilitation Corporation Beverly Holdings I, Inc. 92 Beverly Indemnity, Limited Beverly Real Estate Holdings, Inc. Beverly REMIC Depositor, Inc. Beverly Manor Inc. of Hawaii Beverly Savana Cay Manor, Inc. Brownstone Pharmacy, Inc. Columbia-Valley Nursing Home, Inc. Commercial Management, Inc. Computran Systems, Inc. Continental Care Centers of Council Bluffs, Inc. D.D. Wholesale, Inc. Dunnington Drug, Inc. Dunnington Rx Services of Rhode Island, Inc. Dunnington Rx Services of Massachusetts, Inc. Forest City Building Ltd. Hallmark Convalescent Homes, Inc. Healthcare Prescription Services, Inc. Home Medical Systems, Inc. Hospice Preferred Choice, Inc. Hospital Facilities Corporation Insta-Care Holdings, Inc. Insta-Care Pharmacy Services Corporation Kenwood View Nursing Home, Inc. Liberty Nursing Home, Incorporated MATRIX Rehabilitation, Inc. Medical Arts Health Facility of Lawrenceville, Inc. Medical Health Industries, Inc. Moderncare of Lumberton, Inc. Nebraska City S-C-H, Inc. Nursing Home Operators, Inc. Omni Med B, Inc. Petersen Health Care, Inc. Pharmacy Corporation of America Pharmacy Corporation of America - Massachusetts, Inc. Pharmacy Dynamics Group, Inc. Phymedsco, Inc. Salem No. 1, Inc. South Alabama Nursing Home, Inc. South Dakota - Beverly Enterprises, Inc. Spectra Rehab Alliance, Inc. Synergos, Inc. Synergos - Scottsdale, Inc. TMD Disposition Company Vantage Healthcare Corporation 93 SCHEDULE V EXISTING LETTERS OF CREDIT MORGAN GUARANTY TRUST COMPANY OF NEW YORK
BOND LOCATION BENEFICIARY L/C AMOUNT @November 30, 1996 Lincoln County, KY The Bank of New York $ 110,000.00 Wayne County, IN National City Bank $ 1,288,523.96 Tift County , GA The Bank of New York $ 150,000.00 Jefferson County, KY First American National Bank $ 370,000.00 Shelby County, TN Ameristar Investments & Trust $ 320,000.00 Franklin County 1985, PA The Bank of New York $ 325,000.00 Frankling County 1986, PA The Bank of New York $ 65,000.00 Gettysburg The Bank of New York $ 340,000.00 TOTAL FOR 'ON BALANCE SHEET' FACILITIES $ 2,968,523.96 Encore Term Loan The Bank of New York $15,351,110.00 HCPI HCPI $ 5,000,000.00 Monroe County, FL The Bank of New York $ 4,415,250.00 Okaloosa County, FL The Bank of New York $ 2,035,000.00 Chagrin Falls, OH Mellon Bank $ 1,070,000.00 Heber Springs, AR Thad Realty $ 300,000.00 Heber Springs, AR Troy A. Gray $ 100,000.00 Rosemont, IL Phoenix Home Life Ins. Co. $ 72,000.00 TOTAL FOR 'OFF BALANCE SHEET' FACILITIES $28,343,360.00 TOTAL MORGAN L/C'S $31,311,883.96
94 SCHEDULE V P.2 EXISTING LETTERS OF CREDIT
FACILITY PURPOSE BENEFICIARY L/C AMOUNT @NOV. 30, 1996 PITTSBURGH NATIONAL BANK Clarion, PA Meritcare PNC Bank $ 7,240.054.79 Dedham, MA Meritcare State Street Bank & $ 8,466,175.00 Trust VRT Term Notes Meritcare PNC Bank $23,358,000.00 Total for Meritcare Debt: $39,064,229.79 TORONTO DOMINION BANK 7 Facilities MIFA Bonds State Street Bank & $26,481.640.00 Trust Total for MIFA Debt: $26,481,640.00 L/C SUMMARY BY GROUP: Morgan Guaranty: $31,311,883.96 PNC Bank (Meritcare) $39,064,229.79 Toronto Dominion (MIFA Bonds) $26,481,640.00 TOTAL L/C EXPOSURE $96,857,753.75
95 EXHIBIT A NOTE New York, New York ____________, 1996 For value received, BEVERLY ENTERPRISES, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of ____________________________ (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the Termination Date provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the type thereof and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Amended and Restated Credit Agreement dated as of December __, 1996 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the mandatory and optional repayment and prepayment hereof and the acceleration of the maturity hereof. Payment of principal and interest on this Note is (i) unconditionally guaranteed, subject to the limitations contained in the Subsidiary Guaranty, by the Subsidiary Guarantors pursuant to the Subsidiary Guaranty and (ii) secured by security interests in certain collateral pursuant to the Pledge Agreement. BEVERLY ENTERPRISES, INC. By ------------------------------------------------------- Title: 96 NOTE (CONT'D) LOANS AND PAYMENTS OF PRINCIPAL
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EX-10.31 7 AMENDMENT NO 1 WAIVER TO PARTICIPATION AGREEMENT 1 EXHIBIT 10.31 AMENDMENT NO. 1 AND WAIVER TO PARTICIPATION AGREEMENT This AMENDMENT NO. 1 AND WAIVER TO PARTICIPATION AGREEMENT (this "Amendment"), is entered into as of May 27, 1997, among BEVERLY ENTERPRISES, INC., a Delaware corporation, as the Representative, Construction Agent and Parent Guarantor (in its capacity as Representative, the "Representative"; in its capacity as Construction Agent, the "Construction Agent"; and, 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, the "Guarantors"); 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"); BMO LEASING (U.S.), INC., as Agent Lessor for the Lessors (in such capacity, the "Agent Lessor"); THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY ("LTCB"), BANK OF MONTREAL, a Canadian banking organization ("BMO"), and the other various financial institutions as are or may from time to time become lenders (the "Lenders") under the Loan Agreement; LTCB as Administrative Agent (in such capacity, the "Administrative Agent") for the Lenders and as Arranger (in such capacity, the "Arranger"); and BMO, as Co-Arranger and Syndication Agent (collectively, the "Parties"). R E C I T A L S: A. The Parties entered into a Participation Agreement dated as of March 21, 1997 (the "Participation Agreement"); and B. The Parties desire to amend Section 3.4 and Appendix A to the Participation Agreement and to waive a provision under Section 6.2(b) of the Participation Agreement. A G R E E M E N T: 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. Definitions. 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. Amendment to "London Interbank Offered Rate". The term "London Interbank Offered Rate" as contained in Appendix A of the Participation Agreement is hereby amended in its entirety as follows: 2 "London Interbank Offered Rate" means, as applicable to any Eurodollar Loan, for the Interest Period of such Eurodollar Loan, the rate per annum determined by the Administrative Agent on the basis of the offered rate for deposits in Dollars of amounts equal or comparable to the principal amount of such Eurodollar Loan offered for a term comparable to such Interest Period, which rates appear on the Reuters Screen LIBO Page as of 11:00 A.M., London time, two (2) Business Days prior to the first day of such Interest Period, provided that (i) if more than one such offered rate appears on the Reuters Screen LIBO Page, the "London Interbank Offered Rate" will be the arithmetic average (rounded upwards, if necessary, to the next higher 1/100th of it) of such offered rates; (ii) if no such offered rates appear on such page, the "London Interbank Offered Rate" for such Interest Period will be the rate per annum quoted by the Administrative Agent's London Branch two (2) Business Days prior to the first day of such Interest Period, for deposits in Dollars offered to leading banks for a period comparable to such Interest Period in an amount comparable to the principal amount of such Eurodollar Loan; and (iii) with respect to an Interest Period of a duration less than one month, the "London Interbank Offered Rate" for such Interest Period will be the rate per annum quoted by the Administrative Agent's London Branch two (2) Business Days prior to the first day of such Interest Period, for deposits in Dollars offered to the Administrative Agent for a period comparable to such Interest Period in an amount comparable to the principal amount of such Eurodollar Loan. 3. Amendment to Section 3.4(a). The third sentence of Section 3.4(a) of the Participation Agreement is hereby amended in its entirety as follows: "Such Loans and Lessor Amounts made with respect to each Advance (i) if made on a day other than a Scheduled Payment Date or an Acquisition Date, shall be Base Rate Loans/Lessor Amounts and (ii) if made on a Scheduled Payment Date or an Acquisition Date, shall be Eurodollar Loans/Lessor Amounts, and the duration of the initial Interest Period with respect to such Advance shall begin on the proposed Acquisition Date or Funding Date and end on the next succeeding Scheduled Payment Date (the "Initial Interest Period")." 4. Waiver of As-Built Appraisal Delivery Requirement. Effective as of the Effective Date, each of the Participants hereby waives the delivery requirements of Section 6.2(b) of the Participation Agreement with respect to the As-Built Appraisal for the Property located in Cobb County, Georgia and acquired pursuant to the Operative Documents on May 30, 1997 until the earlier of (i) 30 days after the Effective Date and (ii) the next succeeding Funding Date with respect to such Property. The failure to deliver the As-Built Appraisal as provided in this Section 4 shall constitute a failure by the Representative to observe and perform a covenant under the Participation Agreement. 5. Effective Date. This Amendment shall be effective and the Participation Agreement amended as of May 27, 1997 (the "Effective Date"), as if entered into on such date. -2- 3 6. Effect of Amendment. The Parties agree that, except as amended hereby or hereafter, the Participation Agreement and any and all other agreements, documents, certificates and other instruments executed in connection therewith shall remain in full force and effect in accordance with their terms. Any reference to the Participation Agreement shall be deemed to be a reference to the Participation Agreement as amended by this Amendment. 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 laws of the State of New York. -3- 4 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 and Parent Guarantor By ------------------------------------------- Name: Title: THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, as Arranger, Administrative Agent and as a Lender By ------------------------------------------- Name: Title: BMO LEASING (U.S.), INC., as Agent Lessor and as a Lessor By ------------------------------------------- Name: Title: BANK OF MONTREAL, as Co-Arranger and as a Lender By ------------------------------------------- Name: Title: -4- 5 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: -5- 6 BEVERLY ENTERPRISES - CALIFORNIA, INC., as Lessee and Structural Guarantor By ------------------------------------------- Name: Title: -6- EX-10.32 8 AMENDMENT NO 2 TO PARTICIPATION AGREEMENT 1 EXHIBIT 10.32 AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT This AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT (this "Amendment"), is entered into as of August 20, 1997, among BEVERLY ENTERPRISES, INC., a Delaware corporation ("BEI"), as the Representative, Construction Agent and Parent Guarantor (in its capacity as Representative, the "Representative"; in its capacity as Construction Agent, the "Construction Agent"; and, 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, the "Guarantors"); 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"); BMO LEASING (U.S.), INC., as Agent Lessor for the Lessors (in such capacity, the "Agent Lessor"); THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY ("LTCB"), BANK OF MONTREAL, a Canadian banking organization ("BMO"), and the other various financial institutions as are or may from time to time become lenders (the "Lenders") under the Loan Agreement; LTCB as Administrative Agent (in such capacity, the "Administrative Agent") for the Lenders and as Arranger (in such capacity, the "Arranger"); and BMO, as Co-Arranger and Syndication Agent (collectively, the "Parties"). R E C I T A L S: A. The Parties entered into a Participation Agreement dated as of March 21, 1997, as amended as of May 27, 1997 (the "Participation Agreement"). B. BEI desires to increase the Aggregate Commitment Amount available to the Lessees from $50,000,000 to an amount sufficient to fund the aggregate Property Cost of (x) the Properties listed in Schedule A attached hereto (such Properties, the "Additional Properties") and (y) the other Properties subject to the Master Lease as of the Amendment Effective Date. C. BEI intends to consummate a series of transactions pursuant to which (i) BEI will form a new Subsidiary (together with its successors, "New BEI") that will be a Delaware corporation wholly-owned by BEI, such corporation to be renamed, upon the consummation of the Pharmacy Divestiture Transaction and the Merger (each as defined below), Beverly Enterprises, Inc., (ii) Pharmacy and its Subsidiaries will repay in cash to BEI not less than $250,000,000 of intercompany advances outstanding from BEI to Pharmacy and its Subsidiaries, (iii) BEI will contribute all of its assets and liabilities (other than the capital stock of Pharmacy and its Subsidiaries) to New BEI and New BEI will assume all of such liabilities, (iv) BEI will distribute pro rata to the holders of its common stock all of the capital stock of New BEI, and (v) BEI will be merged with and into Capstone Pharmacy Services, Inc. D. Subject to the terms and conditions set forth herein, BEI may increase the Aggregate Commitment Amount and consummate the transactions in connection with the Pharmacy Divestiture Transaction and the Merger. E. The Parties desire to amend the Participation Agreement as set forth herein. 2 A G R E E M E N T: 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. Additional Defined Terms. Appendix A to the Participation Agreement is hereby amended by adding the new definitions in the appropriate alphabetical order: "Additional Property" shall mean any of the Properties listed in Schedule V to the Participation Agreement, in each case as previously disclosed to and approved by the Participants. "Amendment Effective Date" means the date upon which the Amended and Restated Credit Agreement dated as of August 20, 1997 becomes effective in accordance with its terms. "Commitment Increase" has the meaning provided in Section 3.7 of the Participation Agreement. "Existing Properties" means all of the Properties subject to the Master Lease as of the Amendment Effective Date, as described in their respective Lease Supplements. "Merger" means the merger of the Representative into Capstone Pharmacy Services, Inc. "New Aggregate Commitment Amount" means an amount sufficient to fund the Property Cost of (i) the Additional Properties and (ii) the Existing Properties. "New BEI" means New Beverly Holdings, Inc., a Delaware corporation and Wholly-Owned Subsidiary of the Representative to be renamed Beverly Enterprises, Inc. following the consummation of the Pharmacy Divestiture Transaction and Merger. "New BEI Spin-Off" means the distribution by the Representative, pro rata to the holders of the Representative's common stock, of all of the capital stock of New BEI. "Non-Pharmacy Asset Contribution" means the contribution by the Representative of all of its assets and liabilities (other than the capital stock of Pharmacy and its Subsidiaries) to New BEI and the assumption by New BEI of all such liabilities. "Pharmacy Divestiture Transaction" means the Pharmacy Intercompany Repayment, the Non-Pharmacy Asset Contribution and the New BEI Spin-Off. 3 "Pharmacy Intercompany Repayment" means the repayment in cash by Pharmacy and its Subsidiaries to the Representative of not less than $250,000,000 of intercompany advances outstanding from the Representative to Pharmacy and its Subsidiaries. "Release Date" means the date upon which (i) all of the conditions set forth in Section 3.03 of the Morgan Credit Agreement shall be satisfied (or waived in accordance with Section 9.05 of the Morgan Credit Agreement) and (ii) all of the following conditions shall have been satisfied to the satisfaction of the Agent Lessor, the Administrative Agent and each Participant: (a) The Administrative Agent, the Agent Lessor and the Participants shall have received an executed counterpart of the Assumption Agreement attached hereto as Exhibit I duly executed by New BEI; (b) New BEI shall have paid the Transaction Expenses invoiced to New BEI and incurred in connection with the transactions contemplated with the Pharmacy Divestiture Transaction and the Merger, and any other costs and fees invoiced to New BEI and incurred by the Administrative Agent, the Agent Lessor and each Participant in accordance with the terms of the Operative Documents; (c) All of the Beverly Entities' covenants, representations and warranties contained in the Operative Documents (except as expressly modified by Section 15.18 of the Participation Agreement) shall remain true and correct and enforceable in all respects after giving effect to the transactions contemplated by the Pharmacy Divestiture and the Merger; (d) No Default, Event of Default, breach or failure of condition exists, or would exist with notice or lapse of time or both, under any of the Operative Documents before or after giving effect to the transactions contemplated by the Pharmacy Divestiture Transaction and the Merger; (e) Each of the Participants shall have received evidence reasonably satisfactory to it that each Lien granted by the Representative under the Operative Documents has been amended in a manner sufficient to properly perfect each of their interests therein (including, without limitation, the filing of appropriately completed and duly executed Uniform Commercial Code financing statements); (f) The Administrative Agent, the Agent Lessor and the Participants shall have received true, correct and complete copies of the Agreement and Plan of Merger dated as of April 15, 1997 between the Representative and Capstone Pharmacy Services, Inc. and such other documents, certificates and instruments delivered in connection with the Pharmacy Divestiture Transaction and the Merger as any of the Administrative Agent, Agent Lessor or Participants shall reasonably request; (g) The Administrative Agent, the Agent Lessor and the Participants shall have received evidence satisfactory to them that the Pharmacy Divestiture Transaction shall have been consummated and New BEI shall be the owner of all the assets theretofore owned by the Representative other than the capital stock of Pharmacy and its Subsidiaries; 4 (h) No legal proceeding shall be pending which in any manner draws into question the validity of any of the Operative Documents; (i) The Administrative Agent, the Agent Lessor and the Participants shall have received opinions of Weil, Gotshal & Manges LLP, special New York counsel to New BEI, and the Vice President and Deputy General Counsel of New BEI, covering those matters relating to the Assumption Agreement, the Pharmacy Divestiture Transaction and the Merger as the Administrative Agent, the Agent Lessor and the Participants may reasonably request; (j) The Administrative Agent, the Agent Lessor and the Participants shall have received a certificate signed by the chief financial officer or treasurer of New BEI to the effect set forth in clauses (c) and (d) above; (k) The Administrative Agent, the Agent Lessor and the Participants shall have received all documents as they may reasonably request relating to the existence of New BEI and each of its Subsidiaries party to any Operative Document, the corporate authority for and the validity of the Operative Documents, and any other matters relevant thereto, all in form and substance satisfactory to the Administrative Agent, the Agent Lessor and the Participants; and (l) The Administrative Agent, the Agent Lessor and the Participants shall have received evidence satisfactory to them that all filings with, and consents and approvals of, any third party or any governmental body, agency or official necessary or desirable to permit the Pharmacy Divestiture Transaction or the Merger have been made or obtained and all waiting periods in respect thereof have expired or been terminated." 3. Amended Defined Terms. The following defined terms in Appendix A to the Participation Agreement are hereby amended in their entirety to read as follows: "Company" means (i) prior to the Release Date, Beverly Enterprises, Inc., a Delaware Corporation and (ii) as of and after the Release Date, New BEI. "Morgan Credit Agreement" means the Amended and Restated Credit Agreement dated as of August 20, 1997 amending and restating the $375,000,000 Amended and Restated Credit Agreement dated as of December 20, 1996 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. "Pledged Stock" means the stock held as collateral from time to time under the Pledge Agreement. 4. Additional Properties. Schedule A attached hereto is hereby added as Schedule V to the Participation Agreement. 5 5. Assumption Agreement. Exhibit I attached hereto is hereby added as Exhibit I to the Participation Agreement. 6. Increase in Commitment. The Participation Agreement is hereby amended by adding as a new Section 3.7 of the Participation Agreement. "Section 3.7. Increase in Commitment. (a) The Beverly Entities may, prior to October 31, 1997, arrange an increase in the Aggregate Commitment Amount to the New Aggregate Commitment Amount (such increase, the "Commitment Increase") in accordance with this Section 3.7 by either arranging for (i) an existing Participant to increase its respective Commitment or (ii) one or more Persons not a party to the Operative Documents to assume Commitment(s) by becoming a party to the Operative Documents as Participants; provided that the aggregate Lender Commitment and aggregate Lessor Commitment shall be increased pro rata in connection with any Commitment Increase. Neither the Administrative Agent, the Agent Lessor nor any Participant is hereby committed to assume any additional Commitment and are not obligated to do so without their prior written consent. (b) In the event that either (i) the Beverly Entities have not obtained written commitments to increase the Aggregate Commitment Amount to the New Aggregate Commitment Amount by October 31, 1997 pursuant to Section 3.7(a) or (ii) Schedule I to the Participation Agreement and the other relevant provisions of the Operative Documents have not been amended to reflect an increase in the Aggregate Commitment Amount to the New Aggregate Commitment Amount by November 14, 1997, the Administrative Agent and Agent Lessor may instruct the Representative to cause any Lessee to purchase any or all of such Lessee's Additional Properties at a price equal to the Property Balance with respect thereto, including any accrued and unpaid Rent and any other amounts payable under the Operative Documents with respect to such Additional Properties. Within 30 days after receipt of instructions from the Administrative Agent and Agent Lessor specifying the Additional Property or Properties to be purchased, the Representative shall cause each applicable Lessee to purchase its respective Additional Properties, as specified by the Administrative Agent and Agent Lessor, in accordance with the previous sentence. Upon receipt of the Property Balance with respect to each applicable Additional Property, the Agent Lessor shall transfer to the applicable Lessee all of Agent Lessor's right, title and interest in and to each such Additional Property in accordance with the procedures set forth in Section 21.1(a) of the Master Lease. (c) The failure of the Representative or any Lessee of an Applicable Property to satisfy any of their respective obligations pursuant to Section 3.7(b) shall constitute a Lease Event of Default as defined under the Master Lease." 7. Amendment of Investments. Subsection 10.2(e)(i) of the Participation Agreement is hereby deleted in its entirety and replaced with the following: "(i) Investments in the Representative or in Persons that are Subsidiaries of the Representative (including any other Beverly Entity) on the date hereof (other than, after the Release Date, Pharmacy and the Subsidiaries of Pharmacy);" 6 8. Amendment of Restricted Payments on Stock. Section 10.2(f) of the Participation Agreement is hereby amended by deleting the word "and" at the end of clause (iv) thereof and replacing clause (v) thereof with the following provisions: "(v) the Representative may consummate the New BEI Spin-Off as part of the Pharmacy Divestiture Transaction on the Release Date, and (vi) 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 Effective Date (including, without limitation, any such payments or distributions permitted under subclause (ii)(A) or clause (iv) above) does not exceed the sum of $75,000,000 plus 50% of Consolidated Net Income for the period after June 30, 1997 through the date of such declaration, payment or distribution." 9. Amendment of Negative Pledge. (a) Clauses 10.2(g)(13) and 10.2(g)(15) of the Participation Agreement are hereby amended to read in their entirety as follows: "(13) Liens on nursing homes and related real estate improvements and equipment ("Mortgage Assets") given in substitution for Liens on Mortgage Assets existing on the date hereof or for Liens on Mortgage Assets incurred pursuant to this clause (13) or clause (15) below, provided that the sum of (A) the excess of the Appraised Value of all Mortgage Assets subjected to Liens pursuant to this clause (13) on or after the Amendment Effective Date over the Appraised Value of all such Mortgage Assets released from Liens on or after the Amendment Effective Date and (B) all Indebtedness incurred after the Amendment Effective Date and secured by Liens permitted under clause (15) below shall not at any time exceed $50,000,000;" "(15) Liens not otherwise permitted under clauses (1) through (14) of this Section, provided that the sum of the amounts set forth in subclause (A) of clause (13) above and the aggregate principal amount of all indebtedness incurred after the date hereof and secured by Liens permitted under this clause (15) shall not at any time exceed $50,000,000." (b) Section 10.2(g) of the Participation Agreement is hereby amended by adding the following new subsection (iii) immediately following Subsection 10.2(g)(ii). "(iii) The Representative will not permit any issuer of Pledged Stock or any of their respective Subsidiaries to create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it except (A) Liens permitted by clauses (1) through (11) of Subsection 10.2(g)(i) above, (B) Liens granted prior to the Amendment Effective Date and permitted by clauses (13) and (15) of Section 10.2(g)(i) above, (C) Liens on nursing homes and related real estate improvements and equipment of issuers of Pledged Stock and their Subsidiaries ("Pledged Subsidiary Mortgage Assets") given in substitution for Liens on Pledged Subsidiary Mortgage Assets incurred pursuant to this clause (C) or clause (D) below, provided that the sum of (x) the excess of the Appraised Value of all Pledged Subsidiary Mortgage Assets subjected to Liens pursuant to this clause (C) on or after the Amendment Effective Date over the Appraised Value of all such Pledged Subsidiary Mortgage Assets released from Liens on or after the Amendment 7 Effective Date and (y) all Indebtedness incurred after the date hereof and permitted under clause (D) below shall not at any time exceed $50,000,000 and (D) Liens not otherwise permitted under clauses (A), (B) and (C) of this Subsection (iii), provided that the sum of the amounts set forth in subclause (x) of clause (C) above and the aggregate principal amount of all Indebtedness incurred after the Amendment Effective Date and secured by Liens permitted under this clause (D) shall not exceed $50,000,000." 10. Amendment of Consolidations, Mergers and Sales of Assets Provisions. Section 10.2(h) of the Participation Agreement is hereby amended by replacing the word "and" that occurs immediately prior to clause (II) thereof with a comma and inserting the following immediately before the period which ends such Section: "and (III) this Section shall not prohibit the consummation of the Pharmacy Divestiture Transaction or the Merger on the Release Date." 11. Amendment of Incurrence of Debt Provisions. (a) Subsection 10.2(i)(i)(14) of the Participation Agreement is hereby amended to read in its entirety as follows: "(14) Indebtedness not otherwise permitted under clauses (1) through (13) of this Section, provided that the aggregate principal amount of all Indebtedness permitted under this clause (14) that is incurred on or after the Amendment Effective Date shall not at any time exceed $75,000,000." (b) Subsection 10.2(i) of the Participation Agreement is hereby amended by adding the following as a new Subsection "(iii)" immediately following Subsection 10.2(i)(ii): "(iii) The Representative will not permit any issuer of Pledged Stock or any of their respective Subsidiaries to incur, assume or suffer to exist Indebtedness other than (A) Indebtedness permitted under clauses (1), (2) (but only to the extent that the Lease Cancellation Payments relate to a facility operated by any such issuer or Subsidiary), (3), (4), (5) (to the extent the Refinanced Debt referred to therein is Indebtedness referred to in clauses (1), (2) (but only to the extent that the Lease Cancellation Payments relate to a facility operated by any such issuer or Subsidiary), (3) and (4)), (6), (7), (8), (9), (10), (11) (but only to the extent that the assets acquired, constructed or approved with the proceeds of such Indebtedness are assets of such issuer or such Subsidiary) and (14) of subsection 10.2(i)(i) above; provided that the aggregate principal amount of Indebtedness of such issuers and Subsidiaries permitted under clauses (8) (other than guarantees by an issuer of Pledged Stock or any of its Subsidiaries of Indebtedness of an issuer of Pledged Stock or any of its Subsidiaries) and (14) shall not exceed in the aggregate $50,000,000 and (B) unsecured guarantees of obligations of Subsidiaries of the Representative, which obligations are permitted under clause (11) of Section 10.2(i)(i) above and arise under the Operative Documents, and refinancings, extensions, replacements and increases thereof, provided that the aggregate principal amount of indebtedness permitted under this clause (B) may not exceed $150,000,000." 12. Amendment of Assignment by Beverly. Section 15.18 of the Participation Agreement is hereby amended to read in its entirety as follows: 8 Section 15.18 Assignment by Beverly Enterprises, Inc. Subject to the conditions set forth in the definition of Release Date, notwithstanding any other provision herein each party hereto agrees that Beverly Enterprises, Inc. may transfer all of its assets (other than the stock of Pharmacy and the Subsidiaries of Pharmacy) to New BEI, and Beverly Enterprises, Inc. shall cause New BEI to execute the Assumption Agreement. On the Release Date the terms "Company", "Representative", "Construction Agent" and "Parent Guarantor" shall mean New BEI and shall cease to mean Beverly Enterprises, Inc. and thereupon Beverly Enterprises, Inc. and Pharmacy and its Subsidiaries, without any further action on behalf of any party hereto, shall be released from all covenants, liabilities and obligations under the Operative Documents. Any transfer of assets by Beverly Enterprises, Inc. as aforesaid to New BEI and any distribution of the stock of New BEI to shareholders of Beverly Enterprises, Inc. shall not constitute a Change of Control. 13. Effective Date. Subject to Section 15 below, this Amendment shall be effective and the Participation Agreement amended as of August 20, 1997 (the "Effective Date"), as if entered into on such date. 14. Representations and Warranties. To induce the Administrative Agent, the Agent Lessor and the Participants to execute and deliver this Amendment (which representations shall survive the execution and delivery of this Amendment), each of the Beverly Entities that is a party hereto represents and warrants 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 Participation Agreement, as amended by 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, 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 Section 14(c); 9 (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 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. 15. 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 and restated in form and substance satisfactory to the Administrative Agent, the Agent Lessor and the Participants; (c) The representations and warranties of the Beverly Entities set forth in Section 14 hereof are true and correct on and with respect to the date hereof; and (d) The Administrative Agent shall have received (i) a fee in connection with the Participants' agreement to the terms of this Amendment equal to $25,000 for the account of the Participants and (ii) an administrative fee equal to $25,000 for the benefit of the Agent Lessor. Upon receipt of all of the foregoing, this Amendment shall become effective. 16. Payment of Fees and Expenses. The Representative agrees to pay upon demand, the reasonable fees and expenses of (i) Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Lenders, and (ii) Mayer, Brown & Platt, counsel to the Lessors, in connection with the negotiation, preparation, approval, execution and delivery of this Amendment. 17. Effect of Amendment. The Parties agree that upon the effectiveness of this Amendment as provided in Section 15 (a) except as amended hereby or hereafter, the Participation Agreement and any and all other agreements, documents, certificates and other instruments executed in connection therewith shall remain in full force and effect in accordance with their terms, and (b) any reference to the Participation Agreement shall be deemed to be a reference to the Participation Agreement as amended by this Amendment. 18. 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. 19. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. 10 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 and Parent Guarantor By ------------------------------------ Name: Title: THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, as Arranger, Administrative Agent and as a Lender By ------------------------------------ Name: Title: BMO LEASING (U.S.), INC., as Agent Lessor and as a Lessor By ------------------------------------ Name: Title: BANK OF MONTREAL, as Co-Arranger and as a Lender By ------------------------------------ Name: Title: S - 1 11 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: S - 2 12 Schedule A Additional Properties 13 EXHIBIT I ASSUMPTION AGREEMENT AGREEMENT dated as of [Release Date], 1997 by NEW BEVERLY HOLDINGS, INC., a Delaware corporation (with its successors, "New Beverly") for the benefit of the Administrative Agent, the Agent Lessor and the Participants under the Participation Agreement and the other Operative Documents (as defined below). WITNESSETH WHEREAS, this Assumption Agreement (the "Agreement") relates to the Participation Agreement dated as of March 21, 1997 and as amended as of May 27, 1997 and as of August 20, 1997, among BEVERLY ENTERPRISES, INC., a Delaware corporation ("BEI"), as the Representative, Construction Agent and Parent Guarantor (in its capacity as Representative, the "Representative"; in its capacity as Construction Agent, the "Construction Agent"; and, 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, the "Guarantors"); 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"); BMO LEASING (U.S.), INC., as Agent Lessor for the Lessors (in such capacity, the "Agent Lessor"); THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY ("LTCB"), BANK OF MONTREAL, a Canadian banking organization ("BMO"), and the other various financial institutions as are or may from time to time become lenders (the "Lenders") under the Loan Agreement; LTCB as Administrative Agent (in such capacity, the "Administrative Agent") for the Lenders and as Arranger (in such capacity, the "Arranger"); and BMO, as Co-Arranger and Syndication Agent (collectively, the "Parties") and the other Operative Documents executed in connection therewith. WHEREAS, in order to (i) permit BEI to transfer all of its assets, other than the stock of Pharmacy Corporation of America, a California corporation ("Pharmacy") and its Subsidiaries, to New Beverly and (ii) induce the Administrative Agent, the Agent Lessor and the Participants to release BEI from its obligations under the Operative Documents (as defined in the Participation Agreement), New Beverly is willing to enter into this Agreement; WHEREAS, New Beverly proposes to assume all of the rights and obligations of BEI under the Operative Documents; NOW, THEREFORE, in consideration of the foregoing, New Beverly hereby agrees as follows; Section 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in Appendix X to the Participation Agreement. 1 14 Section 2. Assumption. New Beverly hereby assumes and agrees to perform, pay and discharge all of the liabilities and obligations of BEI as Construction Agent, Parent Guarantor and Representative under and pursuant to the Operative Documents. Section 3. Representations and Warranties. New Beverly hereby makes, on and as of the date hereof, each representation and warranty made by BEI as Construction Agent, Parent Guarantor and Representative in any Operative Document. Section 4. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Section 5. Further Assurances. New Beverly hereby agrees to take such further action and to execute and deliver such further agreements and undertakings as the Administrative Agent, the Agent Lessor or any Participant may from time to time request to further carry out the intent of the parties hereunder. 2 15 IN WITNESS WHEREOF, the undersigned has caused this Agreement to be executed and delivered by its duly authorized officer as of the date first above written. NEW BEVERLY HOLDINGS, INC. By: ----------------------------- Name: Title: Agreed and accepted as of the date first written above: THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, as Arranger, Administrative Agent and as a Lender By ------------------------------- Name: Title: BMO LEASING (U.S.), INC., as Agent Lessor and as a Lessor By ------------------------------- Name: Title: BANK OF MONTREAL, as Co-Arranger and as a Lender By ------------------------------- Name: Title: 3 EX-23.1 9 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 7, 1997 (except for Note 2, paragraph 3, as to which the date is March 13, 1997) with respect to the consolidated financial statements and schedule of Beverly Enterprises, Inc. included in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-28521) and related Prospectus of New Beverly Holdings, Inc. for the registration of 110,424,677 shares of its common stock. We also consent to the reference to our firm under the caption "Experts" and to the use of our report dated April 18, 1997, with respect to the consolidated financial statements and schedule of Pharmacy Corporation of America included in the above mentioned Amendment No. 2 to the Registration Statement and Prospectus of New Beverly Holdings, Inc. In addition we consent to the reference to our firm under the caption "Experts" and to the use of our report dated June 2, 1997, with respect to the balance sheet of New Beverly Holdings, Inc., included in the above mentioned Amendment No. 2 to the Registration Statement and Prospectus. /s/ ERNST & YOUNG LLP September 17, 1997 Little Rock, Arkansas -----END PRIVACY-ENHANCED MESSAGE-----