-----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, CspQA3TyKIArZeUNOgsIoJuwgH8GyT1ZkSJjXeGmEhVp5hFJlEnPxsZcdNwIs6sO Rfl8zfcADcuykwNOq8HPaQ== 0000950134-98-002567.txt : 19980331 0000950134-98-002567.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950134-98-002567 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BEVERLY ENTERPRISES INC CENTRAL INDEX KEY: 0001040441 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621691861 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09550-2B FILM NUMBER: 98577130 BUSINESS ADDRESS: STREET 1: 5111 ROGERS AVE STREET 2: SUITE 40-A CITY: FORT SMITH STATE: AR ZIP: 72903 BUSINESS PHONE: 5014526712 MAIL ADDRESS: STREET 1: 511 ROGERS AVE STREET 2: SUITE 40-A CITY: FORT SMITH STATE: AR ZIP: 72903 FORMER COMPANY: FORMER CONFORMED NAME: NEW BEVERLY HOLDINGS INC DATE OF NAME CHANGE: 19970604 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1997 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NUMBER: 1-9550 BEVERLY ENTERPRISES, INC. (Exact name of Registrant as specified in its charter) DELAWARE 62-1691861 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5111 ROGERS AVENUE, SUITE 40-A FORT SMITH, ARKANSAS 72919-0155 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (501) 452-6712 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.10 par value New York Stock Exchange Pacific Stock Exchange 9% Senior Notes due February 15, 2006 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] No [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF REGISTRANT WAS $1,598,662,838 AS OF FEBRUARY 27, 1998. 106,027,451 (NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, NET OF TREASURY SHARES, AS OF FEBRUARY 27, 1998) PART III IS INCORPORATED BY REFERENCE FROM THE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 28, 1998. ================================================================================ 2 PART I ITEM 1. BUSINESS. GENERAL References herein to the Company include Beverly Enterprises, Inc. and its wholly-owned subsidiaries. Beverly Enterprises, Inc. (formerly known as New Beverly Holdings, Inc.), which was incorporated on April 15, 1997 ("New Beverly"), is the successor to the former Beverly Enterprises, Inc., which was incorporated on February 27, 1987 ("Old Beverly"), as the result of a tax-free reorganization completed December 3, 1997 (the "Reorganization") in order to facilitate the Merger of PCA with Capstone (as discussed below). The Reorganization was accomplished in two steps. Old Beverly transferred or contributed to New Beverly all of its assets and liabilities, except for its institutional pharmacy business conducted by its wholly-owned subsidiary, Pharmacy Corporation of America and its subsidiaries ("PCA"), (the "Remaining Healthcare Business"), in exchange for all of the issued and outstanding common stock of New Beverly. Old Beverly immediately distributed the common stock of New Beverly to its stockholders on a one-for-one basis (the "Distribution"). As a result of the Distribution, New Beverly became an independent, publicly-traded company engaged in the Remaining Healthcare Business and owned by the stockholders of Old Beverly. Following the Distribution, Old Beverly, whose only assets consisted of the stock of PCA and its subsidiaries, merged with and into Capstone Pharmacy Services, Inc. ("Capstone"), with Capstone being the surviving corporation (the "Merger"). Immediately after the Merger, Capstone changed its name to PharMerica, Inc. and New Beverly changed its name to Beverly Enterprises, Inc. References to Beverly Enterprises, Inc., or the Company, prior to December 3, 1997 will mean the predecessor corporation, Old Beverly. References to Beverly Enterprises, Inc., or the Company, on or after December 3, 1997 will mean New Beverly, and New Beverly will be treated for accounting purposes as the continuing reporting entity with respect to the historical and future operations of the Company. See "Part II, Item 8 -- Note 2 of Notes to Consolidated Financial Statements" for additional information. The business of the Company consists 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 and home health centers. The Company is one of the largest operators of nursing facilities in the United States. At January 31, 1998, the Company operated 568 nursing facilities with 63,376 licensed beds. The facilities are located in 29 states and the District of Columbia, and range in capacity from 20 to 355 beds. At January 31, 1998, the Company also operated 34 assisted living centers containing 901 units, 13 transitional hospitals containing 671 beds, 70 outpatient therapy clinics, and 25 home health centers. The Company's facilities had average occupancy of 88.9%, 87.4% and 88.1% during the years ended December 31, 1997, 1996 and 1995, respectively. See "Item 2. Properties." Information provided by the Company from time to time may contain certain "forward-looking" information regarding continued performance improvements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to differ materially from forecasted results. These risks and uncertainties include, but are not limited to, national and local economic conditions, the effect of government regulation, the competitive environment in which the Company operates, and the availability and cost of labor and materials. These, and other risks and uncertainties that could affect future results, are discussed in greater detail throughout this Annual Report on Form 10-K. Healthcare service providers, such as the Company, operate in an industry that is subject to significant changes from business combinations, new strategic alliances, legislative reform, aggressive marketing practices by competitors and market pressures. In this environment, the Company is frequently contacted by, and otherwise engages in discussions with, other healthcare companies and financial advisors regarding possible strategic alliances, joint ventures, business combinations and other financial alternatives. 1 3 OPERATIONS The Company is organized into three operating units, which support the Company's delivery of vertically integrated services to the long-term healthcare market. These operating units include: (i) Beverly Healthcare, which provides long-term and subacute care through the operation of nursing facilities and assisted living centers; (ii) Beverly Care Alliance, which operates outpatient therapy clinics and home health centers, and manages Beverly Healthcare's rehabilitation services business; and (iii) Beverly Specialty Hospitals, which operates the Company's transitional hospitals. Business in each operating unit is conducted by one or more corporations headed by a President who is also a senior officer of the Company and reports directly to the President of the Company. Each of the three operating units also has a separate Board of Directors consisting of four senior executives of the Company and the President of the unit. Long-Term Care. Beverly Healthcare's nursing facilities provide residents with routine long-term care services, including daily dietary, social and recreational services and a full range of pharmacy services and medical supplies. Beverly Healthcare's 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. Through Beverly Care Alliance, the Company offers industrial rehabilitation, outpatient therapy clinics, acute hospital therapy contracts, management/consulting rehabilitation programs and home health services within the Company's network of facilities and to other healthcare providers. Transitional Care. Beverly Specialty Hospitals operates 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 Beverly Specialty Hospital patient requires an average of six hours of nursing care per day for 30 to 45 days. Other Services. The Company offers other healthcare related services to payors and patients, including assisted living services and information and referral systems that link payors and employees to long-term care providers. The Company has a Quality Management ("QM") program to help ensure that high quality care is provided in each of its nursing, transitional and outpatient facilities. The Company's QM program has been a key factor in helping the Company 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"). The Company's nationwide QM network of healthcare professionals includes physician medical directors, registered nurses, dieticians, social workers and other specialists who work in conjunction with regional and facility based QM professionals. Facility based QM is structured through the Company's Quality Assessment and Assurance Committee. With a philosophy of quality improvement, Company-wide clinical indicators are utilized as a database to set goals and monitor thresholds in critical areas directly related to the delivery of healthcare related services. These internal evaluations are used by local quality improvement teams, which include QM advisors, to identify and correct possible problems. The Senior Vice President of QM reports directly to the President of the Company and the QM Committee of the Company's Board of Directors. GOVERNMENTAL REGULATION AND REIMBURSEMENT The Company's nursing facilities are subject to compliance with various federal, state and local healthcare statutes and regulations. Compliance with state licensing requirements imposed upon all healthcare facilities is a prerequisite for the operation of the facilities and for participation in government-sponsored healthcare funding programs, such as Medicaid and Medicare. Medicaid is a medical assistance program for the indigent, operated by individual states with the financial participation of the federal government. Medicare is a health insurance program for the aged and certain other chronically disabled individuals, operated by the federal government. Changes in the reimbursement policies of such funding programs as a result of budget cuts by federal and state governments or other legislative and regulatory actions could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. 2 4 The Company receives payments for services rendered to patients from (a) each of the states in which its nursing facilities are located under the Medicaid program; (b) the federal government under the Medicare program; and (c) private payors, including commercial insurers 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 ------------------ ------------------ ------------------ ROOM AND ROOM AND ROOM AND PATIENT BOARD PATIENT BOARD PATIENT BOARD ANCILLARY AND DAYS REVENUES DAYS REVENUES DAYS REVENUES OTHER REVENUES ------- -------- ------- -------- ------- -------- -------------- Year ended: December 31, 1997.... 68% 40% 12% 12% 20% 16% 32% December 31, 1996.... 69% 42% 12% 12% 19% 14% 32% December 31, 1995.... 68% 43% 12% 11% 20% 15% 31%
Consistent with the long-term care industry in general, changes in the mix of the Company's patient population among the Medicaid, Medicare and private categories can significantly affect revenues and profitability. 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. The Company 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 the Company's nursing facilities. The Company is pursuing further growth of ancillary revenues, through acquisitions as well as internal expansion of specialty services such as rehabilitation. Due to the Company'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 the Company operates nursing facilities. While these programs differ in certain respects from state to state, they are all subject to federally-imposed requirements, and at least 50% of the funds available under these programs is provided by the federal government under a matching program. The Medicaid and Medicare programs each contain specific requirements which must be adhered to by healthcare facilities in order to qualify under the programs. Currently, 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 and California provide for reimbursement at a flat daily rate, as determined by the responsible state agency. Several states in which the Company currently operates have enacted payment mechanisms which are based on patient acuity versus traditional cost-based methodologies. Many other states are actively 3 5 developing similar payment systems. There can be no assurances made as to the ultimate impact of these changes in payment mechanisms on the Company's consolidated financial position, results of operations, or cash flows. 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. In August 1997, the President signed into law the Balanced Budget Act of 1997 (the "1997 Act") in which Congress included numerous program changes directed at balancing the federal budget. The legislation changes Medicare and Medicaid policy in a number of ways, including: (i) development of new Medicare and Medicaid health plan options; (ii) creation of additional safeguards against healthcare fraud and abuse; (iii) repeal of the Medicaid "Boren Amendment" payment standard; (iv) a 10% reduction in Part B therapy costs for the period from January 1, 1998 through July 1, 1998, at which time reimbursement for these services will be based on HCFA established fee schedules; (v) the phasing in of a Medicare prospective payment system ("PPS") for skilled nursing facilities effective July 1, 1998 (which will be in effect for the Company in January 1999); and (vi) establishment of limitations on Part B therapy charges per beneficiary per year. The legislation includes new opportunities for providers to focus further on patient outcomes by creating alternative patient delivery structures. At this time, the Company has not been able to fully assess the impact of these changes, due in part to uncertainty as to the details of implementation and interpretation of the legislation by HCFA and, therefore, no assurances can be made as to the ultimate impact of this legislation or future healthcare reform legislation on the Company's consolidated financial position, results of operations, or cash flows. However, future federal budget legislation and regulatory changes may negatively impact the Company. During the first quarter of 1998, 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 and respiratory therapy services. The Company does not expect the new rules to have a material adverse effect on its consolidated results of operations or cash flows based on the following: (i) the Company currently provides the majority of its therapy services through on-staff therapists; and (ii) the salary equivalency guidelines cease to apply to skilled nursing facilities once the 1997 Act provisions for PPS become effective. In addition to the requirements to be met by the Company's facilities for annual licensure renewal, the Company's healthcare facilities are subject to annual surveys and inspections in order to be certified for participation in the Medicare and Medicaid programs. In order to maintain their operator's licenses and their certification for participation in Medicare and Medicaid programs, the nursing facilities must meet certain statutory and administrative requirements. These requirements relate to the condition of the facilities and the adequacy and condition of the equipment used therein, the quality and adequacy of personnel, and the quality of medical care. Such requirements are subject to change. There can be no assurance that, in the future, the Company will be able to maintain such licenses for its facilities or that the Company will not be required to expend significant 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 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, 4 6 will be imposed on facilities which are not in compliance with the participation requirements. The Company has undertaken an analysis of the procedures in respect of its programs and facilities covered by the final HCFA regulations. While the Company is unable to predict with total accuracy the degree to which its programs and facilities will be determined to be in compliance with regulations in the future, compliance data for the past year is available. Results of HCFA surveys for the past year have determined that in the states where the Company operates nursing facilities, the Company has a higher percentage of deficiency-free facilities than the rest of the facilities in those states combined. Furthermore, the Company's facilities that are cited with deficiencies are cited less frequently than the rest of the facilities in the industry. Although the Company could be adversely affected if a substantial portion of its programs or facilities were eventually determined not to be in compliance with the HCFA regulations, the Company believes its programs and facilities generally exceed industry standards. The Company 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, the Company receives notices of deficiencies for failure to comply with various regulatory requirements. The Company reviews such notices and takes appropriate corrective action. In most cases, the Company and the reviewing agency will agree upon the steps to be taken to bring the facility into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take a number of adverse actions against a facility. These adverse actions can include the imposition of fines, temporary suspension of admission of new patients to the facility, decertification from participation in the Medicaid or Medicare programs and, in extreme circumstances, revocation of a facility's license. The 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 the Company's facilities are 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 the Company has 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 the Company 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. 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 could use the Boren Amendment to require states to comply with their legal obligation to adequately fund Medicaid programs. The 1997 Act repeals the Boren Amendment and authorizes states to develop their own standards for setting payment rates. It requires each 5 7 state to use a public process for establishing proposed rates whereby the methodologies and justifications used for setting such rates are available for public review and comment. This will require facilities to become more involved in the rate setting process and failure to do so may interfere with a facility's ability to challenge rates later. COMPETITION The long-term care industry is highly competitive. The Company's competitive position varies from facility to facility, from community to community and from state to state. Some of the significant competitive factors for the placing of patients in a nursing facility include quality of care, reputation, physical appearance of facilities, services offered, family preferences, location, physician services and price. The Company's operations compete with services provided by nursing facilities, acute care hospitals, subacute facilities, transitional hospitals, rehabilitation facilities, hospices and home healthcare centers. The Company also competes with a number of tax-exempt nonprofit organizations which can finance acquisitions and capital expenditures on a tax-exempt basis or receive charitable contributions unavailable to the Company. There can be no assurance that the Company will not encounter increased competition which could adversely affect its business, results of operations or financial condition. EMPLOYEES At December 31, 1997, the Company had approximately 74,000 employees. The Company is subject to both federal minimum wage and applicable federal and state wage and hour laws and maintains various employee benefit plans. The federal government passed legislation in 1996 to increase the minimum wage in two phases. The initial increase took effect October 1, 1996, with the final increase effective September 1, 1997. This new legislation did not result in a material increase in the Company's wage rates in 1997 or 1996, because a substantial portion of the Company's associates earn in excess of the new minimum wage levels. The effect of the new minimum wage on the Company's future operations is not expected to be material as the Company believes that a significant portion of such increase will be reimbursed through Medicare and Medicaid rate increases. In recent years, the Company has experienced increases in its labor costs primarily due to higher wages and greater benefits required to attract and retain qualified personnel, increased staffing levels in its nursing facilities due to greater patient acuity and the hiring of therapists on staff. The Company's ability to control costs, including its wages and related expenses which continue to rise and represent the largest component of the Company's operating and administrative expenses, will significantly impact its future operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Operating Results." In the past, the healthcare industry, including the Company'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. The Company 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 the Company in other capacities, such as nurses' aides. A nursing, therapist or nurse's aide shortage could force the Company to pay even higher salaries and make greater use of higher cost temporary personnel. A lack of qualified personnel might also require the Company to reduce its census or admit patients requiring a lower level of care, both of which could adversely affect operating results. Approximately 100 of the Company's facilities, or 7% of the Company's employees, are represented by various labor unions. Certain labor unions have publicly stated that they are concentrating their organizing efforts within the long-term healthcare industry. The Company, being one of the largest employers within the long-term healthcare industry, has been the target of a "corporate campaign" by two AFL-CIO affiliated unions attempting to organize certain of the Company's facilities. Although the Company has never experienced any material work stoppages and believes that its relations with its employees are generally good, the Company cannot predict the effect continued union representation or organizational activities will have on 6 8 the Company's future activities. There can be no assurance that continued union representation and organizational activities will not result in material work stoppages, which could have a material adverse effect on the Company's operations. Excessive litigation is a tactic common to "corporate campaigns" and one that is being employed against the Company. There have been several proceedings against facilities operated by the Company before the National Labor Relations Board ("NLRB"). These proceedings consolidate individual cases from separate facilities, and certain of these proceedings are currently pending before the NLRB. The Company is vigorously defending these proceedings. The Company believes, based on advice of its general counsel, that many of these cases are without merit, and further, it is the Company's belief that the NLRB-related proceedings, individually and in the aggregate, are not material to the Company's consolidated financial position, results of operations, or cash flows. ITEM 2. PROPERTIES. At January 31, 1998, the Company operated 568 nursing facilities, 34 assisted living centers, 13 transitional hospitals, 70 outpatient therapy clinics and 25 home health centers in 31 states and the District of Columbia. Most of the Company's 188 leased nursing facilities are subject to "net" leases which require the Company to pay all taxes, insurance and maintenance costs. Most of the Company's 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 the Company's leases also contain purchase options. The Company considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. Certain of the nursing facilities and assisted living centers owned by the Company are included in the collateral securing the obligations under its various debt agreements. See "Part II, Item 8 -- Note 4 of Notes to Consolidated Financial Statements." 7 9 The following is a summary of the Company's nursing facilities, assisted living centers, transitional hospitals, outpatient therapy clinics and home health centers at January 31, 1998:
OUTPATIENT HOME NURSING ASSISTED TRANSITIONAL THERAPY HEALTH FACILITIES LIVING CENTERS HOSPITALS CLINICS CENTERS ------------------ -------------- ----------------- ---------- ------- TOTAL TOTAL LICENSED TOTAL LICENSED LOCATION NUMBER BEDS NUMBER UNITS NUMBER BEDS NUMBER NUMBER -------- ------ --------- ------ ----- ------ -------- ---------- ------- Alabama..................... 21 2,725 -- -- -- -- -- -- Arizona..................... 3 480 -- -- 1 48 -- -- Arkansas.................... 31 3,827 3 48 1 38 -- 2 California.................. 68 7,238 2 113 -- -- -- 9 District of Columbia........ 1 355 -- -- -- -- -- -- Florida..................... 61 7,704 5 290 -- -- -- -- Georgia..................... 17 2,100 4 72 -- -- 18 2 Hawaii...................... 2 396 -- -- -- -- -- -- Illinois.................... 3 275 -- -- -- -- -- -- Indiana..................... 26 3,817 1 16 1 40 -- 1 Kansas...................... 33 2,164 3 39 -- -- -- -- Kentucky.................... 8 1,037 -- -- -- -- -- -- Maryland.................... 4 585 1 16 -- -- 9 -- Massachusetts............... 24 2,402 -- -- -- -- -- -- Michigan.................... 2 206 -- -- -- -- -- -- Minnesota................... 35 3,152 3 32 -- -- -- -- Mississippi................. 21 2,466 -- -- -- -- -- -- Missouri.................... 29 3,038 3 101 -- -- -- 1 Nebraska.................... 24 2,173 1 16 -- -- -- 3 New Jersey.................. 1 120 -- -- -- -- -- -- North Carolina.............. 11 1,398 1 16 -- -- -- -- Ohio........................ 12 1,433 -- -- 1 44 3 -- Oklahoma.................... -- -- -- -- 2 64 -- -- Pennsylvania................ 42 4,785 3 53 -- -- -- 3 South Carolina.............. 3 302 -- -- -- -- 2 -- South Dakota................ 17 1,232 -- -- -- -- -- -- Tennessee................... 7 948 2 57 3 105 -- -- Texas....................... -- -- -- -- 4 332 38 3 Virginia.................... 16 2,113 2 32 -- -- -- -- Washington.................. 11 1,082 -- -- -- -- -- -- West Virginia............... 3 310 -- -- -- -- -- -- Wisconsin................... 32 3,513 -- -- -- -- -- 1 --- ------ -- --- -- --- -- -- 568 63,376 34 901 13 671 70 25 === ====== == === == === == == CLASSIFICATION - ----------- Owned....................... 378 41,561 30 709 1 198 -- -- Leased...................... 188 21,680 4 192 12 473 70 25 Managed..................... 2 135 -- -- -- -- -- -- --- ------ -- --- -- --- -- -- 568 63,376 34 901 13 671 70 25 === ====== == === == === == ==
8 10 ITEM 3. LEGAL PROCEEDINGS. On March 4, 1998, a jury in California returned a verdict of $95.1 million against a nursing facility operated by a subsidiary of the Company. The verdict, which was based on findings of fraud as well as negligence and abuse, consisted of $365,580 in compensatory damages and $94.7 million in punitive damages. Since punitive damages are generally not covered by insurance, a final judgement of this size could have a material adverse effect on the Company's consolidated results of operations and financial position. However, it is the Company's belief, based on discussions with its trial and appellate counsel, that many of the jury's findings, including fraud, are not supportable from the evidence presented in the case, and the judgement entered will be significantly reduced by the trial court or an appeal. The Company intends to aggressively pursue all post-trial remedies available to it. There are various other lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages which are generally not covered by insurance. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On November 20, 1997, in conjunction with the Reorganization, the Company held a Special Meeting of Stockholders in Fort Smith, Arkansas, for the purposes of approving and adopting an Agreement and Plan of Distribution, approving and adopting an Agreement and Plan of Merger, approving the New Beverly 1997 Long-Term Incentive Plan, approving the New Beverly Non-Employee Directors Stock Option Plan, approving the possible adjournment of the Special Meeting of Stockholders for purposes of soliciting additional votes in favor of the above proposals and transacting such other business as may have properly come before the meeting or any adjournment thereof. The Agreement and Plan of Distribution was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter: For...................................................... 88,956,221 Against.................................................. 153,732 Abstentions.............................................. 184,382
The Agreement and Plan of Merger was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter: For...................................................... 88,958,901 Against.................................................. 150,959 Abstentions.............................................. 184,475
The New Beverly 1997 Long-Term Incentive Plan was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter: For...................................................... 83,453,156 Against.................................................. 5,560,086 Abstentions.............................................. 281,093
The New Beverly Non-Employee Directors Stock Option Plan was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter: For...................................................... 81,970,461 Against.................................................. 6,971,231 Abstentions.............................................. 352,643
9 11 The possible adjournment of the Special Meeting was approved at the meeting. The following table sets forth the number of votes for and against, as well as abstentions as to this matter:
For...................................................... 63,009,792 Against.................................................. 25,144,748 Abstentions.............................................. 1,139,795
EXECUTIVE OFFICERS AND DIRECTORS The table below sets forth, as to each executive officer and director of the Company, such person's name, positions with the Company and age. Each executive officer and director of the Company holds office until a successor is elected, or until the earliest of death, resignation or removal. Each executive officer is elected or appointed by the Board of Directors. The information below is given as of March 18, 1998.
NAME POSITION AGE ---- -------- --- David R. Banks(1)............................ Chairman of the Board, Chief Executive Officer and Director 61 Boyd W. Hendrickson(1)....................... President, Chief Operating Officer and Director 53 William A. Mathies........................... Executive Vice President and President -- Beverly Healthcare 38 T. Jerald Moore.............................. Executive Vice President and President -- Beverly Specialty Hospitals 57 Robert W. Pommerville........................ Executive Vice President, General Counsel and Secretary 57 Bobby W. Stephens............................ Executive Vice President -- Asset Management 53 Scott M. Tabakin............................. Executive Vice President and Chief Financial Officer 39 Mark D. Wortley.............................. Executive Vice President and President -- Beverly Care Alliance 42 Pamela H. Daniels............................ Vice President, Controller and Chief Accounting Officer 34 Beryl F. Anthony, Jr.(1)(3)(5)............... Director 60 Carolyne K. Davis, R.N., Ph.D.(1)(4)......... Director 66 James R. Greene(2)(3)(4)..................... Director 76 Edith E. Holiday(2)(4)(5).................... Director 46 Jon E. M. Jacoby(1)(2)....................... Director 59 Risa J. Lavizzo-Mourey, M.D.(3)(4)........... Director 43 Marilyn R. Seymann(2)(4)(5).................. Director 55
- --------------- (1) Member of the Executive Committee. (2) Member of the Audit Committee. (3) Member of the Compensation Committee. (4) Member of the Quality Management Committee. (5) Member of the Nominating Committee. Mr. Banks has been a director of the Company since 1979 and has served as Chief Executive Officer since May 1989 and Chairman of the Board since March 1990. Mr. Banks was President of the Company from 1979 to September 1995. Mr. Banks is a director of Nationwide Health Properties, Inc., Ralston Purina Company, Wellpoint Health Networks, Inc., and trustee for Occidental College. Mr. Banks also serves as a director of PharMerica, Inc., a major supplier of institutional pharmacy services to the Company. Mr. Hendrickson joined the Company 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 Beverly Healthcare in January 1995 and President, Chief Operating Officer and a director of the Company in September 1995. He is a director of PharMerica, Inc. 10 12 Mr. Mathies joined the Company in 1981 as an Administrator in training. He was an Administrator until 1986 at which time he became a Regional Manager. In 1988, Mr. Mathies was elected Vice President of Operations for the California region and was elected Executive Vice President of the Company and President of the corporations within Beverly Healthcare in September 1995. Mr. Moore joined the Company as Executive Vice President in December 1992 and was elected President of the corporations within Beverly Specialty Hospitals 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 the Company in 1970 and left in 1976. He rejoined the Company 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. Mr. Stephens joined the Company as a staff accountant in 1969. He was elected Assistant Vice President in 1978, Vice President of the Company and President of the Company's Central Division in 1980, and Executive Vice President in February 1990. Mr. Stephens is a director of City National Bank in Fort Smith, Arkansas, Beverly Japan Corporation, and Harbortown Properties, Inc. Mr. Tabakin joined the Company in October 1992 as Vice President, Controller and Chief Accounting Officer. He was elected Senior Vice President in May 1995, Acting Chief Financial Officer in September 1995 and Executive Vice President and Chief Financial Officer in October 1996. From 1980 to 1992, Mr. Tabakin was with Ernst & Young LLP. Mr. Wortley joined the Company as Senior Vice President and President of the corporations within Beverly Care Alliance in September 1994 and was elected Executive Vice President in February 1996. From 1988 to 1994, Mr. Wortley was an officer of Therapy Management Innovations. Ms. Daniels joined the Company in May 1988 as Audit Coordinator. She was promoted to Financial Reporting Senior Manager in 1991 and Director of Financial Reporting in 1992. She was elected Vice President, Controller and Chief Accounting Officer in October 1996. 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 the Company since January 1993. Dr. Davis is currently a part-time scholar in residence at the Sloan Health Management Program at Cornell University, Ithaca, New York. She served as Administrator of the Health Care Financing Administration of the U.S. Department of Health and Human Services from 1981 to 1985. She was a director of the Company from 1985 to 1989 and served as consultant and advisor to the Company's Board of Directors from 1989 to 1997. She was a national and international health care advisor to Ernst & Young LLP from 1985 to 1997. She is a member of the Institute of Medicine and the National Academy of Science, a trustee for the University of Pennsylvania Medical Center, a member of the board of directors for Georgetown University, a director of Beckman Instruments, Inc., Merck & Co., Inc., The Prudential Insurance Company of North America, Pharmaceutical Marketing Services, Inc. and MiniMed, Inc. She has been a director of the Company since December 1997. Mr. Greene's principal occupation has been that of a director and consultant to various U.S. and international businesses since 1986. He is a director of Buck Engineering Company and Bank Leumi. He has been a director of the Company since January 1991. Ms. Holiday is an attorney. She served as White House Liaison for the Cabinet and all federal agencies during the Bush administration. Prior to that, Ms. Holiday served as General Counsel of the U.S. Treasury Department, as well as its Assistant Secretary of Treasury for Public Affairs and Public Liaison. She is a director of Amerada Hess Corporation, Hercules Incorporated 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 the Company since March 1995. 11 13 Mr. Jacoby is Executive Vice President, Chief Financial Officer and a director of Stephens Group, Inc. Mr. Jacoby has held the indicated positions with Stephens Group, Inc. since 1986, and prior to that time, served as Manager of the Corporate Finance Department and Assistant to the President of Stephens Inc. Mr. Jacoby is a director of Power-One, Inc. and Delta and Pine Land Company, Inc. He has been a director of the Company since February 1987. Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the Division of Geriatric Medicine, Associate Executive Vice President for health policy, and Professor of Medicine at the University of Pennsylvania. 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 Managed Care Solutions, Inc. and Kapson Senior Quarters Corp. She has been a director of the Company since March 1995. Ms. Seymann is President and Chief Executive Officer of M One, Inc., a management and information systems consulting firm specializing in the financial services industry. 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 is a director of Claremont Technology Group, Inc. She has been a director of the Company since March 1995. During 1997, there were eight meetings of the Board of Directors. Each director attended 75% or more of the meetings of the Board and committees on which he or she served. In 1997, directors, other than Mr. Banks and Mr. Hendrickson, received a retainer fee of $25,000 for serving on the Board and an additional fee of $1,000 for each Board or committee meeting attended. The chairperson of each committee received an additional $1,000 for each committee meeting attended. Mr. Banks, the Company's current Chairman of the Board and Chief Executive Officer, and Mr. Hendrickson, the Company's current President and Chief Operating Officer, received no additional cash compensation for serving on the Board or its committees. During 1997, the Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan (the "Non-Employee Director Deferred Compensation Plan") was approved. Such plan provides each nonemployee director the opportunity to receive awards equivalent to shares of Common Stock ("deferred share units") and to defer receipt of compensation for services rendered to the Company. There are three types of contributions available under the plan. First, nonemployee directors can defer all or part of retainer and meeting fees to a pre-tax deferred compensation account with two investment options. The first investment option is a cash account which is credited with interest, and the second investment option is a deferred share unit account, with each unit having a value equivalent to one share of Common Stock. The second type of contribution is a Company matching contribution whereby the Company matches 25% of the amount of fees deferred, to the extent the deferral is in the deferred share unit account. Third, as a replacement for the prior benefits under the retirement plan for outside directors, each nonemployee director receives a grant of 500 deferred share units each year which is automatically credited to the deferred share unit account. Distributions under the plan will commence upon retirement, termination, death or disability and will be made in shares of Common Stock unless the Board of Directors approves payment in cash. During 1997, the New Beverly Non-Employee Directors Stock Option Plan (the "Non-Employee Directors Stock Option Plan") was approved. Such plan became effective December 3, 1997 and will remain in effect until December 31, 2007, subject to earlier termination by the Board of Directors. Such plan replaced the Nonemployee Directors' Plan entered into in 1994. There are 300,000 shares of the Company's $.10 par value common stock ("Common Stock") authorized for issuance, subject to certain adjustments, under the Non-Employee Directors Stock Option Plan. The Non-Employee Directors Stock Option Plan was amended by the Board of Directors on December 11, 1997 to provide that 3,375 stock options be granted to each nonemployee director on June 1 of each year until the plan is terminated, subject to the availability of shares. Such grants have been made since 1994 to each of the nonemployee directors. Such stock options are granted at a purchase price equal to fair market value on the date of grant, become exercisable one year after date of grant and expire ten years after date of grant. 12 14 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed on the New York and Pacific Stock Exchanges. The table below sets forth, for the periods indicated, the range of high and low sales prices of the Common Stock as reported on the New York Stock Exchange composite tape.
PRICES ----------- HIGH LOW ---- --- 1996 First Quarter............................................. $12 3/8 $10 1/8 Second Quarter............................................ 12 5/8 11 Third Quarter............................................. 12 1/8 9 1/4 Fourth Quarter............................................ 13 3/4 10 5/8 1997 First Quarter............................................. $16 1/8 $12 1/4 Second Quarter............................................ 16 7/8 13 1/8 Third Quarter............................................. 17 1/2 14 9/16 Fourth Quarter............................................ 17 1/2 12 1/8(1) 1998 First Quarter (through March 18).......................... $15 9/16 $12 5/16
- --------------- (1) After the effect of the Reorganization on December 3, 1997 (as discussed herein). The Company is subject to certain restrictions under its long-term debt agreements related to the payment of cash dividends on its Common Stock. During 1997 and 1996, no cash dividends were paid on the Company's Common Stock and no future dividends are currently planned. At March 18, 1998, there were 5,824 record holders of the Common Stock. EMPLOYEE STOCK PURCHASE PLAN The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and restated) enables all full-time employees having completed one year of continuous service to purchase shares of Common Stock at the current market price through payroll deductions. The Company makes contributions in the amount of 30% of the participant's contribution. Each participant specifies the amount to be withheld from earnings per two-week pay period, subject to certain limitations. The total charge to the Company's statement of operations for the year ended December 31, 1997 related to this plan was approximately $2,449,000. At December 31, 1997, there were approximately 4,700 participants in the plan. Merrill Lynch & Co., Merrill Lynch World Headquarters, North Tower, World Financial Center, New York, New York 10281, was appointed broker to open and maintain an account in each participant's name and to purchase shares of Common Stock on the New York Stock Exchange for each participant. 13 15 ITEM 6. SELECTED FINANCIAL DATA. The following table of selected financial data should be read in conjunction with the Company's consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------- 1997(1) 1996 1995 1994 1993 ----------- ----------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net operating revenues............................... $ 3,217,099 $ 3,267,189 $3,228,553 $2,969,239 $2,884,451 Interest income...................................... 13,201 13,839 14,228 14,578 15,269 ----------- ----------- ---------- ---------- ---------- Total revenues............................... 3,230,300 3,281,028 3,242,781 2,983,817 2,899,720 Costs and expenses: Operating and administrative: Wages and related................................ 1,772,429 1,819,500 1,736,151 1,600,580 1,593,410 Other............................................ 1,115,592 1,139,442 1,224,681 1,114,916 1,069,536 Interest........................................... 82,713 91,111 84,245 64,792 66,196 Depreciation and amortization...................... 107,060 105,468 103,581 88,734 82,938 Transaction costs.................................. 44,000 -- -- -- -- Impairment of long-lived assets: Adoption of SFAS No. 121......................... -- -- 68,130 -- -- Development and other costs...................... -- -- 32,147 -- -- ----------- ----------- ---------- ---------- ---------- Total costs and expenses..................... 3,121,794 3,155,521 3,248,935 2,869,022 2,812,080 ----------- ----------- ---------- ---------- ---------- Income (loss) before provision for income taxes and extraordinary charge............................... 108,506 125,507 (6,154) 114,795 87,640 Provision for income taxes........................... 49,913 73,481 1,969 37,882 29,684 ----------- ----------- ---------- ---------- ---------- Income (loss) before extraordinary charge............ 58,593 52,026 (8,123) 76,913 57,956 Extraordinary charge, net of income tax benefit of $1,099 in 1996, $1,188 in 1994 and $1,155 in 1993............................................... -- (1,726) -- (2,412) (2,345) ----------- ----------- ---------- ---------- ---------- Net income (loss).................................... $ 58,593 $ 50,300 $ (8,123) $ 74,501 $ 55,611 =========== =========== ========== ========== ========== Net income (loss) applicable to common shares........ $ 58,593 $ 50,300 $ (14,998) $ 66,251 $ 31,173 =========== =========== ========== ========== ========== Income (loss) per share of common stock(2): Basic: Before redemption premium on preferred stock and extraordinary charge........................... $ .57 $ .53 $ (.16) $ .80 $ .67 Redemption premium on preferred stock............ -- -- -- -- (.25) ----------- ----------- ---------- ---------- ---------- Before extraordinary charge...................... .57 .53 (.16) .80 .42 Extraordinary charge............................. -- (.02) -- (.02) (.03) ----------- ----------- ---------- ---------- ---------- Net income (loss)................................ $ .57 $ .51 $ (.16) $ .78 $ .39 =========== =========== ========== ========== ========== Shares used to compute per share amounts......... 102,060,000 98,574,000 92,233,000 85,430,000 79,735,000 Diluted: Before redemption premium on preferred stock and extraordinary charge........................... $ .57 $ .50 $ (.16) $ .78 $ .65 Redemption premium on preferred stock............ -- -- -- -- (.23) ----------- ----------- ---------- ---------- ---------- Before extraordinary charge...................... .57 .50 (.16) .78 .42 Extraordinary charge............................. -- (.01) -- (.02) (.03) ----------- ----------- ---------- ---------- ---------- Net income (loss)................................ $ .57 $ .49 $ (.16) $ .76 $ .39 =========== =========== ========== ========== ========== Shares used to compute per share amounts........... 103,422,000 110,726,000 92,233,000 98,016,000 85,243,000 CONSOLIDATED BALANCE SHEET DATA: Total assets......................................... $ 2,073,469 $ 2,525,082 $2,506,461 $2,322,578 $2,000,804 Current portion of long-term obligations............. $ 31,551 $ 38,826 $ 84,639 $ 60,199 $ 43,125 Long-term obligations, excluding current portion..... $ 686,941 $ 1,106,256 $1,066,909 $ 918,018 $ 706,917 Stockholders' equity................................. $ 862,505 $ 861,095 $ 820,333 $ 827,244 $ 742,862 OTHER DATA: Patient days......................................... 21,676,000 23,670,000 25,297,000 26,766,000 29,041,000 Average occupancy percentage(3)...................... 88.9% 87.4% 88.1% 88.5% 88.5% Number of nursing home beds.......................... 63,552 71,204 75,669 78,058 85,001
- --------------- (1) Amounts for 1997 include the operations of PCA up until the effective date of the Merger (as discussed herein). (2) The earnings per share amounts prior to 1997 were restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." See "Part II, Item 8 -- Note 1 of Notes to Consolidated Financial Statements." (3) Average occupancy percentage for 1997 was based on operational beds, and for all periods prior to 1997, such percentage was based on licensed beds. Average occupancy percentage for 1997 based on licensed beds was 87.1%. 14 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Beverly Enterprises, Inc. (formerly known as New Beverly Holdings, Inc.), which was incorporated on April 15, 1997 ("New Beverly"), is the successor to the former Beverly Enterprises, Inc., which was incorporated on February 27, 1987 ("Old Beverly"), as the result of a tax-free reorganization completed December 3, 1997 (the "Reorganization") in order to facilitate the Merger of PCA with Capstone (as discussed below). The Reorganization was accomplished in two steps. Old Beverly transferred or contributed to New Beverly all of its assets and liabilities, except for its institutional pharmacy business conducted by its wholly-owned subsidiary, Pharmacy Corporation of America and its subsidiaries ("PCA"), (the "Remaining Healthcare Business"), in exchange for all of the issued and outstanding common stock of New Beverly. Old Beverly immediately distributed the common stock of New Beverly to its stockholders on a one-for-one basis (the "Distribution"). As a result of the Distribution, New Beverly became an independent, publicly-traded company engaged in the Remaining Healthcare Business and owned by the stockholders of Old Beverly. Following the Distribution, Old Beverly, whose only assets consisted of the stock of PCA and its subsidiaries, merged with and into Capstone Pharmacy Services, Inc. ("Capstone"), with Capstone being the surviving corporation (the "Merger"). Immediately after the Merger, Capstone changed its name to PharMerica, Inc. and New Beverly changed its name to Beverly Enterprises, Inc. References to Beverly Enterprises, Inc., or the Company, prior to December 3, 1997 will mean the predecessor corporation, Old Beverly. References to Beverly Enterprises, Inc., or the Company, on or after December 3, 1997 will mean New Beverly, and New Beverly will be treated for accounting purposes as the continuing reporting entity with respect to the historical and future operations of the Company. See "Part II, Item 8 -- Note 2 of Notes to Consolidated Financial Statements." Healthcare system reform and concerns over rising Medicare and Medicaid costs continue to be high priorities for both federal and state governments. In August 1997, the President signed into law the Balanced Budget Act of 1997 (the "1997 Act") in which Congress included numerous program changes directed at balancing the federal budget. The legislation changes Medicare and Medicaid policy in a number of ways, including: (i) development of new Medicare and Medicaid health plan options; (ii) creation of additional safeguards against healthcare fraud and abuse; (iii) repeal of the Medicaid "Boren Amendment" payment standard; (iv) a 10% reduction in Part B therapy costs for the period from January 1, 1998 through July 1, 1998, at which time reimbursement for these services will be based on HCFA established fee schedules; (v) the phase in of a Medicare prospective payment system ("PPS") for skilled nursing facilities effective July 1, 1998 (which will be in effect for the Company in January 1999); and (vi) establishment of limitations on Part B therapy charges per beneficiary per year. The legislation includes new opportunities for providers to focus further on patient outcomes by creating alternative patient delivery structures. At this time, the Company has not been able to fully assess the impact of these changes, due in part to uncertainty as to the details of implementation and interpretation of the legislation by the Health Care Financing Administration of the Department of Health and Human Services ("HCFA") and, therefore, no assurances can be made as to the ultimate impact of this legislation or future healthcare reform legislation on the Company's consolidated financial position, results of operations, or cash flows. However, future federal budget legislation and regulatory changes may negatively impact the Company. During the first quarter of 1998, 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 and respiratory therapy services. The Company does not expect the regulations to have a material adverse effect on its consolidated results of operations or cash flows based on the following: (i) the Company currently provides the majority of its therapy services through on-staff therapists; and (ii) the salary equivalency guidelines cease to apply to skilled nursing facilities once the 1997 Act provisions for PPS become effective. 15 17 The federal government passed legislation in 1996 to increase the minimum wage in two phases. The initial increase took effect October 1, 1996, with the final increase effective September 1, 1997. This new legislation did not result in a material increase in the Company's wage rates in 1997 or 1996, because a substantial portion of the Company's associates earn in excess of the new minimum wage levels. The effect of the new minimum wage on the Company's future operations is not expected to be material as the Company believes that a significant portion of such increase will be reimbursed through Medicare and Medicaid rate increases. The Company's future operating performance will continue to be affected by the issues facing the long-term healthcare industry as a whole, including the maintenance of occupancy, its ability to continue to expand higher margin businesses, the availability of nursing, therapy and other personnel, the adequacy of funding of governmental reimbursement programs, the 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. The Company's ability to control costs, including its wages and related expenses which continue to rise and represent the largest component of the Company's operating and administrative expenses, will also significantly impact its future operating results. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has determined that it will be required to modify or replace significant portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The full effect of the Year 2000 Issue, including the total costs to complete such project, is not readily determinable at this time. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company is in the process of initiating formal communications with all of its significant suppliers and large customers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and will not have an adverse effect on the Company's systems or ongoing operations. OPERATING RESULTS 1997 COMPARED TO 1996 Operating results for 1997 include the operations of PCA up until the effective date of the Merger (as discussed herein). Net income was $58,593,000 for the year ended December 31, 1997, as compared to net income of $50,300,000 for the same period in 1996. Net income for 1997 included a pre-tax charge of $44,000,000 relating to the Reorganization on December 3, 1997 (as discussed herein). 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 refinanced debt. The Company had an annual effective tax rate of 46% for the year ended December 31, 1997, compared to an annual effective tax rate of 59% for the same period in 1996. The annual effective tax rate in 1997 was different than the federal statutory rate primarily due to the impact of nondeductible transaction costs associated with the Reorganization. In addition, the annual effective tax rate in 1996 was different than the 16 18 federal statutory rate primarily due to the impact of nondeductible goodwill associated with the sale of the Company's MedView Services unit ("MedView"). Net operating revenues and operating and administrative costs decreased approximately $50,100,000 and $70,900,000, respectively, for the year ended December 31, 1997, as compared to the same period in 1996. These decreases consist of the following: decreases in net operating revenues and operating and administrative costs of approximately $246,500,000 and $215,900,000, respectively, due to the disposition of, or lease terminations on 68 nursing facilities in 1997 and 83 nursing facilities and MedView in 1996; partially offset by increases in net operating revenues and operating and administrative costs of approximately $100,300,000 and $77,600,000, respectively, for facilities which the Company operated during each of the years ended December 31, 1997 and 1996 ("same facility operations"); increases in net operating revenues and operating and administrative costs of approximately $57,800,000 and $51,500,000, respectively, related to the acquisitions of eight nursing facilities in 1996, as well as certain outpatient therapy and hospice businesses acquired in 1997 and 1996; and increases in net operating revenues and operating and administrative costs of approximately $38,300,000 and $15,900,000, respectively, due to the operations of PCA. The increase in net operating revenues for same facility operations for the year ended December 31, 1997, as compared to the same period in 1996, was due to the following: approximately $103,200,000 due to increases in room and board rates and approximately $11,800,000 due primarily to increases in ancillary revenues and various other items. These increases in net operating revenues were partially offset by approximately $9,300,000 due to a decrease in same facility occupancy to 89.8% for the year ended December 31, 1997, as compared to 90.3% for the same period in 1996 and approximately $5,400,000 due to one less calendar day for the year ended December 31, 1997, as compared to the same period in 1996. The increase in operating and administrative costs for same facility operations for the year ended December 31, 1997, as compared to the same period in 1996, was due to the following: approximately $55,600,000 due to increased wages and related expenses 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 the Company's nursing facilities to cover increased patient acuity; approximately $18,200,000 due primarily to increases in purchased ancillary products; approximately $14,300,000 due to increases in nursing supplies and other variable costs; and approximately $10,200,000 due to various other items. These increases in operating and administrative costs were partially offset by approximately $20,700,000 due to a decrease in contracted therapy expenses as a result of hiring therapists on staff as opposed to contracting for their services. Interest expense decreased approximately $8,400,000 as compared to the same period in 1996 primarily due to repayments of the term loan and revolver borrowings under the Company's 1994 Credit Agreement, the term loan under the Company's 1992 Credit Facility and the Nippon Term Loan during late 1996 with the proceeds from a new credit facility, as well as the redemption of the Company's 5 1/2% Debentures in the third quarter of 1997 and the debt repayments made during the fourth quarter of 1997 with the proceeds from the Merger (as discussed below). The increase in depreciation and amortization expense of approximately $1,600,000 as compared to the same period in 1996, was affected by the following: approximately $9,900,000 increase primarily due to capital additions and improvements, as well as acquisitions; partially offset by a decrease of approximately $8,300,000 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," ("SFAS No. 128"). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") which is required to be adopted 17 19 in financial statements for periods beginning after December 15, 1997. SFAS No. 130 requires the presentation of comprehensive income in a company's financial statements. Comprehensive income represents all changes in the equity of a company during the reporting period, including net income and charges directly to retained earnings which are excluded from net income. The Company will adopt SFAS No. 130 in its consolidated financial statements during the first quarter of 1998 and does not expect there to be a material effect on its consolidated financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS No. 131") which is required to be adopted in financial statements for periods beginning after December 15, 1997. SFAS No. 131 provides revised disclosure guidelines for segments of a company based on a management approach to defining operating segments. The Company will provide reporting disclosures as required by SFAS No. 131 for the year ending December 31, 1998. The Company has not completed its review of SFAS No. 131, but does not anticipate that there will be a significant effect on the Company's reporting disclosures. 1996 COMPARED TO 1995 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. 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 refinanced debt. Net loss for 1995 included a pretax 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. 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, 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 its 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 amounts were unrecoverable. 18 20 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% for the same period in 1995. 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 sale of MedView. In addition, 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. 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. 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 consists of the following: increases of approximately $62,300,000 for facilities which the Company 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. 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 consists 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. 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 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 the Company'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. 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 (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 the Company'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 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. 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 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 19 21 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. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had approximately $105,200,000 in cash and cash equivalents and net working capital of approximately $282,300,000. The Company anticipates that approximately $36,100,000 of its existing cash at December 31, 1997, 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. The Company had approximately $324,300,000 of unused commitments under its Revolver/Letter of Credit Facility as of December 31, 1997. Net cash provided by operating activities for the year ended December 31, 1997 was approximately $144,200,000. Net cash provided by investing activities and net cash used for financing activities were approximately $230,900,000 and $339,600,000, respectively, for the year ended December 31, 1997. The Company primarily used cash generated from operations to fund capital expenditures totaling approximately $133,100,000. The Company received net cash proceeds of approximately $421,400,000 from the dispositions of facilities and other assets (which includes approximately $281,000,000 of cash from the Merger of PCA with Capstone), approximately $32,300,000 from collections on notes receivable and the Company's REMIC investment and approximately $31,100,000 from the issuance of long-term obligations. Such net cash proceeds were used to fund acquisitions of approximately $61,600,000, to repay approximately $166,400,000 of long-term obligations, to repurchase shares of Common Stock, and to repay Revolver borrowings. As a result of the Merger of PCA with Capstone, the Company received approximately $281,000,000 of cash as partial repayment for PCA's intercompany debt, with a charge to the Company's retained earnings of approximately $45,100,000 for the remaining intercompany balance which was not repaid. The Company used such cash to repay Revolver borrowings, to redeem 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 Reorganization, each of the Company's stockholders of record at the close of business on December 3, 1997 received .4551 shares of PharMerica, Inc.'s common stock for each share of the Company's Common Stock held. The conversion ratio was based on a total of 109,873,230 outstanding shares of the Company's Common Stock at the close of business on December 3, 1997 divided into the 50,000,000 shares issued by PharMerica, Inc. In connection with the Reorganization, the Company incurred $44,000,000 of transaction costs related to the restructuring, repayment or renegotiating of substantially all of the Company's outstanding debt instruments, as well as the renegotiating or making of certain payments, primarily in the form of accelerated vesting of stock-based awards, under various employment agreements with officers of the Company. Such amounts were funded with a portion of the $281,000,000 proceeds received as partial repayment of PCA's intercompany debt, as discussed above. Included in the $44,000,000 of transaction costs were approximately $18,000,000 of non-cash expenses related to various long-term incentive agreements. 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. A total of $149,162,550 of the $150,000,000 aggregate principal amount outstanding was converted to 11,189,924 shares of the Company's Common Stock, increasing the Company's outstanding shares. The remaining principal amount of $837,450 was redeemed at 103.30% of the principal amount. Had the conversion been completed prior to January 1, 1997, the pro forma diluted net income per share for the year ended December 31, 1997 would have been $.56. During 1997, the Company entered into promissory notes totaling approximately $25,800,000 in conjunction with its purchase of certain nursing facilities. Such debt instruments bear interest at rates ranging from 7.78% to 8.63%, 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. 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 20 22 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, 1997, approximately $9,600,000 of aggregate principal amount under the GE Capital Facility remained unissued. 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 1997, the Company repurchased approximately 4,900,000 shares of its Common Stock at a cost of approximately $62,700,000. The repurchases were financed primarily through proceeds from dispositions and borrowings under the Company's Revolver/Letter of Credit Facility. In connection with the Reorganization, the Company cancelled and retired 6,274,108 shares of Common Stock, with a book value of approximately $70,300,000, held in treasury on the effective date of the Reorganization. The Company 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 $31,600,000, to make normal recurring capital additions and improvements of approximately $102,000,000, 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 December 31, 1998. As of December 31, 1997, the Company had total indebtedness of approximately $718,500,000 and total stockholders' equity of approximately $862,500,000. The ability of the Company 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 the Company's control, such as federal and state healthcare reform. In addition, healthcare service providers, such as the Company, 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, the Company is frequently contacted by, and otherwise engages in discussions with, other healthcare companies and financial advisors regarding possible strategic alliances, joint ventures, business combinations and other financial alternatives. The terms of substantially all of the Company's debt instruments require the Company to repay or refinance indebtedness under such debt instruments in the event of a change of control. There can be no assurance that the Company will have the financial resources to repay such indebtedness upon a change of control. See "-- General." 21 23 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... 23 Consolidated Balance Sheets................................. 24 Consolidated Statements of Operations....................... 25 Consolidated Statements of Stockholders' Equity............. 26 Consolidated Statements of Cash Flows....................... 27 Notes to Consolidated Financial Statements.................. 28 Supplementary Data (Unaudited) -- Quarterly Financial Data...................................................... 47
22 24 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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 6, 1998, except for Note 5, paragraph 6, as to which the date is March 4, 1998 23 25 BEVERLY ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
ASSETS DECEMBER 31, ------------------------ 1997 1996 ---------- ---------- Current assets: Cash and cash equivalents................................. $ 105,230 $ 69,761 Accounts receivable -- patient, less allowance for doubtful accounts: 1997 -- $17,879; 1996 -- $25,618.... 384,833 491,063 Accounts receivable -- nonpatient, less allowance for doubtful accounts: 1997 -- $626; 1996 -- $401............................. 14,400 13,480 Notes receivable.......................................... 4,409 10,746 Operating supplies........................................ 30,439 55,348 Deferred income taxes..................................... 27,304 14,543 Prepaid expenses and other................................ 59,703 42,304 ---------- ---------- Total current assets.............................. 626,318 697,245 Property and equipment, net................................. 1,158,329 1,248,785 Other assets: Notes receivable, less allowance for doubtful notes: 1997 -- $2,917; 1996 -- $4,951......................... 20,564 37,306 Designated and restricted funds........................... 64,233 75,848 Goodwill, net............................................. 99,280 356,197 Other, net................................................ 104,745 109,701 ---------- ---------- Total other assets................................ 288,822 579,052 ---------- ---------- $2,073,469 $2,525,082 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 75,791 $ 99,121 Accrued wages and related liabilities..................... 123,146 131,072 Accrued interest.......................................... 15,108 16,969 Other accrued liabilities................................. 98,421 93,042 Current portion of long-term obligations.................. 31,551 38,826 ---------- ---------- Total current liabilities......................... 344,017 379,030 Long-term obligations....................................... 686,941 1,106,256 Deferred income taxes payable............................... 111,388 83,610 Other liabilities and deferred items........................ 68,618 95,091 Commitments and contingencies Stockholders' equity: Preferred stock, shares authorized: 25,000,000............ -- -- Common stock, shares issued: 1997 -- 109,890,205; 1996 -- 104,432,848.................................... 10,989 10,443 Additional paid-in capital................................ 874,335 774,672 Retained earnings......................................... 27,571 133,957 Treasury stock, at cost: 1997 -- 4,000,000 shares; 1996 -- 5,423,408 shares............................... (50,390) (57,977) ---------- ---------- Total stockholders' equity........................ 862,505 861,095 ---------- ---------- $2,073,469 $2,525,082 ========== ==========
See accompanying notes. 24 26 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Net operating revenues................................. $3,217,099 $3,267,189 $3,228,553 Interest income........................................ 13,201 13,839 14,228 ---------- ---------- ---------- Total revenues............................... 3,230,300 3,281,028 3,242,781 Costs and expenses: Operating and administrative: Wages and related................................. 1,772,429 1,819,500 1,736,151 Other............................................. 1,115,592 1,139,442 1,224,681 Interest............................................. 82,713 91,111 84,245 Depreciation and amortization........................ 107,060 105,468 103,581 Transaction costs.................................... 44,000 -- -- Impairment of long-lived assets: Adoption of SFAS No. 121.......................... -- -- 68,130 Development and other costs....................... -- -- 32,147 ---------- ---------- ---------- Total costs and expenses..................... 3,121,794 3,155,521 3,248,935 ---------- ---------- ---------- Income (loss) before provision for income taxes and extraordinary charge................................. 108,506 125,507 (6,154) Provision for income taxes............................. 49,913 73,481 1,969 ---------- ---------- ---------- Income (loss) before extraordinary charge.............. 58,593 52,026 (8,123) Extraordinary charge, net of income tax benefit of $1,099............................................... -- (1,726) -- ---------- ---------- ---------- Net income (loss)...................................... $ 58,593 $ 50,300 $ (8,123) ========== ========== ========== Net income (loss) applicable to common shares.......... $ 58,593 $ 50,300 $ (14,998) ========== ========== ========== Income (loss) per share of common stock: Basic: Before extraordinary charge....................... $ .57 $ .53 $ (.16) Extraordinary charge.............................. -- (.02) -- ---------- ---------- ---------- Net income (loss)................................. $ .57 $ .51 $ (.16) ========== ========== ========== Shares used to compute per share amounts.......... 102,060 98,574 92,233 ========== ========== ========== Diluted: Before extraordinary charge....................... $ .57 $ .50 $ (.16) Extraordinary charge.............................. -- (.01) -- ---------- ---------- ---------- Net income (loss)................................. $ .57 $ .49 $ (.16) ========== ========== ========== Shares used to compute per share amounts.......... 103,422 110,726 92,233 ========== ========== ==========
See accompanying notes. 25 27 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, 1995....... $ 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 1,451,200 shares 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 Employee stock transactions, net.......................... -- 54 21,314 -- -- 21,368 Purchase of 4,850,700 shares of common stock for treasury.... -- -- -- -- (62,729) (62,729) Cancellation and retirement of 6,274,108 shares of common stock held in treasury....... -- (627) (69,689) -- 70,316 -- Disposition of PCA.............. -- -- -- (121,230) -- (121,230) Forgiveness of PCA intercompany balance...................... -- -- -- (45,081) -- (45,081) Conversion of 5 1/2% Debentures into common stock............ -- 1,119 147,991 -- -- 149,110 Conversion of 7 5/8% Debentures into common stock............ -- -- 47 -- -- 47 Unrealized gains on securities, net of income taxes of $896......................... -- -- -- 1,332 -- 1,332 Net income...................... -- -- -- 58,593 -- 58,593 --------- ------- -------- --------- -------- --------- Balances at December 31, 1997..... $ -- $10,989 $874,335 $ 27,571 $(50,390) $ 862,505 ========= ======= ======== ========= ======== =========
See accompanying notes. 26 28 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss).................................. $ 58,593 $ 50,300 $ (8,123) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization................... 107,060 105,468 103,581 Impairment of long-lived assets................. -- -- 100,277 Provision for reserves on patient, notes and other receivables, net........................ 34,341 28,544 15,889 Amortization of deferred financing costs........ 3,163 3,210 4,379 Transaction costs............................... 44,000 -- -- Extraordinary charge............................ -- 2,825 -- Gains on dispositions of facilities and other assets, net................................... (19,901) (20,951) (2,253) Deferred taxes.................................. 20,247 33,765 (20,394) Net decrease in insurance related accounts...... (25,432) (22,336) (10,531) Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable -- patient................ (46,639) (25,851) (84,420) Operating supplies............................ (3,911) 3,226 1,649 Prepaid expenses and other receivables........ (18,749) 771 (154) Accounts payable and other accrued expenses... 3,377 (53,029) 16,370 Income taxes payable.......................... (7,305) 26,711 (6,194) Other, net.................................... (4,640) 527 (3,867) ----------- ----------- ----------- Total adjustments.......................... 85,611 82,880 114,332 ----------- ----------- ----------- Net cash provided by operating activities............................... 144,204 133,180 106,209 Cash flows from investing activities: Capital expenditures............................... (133,087) (136,442) (161,911) Payments for acquisitions, net of cash acquired.... (61,567) (80,981) (34,184) Proceeds from dispositions of facilities and other assets.......................................... 421,412 121,660 46,892 Collections on notes receivable and REMIC investment...................................... 32,273 12,809 15,594 Other, net......................................... (28,178) (8,547) (10,945) ----------- ----------- ----------- Net cash provided by (used for) investing activities............................... 230,853 (91,501) (144,554) Cash flows from financing activities: Revolver borrowings................................ 1,604,000 1,308,000 1,017,000 Repayments of Revolver borrowings.................. (1,745,000) (1,230,000) (939,000) Proceeds from issuance of long-term obligations.... 31,137 228,862 25,000 Repayments of long-term obligations................ (166,369) (318,447) (68,400) Purchase of common stock for treasury.............. (65,126) (15,445) -- Proceeds from exercise of stock options............ 5,401 3,620 2,146 Deferred financing costs........................... (1,251) (7,560) (2,161) Dividends paid on preferred stock.................. -- (688) (8,250) Proceeds from designated funds, net................ (2,380) 3,437 349 ----------- ----------- ----------- Net cash provided by (used for) financing activities............................... (339,588) (28,221) 26,684 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents........................................ 35,469 13,458 (11,661) Cash and cash equivalents at beginning of year....... 69,761 56,303 67,964 ----------- ----------- ----------- Cash and cash equivalents at end of year............. $ 105,230 $ 69,761 $ 56,303 =========== =========== =========== Supplemental schedule of cash flow information: Cash paid during the year for: Interest (net of amount capitalized)............ $ 81,411 $ 81,193 $ 80,433 Income taxes (net of refunds)................... 36,971 11,906 28,557
See accompanying notes. 27 29 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation References herein to the Company include Beverly Enterprises, Inc. and its wholly-owned subsidiaries. Beverly Enterprises, Inc. (formerly known as New Beverly Holdings, Inc.), which was incorporated on April 15, 1997 ("New Beverly"), is the successor to the former Beverly Enterprises, Inc., which was incorporated on February 27, 1987 ("Old Beverly"), as the result of a tax-free reorganization completed December 3, 1997 (the "Reorganization") in order to facilitate the Merger of PCA with Capstone (as discussed below). The Reorganization was accomplished in two steps. Old Beverly transferred or contributed to New Beverly all of its assets and liabilities, except for its institutional pharmacy business conducted by its wholly-owned subsidiary, Pharmacy Corporation of America and its subsidiaries ("PCA"), (the "Remaining Healthcare Business"), in exchange for all of the issued and outstanding common stock of New Beverly. Old Beverly immediately distributed the common stock of New Beverly to its stockholders on a one-for-one basis (the "Distribution"). As a result of the Distribution, New Beverly became an independent, publicly-traded company engaged in the Remaining Healthcare Business and owned by the stockholders of Old Beverly. Following the Distribution, Old Beverly, whose only assets consisted of the stock of PCA and its subsidiaries, merged with and into Capstone Pharmacy Services, Inc. ("Capstone"), with Capstone being the surviving corporation (the "Merger"). Immediately after the Merger, Capstone changed its name to PharMerica, Inc. and New Beverly changed its name to Beverly Enterprises, Inc. References to Beverly Enterprises, Inc., or the Company, prior to December 3, 1997 will mean the predecessor corporation, Old Beverly. References to Beverly Enterprises, Inc., or the Company, on or after December 3, 1997 will mean New Beverly, and New Beverly will be treated for accounting purposes as the continuing reporting entity with respect to the historical and future operations of the Company. See Note 2 for additional information. The Company provides long-term healthcare in 31 states and the District of Columbia. Its operations include nursing facilities, acute long-term transitional hospitals, rehabilitation therapy services, outpatient therapy clinics, assisted living centers and home health 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. 28 30 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Intangible Assets Goodwill (stated at cost less accumulated amortization of $21,610,000 in 1997 and $38,446,000 in 1996) 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 $17,442,000 in 1997 and $18,716,000 in 1996) 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, 1997, 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 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. 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 its 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. There were no material impairment adjustments recorded during the years ended December 31, 1997 and 1996. 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 29 31 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) wrote off certain business development and other costs where the Company believed the carrying amounts were 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. Had the discount rate been reduced by one-half of a percentage point, the Company would have incurred a pre-tax charge of approximately $1,100,000 for the year ended December 31, 1997. The discounted insurance liabilities are included in the consolidated balance sheet captions as follows (in thousands):
1997 1996 ------- -------- Accrued wages and related liabilities....................... $28,484 $ 32,644 Other accrued liabilities................................... 6,874 8,226 Other liabilities and deferred items........................ 50,366 90,714 ------- -------- $85,724 $131,584 ======= ========
On an undiscounted basis, the total insurance liabilities as of December 31, 1997 and 1996 were $111,200,000 and $170,099,000, respectively. As of December 31, 1997, the Company had deposited approximately $80,800,000 in funds (the "Beverly Indemnity funds") that are restricted for the payment of insured claims. In addition, the Company anticipates that approximately $36,100,000 of its existing cash at December 31, 1997, 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. During 1997, the Company transferred a portion of its liabilities for workers' compensation and general liability related to certain of its sold nursing facilities to a third-party indemnity insurance company. In addition, the Company purchased traditional indemnity insurance coverage for its 1997 workers' compensation and auto liabilities. Since the Company does not need to set aside funds nor estimate liabilities for future payments of these claims, these transactions resulted in a significant reduction in the Company's insurance liabilities during the year ended December 31, 1997, as compared to the same period in 1996. 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. 30 32 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Revenues The Company's revenues are derived primarily from providing long-term healthcare services. Approximately 74%, 75% and 77% of the Company's net operating revenues for 1997, 1996 and 1995, respectively, were derived from funds under federal and state medical assistance programs, and approximately 68% and 73% of the Company's net patient accounts receivable at December 31, 1997 and 1996, 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 $8,900,000, $10,900,000 and $19,700,000 of net operating revenues for the years ended December 31, 1997, 1996 and 1995, 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. Income Taxes The Company follows the liability method in accounting for deferred income taxes. The liability method provides that deferred tax assets and liabilities are recorded at currently enacted tax rates based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Earnings per Share In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share," ("SFAS No. 128"). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements. 31 33 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31 (in thousands):
1997 1996 1995 -------- -------- -------- NUMERATOR: Income (loss) from continuing operations............. $ 58,593 $ 52,026 $ (8,123) Preferred stock dividends............................ -- -- (6,875) -------- -------- -------- Numerator for basic earnings per share -- income (loss) available to common stockholders........... 58,593 52,026 (14,998) Effect of dilutive securities: 5 1/2% Debentures................................. -- 3,420 -- -------- -------- -------- Numerator for diluted earnings per share -- income (loss) available to common stockholders after assumed conversions............................... $ 58,593 $ 55,446 $(14,998) ======== ======== ======== DENOMINATOR: Denominator for basic earnings per share -- weighted average shares.................................... 102,060 98,574 92,233 Effect of dilutive securities: Employee stock options............................ 1,236 899 -- Performance shares................................ 126 -- -- 5 1/2% Debentures................................. -- 11,253 -- -------- -------- -------- Dilutive potential common shares..................... 1,362 12,152 -- -------- -------- -------- Denominator for diluted earnings per share --adjusted weighted average shares and assumed conversions... 103,422 110,726 92,233 ======== ======== ======== Basic earnings per share............................... $ 0.57 $ 0.53 $ (0.16) ======== ======== ======== Diluted earnings per share............................. $ 0.57 $ 0.50 $ (0.16) ======== ======== ========
New Accounting Standards In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130") which is required to be adopted in financial statements for periods beginning after December 15, 1997. SFAS No. 130 requires the presentation of comprehensive income in a company's financial statements. Comprehensive income represents all changes in the equity of a company during the reporting period, including net income and charges directly to retained earnings which are excluded from net income. The Company will adopt SFAS No. 130 in its consolidated financial statements during the first quarter of 1998 and does not expect there to be a material effect on its consolidated financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS No. 131") which is required to be adopted in financial statements for periods beginning after December 15, 1997. SFAS No. 131 provides revised disclosure guidelines for segments of a company based on a management approach to defining operating segments. The Company will provide reporting disclosures as required by SFAS No. 131 for the year ending December 31, 1998. The Company has not completed its 32 34 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) review of SFAS No. 131, but does not anticipate that there will be a significant effect on the Company's reporting disclosures. Other Certain prior year amounts have been reclassified to conform with the 1997 presentation. 2. ACQUISITIONS AND DISPOSITIONS During the year ended December 31, 1997, the Company purchased six previously leased nursing facilities (758 beds) and certain other assets including, among other things, 14 institutional pharmacies and 40 outpatient therapy clinics, for approximately $60,800,000 cash and approximately $9,500,000 closing and other costs. Also during such period, the Company sold or terminated the leases on 68 nursing facilities (8,314 beds) and certain other assets for cash proceeds of approximately $146,800,000. The Company 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 Company recognized net pre-tax gains of approximately $19,900,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. On December 3, 1997, the Company completed its previously announced Merger of PCA with Capstone. As a result of the Merger, the Company received approximately $281,000,000 of cash as partial repayment for PCA's intercompany debt, with a charge to the Company's retained earnings of approximately $45,100,000 for the remaining intercompany balance which was not repaid. The Company used such cash to repay Revolver borrowings, to redeem 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 Reorganization, each of the Company's stockholders of record at the close of business on December 3, 1997 received .4551 shares of PharMerica, Inc.'s common stock for each share of the Company's Common Stock held. The conversion ratio was based on a total of 109,873,230 outstanding shares of the Company's Common Stock at the close of business on December 3, 1997 divided into the 50,000,000 shares issued by PharMerica, Inc. In connection with the Reorganization, the Company incurred $44,000,000 of transaction costs related to the restructuring, repayment or renegotiating of substantially all of the Company's outstanding debt instruments, as well as the renegotiating or making of certain payments, primarily in the form of accelerated vesting of stock-based awards, under various employment agreements with officers of the Company. Such amounts were funded with a portion of the $281,000,000 proceeds received as partial repayment of PCA's intercompany debt, as discussed above. Included in the $44,000,000 of transaction costs were approximately $18,000,000 of non-cash expenses related to various long-term incentive agreements. At the date of the Merger, PCA had total assets of approximately $489,200,000, total liabilities of approximately $368,000,000 and total stockholder's equity of approximately $121,200,000. Total net operating revenues for PCA for the years ended December 31, 1997, 1996 and 1995 were approximately $564,200,000, $516,400,000 and $451,700,000, respectively. Total net operating revenues for the year ended December 31, 1997 represent the operations of PCA prior to the Merger. 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 33 35 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 2. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED) 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 did 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 Company recognized net pre-tax gains of approximately $6,300,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. In 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 Company recognized net pre-tax gains of approximately $14,700,000 as a result of this disposition. The operations of MedView were immaterial to the Company's consolidated 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 did 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 facilities (150 beds) and four assisted living centers (510 units). The Company recognized net pre-tax gains of approximately $2,300,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. In June 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 consolidated financial position or results of operations. 34 36 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 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 ----------------------- ----------------------- ----------------- 1997 1996 1997 1996 1997 1996 ---------- ---------- ---------- ---------- ------- ------- Land, buildings and improvements................... $1,437,334 $1,476,988 $1,395,859 $1,424,517 $41,475 $52,471 Furniture and equipment.......... 329,222 375,479 324,309 365,678 4,913 9,801 Construction in progress......... 30,607 39,403 30,607 39,403 -- -- ---------- ---------- ---------- ---------- ------- ------- 1,797,163 1,891,870 1,750,775 1,829,598 46,388 62,272 Less accumulated depreciation and amortization................... 638,834 643,085 606,541 601,330 32,293 41,755 ---------- ---------- ---------- ---------- ------- ------- $1,158,329 $1,248,785 $1,144,234 $1,228,268 $14,095 $20,517 ========== ========== ========== ========== ======= =======
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, 1997, 1996 and 1995 was $87,286,000, $85,221,000 and $82,752,000, respectively. 35 37 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 4. LONG-TERM OBLIGATIONS Long-term obligations consist of the following at December 31 (dollars in thousands, except per share amounts):
1997 1996 ---------- ---------- Notes and mortgages, less imputed interest: 1997 -- $203, 1996 -- $257; due in installments through the year 2031, at effective interest rates of 5.93% to 12.50%, a portion of which is secured by property, equipment and other assets with a net book value of $229,062 at December 31, 1997...................................................... $ 170,738 $ 178,983 Industrial development revenue bonds, less imputed interest: 1997 -- $19, 1996 -- $48; due in installments through the year 2013, at effective interest rates of 5.08% to 10.52%, a portion of which is secured by property and other assets with a net book value of $227,917 at December 31, 1997.... 188,711 203,606 9% Senior Notes due February 15, 2006, unsecured............ 180,000 180,000 1996 Credit Agreement due December 31, 2001................. 15,000 156,000 Term Loan under the GE Capital Facility..................... 10,505 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 $16,342 at December 31, 1997...................................................... 18,750 19,362 8 5/8% First Mortgage Bonds due October 1, 2008, secured by first mortgages on ten nursing facilities with an aggregate net book value of $27,673 at December 31, 1997...................................................... 28,195 29,062 8 3/4% Notes due December 31, 2003, unsecured (repaid in October 1997)............................................. -- 24,845 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 $21,679 at December 31, 1997..................... 21,437 22,554 Series 1995 Bonds due June 2005, at an interest rate of 6.88% with respect to $7,000 and 7.24% with respect to $18,000, secured by a letter of credit.................... 25,000 25,000 Medium Term Notes due June 15, 2000, at an interest rate based on LIBOR, as defined, plus .35%, secured by eligible receivables of selected nursing facilities of $54,722 at December 31, 1997, which cannot be used to satisfy claims of the Company or any of its subsidiaries................. 40,000 50,000 7 5/8% convertible subordinated debentures due March 15, 2003, convertible at $20.47 per share of Common Stock (redeemed in December 1997)............................... -- 67,924 5 1/2% convertible subordinated debentures due August 1, 2018, convertible at $13.33 per share of Common Stock (called for redemption on August 18, 1997)................ -- 150,000 Zero coupon notes, face amount, less unamortized discount: 1996 -- $785 (repurchased in May 1997).................... -- 1,172 ---------- ---------- 698,336 1,118,055 Present value of capital lease obligations, less imputed interest: 1997 -- $456, 1996 -- $863, at effective interest rates of 5.83% to 13.00%......................... 20,156 27,027 ---------- ---------- 718,492 1,145,082 Less amounts due within one year............................ 31,551 38,826 ---------- ---------- $ 686,941 $1,106,256 ========== ==========
36 38 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 4. LONG-TERM OBLIGATIONS -- (CONTINUED) 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. A total of $149,162,550 of the $150,000,000 aggregate principal amount outstanding was converted to 11,189,924 shares of the Company's Common Stock, increasing the Company's outstanding shares. The remaining principal amount of $837,450 was redeemed at 103.30% of the principal amount. Had the conversion been completed prior to January 1, 1997, the pro forma diluted net income per share for the year ended December 31, 1997 would have been $.56. The Company primarily used the net cash proceeds from the disposition of facilities and other assets, as well as the cash received from the Merger, to repay Revolver borrowings, to repurchase the zero coupon notes, to redeem 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 (See Note 2). During 1997, the Company entered into promissory notes totaling approximately $25,800,000 in conjunction with its purchase of certain nursing facilities. Such debt instruments bear interest at rates ranging from 7.78% to 8.63%, 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. 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"). 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 $324,300,000 of unused commitments under such facility at December 31, 1997. The 1996 Credit Agreement is secured by a security interest in the stock of certain of the Company's subsidiaries and imposes on the Company certain financial tests and restrictive covenants. 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, 1997, approximately $9,600,000 of aggregate principal amount under the GE Capital Facility remained unissued. 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"). 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. 37 39 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 4. LONG-TERM OBLIGATIONS -- (CONTINUED) Maturities and sinking fund requirements of long-term obligations, including capital leases, for the years ending December 31 are as follows (in thousands):
1998 1999 2000 2001 2002 THEREAFTER TOTAL ------- ------- ------- ------- ------- ---------- -------- Future minimum lease payments................. $ 3,713 $ 3,127 $ 2,802 $ 2,667 $ 2,763 $ 22,156 $ 37,228 Less interest.............. 1,816 1,642 1,510 1,399 1,273 9,432 17,072 ------- ------- ------- ------- ------- -------- -------- Net present value of future minimum lease payments... 1,897 1,485 1,292 1,268 1,490 12,724 20,156 Notes, mortgages, bonds and debentures............... 29,654 25,588 71,425 55,909 46,356 469,404 698,336 ------- ------- ------- ------- ------- -------- -------- $31,551 $27,073 $72,717 $57,177 $47,846 $482,128 $718,492 ======= ======= ======= ======= ======= ======== ========
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 1997, 1996 or 1995. 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, 1997, are as follows (in thousands):
YEAR ENDING DECEMBER 31, ------------ 1998...................................................... $ 68,799 1999...................................................... 57,451 2000...................................................... 39,308 2001...................................................... 27,897 2002...................................................... 23,019 Thereafter.................................................. 34,702 -------- $251,176 ========
Total future minimum rental commitments are net of approximately $22,594,000 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: 1997 -- $114,694,000; 1996 -- $116,718,000; 1995 -- $127,074,000. Sublease rent income was approximately $5,638,000, $4,595,000 and $5,426,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Contingent rent expense, based primarily on revenues, was approximately $18,000,000, $18,000,000 and $22,000,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 38 40 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) In 1992, the Company entered into an agreement to outsource its management information systems functions for a period of seven years, with an option to renew based on mutual agreement among the parties. Such agreement was renegotiated during 1997 to allow the Company to bring the programming functions under its direct control but continue to outsource the data processing functions. The future minimum commitments as of December 31, 1997 required under such agreement are as follows: 1998 -- $4,127,000; 1999 -- $4,033,000; 2000 -- $3,944,000; 2001 -- $3,859,000; 2002 -- $2,849,000. The Company incurred approximately $4,498,000, $8,711,000 and $8,529,000 under such agreement during the years ended December 31, 1997, 1996 and 1995, respectively. The Company is contingently liable for approximately $79,375,000 of long-term obligations maturing on various dates through 2019, as well as annual interest and letter of credit fees of approximately $7,274,000. 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 $25,895,000 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, or 7% of the Company's employees, are represented by various labor unions. Certain labor unions have publicly stated that they are concentrating their organizing efforts within the long-term healthcare industry. The Company, being one of the largest employers within the long-term healthcare industry, has been the target of a "corporate campaign" by two AFL-CIO affiliated unions attempting to organize certain of the Company's facilities. Although the Company has never experienced any material work stoppages and believes that its relations with its employees (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. On March 4, 1998, a jury in California returned a verdict of $95.1 million against a nursing facility operated by a subsidiary of the Company. The verdict, which was based on findings of fraud as well as negligence and abuse, consisted of $365,580 in compensatory damages and $94.7 million in punitive damages. Since punitive damages are generally not covered by insurance, a final judgement of this size could have a material adverse effect on the Company's consolidated results of operations and financial position. However, it is the Company's belief, based on discussions with its trial and appellate counsel, that many of the jury's findings, including fraud, are not supportable from the evidence presented in the case, and the judgement entered will be significantly reduced by the trial court or an appeal. The Company intends to aggressively pursue all post-trial remedies available to it. There are various other lawsuits and regulatory actions pending against the Company arising in the normal course of business, some of which seek punitive damages which are generally not covered by insurance. 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, 1997 and 1996. 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, 1997 and 1996, all of which remained 39 41 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 6. STOCKHOLDERS' EQUITY -- (CONTINUED) 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 1997, the Company repurchased approximately 4,900,000 shares of its Common Stock at a cost of approximately $62,700,000. The repurchases were financed primarily through proceeds from dispositions and borrowings under the Company's Revolver/LOC Facility. In connection with the Reorganization, the Company cancelled and retired 6,274,108 shares of Common Stock, with a book value of approximately $70,300,000, held in treasury on the effective date of the Reorganization. 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. On May 18, 1995, the Company's stockholders approved certain amendments to the Rights Plan which provided, among other things, that the Rights Plan will expire on the date of the 1998 Annual Meeting of Stockholders, which has been set for May 28, 1998, unless an extension of the term is approved by the stockholders at the 1998 Annual Meeting of Stockholders (the "Amended Rights Plan"). The Board of Directors adopted a stockholder rights plan to be effective on the effective date of the Reorganization with the same terms as the Amended Rights Plan. During 1997, the New Beverly 1997 Long-Term Incentive Plan was approved (the "1997 Long-Term Incentive Plan"). Such plan became effective December 3, 1997 and will remain in effect until December 31, 2006, subject to the earlier termination by the Board of Directors. Such plan replaced the 1996 Long-Term Incentive Plan, the 1993 Incentive Stock Plan and the 1985 Nonqualified Stock Option Plan. The Compensation Committee of the Board of Directors (the "Committee") is responsible for administering the 1997 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 10,000,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under the 1997 Long-Term Incentive Plan in the form of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance awards, bonus stock and other stock unit awards. Except for options granted upon the assumption of, or in substitution for, options of another company in which the Company participates in a corporate transaction or the options as described below, nonqualified and incentive stock options must be granted at a purchase price equal to the market price on the date of grant. Options shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine and expire no later than 10 years from the grant date. Stock appreciation rights may be granted alone, in tandem with an option or in addition to an option. Stock appreciation rights shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine and expire no later than 10 years from the grant date. Restricted stock awards are outright stock grants which have a minimum vesting period of one year for performance-based awards and three years for other awards. Performance awards, bonus stock and other stock unit awards may be granted based on the achievement of certain performance or other goals and will carry certain restrictions, as defined. 40 42 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 6. STOCKHOLDERS' EQUITY -- (CONTINUED) During 1997, the New Beverly Non-Employee Directors Stock Option Plan was approved (the "Non-Employee Directors Stock Option Plan"). Such plan became effective December 3, 1997 and will remain in effect until December 31, 2007, subject to the earlier termination by the Board of Directors. Such plan replaced the Nonemployee Directors' Plan. The Company has 300,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under its Non-Employee Directors Stock Option Plan. The Non-Employee Directors Stock Option Plan was amended by the Board of Directors on December 11, 1997 to provide that each nonemployee director be granted an option to purchase 3,375 shares of the Company's Common Stock on June 1 of each year until the plan is terminated, subject to the availability of shares. Such options are granted at a purchase price equal to fair market value on the date of grant, become exercisable one year after date of grant and expire ten years after date of grant. 41 43 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 6. STOCKHOLDERS' EQUITY -- (CONTINUED) The following table summarizes stock option, restricted stock and other stock units data relative to the Company's long-term incentive plans for the years ended December 31:
1997 1996 1995 ----------------------------- ---------------------------- ---------------------------- 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............................. 4,908,727 $10.55 4,394,382 $ 9.02 4,375,441 $ 8.74 Changes during the year: Granted.......................... 2,944,522 10.87 1,696,500 12.38 355,500 13.04 Acquired......................... -- -- -- -- 342,311 6.17 Exercised........................ (1,047,423) 8.06 (833,587) 5.41 (416,010) 5.22 Cancelled........................ (243,923) 14.64 (348,568) 12.39 (262,860) 12.19 ---------- --------- --------- Options outstanding at end of year............................. 6,561,903(1) 9.29 4,908,727 10.55 4,394,382 9.02 ========== ========= ========= Options exercisable at end of year............................. 5,073,903 8.23 2,560,209 8.75 3,028,903 7.52 ========== ========= ========= Options available for grant at end of year.......................... 3,738,097 3,052,403 1,243,953 ========== ========= ========= Restricted stock outstanding at beginning of year................ 145,200 306,052 267,353 Changes during the year: Granted.......................... 10,500 29,000 236,555 Vested........................... (134,711) (148,352) (182,153) Forfeited........................ (20,989) (41,500) (15,703) ---------- --------- --------- Restricted stock outstanding at end of year.......................... -- 145,200 306,052 ========== ========= ========= Phantom units outstanding at beginning of year................ 76,769 90,942 44,529 Changes during the year: Granted.......................... -- -- 54,110 Vested........................... (76,316) (6,982) -- Cancelled........................ (453) (7,191) (7,697) ---------- --------- --------- Phantom units outstanding at end of year............................. -- 76,769 90,942 ========== ========= ========= Performance shares outstanding at beginning of year................ 992,000 -- -- Changes during the year: Granted.......................... 16,000 1,040,000 -- Vested........................... (759,389) -- -- Cancelled........................ (248,611) (48,000) -- ---------- --------- --------- Performance shares outstanding at end of year...................... -- 992,000 -- ========== ========= =========
- --------------- (1) Exercise prices for options outstanding as of December 31, 1997 ranged from $3.24 to $12.88. The weighted-average remaining contractual life of these options is eight years. As a result of the Reorganization (as discussed herein), immediately prior to the Distribution, (i) each option to purchase the Company's Common Stock then outstanding became fully vested and exercisable, (ii) all restrictions on outstanding restricted shares lapsed and became fully vested, (iii) each outstanding award of phantom units became fully vested, and (iv) each outstanding performance share became fully 42 44 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 6. STOCKHOLDERS' EQUITY -- (CONTINUED) vested. The Company incurred non-cash expenses of approximately $18,000,000 as it related to these stock-based awards, which was included in the $44,000,000 of transaction costs. In addition, all options outstanding immediately after the Distribution were cancelled and replaced with new options issued by the Company under the 1997 Long-Term Incentive Plan. Such options are exercisable upon the same terms and conditions (except that all options are 100% vested) as under the applicable option agreement issued thereunder, except that (i) the number of shares for which such options may be converted, and (ii) the option exercise price per share of such options were adjusted to take into account the effect of the Reorganization. The Company 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 share grants (when the performance targets are achieved) and other stock unit awards. The total charges to the Company's consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995 related to these stock-based awards were approximately $19,767,000, $509,000 and $3,065,000, respectively. The total charges for 1997 included approximately $18,000,000 related to the impact of the Reorganization on the Company's stock-based awards (as discussed above), which was included in the $44,000,000 of transaction costs. 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 1997, 1996 and 1995 stock option and performance share grants under the fair value method as prescribed by such statement. The fair value for stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31, 1997, 1996 and 1995, respectively: risk-free interest rates of 5.9%, 6.5% and 6.0%; volatility factors of the expected market price of the Company's Common Stock of .35, .34 and .35; and a weighted-average expected life of the option of 8 years, 10 years and 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 1997, 1996 and 1995 of $7.84 per share, $7.30 per share and $7.65 per share, respectively. The fair value of the performance share grants was based on the market value of the Company's Common Stock on the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the stock options and performance shares is amortized to expense over their respective vesting periods. The pro forma effects on reported net income (loss) and diluted earnings per share assuming the Company had elected to account for its stock option and performance share grants in accordance with SFAS No. 123 for the years ended December 31, 1997, 1996 and 1995, respectively, would have been net income of $47,244,000 or $.46 per share, net income 43 45 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 6. STOCKHOLDERS' EQUITY -- (CONTINUED) of $48,964,000 or $.49 per share and net loss of $8,408,000 or $.17 per share. The pro forma amounts for 1997 reflect the impact of the Reorganization on the Company's outstanding stock options (as discussed above). Such pro forma effects are not necessarily indicative of the effect on future years. The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and restated) enables all full-time employees having completed one year of continuous service to purchase shares of Common Stock at the current market price through payroll deductions. The Company makes contributions in the amount of 30% of the participant's contribution. Each participant specifies the amount to be withheld from earnings per two-week pay period, subject to certain limitations. The total charges to the Company's consolidated statements of operations for the years ended December 31, 1997, 1996 and 1995 related to this plan were approximately $2,449,000, $2,258,000 and $2,201,000, respectively. 7. INCOME TAXES The provisions for taxes on income before extraordinary charge consist of the following for the years ended December 31 (in thousands):
1997 1996 1995 ------- ------- -------- Federal: Current............................................ $22,997 $31,615 $ 17,518 Deferred........................................... 20,404 29,466 (16,877) State: Current............................................ 6,669 8,101 4,845 Deferred........................................... (157) 4,299 (3,517) ------- ------- -------- $49,913 $73,481 $ 1,969 ======= ======= ========
The Company had an annual effective tax rate of 46% for the year ended December 31, 1997, compared to an annual effective tax rate of 59% and a negative annual effective tax rate of 32% for the years ended December 31, 1996 and 1995, respectively. The annual effective tax rate in 1997 was different than the federal statutory rate primarily due to the impact of nondeductible transaction costs associated with the Reorganization (see Note 2). 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). In addition, 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 (see Note 1). 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):
1997 1996 1995 -------------- -------------- -------------- AMOUNT % AMOUNT % AMOUNT % ------- --- ------- --- ------- --- Tax (benefit) at statutory rate........................... $37,977 35 $43,927 35 $(2,154) 35 General business tax credits..... -- -- -- -- (1,014) 17 State tax provision, net......... 4,233 4 8,060 6 863 (14) Nondeductible intangibles........ 1,702 2 20,881 17 3,797 (62) Effect of Merger................. 5,618 5 -- -- -- -- Other............................ 383 -- 613 1 477 (8) ------- --- ------- --- ------- --- $49,913 46 $73,481 59 $ 1,969 (32) ======= === ======= === ======= ===
44 46 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 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, 1997 and 1996 are as follows (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996 -------------------- -------------------- ASSET LIABILITY ASSET LIABILITY -------- --------- -------- --------- Insurance reserves.......................... $ 36,104 $ -- $ 55,540 $ -- General business tax credit carryforwards... -- -- 12,236 -- Alternative minimum tax credit carryforwards............................. 13,969 -- 14,698 -- Provision for dispositions.................. 32,591 5,776 11,009 6,152 Depreciation and amortization............... 29 140,062 1,401 141,804 Operating supplies.......................... -- 12,907 -- 14,206 Other....................................... 18,304 26,336 22,995 24,784 -------- -------- -------- -------- $100,997 $185,081 $117,879 $186,946 ======== ======== ======== ========
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 fixed-rate notes are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Beverly Indemnity Funds The 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 45 47 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED) primarily from one to five years. During 1997, the Company purchased traditional indemnity insurance coverage for its 1997 workers' compensation and auto liabilities (see Note 1) which resulted in the Company selling a portion of these securities, with a book value of approximately $10,100,000, to fund such purchase. The gain on the sale of such securities was immaterial to the Company's consolidated results of operations for the year ended December 31, 1997. The remaining securities are classified as available-for-sale and as such are carried at fair value. Investment in a Real Estate Mortgage Investment Conduit (REMIC) The fair value of the Company's REMIC investment, which was included in the consolidated balance sheet caption "Other, net" in 1996, is based on information obtained from the REMIC servicer. The Company converted the REMIC investment to notes receivable from the underlying note makers during 1997. 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, 1997 and 1996 are as follows (in thousands):
1997 1996 -------------------- ------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- ---------- ---------- Cash and cash equivalents............ $105,230 $105,230 $ 69,761 $ 69,761 Notes receivable, net (including current portion)................... 24,973 26,400 48,052 49,900 Beverly Indemnity funds.............. 80,804 80,804 94,472 94,821 REMIC investment..................... -- -- 8,052 8,084 Long-term obligations (including current portion)................... 718,492 746,439 1,145,082 1,161,031
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. 46 48 SUPPLEMENTARY DATA (UNAUDITED) QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996.
1997 1996 ------------------------------------------------------ ----------------------------------------- 1ST 2ND 3RD 4TH TOTAL 1ST 2ND 3RD 4TH -------- -------- -------- -------- ---------- -------- -------- -------- -------- Revenues: Remaining Healthcare Business................ $697,899 $692,033 $676,938 $690,444 $2,757,314 $709,166 $696,922 $716,300 $724,226 PCA....................... 147,639 153,770 155,573 107,342 564,324 124,418 124,898 130,413 136,847 Elimination of intercompany revenues... (25,257) (25,139) (24,585) (16,357) (91,338) (19,077) (20,012) (20,774) (22,299) -------- -------- -------- -------- ---------- -------- -------- -------- -------- Total revenues...... $820,281 $820,664 $807,926 $781,429 $3,230,300 $814,507 $801,808 $825,939 $838,774 ======== ======== ======== ======== ========== ======== ======== ======== ======== Income (loss) before provision for income taxes and extraordinary charge.................... $ 30,772 $ 34,950 $ 45,222 $ (2,438) $ 108,506 $ 22,827 $ 28,325 $ 38,130 $ 36,225 Provision for income taxes..................... 12,309 13,980 18,089 5,535 49,913 9,131 11,330 15,252 37,768 -------- -------- -------- -------- ---------- -------- -------- -------- -------- Income (loss) before extraordinary charge...... 18,463 20,970 27,133 (7,973) 58,593 13,696 16,995 22,878 (1,543) Extraordinary charge........ -- -- -- -- -- -- -- -- (1,726) -------- -------- -------- -------- ---------- -------- -------- -------- -------- Net income (loss)........... $ 18,463 $ 20,970 $ 27,133 $ (7,973) $ 58,593 $ 13,696 $ 16,995 $ 22,878 $ (3,269) ======== ======== ======== ======== ========== ======== ======== ======== ======== Income (loss) per share of common stock: Basic: Before extraordinary charge................ $ .19 $ .21 $ .26 $ (.07) $ .57 $ .14 $ .17 $ .23 $ (.01) Extraordinary charge.... -- -- -- -- -- -- -- -- (.02) -------- -------- -------- -------- ---------- -------- -------- -------- -------- Net income (loss)....... $ .19 $ .21 $ .26 $ (.07) $ .57 $ .14 $ .17 $ .23 $ (.03) ======== ======== ======== ======== ========== ======== ======== ======== ======== Shares used to compute per share amounts..... 98,144 97,736 103,508 108,719 102,060 98,739 98,981 98,239 98,341 ======== ======== ======== ======== ========== ======== ======== ======== ======== Diluted: Before extraordinary charge................ $ .18 $ .20 $ .26 $ (.07) $ .57 $ .13 $ .16 $ .22 $ (.01) Extraordinary charge.... -- -- -- -- -- -- -- -- (.02) -------- -------- -------- -------- ---------- -------- -------- -------- -------- Net income (loss)....... $ .18 $ .20 $ .26 $ (.07) $ .57 $ .13 $ .16 $ .22 $ (.03) ======== ======== ======== ======== ========== ======== ======== ======== ======== Shares used to compute per share amounts..... 110,386 109,993 107,751 108,719 103,422 111,053 111,154 110,261 98,341 ======== ======== ======== ======== ========== ======== ======== ======== ======== Common stock price range: High...................... $ 16.13 $ 16.88 $ 17.50 $ 17.50 $ 12.38 $ 12.63 $ 12.13 $ 13.75 Low....................... $ 12.25 $ 13.13 14.56 $ 12.13(1) $ 10.13 $ 11.00 $ 9.25 $ 10.63 1996 ---------- TOTAL ---------- Revenues: Remaining Healthcare Business................ $2,846,614 PCA....................... 516,576 Elimination of intercompany revenues... (82,162) ---------- Total revenues...... $3,281,028 ========== Income (loss) before provision for income taxes and extraordinary charge.................... $ 125,507 Provision for income taxes..................... 73,481 ---------- Income (loss) before extraordinary charge...... 52,026 Extraordinary charge........ (1,726) ---------- Net income (loss)........... $ 50,300 ========== Income (loss) per share of common stock: Basic: Before extraordinary charge................ $ .53 Extraordinary charge.... (.02) ---------- Net income (loss)....... $ .51 ========== Shares used to compute per share amounts..... 98,574 ========== Diluted: Before extraordinary charge................ $ .50 Extraordinary charge.... (.01) ---------- Net income (loss)....... $ .49 ========== Shares used to compute per share amounts..... 110,726 ========== Common stock price range: High...................... Low.......................
- --------------- (1) After the effect of the Reorganization on December 3, 1997 (as discussed herein). The Company had an annual effective tax rate of 46% for the year ended December 31, 1997 compared to an annual effective tax rate of 59% for the year ended December 31, 1996. The annual effective tax rate in 1997 was different than the federal statutory rate primarily due to the impact of nondeductible transaction costs associated with the Reorganization (as discussed herein). In addition, 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 (as discussed herein). Earnings per share for 1996 and the first three quarters of 1997 have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings per Share." See "Part II, Item 8 -- Note 1 of Notes to Consolidated Financial Statements." 47 49 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY. Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to be filed pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION. Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to be filed pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to be filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 28, 1998, to be filed pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1 and 2. The Consolidated Financial Statements and Consolidated Financial Statement Schedule The consolidated financial statements and consolidated financial statement schedule listed in the accompanying index to consolidated financial statements and financial statement schedules are filed as part of this annual report. 3. Exhibits The exhibits listed in the accompanying index to exhibits are incorporated by reference herein or are filed as part of this annual report. (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K, dated December 3, 1997, which reported under Item 5 that the Company completed the closing of the transactions contemplated by the definitive Agreement and Plan of Merger dated April 15, 1997 which combined Pharmacy Corporation of America with Capstone Pharmacy Services, Inc. to create one of the nation's largest independent institutional pharmacy companies and filed under Item 7 the Company's press releases dated December 3, 1997 and December 10, 1997. (c) Exhibits See the accompanying index to exhibits referenced in Item 14(a)(3) above for a list of exhibits incorporated herein by reference or filed as part of this annual report. (d) Financial Statement Schedule See the accompanying index to consolidated financial statements and financial statement schedules referenced in Item 14(a)1 and 2, above. 48 50 BEVERLY ENTERPRISES, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (ITEM 14(a))
PAGE ---- 1. Consolidated financial statements: Report of Ernst & Young LLP, Independent Auditors........... 23 Consolidated Balance Sheets at December 31, 1997 and 1996... 24 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1997............... 25 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997..... 26 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997............... 27 Notes to Consolidated Financial Statements.................. 28 Supplementary Data (Unaudited) -- Quarterly Financial Data...................................................... 47 2. Consolidated financial statement schedule for each of the three years in the period ended December 31, 1997: II -- Valuation and Qualifying Accounts..................... 50
All other schedules are omitted because they are either not applicable or the items do not exceed the various disclosure levels. 49 51 BEVERLY ENTERPRISES, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS)
CHARGED DUE TO BALANCE AT (CREDITED) ACQUISITIONS BALANCE BEGINNING TO AND AT END DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS DISPOSITIONS OTHER OF YEAR ----------- ---------- ---------- ---------- ------------ ------ ------- Year ended December 31, 1997: Allowance for doubtful accounts: Accounts receivable -- patient..... $25,618 $35,343 $(34,858) $(8,224) $ -- $17,879 Accounts receivable -- nonpatient................ 637 209 (218) -- 234 862* Notes receivable............ 4,951 (1,211) (306) (1,453) 936 2,917 ------- ------- -------- ------- ------ ------- $31,206 $34,341 $(35,382) $(9,677) $1,170 $21,658 ======= ======= ======== ======= ====== ======= 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 -- nonpatient................ 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) $ -- $ -- $ -- $ -- ======= ======= ======== ======= ====== =======
- --------------- * Includes amounts classified in long-term other assets as well as current assets. 50 52 BEVERLY ENTERPRISES, INC. INDEX TO EXHIBITS (ITEM 14(a)(3))
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Form of Restated Certificate of Incorporation of New Beverly Holdings, Inc. 3.2 -- Form of Certificate of Amendment of Certificate of Incorporation of New Beverly Holdings Inc., changing its name to Beverly Enterprises, Inc. 3.3 -- By-Laws of Beverly Enterprises, Inc. (incorporated by reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on June 4, 1997 (File No. 333-28521)) 4.1 -- Indenture dated as of February 1, 1996 between Beverly Enterprises, Inc. and Chemical Bank, as Trustee, with respect to Beverly Enterprises, Inc.'s 9% Senior Notes due February 15, 2006 (the "9% Indenture") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995) 4.2 -- Form of Supplemental Indenture No. 2 to the 9% Indenture dated as of November 19, 1997 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration Statement of Form S-4 filed on September 8, 1997 (File No. 333-35137)) 4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage Bond Indenture"), among Beverly Enterprises, Inc., Delaware Trust Company, as Corporate Trustee, and Richard N. Smith, as Individual Trustee, with respect to First Mortgage Bonds (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.4 -- First Supplemental Indenture dated as of April 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 3/4% First Mortgage Bonds due 2008 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 5/8% First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated July 15, 1993)(incorporated by reference to Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 4.6 -- Rights Agreement dated as of December 3, 1997, between Beverly Enterprises, Inc. and The Bank of New York, as Rights Agent In accordance with item 601(b)(4)(iii) of Regulation S-K, certain instruments pertaining to Beverly Enterprises, Inc.'s long-term obligations have not been filed; copies thereof will be furnished to the Securities and Exchange Commission upon request. 10.1* -- Beverly Enterprises, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.2* -- New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan (the "1997 LTIP") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 8, 1997 (File No. 333-41669)) 10.3* -- Amendment No. 1 to the 1997 LTIP dated as of December 3, 1997 10.4* -- New Beverly Holdings, Inc. Non-Employee Directors' Stock Option Plan (the "Directors' Option Plan") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 12, 1997 (File No. 333-42131))
51 53
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.5* -- Amendment No. 1 to the Directors' Option Plan dated as of December 3, 1997 10.6* -- Executive Medical Reimbursement Plan (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987) 10.7* -- Amended and Restated Beverly Enterprises, Inc. Executive Life Insurance Plan and Summary Plan Description (the "Executive Life Plan") (incorporated by reference to Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993) 10.8* -- Amendment No. 1, effective September 29, 1994, to the Executive Life Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.9* -- Executive Physicals Policy (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 10.10* -- Amended and Restated Deferred Compensation Plan effective July 18, 1991 (incorporated by reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.11* -- Amendment No. 1, effective September 29, 1994, to the Deferred Compensation Plan (incorporated by reference to Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.12* -- Executive Retirement Plan (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987) 10.13* -- Amendment No. 1, effective as of July 1, 1991, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.14* -- Amendment No. 2, effective as of December 12, 1991, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.15* -- Amendment No. 3, effective as of July 31, 1992, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992) 10.16* -- Amendment No. 4, effective as of January 1, 1993, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.17* -- Amendment No. 5, effective as of September 29, 1994, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.18* -- Amendment No. 6, effective as of January 1, 1996, to the Executive Retirement Plan 10.19* -- Amendment No. 7, effective as of September 1, 1997, to the Executive Retirement Plan 10.20* -- Amendment No. 8, dated as of December 11, 1997, to the Executive Retirement Plan, changing its name to the "Executive SavingsPlus Plan" 10.21* -- Beverly Enterprises, Inc.'s Supplemental Executive Retirement Plan effective as of January 1, 1998 10.22* -- Beverly Enterprises, Inc.'s Executive Deferred Compensation Plan (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 5, 1997 (File No. 333-41673))
52 54
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.23* -- Amendment No. 1 to the Executive Deferred Compensation Plan made as of December 11, 1997 10.24* -- Amendment No. 2 to the Executive Deferred Compensation Plan made as of December 11, 1997 10.25* -- Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan (the "Directors' Plan")(incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.26* -- Amendment No. 1, effective as of December 3, 1997, to the Directors' Plan 10.27* -- Beverly Enterprises, Inc.'s Supplemental Long-Term Disability Plan (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996) 10.28* -- Form of Indemnification Agreement between Beverly Enterprises, Inc. and its officers, directors and certain of its employees (incorporated by reference to Exhibit 19.14 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1987) 10.29* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or directors relating to indemnification rights (incorporated by reference to Exhibit 19.5 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.30* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or employees relating to indemnification rights (incorporated by reference to Exhibit 19.6 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.31* -- Agreement dated December 29, 1986 between Beverly Enterprises, Inc. and Stephens Inc. (incorporated by reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on January 18, 1990 (File No. 33-33052)) 10.32* -- Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and David R. Banks (incorporated by reference to Exhibit 10.17 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.33* -- Form of Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and certain of its officers (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.34 -- Master Lease Document -- General Terms and Conditions dated December 30, 1985 for Leases between Beverly California Corporation and various subsidiaries thereof as lessees and Beverly Investment Properties, Inc. as lessor (incorporated by reference to Exhibit 10.12 to Beverly California Corporation's Annual Report on Form 10-K for the year ended December 31, 1985) 10.35 -- Agreement dated as of December 29, 1986 among Beverly California Corporation, Beverly Enterprises -- Texas, Inc., Stephens Inc. and Real Properties, Inc. (incorporated by reference to Exhibit 28 to Beverly California Corporation's Current Report on Form 8-K dated December 30, 1986) and letter agreement dated as of July 31, 1987 among Beverly Enterprises, Inc., Beverly California Corporation, Beverly Enterprises -- Texas, Inc. and Stephens Inc. with reference thereto (incorporated by reference to Exhibit 19.13 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1987)
53 55
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.36 -- 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 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.37 -- Amendment No. 1 and Waiver to Participation Agreement, dated as of May 27, 1997 (incorporated by reference to Exhibit 10.31 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.38 -- Amendment No. 2 to Participation Agreement, dated as of August 20, 1997 (incorporated by reference to Exhibit 10.32 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement of Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.39 -- 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)) 10.40 -- 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)) 10.41 -- 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) 10.42 -- Form of Irrevocable Trust Agreement for the Beverly Enterprises, Inc. Executive Benefits Plan (incorporated by reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 11.1 -- Computation of Net Income (Loss) Per Share for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 21.1 -- Subsidiaries of Registrant 23.1 -- Consent of Ernst & Young LLP, Independent Auditors 27.1 -- Financial Data Schedule for the year ended December 31, 1997 27.2 -- Restated Financial Data Schedule for the year ended December 31, 1996 27.3 -- Restated Financial Data Schedule for the year ended December 31, 1995
- --------------- * Exhibits 10.1 through 10.33 are the management contracts, compensatory plans, contracts and arrangements in which any director or named executive officer participates. 54 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BEVERLY ENTERPRISES, INC. Registrant Dated: March 27, 1998 By: /s/ DAVID R. BANKS ------------------------------------------- David R. Banks Chairman of the Board, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated: /s/ DAVID R. BANKS Chairman of the Board, Chief - ----------------------------------------------------- Executive Officer and David R. Banks Director March 27, 1998 /s/ BOYD W. HENDRICKSON President, Chief Operating - ----------------------------------------------------- Officer and Director Boyd W. Hendrickson March 27, 1998 /s/ SCOTT M. TABAKIN Executive Vice President and - ----------------------------------------------------- Chief Financial Officer Scott M. Tabakin March 27, 1998 /s/ PAMELA H. DANIELS Vice President, Controller and - ----------------------------------------------------- Chief Accounting Officer Pamela H. Daniels March 27, 1998 /s/ BERYL F. ANTHONY, JR. Director March 27, 1998 - ----------------------------------------------------- Beryl F. Anthony, Jr. CAROLYNE K. DAVIS Director March 27, 1998 - ----------------------------------------------------- Carolyne K. Davis /s/ JAMES R. GREENE Director March 27, 1998 - ----------------------------------------------------- James R. Greene /s/ EDITH E. HOLIDAY Director March 27, 1998 - ----------------------------------------------------- Edith E. Holiday /s/ JON E. M. JACOBY Director March 27, 1998 - ----------------------------------------------------- Jon E. M. Jacoby /s/ RISA J. LAVIZZO-MOUREY Director March 27, 1998 - ----------------------------------------------------- Risa J. Lavizzo-Mourey /s/ MARILYN R. SEYMANN Director March 27, 1998 - ----------------------------------------------------- Marilyn R. Seymann
55 57 BEVERLY ENTERPRISES, INC. INDEX TO EXHIBITS (ITEM 14(A)(3))
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Form of Restated Certificate of Incorporation of New Beverly Holdings, Inc. 3.2 -- Form of Certificate of Amendment of Certificate of Incorporation of New Beverly Holdings Inc., changing its name to Beverly Enterprises, Inc. 3.3 -- By-Laws of Beverly Enterprises, Inc. (incorporated by reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on June 4, 1997 (File No. 333-28521)) 4.1 -- Indenture dated as of February 1, 1996 between Beverly Enterprises, Inc. and Chemical Bank, as Trustee, with respect to Beverly Enterprises, Inc.'s 9% Senior Notes due February 15, 2006 (the "9% Indenture") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995) 4.2 -- Form of Supplemental Indenture No. 2 to the 9% Indenture dated as of November 19, 1997 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration Statement of Form S-4 filed on September 8, 1997 (File No. 333-35137)) 4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage Bond Indenture"), among Beverly Enterprises, Inc., Delaware Trust Company, as Corporate Trustee, and Richard N. Smith, as Individual Trustee, with respect to First Mortgage Bonds (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.4 -- First Supplemental Indenture dated as of April 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 3/4% First Mortgage Bonds due 2008 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 5/8% First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated July 15, 1993)(incorporated by reference to Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 4.6 -- Rights Agreement dated as of December 3, 1997, between Beverly Enterprises, Inc. and The Bank of New York, as Rights Agent In accordance with item 601(b)(4)(iii) of Regulation S-K, certain instruments pertaining to Beverly Enterprises, Inc.'s long-term obligations have not been filed; copies thereof will be furnished to the Securities and Exchange Commission upon request. 10.1* -- Beverly Enterprises, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.2* -- New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan (the "1997 LTIP") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 8, 1997 (File No. 333-41669)) 10.3* -- Amendment No. 1 to the 1997 LTIP dated as of December 3, 1997 10.4* -- New Beverly Holdings, Inc. Non-Employee Directors' Stock Option Plan (the "Directors' Option Plan") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 12, 1997 (File No. 333-42131)) 10.5* -- Amendment No. 1 to the Directors' Option Plan dated as of December 3, 1997
58
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.6* -- Executive Medical Reimbursement Plan (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987) 10.7* -- Amended and Restated Beverly Enterprises, Inc. Executive Life Insurance Plan and Summary Plan Description (the "Executive Life Plan") (incorporated by reference to Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993) 10.8* -- Amendment No. 1, effective September 29, 1994, to the Executive Life Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.9* -- Executive Physicals Policy (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 10.10* -- Amended and Restated Deferred Compensation Plan effective July 18, 1991 (incorporated by reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.11* -- Amendment No. 1, effective September 29, 1994, to the Deferred Compensation Plan (incorporated by reference to Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.12* -- Executive Retirement Plan (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987) 10.13* -- Amendment No. 1, effective as of July 1, 1991, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.14* -- Amendment No. 2, effective as of December 12, 1991, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.15* -- Amendment No. 3, effective as of July 31, 1992, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992) 10.16* -- Amendment No. 4, effective as of January 1, 1993, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.17* -- Amendment No. 5, effective as of September 29, 1994, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.18* -- Amendment No. 6, effective as of January 1, 1996, to the Executive Retirement Plan 10.19* -- Amendment No. 7, effective as of September 1, 1997, to the Executive Retirement Plan 10.20* -- Amendment No. 8, dated as of December 11, 1997, to the Executive Retirement Plan, changing its name to the "Executive SavingsPlus Plan" 10.21* -- Beverly Enterprises, Inc.'s Supplemental Executive Retirement Plan effective as of January 1, 1998 10.22* -- Beverly Enterprises, Inc.'s Executive Deferred Compensation Plan (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 5, 1997 (File No. 333-41673)) 10.23* -- Amendment No. 1 to the Executive Deferred Compensation Plan made as of December 11, 1997 10.24* -- Amendment No. 2 to the Executive Deferred Compensation Plan made as of December 11, 1997
59
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.25* -- Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan (the "Directors' Plan")(incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.26* -- Amendment No. 1, effective as of December 3, 1997, to the Directors' Plan 10.27* -- Beverly Enterprises, Inc.'s Supplemental Long-Term Disability Plan (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996) 10.28* -- Form of Indemnification Agreement between Beverly Enterprises, Inc. and its officers, directors and certain of its employees (incorporated by reference to Exhibit 19.14 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1987) 10.29* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or directors relating to indemnification rights (incorporated by reference to Exhibit 19.5 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.30* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or employees relating to indemnification rights (incorporated by reference to Exhibit 19.6 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.31* -- Agreement dated December 29, 1986 between Beverly Enterprises, Inc. and Stephens Inc. (incorporated by reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on January 18, 1990 (File No. 33-33052)) 10.32* -- Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and David R. Banks (incorporated by reference to Exhibit 10.17 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.33* -- Form of Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and certain of its officers (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.34 -- Master Lease Document -- General Terms and Conditions dated December 30, 1985 for Leases between Beverly California Corporation and various subsidiaries thereof as lessees and Beverly Investment Properties, Inc. as lessor (incorporated by reference to Exhibit 10.12 to Beverly California Corporation's Annual Report on Form 10-K for the year ended December 31, 1985) 10.35 -- Agreement dated as of December 29, 1986 among Beverly California Corporation, Beverly Enterprises -- Texas, Inc., Stephens Inc. and Real Properties, Inc. (incorporated by reference to Exhibit 28 to Beverly California Corporation's Current Report on Form 8-K dated December 30, 1986) and letter agreement dated as of July 31, 1987 among Beverly Enterprises, Inc., Beverly California Corporation, Beverly Enterprises -- Texas, Inc. and Stephens Inc. with reference thereto (incorporated by reference to Exhibit 19.13 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1987)
60
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.36 -- 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 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.37 -- Amendment No. 1 and Waiver to Participation Agreement, dated as of May 27, 1997 (incorporated by reference to Exhibit 10.31 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.38 -- Amendment No. 2 to Participation Agreement, dated as of August 20, 1997 (incorporated by reference to Exhibit 10.32 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement of Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.39 -- 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)) 10.40 -- 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)) 10.41 -- 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) 10.42 -- Form of Irrevocable Trust Agreement for the Beverly Enterprises, Inc. Executive Benefits Plan (incorporated by reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 11.1 -- Computation of Net Income (Loss) Per Share for the years ended December 31, 1997, 1996, 1995, 1994 and 1993 21.1 -- Subsidiaries of Registrant 23.1 -- Consent of Ernst & Young LLP, Independent Auditors 27.1 -- Financial Data Schedule for the year ended December 31, 1997 27.2 -- Restated Financial Data Schedule for the year ended December 31, 1996 27.3 -- Restated Financial Data Schedule for the year ended December 31, 1995
- --------------- * Exhibits 10.1 through 10.33 are the management contracts, compensatory plans, contracts and arrangements in which any director or named executive officer participates. EX-3.1 2 FORM OF RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF NEW BEVERLY HOLDINGS, INC. The undersigned, Robert W. Pommerville and Holly A. Odom, certify that they are the Executive Vice President, General Counsel and Secretary and the Assistant Secretary, respectively, of New Beverly Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), and do hereby further certify as follows: 1. The name of the Corporation is New Beverly Holdings, Inc., the name under which it was originally incorporated. 2. The original Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of the State of Delaware on April 15, 1997. 3. This Restated Certificate of Incorporation was duly adopted by stockholder vote in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware. 4. The text of the Certificate of Incorporation of the Corporation as amended hereby is restated to read in its entirety, as follows: ARTICLE I The name of the Corporation is New Beverly Holdings, Inc. ARTICLE II The registered office of the Corporation in the State of Delaware is located at 1013 Centre Road, in the City of Wilmington, County of New Castle, 19805. The name of the Corporation's registered agent is Corporation Service Company. ARTICLE III The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE IV 1. The total number of shares which the Corporation shall have authority to issue is Three Hundred Twenty-Five Million (325,000,000), consisting of Twenty-Five Million (25,000,000) shares of Preferred Stock, par value One Dollar ($1.00) per share (the "Preferred 1 2 Stock"), and Three Hundred Million (300,000,000) shares of Common Stock, par value Ten Cents ($.10) per share (the "Common Stock"). 2. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors hereby is authorized to establish from time to time by resolution or resolutions and, if and to the extent from time to time required by law, by filing a certificate pursuant to the applicable law of the State of Delaware, the number of shares to be included in each such series, and to fix the designations, powers, preferences and rights of the shares of each such series and the qualifications, limitations, or restrictions thereof, including but not limited to the fixing or alteration 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 shares of Preferred Stock; and to increase or decrease the number of shares of any series subsequent to the issue of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status of authorized but unissued shares of Preferred Stock without designation as to series. ARTICLE V The number of directors which shall comprise the full Board of Directors of the Corporation may be fixed in the manner provided in the By-Laws of the Corporation. ARTICLE VI Unless and except to the extent that the By-Laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. ARTICLE VII In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized and empowered to make, alter and repeal the By-Laws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any by-law made by the Board of Directors. ARTICLE VIII No action of stockholders of the Corporation required to be taken or which may be taken at any annual or special meeting of the stockholders of the Corporation may be taken without a meeting, prior notice and a vote, and the power of the stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. 2 3 ARTICLE IX Special meetings of the stockholders for any purpose or purposes whatsoever may be called at any time, but only by a majority of the Board of Directors, the Chairman of the Board or the President of the Corporation. ARTICLE X To the full extent permitted by the laws of the State of Delaware, the Corporation may lend money to, or guarantee any obligation of, or otherwise assist any director, officer or employee of the Corporation or of its subsidiary or subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. Any loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Nothing in this Article shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the Corporation at law or under any statute. ARTICLE XI 1. Vote Required for Certain Business Combinations. (a) For purposes of this Article: (i) "Affiliate" and "beneficial owner" are used herein as defined in Rule 12b-2 and Rule 13d-3, respectively, under the Securities Exchange Act of 1934, as amended, ("1934 Act"). The term "Affiliate" as used herein shall exclude the Corporation, but shall include the definition of "Associate" as contained in said Rule 12b-2. (ii) An "Interested Shareholder" is a Person other than the Corporation or any subsidiary who is (A) the beneficial owner, directly or indirectly, of ten percent (10%) or more of the capital stock of the Corporation entitled to vote generally for the election of directors ("Voting Stock"), or (B) an Affiliate of the Corporation and (1) at any time within a two-year period prior to the record date to vote on a Business Combination was the beneficial owner, directly or indirectly, of ten percent (10%) or more of the Voting Stock, or (2) at the completion of the Business Combination will be the beneficial owner of ten percent (10%) or more of the Voting Stock. (iii) A "Person" is a natural person or a legal entity of any kind, together with an Affiliate of such person or entity, or any person or entity with whom such person, entity or an Affiliate has any agreement or understanding relating to acquiring, voting, or holding Voting Stock. 3 4 (iv) A "Disinterested Director" is a member of the Board of Directors of the Corporation (other than the Interested Shareholder) who was a director prior to the time the Interested Shareholder became an Interested Shareholder, or any director who was recommended for election by the Disinterested Directors. Any action to be taken by the Disinterested Directors shall require the affirmative vote of at least a majority of the Disinterested Directors. (v) A "Business Combination" is (A) a merger or consolidation of the Corporation or any of its subsidiaries with or into an Interested Shareholder; (B) the sale, lease, exchange, pledge, transfer or other disposition (1) by the Corporation or any of its subsidiaries of all or a Substantial Part of the Corporation's Assets to an Interested Shareholder, or (2) by an Interested Shareholder of any of its assets, except in the ordinary course of business, to the Corporation or any of its subsidiaries other than in connection with the exercise of rights or conversion of securities exercisable or convertible into securities of the Corporation or any subsidiary of the Corporation, which exercisable rights or convertible securities were distributed on a pro rata basis to all holders of the Voting Stock of the same class held by the Interested Shareholder; (C) the issuance of stock or other securities of the Corporation or any of its subsidiaries to an Interested Shareholder, other than on a pro rata basis to all holders of Voting Stock of the same class held by the Interested Shareholder or other than upon exercise of rights or conversion of securities which were distributed on a pro rata basis to all holders of the Voting Stock of the same class held by the Interested Shareholder; (D) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder; (E) any reclassification of securities, recapitalization, merger or consolidation or other transaction which has the effect, directly or indirectly, of increasing the proportionate share by more than one percent (1%) of any Voting Stock beneficially owned by an Interested Shareholder; or (F) any agreement, contract or other arrangement providing for any of the foregoing transactions. (vi) A "Substantial Part of the Corporation's Assets" shall mean assets of the Corporation or any of its subsidiaries in an amount equal to thirty percent (30%) or more of the fair market value, as determined by the Disinterested Directors, of the total consolidated assets of the Corporation and its subsidiaries taken as a whole as of the end of its most recent fiscal year ended prior to the time the determination is made. (b) Subject to the provisions of any series of Preferred Stock which may at the time be outstanding and in addition to any affirmative vote required by law, the affirmative vote of not less than eighty percent (80%) of the Voting Stock shall be required for the adoption or authorization of a Business Combination, unless: (i) a majority of the Disinterested Directors determine that: (A) The Interested Shareholder is the beneficial owner of not less than 4 5 eighty percent (80%) of the Voting Stock and has declared its intention to vote in favor of or approve such Business Combination; or (B)(1) The fair market value of the consideration per share to be received or retained by the holders of each class or series of stock of the Corporation in a Business Combination is not less than the highest price per share (including brokerage commissions, transfer taxes and soliciting dealer's fees) paid by such Interested Shareholder for any shares of such class of stock within the two-year period prior to the Business Combination, whether before or after the Interested Shareholder became an Interested Shareholder; and (2) the Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise; or (ii) The Business Combination has been approved by a majority of the Disinterested Directors. (c) In the event any vote of holders of Voting Stock is required for the adoption or approval of any Business Combination, a proxy or information statement describing the Business Combination and complying with the requirements of the 1934 Act shall be mailed at a date determined by the Disinterested Directors to all stockholders of the Corporation whether or not such statement is required under the 1934 Act. The statement shall contain any recommendations as to the advisability (or inadvisability) of the Business Combination which the Disinterested Directors, or any of them, may choose to state and, if deemed advisable by the Disinterested Directors, an opinion of a reputable national investment banking firm as to the fairness of the terms of such Business Combination. Such firm shall be selected by a majority of the Disinterested Directors and paid a reasonable fee for its services by the Corporation as approved by the Disinterested Directors. 2. Amendment, Repeal, etc. Notwithstanding anything contained in this Restated Certificate of Incorporation or the By-Laws of the Corporation to the contrary, the alteration, change, amendment or repeal of any provision of this Article or adoption of any provisions inconsistent with this Article shall require the affirmative vote of the holders of eighty percent (80%) of the combined voting power of the outstanding Voting Stock, voting together as a single class. ARTICLE XII 1. Prevention of Greenmail. Any direct or indirect purchase or other acquisition by the Corporation of any Voting Stock (as defined in Article XI) of any class from any Interested Shareholder (as hereinafter defined) at a price in excess of the Market Price (as hereinafter defined) shall, except as hereinafter provided, require the affirmative vote of the holders of at least 5 6 a majority of the combined voting power of the Voting Stock, voting as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange, or otherwise, but no such affirmative vote shall be required with respect to any purchase or other acquisition of securities made as part of (a) a tender or exchange offer by the Corporation to purchase securities of the same class made on the same terms to all holders of such securities and complying with the applicable requirements of the United States securities laws and the rules and regulations promulgated thereunder, (b) the redemption of any shares of Preferred Stock pursuant to the provisions of Article IV of this Restated Certificate of Incorporation or any Certificate of Designation with respect to any series of Preferred Stock, or (c) pursuant to a publicly announced share repurchase program. 2. Prevention of Self-Dealing. In addition to any action including any vote by stockholders, required by law or this Restated Certificate of Incorporation, the approval or authorization of any Self-Dealing Transaction (as hereinafter defined) shall require either (a) the approval of a majority of Disinterest Directors (as defined in Article XI) or (b) the affirmative vote of the holders of at least a majority of the combined voting power of the Voting Stock, voting together as a single class. 3. Certain Definitions. For the purpose of this Article: (a) "Interested Shareholder" shall mean any person (other than the Corporation or any subsidiary) who or which: (i) is the beneficial owner, directly or indirectly of five percent (5%) or more of the outstanding Voting Stock; or (ii) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of five percent (5%) or more of the outstanding Voting Stock. (b) "Affiliates" and "beneficial owner" are used herein as defined in Rule 12b-2 and Rule 13d-3, respectively, under the 1934 Act. The term "Affiliate" as used herein shall exclude the Corporation, but shall include the definition of "Associate" as contained in said Rule 12b-2. (c) In determining whether a person is an Interested Shareholder pursuant to paragraph (a) of this Section 3, (i) such person (the "Shareholder") shall be deemed to be the beneficial owner of any Voting Stock (A) of which any Affiliate of the Shareholder is the beneficial owner, (B) of which any other person is the beneficial owner and with which the Shareholder or any of the Shareholder's Affiliates had any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any Voting Stock or (C) of which any other person is the beneficial owner as a result of the assignment by or succession from the Shareholder within the two-year period immediately prior to the date in question which shall have occurred in the 6 7 course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, and (ii) any class of Voting Stock outstanding shall be deemed to include any Voting Stock deemed owned through application of clause (i) of this paragraph (c) but shall not include any other securities of such class which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (d) "Self-Dealing Transaction" means any of the following transactions: (i) any merger or consolidation of the Corporation or any Subsidiary with (A) any Interested Shareholder or (B) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate of an Interested Shareholder; or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate fair market value of $100,000,000 or more or any loan, advance, guarantee or other financial assistance, including any tax credit or other tax advantages, to or with any Interested Shareholder or any Affiliate of any Interested Shareholder which involves a financial obligation or benefit of $100,000,000 or more; or (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $100,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Shareholder or any Affiliate of any Interested Shareholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share by more than one percent (1%) of the outstanding shares of any class of Voting Stock of the Corporation or any Subsidiary which is directly or indirectly owned by an Interested Shareholder or any Affiliate of any Interested Shareholder. (e) "Subsidiary" means any corporation of which a majority of any class of shares of such corporation entitled to vote generally in the election of directors is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Shareholder 7 8 set forth in paragraph (a) of this Section 3, the term "Subsidiary" shall mean only a corporation of which a majority of the combined voting power of all shares of such corporation entitled to vote generally in the election of directors is owned, directly or indirectly, by the Corporation. (f) "Market Price" means the average of the closing sale prices on the 20 regular trading days immediately preceding the date of any binding agreement to purchase shares of Voting Stock of the class of Voting Stock in question on the Composite Tape for New York Stock Exchange- Listed Stocks, or, if such class of Voting Stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such class of Voting Stock is not listed on such Exchange, on the principal United States securities exchange registered under the 1934 Act, on which such class of Voting Stock is listed, or, if such class of Voting Stock is not listed on any such exchange, the last closing bid quotations with respect to a share of such class of Voting Stock immediately preceding the time in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use (or any other system of reporting or ascertaining quotations then available), or if such class of Voting Stock is not so quoted, the fair market value at the time in question of such stock as determined by the Board of Directors in good faith. 4. Powers of the Board of Directors. A majority of the Disinterested Directors, or, if there are no Disinterested Directors, a majority of the members of the Board of Directors then in office, shall have the power to determine, for the purpose of this Article, on the basis of information known to them, (a) whether a person is an Interested Shareholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, and (d) whether the assets or financial obligations or benefits which are the subject of any Self- Dealing Transaction have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Self-Dealing Transaction has, an aggregate fair market value of or involve $100,000,000 or more. A majority of the Disinterested Directors, a majority of the members of the Board of Directors then in office, shall have the further power to interpret all of the terms and provisions of this Article. ARTICLE XIII The Corporation shall indemnify to the full extent permitted by law (such as it presently exists or may hereafter be amended) any person made, or threatened to be made, a defendant or witness to any action, suit or proceeding (whether civil, criminal, administrative or investigative), by reason of the fact that such person is or was a director or officer of the Corporation or by reason of the fact that such director or officer, at the request of the Corporation, is or was serving any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, in any capacity. Any amendment, repeal, or modification of the foregoing paragraph shall not adversely affect any right or protection of such person existing hereunder with respect to any act or omission occurring prior to such amendment, repeal, or modification. 8 9 ARTICLE XIV A director of this Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law as the same exists or may hereafter be amended. Any amendment, repeal, or modification of the foregoing paragraph shall not adversely affect any right or protection of a director of the Corporation existing hereunder with respect to any act or omission occurring prior to such amendment, repeal, or modification. ARTICLE XV Subject to the provisions of Article XI, the Corporation reserves the right at any time, and from time to time, to amend, alter, change or repeal any provision contained in this Restated Certificate of Incorporation, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted, in the manner now or hereafter prescribed by law; and all rights, preferences and privileges of whatsoever nature conferred upon stockholders, directors or any other persons whomsoever by and pursuant to this Restated Certificate of Incorporation in its present form or as hereafter amended are granted subject to the rights reserved in this Article. ARTICLE XVI The Board of Directors of the Corporation is authorized from time to time to enact by resolution, without additional authorization by the stockholders of the Corporation, by-laws of the Corporation, in such form and with such additional terms as the Board of Directors may determine, with respect to, among other things, the matters of corporate proceeding set forth below: (a) Regulation of the procedure for submitting nominations of persons to be elected directors, including requirements that nominations of persons to be elected directors, other than nominations submitted on behalf of the incumbent Board of Directors, be (i) by notice in writing containing such information as the Board of Directors determines, and (ii) submitted to the corporate secretary or other designated officer or agent of the Corporation that number of days before the meeting of the stockholders at which such election is to be held as is specified in such by-law. (b) Regulation of the procedure for introducing business to be brought before any annual or special meetings of the stockholders of the corporation, other than business introduced by the Corporation. 9 10 IN WITNESS WHEREOF, the undersigned have executed this instrument this 21st day of November, 1997. ------------------------------------ Robert W. Pommerville Executive Vice President, General Counsel and Secretary Attest: - ----------------------------------- Holly A. Odom Assistant Secretary 10 EX-3.2 3 AMENDMENT OF CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF NEW BEVERLY HOLDINGS, INC. The undersigned, Robert W. Pommerville and Holly A. Odom, certify that they are the Executive Vice President, General Counsel and Secretary and the Assistant Secretary, respectively, of New Beverly Holdings, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), and do hereby further certify as follows: 1. The name of the Corporation is currently New Beverly Holdings, Inc., the name under which it was originally incorporated. 2. The original Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of the State of Delaware on April 15, 1997. 3. The Restated Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of the State of Delaware on November 21, 1997. 4. This Certificate of Amendment of Certificate of Incorporation was duly adopted by the sole stockholder of the Corporation in accordance with Section 228 and 242 of the General Corporation Law of the State of Delaware. 5. The Restated Certificate of Incorporation of the Corporation is amended hereby by changing Article I thereof so that, as amended said Article shall be and read as follows: "ARTICLE I The name of the Corporation is Beverly Enterprises, Inc." IN WITNESS WHEREOF, the undersigned have executed this instrument as of this ____ day of December, 1997. --------------------------------------------- Robert W. Pommerville Executive Vice President, General Counsel and Secretary Attest: - --------------------------- Holly A. Odom Assistant Secretary EX-4.6 4 RIGHTS AGREEMENT 12/3/97 1 EXHIBIT 4.6 ================================================================================ NEW BEVERLY HOLDINGS, INC. and THE BANK OF NEW YORK as Rights Agent Rights Agreement Dated as of December 3, 1997 ================================================================================ 2 RIGHTS AGREEMENT Agreement, dated as of December 3, 1997 between NEW BEVERLY HOLDINGS, INC., A DELAWARE CORPORATION (the "Company"), and THE BANK OF NEW YORK, A NEW YORK BANKING CORPORATION, as Rights Agent (the "Rights Agent"). RECITALS The Board of Directors of the Company has authorized and declared a dividend of one right (a "Right") for each Common Share (as defined in Section 1.6) of the Company outstanding at the close of business on December 3, 1997 (the "Record Date") and has authorized the issuance of one Right with respect to each Common Share that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are defined in Sections 3.1 and 7.1), each Right initially representing the right to purchase one Common Share. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. Certain Definitions. For purposes of this Rights Agreement, the following terms have the meanings indicated: 1.1 "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the Common Shares of the Company then outstanding but shall not include the Company, any Subsidiary of the Company or any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan. Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the Common Shares of the Company then outstanding; PROVIDED, HOWEVER, that if a Person shall become the Beneficial Owner of 15% or more of the Common Shares of the Company then outstanding solely by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an "Acquiring Person." Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person," as defined pursuant to the foregoing provisions of this Section 1.1, has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of Common Shares so that such Person would no longer be an Acquiring Person, as defined pursuant to the foregoing provisions of this Section 1.1, then such Person shall not be deemed to be an "Acquiring Person" at any time for any purposes of this Agreement. 3 1.2 "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations, as in effect on the date of this Rights Agreement, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 1.3 A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly (as determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Exchange Act as in effect on the date of this Agreement); (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately, or only after the passage of time, compliance with regulatory requirements, fulfillment of a condition or otherwise) pursuant to any agreement, arrangement or understanding, whether or not in writing (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, (1) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange or (2) securities which such Person or any of such Person's Affiliates or Associates may acquire, does or do acquire or may be deemed to have the right to acquire, pursuant to any merger or other acquisition agreement between the Company and such Person (or one or more of his Affiliates or Associates) if such agreement has been approved by the Board of Directors of the Company prior to such Person's becoming an Acquiring Person; or (B) the right to vote pursuant to any agreement, arrangement or understanding (whether or not in writing); PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security under this clause (B) if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), whether or not in writing, for the 2 4 purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in the proviso to Section 1.3(ii)(B)) or disposing of any securities of the Company. 1.4 "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. 1.5 "Close of Business" on any given date shall mean 5:00 p.m., New York City time, on such date; PROVIDED, HOWEVER, that if such date is not a Business Day it shall mean 5:00 p.m., New York City time, on the next succeeding Business Day. 1.6 "Common Shares" when used with reference to the Company shall mean the shares of common stock, par value $.10 per share, of the Company. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such other Person or, if such Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person, and which has issued and outstanding such capital stock, equity securities or equity interest. 1.7 "Continuing Director" shall mean (i) any member of the Board of Directors of the Company, while such Person is a member of the Board, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or an employee, director, representative, nominee or designee of any Acquiring Person or of any such Affiliate or Associate, and was a member of the Board prior to the time that any Person becomes an Acquiring Person or (ii) any Person (during such period in which such Person is a member of the Board) who, after the time that any Person becomes an Acquiring Person, becomes a member of the Board and who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or an employee, director, representative, nominee or designee of an Acquiring Person or of any such Affiliate or Associate, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. 1.8 "Person" shall mean any individual, partnership, joint venture, limited liability company, firm, corporation, unassociated association, trust or other entity, and shall include any successor (by merger or otherwise) of such entity. 1.9 "Shares Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, the filing of a report pursuant to Section 13(d) of the Exchange Act or pursuant to a comparable successor statute) by the Company or an Acquiring Person that an Acquiring Person has become such or that discloses information which reveals the existence of an Acquiring Person. 3 5 1.10 "Subsidiary" of any Person shall mean any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interests is owned, of record or beneficially, directly or indirectly, by such Person. 1.11 A "Trigger Event" shall be deemed to have occurred upon any Person becoming an Acquiring Person. Notwithstanding the foregoing, a Trigger Event shall not be deemed to have occurred if the event causing the 15% ownership threshold to be crossed is an acquisition of Common Shares made pursuant to a cash tender offer made pursuant to the rules and regulations under the Exchange Act and filed with the Securities and Exchange Commission on Schedule 14D-1 (or any successor form) for all outstanding Common Shares not beneficially owned by the Person making such offer (or by its Affiliates or Associates) so long as the Board of Directors of the Company determines, after receiving advice from one or more investment banking firms, that such offer is (i) at a price and on terms which are fair to stockholders (taking into account all factors which such members of the Board deem relevant, including without limitation, prices which could reasonably be achieved if the Company or its assets were sold on an orderly basis designed to realize maximum value) and (ii) otherwise in the best interests of the Company and its stockholders; PROVIDED, HOWEVER, that there must be Continuing Directors then in office and any such determination shall require the concurrence of a majority of such Continuing Directors. 1.12 The following terms shall have the meanings defined for such terms in the Sections set forth below:
Term Section Adjustment Shares 11.1.2 common stock equivalent 11.1.3 Company Recitals current per share market price 11.4 Current Value 11.1.3 Distribution Date 3.1 Exchange Act 1.2 Exchange Consideration 27 Final Expiration Date 7.1 NASDAQ 9 Purchase Price 4 Record Date Recitals Redemption Date 7.1 Redemption Price 23.1 Right Recitals Right Certificate 3.1 Rights Agent Recitals Spread 11.1.3 Substitution Period 11.1.3 Summary of Rights 3.2 Trading Day 11.4
4 6 Section 2. Appointment of Rights Agent. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3, shall prior to the Distribution Date also be the holders of the Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable upon ten (10) days' prior written notice to the Rights Agent. The Rights Agent shall have no duty to supervise, and shall in no event be liable for, the acts or omissions of any such co-Rights Agent. In the event the Company appoints one or more co-Rights Agents, the respective duties of the Rights Agent and any co-Rights Agent shall be as the Company shall determine. Contemporaneously with such appointment, if any, the Company shall notify the Rights Agent thereof. Section 3. Issuance of Right Certificates. 3.1 Rights Evidenced by Share Certificates. Until the earlier of (i) the tenth day after the Shares Acquisition Date or (ii) the tenth day after the date of the commencement of, or first public announcement of the intent of any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan) to commence, a tender or exchange offer the consummation of which would result in any Person becoming the Beneficial Owner of Common Shares aggregating 15% or more of the then outstanding Common Shares of the Company (the earlier of (i) and (ii) being herein referred to as the "Distribution Date," whether or not either such date occurs prior to the Record Date), (x) the Rights (unless earlier expired, redeemed or terminated) will be evidenced (subject to the provisions of Section 3.2) by the certificates for Common Shares registered in the names of the holders thereof (which certificates for Common Shares shall also be deemed to be Right Certificates) and not by separate certificates, and (y) the Rights (and the right to receive certificates therefor) will be transferable only in connection with the transfer of the underlying Common Shares. The preceding sentence notwithstanding, prior to the Distribution Date specified therein (or such later Distribution Date as the Board of Directors of the Company may select pursuant to this sentence), the Board of Directors of the Company may postpone, one or more times, the Distribution Date beyond the earlier of the dates set forth in such preceding sentence; PROVIDED, HOWEVER, that there must be Continuing Directors then in office and any such postponement shall require the approval of at least a majority of such Continuing Directors. As soon as practicable after the Distribution Date, the Rights Agent will send, by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, a certificate for Rights, in substantially the form of Exhibit A hereto (a "Right Certificate"), evidencing one Right for each Common Share so held. As of the 5 7 Distribution Date, the Rights will be evidenced solely by such Right Certificates. The Company shall give the Rights Agent prompt written notice of the Distribution Date. 3.2 Summary of Rights. On the Record Date or as soon as practicable thereafter, the Company will send or cause to be sent a copy of a Summary of Rights to Purchase Common Shares, in substantially the form attached hereto as Exhibit B (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Record Date at the address of such holder shown on the records of the Company. With respect to certificates for Common Shares outstanding as of the close of business on the Record Date, until the Distribution Date (or the earlier Redemption Date or Final Expiration Date), the Rights will be evidenced by such certificates for Common Shares registered in the names of the holders thereof together with a copy of the Summary of Rights and the registered holders of the Common Shares shall also be registered holders of the associated Rights. Until the Distribution Date (or the earlier Redemption Date or Final Expiration Date), the surrender for transfer of any certificate for Common Shares outstanding at the close of business on the Record Date, with or without a copy of the Summary of Rights, shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. 3.3 New Certificates After Record Date. Certificates for Common Shares which become outstanding (whether upon issuance out of authorized but unissued Common Shares, issuance out of treasury or transfer or exchange of outstanding Common Shares) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date, shall be deemed also to be certificates for Rights, and shall have impressed, printed, stamped, written or otherwise affixed onto them the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement between New Beverly Holdings, Inc. and The Bank of New York, dated as of ________________, 1997, as the same may be amended from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of New Beverly Holdings, Inc. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. New Beverly Holdings, Inc. will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. As described in the Rights Agreement, Rights which are held by or have been held by Acquiring Persons or Associates or Affiliates thereof (as defined in the Rights Agreement) shall become null and void. 6 8 With respect to such certificates containing the foregoing legend, until the Distribution Date (or the earlier Redemption Date or Final Expiration Date), the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates and the surrender for transfer of any such certificates shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed canceled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. Section 4. Form of Right Certificates. The Right Certificates (and the forms of election to purchase shares, certification and assignment to be printed on the reverse thereof) shall be substantially the same as Exhibit A hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Rights Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange or trading system on which the Rights may from time to time be listed or quoted, or to conform to usage. Subject to the terms and conditions hereof, the Right Certificates, whenever issued, shall be dated as of the Record Date, and shall show the date of countersignature by the Rights Agent, and on their face shall entitle the holders thereof to purchase such number of Common Shares as shall be set forth therein at the price per share set forth therein (the "Purchase Price"), but the number and kind of such shares and the Purchase Price shall be subject to adjustment as provided herein. Section 5. Countersignature and Registration. The Right Certificates shall be executed on behalf of the Company by its Chairman of the Board of Directors, the Chief Executive Officer, President or any Vice President, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or any Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by an authorized signatory of the Rights Agent, but it shall not be necessary for the same signatory to countersign all of the Right Certificates hereunder. No Right Certificate shall be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent, and issued and delivered by the Company with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. 7 9 Following the Distribution Date, the Rights Agent will keep or cause to be kept, at one of its offices in New York, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates, the number of the Right Certificates and the date of each of the Right Certificates. Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates. Subject to the provisions of Section 11.1.2 and Section 14, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the earlier of the Redemption Date or the Final Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Rights that have become void pursuant to Section 11.1.2 or that have been exchanged pursuant to Section 27) may be transferred, split up or combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of Common Shares as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up or combine or exchange any Right Certificate shall make such request in writing delivered to the Rights Agent, and shall surrender, together with any required form of assignment and certificate duly completed, the Right Certificate or Right Certificates to be transferred, split up or combined or exchanged at the office of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Right Certificate or Right Certificates until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Right Certificate or Right Certificates and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall countersign and deliver to the person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment from the holders of Right Certificates of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up or combination or exchange of such Right Certificates. Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. 8 10 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights. 7.1 Exercise of Rights. Subject to Section 11.1.3, the registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase and certification on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose, together with payment of the Purchase Price for each Common Share as to which the Rights are exercised, at or prior to the earliest of (i) the close of business on the Final Expiration Date (as such term is hereinafter defined), (ii) the time at which the Rights are redeemed as provided in Section 23 (the "Redemption Date"), (iii) the closing of any merger or other acquisition transaction involving the Company pursuant to an agreement of the type described in Section 1.3(ii)(A)(2), at which time the Rights are deemed terminated, or (iv) the time at which the Rights are exchanged as provided in Section 27. The Final Expiration Date shall mean the date of the annual meeting of stockholders in 1998 (the "1998 Meeting"), unless a proposal requiring extension of the Final Expiration Date to the date of the annual meeting of stockholders in the year 2001 (the "2001 Meeting") shall have received the affirmative vote of a majority of the shares voting thereon at the 1998 Meeting, in which case the Final Expiration Date shall be extended to the 2001 Meeting. 7.2 Purchase Price. The Purchase Price for each Common Share pursuant to the exercise of a Right shall initially be $70, shall be subject to adjustment from time to time as provided in Sections 11, 13 and 26 and shall be payable in lawful money of the United States of America in accordance with paragraph 7.3. 7.3 Payment Procedures. Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase and certification duly executed, accompanied by payment of the Purchase Price for the shares to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Right Certificate in accordance with Section 9, by certified or cashier's check or money order payable to the order of the Company, the Rights Agent shall thereupon promptly (i) requisition from any transfer agent of the Common Shares (or make available, if the Rights Agent is the transfer agent) certificates for the number of Common Shares to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of the issuance of fractional shares in accordance with Section 14, (iii) promptly after receipt of such certificates, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt, promptly deliver such cash to or upon the order of the registered holder of such Right Certificate. In the event that the Company is obligated to issue other securities of the Company, pay cash and/or distribute other property pursuant to Section 11.1.3, the Company will make all arrangements necessary so that such other securities, cash and/or other property are available for distribution by the Rights Agent, if and when appropriate. 9 11 7.4 Partial Exercise. In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent and delivered to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14. 7.5 Full Information Concerning Ownership. Notwithstanding anything in this Rights Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless the certificate contained in the form of election to purchase set forth on the reverse side of the Right Certificate surrendered for such exercise shall have been duly completed and signed by the registered holder thereof and the Company shall have been provided with such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. Cancellation and Destruction of Right Certificates. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Right Certificates to the Company, or may, but shall not be required to, at the written request of the Company, destroy such canceled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. Reservation and Availability of Common Shares. The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Common Shares, or any authorized and issued Common Shares held in its treasury, the number of Common Shares that will be sufficient to permit the exercise in full of all outstanding Rights. So long as the Common Shares issuable upon the exercise of Rights may be listed on any national securities exchange or traded in the over-the-counter market and quoted on the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"), the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares reserved for such issuance to be listed on such exchange or so traded in such over-the-counter market, upon official notice of issuance upon such exercise. The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Common Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares. 10 12 The Company further covenants and agrees that it will pay when due and payable any and all Federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any Common Shares upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a person other than, or the issuance or delivery of certificates for the Common Shares in a name other than that of, the registered holder of the Right Certificate evidencing Rights surrendered for exercise or to issue or deliver any certificates for Common Shares in a name other than that of the registered holder upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. Section 10. Common Shares Record Date. Each person in whose name any certificate for Common Shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Common Shares represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and payment is a date upon which the Common Shares transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Common Shares transfer books of the Company are open. Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights. 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 as provided in this Section 11. 11.1 Post Execution Events. 11.1.1 Corporate Dividends, Reclassifications, Etc. In the event the Company shall at any time after the date of this Rights Agreement (A) declare a dividend on the Common Shares payable in Common Shares, (B) subdivide the outstanding Common Shares, (C) combine the outstanding Common Shares into a smaller number of shares or (D) issue any shares of its capital stock in a reclassification of the Common Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11.1, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Common Shares transfer books of the Company were open, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both Section 11.1.1 and Section 11.1.2, 11 13 the adjustment provided for in this Section 11.1.1 shall be in addition to, and shall be made prior to, the adjustment required pursuant to, Section 11.1.2. 11.1.2 Acquiring Person Events; Triggering Events. Subject to Sections 23.1 and 27 of this Agreement, in the event (A) any Acquiring Person or any Associate or Affiliate of any Acquiring Person, at any time after the date of this Rights Agreement, directly or indirectly, shall merge into the Company or otherwise combine with the Company and the Company shall be the continuing or surviving corporation of such merger or combination and the Common Shares of the Company shall remain outstanding and not changed into or exchanged for stock or other securities of any other Person or the Company or cash or any other property, or (B) that a Trigger Event occurs, then, promptly following the occurrence of each such event listed in this Section 11.1.2, proper provision shall be made so that each holder of a Right, except as provided below, shall thereafter have a right to receive, upon exercise thereof in accordance with the terms of this Rights Agreement, such number of Common Shares as shall equal the result obtained by (x) multiplying the then-current Purchase Price by the then-number of Common Shares for which a Right is then exercisable and (y) dividing that product by 50% of the current per share market price of the Common Shares (determined pursuant to Section 11.4) on the first of the date of the occurrence of, or the date of the first public announcement of, one of the events listed above in this Section 11.1.2 (the "Adjustment Shares"); PROVIDED, HOWEVER, that if the transaction that would otherwise give rise to the foregoing adjustment is also subject to the provisions of Section 13, then only the provisions of Section 13 shall apply and no adjustment shall be made pursuant to this Section 11.1.2; and PROVIDED, FURTHER, that nothing contained in this Section 11.1.2 shall limit or otherwise diminish the power of the Board of Directors (or, if applicable, the Continuing Directors) to postpone the Distribution Date pursuant to Section 3.1 or to extend the period during which the Rights may be redeemed pursuant to Section 23.1. Notwithstanding the foregoing, upon the occurrence of either of the events listed above in this Section 11.1.2, any Rights that are or were acquired or beneficially owned by an Acquiring Person or any Associate or Affiliate of the Acquiring Person shall become void and any holder (whether or not such holder is an Acquiring Person or an Associate or Affiliate of an Acquiring Person) of such Rights shall thereafter have no right to exercise such Rights under any provision of this Rights Agreement or otherwise. The Company shall not enter into any transaction of the type described in this Section 11.1.2 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. Any Right Certificate issued pursuant to Section 3 or Section 22 that represents Rights beneficially owned by: (1) an Acquiring Person or any Associate or Affiliate thereof, (2) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (3) a transferee of an Acquiring Person (or of any such 12 14 Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect avoidance of this Section 11.1.2 and any Right Certificate issued pursuant to Section 6, 7.4 or 22 or this Section 11 upon transfer, exchange, replacement or adjustment of any other Right Certificate referred to in this sentence, shall contain the following legend (PROVIDED, HOWEVER, that the Rights Agent shall not be responsible for affixing such legend unless it has actual knowledge as to the foregoing circumstances or the Company has notified the Rights Agent in writing thereof): THE RIGHTS REPRESENTED BY THIS RIGHT CERTIFICATE ARE HELD OR HAVE BEEN HELD BY A PERSON WHO IS OR WAS AN ACQUIRING PERSON OR AN AFFILIATE OR AN ASSOCIATE OF AN ACQUIRING PERSON OR A NOMINEE THEREOF. THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY HAVE BECOME NULL AND VOID AS SPECIFIED IN SECTION 11.1.2 OF THE RIGHTS AGREEMENT. The Company shall use all reasonable efforts to insure that the provisions of this Section 11.1.2 are complied with, but shall have no liability to any holder of Right Certificates or other Person as a result of its failure to make any determinations with respect to any Acquiring Person or its Affiliates, Associates or transferees hereunder. 11.1.3 Insufficient Shares. In the event that upon the occurrence of one or more of the events listed in Section 11.1.2 above there shall not be sufficient Common Shares authorized but unissued, or held by the Company as treasury shares, to permit the exercise in full of the Rights in accordance with the foregoing Section 11.1.2, the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exercise of the Rights, PROVIDED, HOWEVER, that if the Company determines that it is unable to cause the authorization of a sufficient number of additional Common Shares, then, in the event the Rights become exercisable, the Company, with respect to each Right and to the extent necessary and permitted by applicable law and any agreements or instruments in effect on the date hereof to which it is a party, shall: (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value"), over (2) the Purchase Price (such excess, the "Spread") and (B) with respect to each Right, make adequate provision to substitute for the Adjustment Shares, upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) Common Shares or other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock which the Board of Directors of the Company has deemed to have the same value as Common Shares) (each such share of preferred stock constituting a "common stock equivalent")), (4) debt securities of the Company, (5) other assets or (6) any combination of the foregoing having an aggregate value 13 15 equal to the Current Value, where such aggregate value has been determined by the Board of Directors of the Company based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; PROVIDED, HOWEVER, that if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the first occurrence of one of the events listed in Section 11.1.2 above, then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, Common Shares (to the extent available) and then, if necessary, cash, which in the aggregate are equal to the Spread. If the Board of Directors of the Company shall determine in good faith that it is unlikely that sufficient additional Common Shares could be authorized for issuance upon exercise in full of the Rights, the thirty (30) day period set forth above may be extended and re-extended to the extent necessary, but not more than ninety (90) days following the first occurrence of one of the events listed in Section 11.1.2 above, in order that the Company may seek stockholder approval for the authorization of such additional shares (such period as may be extended, the "Substitution Period"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 11.1.3, the Company (x) shall provide that such action shall apply uniformly to all outstanding Rights, and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11.1.3, the value of a Common Share shall be the current per share market price (as determined pursuant to Section 11.4) on the date of the first occurrence of one of the events listed in Section 11.1.2 above and the value of any "common stock equivalent" shall be deemed to have the same value as the Common Shares on such date. 11.2 Dilutive Rights Offering. In case the Company shall fix a record date for the issuance of rights or warrants to all holders of Common Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Common Shares (or securities convertible into Common Shares) at a price per Common Share (or having a conversion price per Common Share, if a security convertible into Common Shares) less than the current per share market price of the Common Shares (as defined in Section 11.4) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Common Shares outstanding on such record date plus the number of Common Shares which the aggregate offering price of the total number of Common Shares to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Common Shares outstanding on such record date plus the number of additional Common Shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined 14 16 in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. Common Shares owned by or held for the account of the Company or any Subsidiary of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such rights or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. 11.3 Distributions. In case the Company shall fix a record date for the making of a distribution to all holders of the Common Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness, securities or assets (other than a regular periodic cash dividend at a rate not in excess of 125% of the rate of the last regular periodic cash dividend theretofore paid or, in case regular periodic cash dividends have not theretofore been paid, at a rate not in excess of 50% of the average net income per share of the Company for the four quarters ended immediately prior to the payment of such dividend, or a dividend payable in Common Shares (which dividend, for purposes of this Agreement, shall be subject to the provisions of Section 11.1.1(A) hereof)) or subscription rights or warrants (excluding those referred to in Section 11.2), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current per share market price of the Common Shares (as defined in Section 11.4) on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the assets, securities or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Common Share and the denominator of which shall be such current per share market price of the Common Shares. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. 11.4 Current Per Share Market Value. For the purpose of any computation hereunder, the "current per share market price" of the Common Shares on any date shall be deemed to be the average of the daily closing prices per share of such Common Shares for the thirty (30) consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; PROVIDED, HOWEVER, that in the event that the current per share market price of the Common Shares is determined during any period following the announcement by the issuer of such Common Shares of (i) a dividend or distribution on such Common Shares payable in such Common Shares or securities convertible into such Common Shares or (ii) any subdivision, combination or reclassification of such Common Shares, and prior to the expiration of thirty (30) Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current per share market price" shall be appropriately adjusted to reflect the current market price per 15 17 Common Share equivalent. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Shares are listed or admitted to trading or, if the Common Shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use, or, if on any such date the Common Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Shares selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Common Shares, the fair value of the Common Shares on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Shares are listed or admitted to trading is open for the transaction of business or, if the Common Shares are not listed or admitted to trading on any national securities exchange, a Business Day. If the Common Shares are not publicly held or not so listed or traded, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company or, if at the time of such determination there is an Acquiring Person, by a majority of the Continuing Directors then in office, or if there are no Continuing Directors, by a nationally recognized investment banking firm selected by the Board of Directors, whose determination shall be described in a statement filed with the Rights Agent. 11.5 Insignificant Changes. No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price. Any adjustments which by reason of this Section 11.5 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest ten-thousandth of a share as the case may be. 11.6 Shares Other Than Common Shares. If as a result of an adjustment made pursuant to Section 11.1, the holder of any right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Common Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Shares contained in Sections 11.1 through 11.3, inclusive, and the provisions of Sections 7, 9, 10 and 13 with respect to the Common Shares shall apply on like terms to any such other shares. 16 18 11.7 Rights Issued Prior to Adjustment. All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of Common Shares purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. 11.8 Effect of Adjustments. Unless the Company shall have exercised its election as provided in Section 11.9, upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11.1, 11.2 and 11.3, each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of shares (calculated to the nearest ten-thousandth) obtained by (i) multiplying (x) the number of shares covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. 11.9 Adjustment in Number of Rights. The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of Common Shares issuable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercised for the number of Common Shares for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least ten (10) days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11.9, the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. 17 19 11.10 Right Certificates Unchanged. Irrespective of any adjustment or change in the Purchase Price or the number of Common Shares issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price per share and the number of shares which were expressed in the initial Right Certificates issued hereunder. 11.11 Par Value Limitations. Before taking any action that would cause an adjustment reducing the Purchase Price below the then par value, if any, of the Common Shares issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Common Shares at such adjusted Purchase Price. 11.12 Deferred Issuance. In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date the Common Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Common Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. 11.13 Reduction in Purchase Price. Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Common Shares, issuance wholly for cash of any of the Common Shares at less than the current market price, issuance wholly for cash of Common Shares or securities which by their terms are convertible into or exchangeable for Common Shares, stock dividends or issuance of rights, options or warrants referred to hereinabove in this Section 11, hereafter made by the Company to holders of its Common Shares shall not be taxable to such stockholders. Section 12. Certificate of Adjusted Purchase Price or Number of Shares. Whenever an adjustment is made as provided in Sections 11 and 13, the Company shall (a) promptly prepare a certificate setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent and with each transfer agent for the Common Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 25. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained and shall not be deemed to have knowledge of any such adjustment unless and until it shall have received such certificate. Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power. 18 20 13.1 General. In the event that, following the Shares Acquisition Date, directly or indirectly, (A) the Company shall consolidate with, or merge with and into, any other Person and the Company shall not be the continuing or surviving corporation, (B) any Person shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of the Company or any other Person or cash or any other property, or (C) the Company shall sell, exchange, mortgage or otherwise transfer (or one or more of its Subsidiaries shall sell, exchange, mortgage or otherwise transfer), in one or more transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons, then, and in each such case, proper provision shall be made so that (i) each holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price in accordance with the terms of this Rights Agreement, such number of Common Shares of such other Person (including the Company as successor thereto or as the surviving corporation) as shall be equal to the result obtained by (x) multiplying the then-current Purchase Price by the then-number of Common Shares for which a Right is then exercisable (without taking into account any adjustment previously made pursuant to Section 11.1.2) and (y) dividing that product by 50% of the current per share market price of the Common Shares of such other Person (determined pursuant to Section 11.4) on the date of consummation of such consolidation, merger, sale or transfer; (ii) the issuer of such Common Shares shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale or transfer, all the obligations and duties of the Company pursuant to this Rights Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such issuer; and (iv) such issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its Common Shares thereafter deliverable upon the exercise of the Rights. The Company shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. The Company shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Company and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement so providing. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. 13.2 Approved Acquisitions. Notwithstanding anything contained herein to the contrary, in the event of any merger or other acquisition transaction involving the Company pursuant to a merger or other acquisition agreement between the Company and any Person (or one or more of such Person's Affiliates or Associates) which agreement has been approved by the Board of Directors of the Company prior to any Person becoming an Acquiring Person, this Rights Agreement and the rights of holders of Rights hereunder shall be terminated in accordance with Section 7.1. 19 21 Section 14. Fractional Rights and Fractional Shares. 14.1 Cash in Lieu of Fractional Rights. The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14.1, the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used. 14.2 Cash in Lieu of Fractional Shares. The Company shall not be required to issue fractions of shares upon exercise of the Rights or to distribute certificates which evidence fractional shares. In lieu of fractional shares, the Company may pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Common Share. For purposes of this Section 14.2, the current market value of a Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section 11.4) for the Trading Day immediately prior to the date of such exercise. 14.3 Waiver of Right to Receive Fractional Rights or Shares. The holder of a Right by the acceptance of the Rights expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right. Section 15. Rights of Action. All rights of action in respect of this Rights Agreement, except the rights of action given to the Rights Agent under Section 18, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent 20 22 or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his own behalf and for his own benefit, enforce this Rights Agreement, and may institute and maintain any suit, action or proceeding against the Company to enforce this Rights Agreement, or otherwise enforce or act in respect of his right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Rights Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Rights Agreement and shall be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of, the obligations of any Person (including, without limitation, the Company) subject to this Rights Agreement. Section 16. Agreement of Right Holders. Every holder of a Right by accepting the same consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) as of and after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer with all required certifications completed; and (c) the Company and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary. Section 17. Right Certificate Holder Not Deemed a Stockholder. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Common Shares or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 24), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. 21 23 Section 18. Concerning the Rights Agent. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder in accordance with a fee schedule to be mutually agreed upon and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and expenses and other disbursements incurred in the administration and execution of this Rights Agreement and the acceptance, exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Rights Agreement, including the costs and expenses of defending against any claim of liability in the premises. The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Rights Agreement in reliance upon any Right Certificate or certificate for the Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, instruction, direction, opinion, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed and executed by the proper person or persons and when necessary, to be verified or acknowledged. The provisions of this Section 18 shall survive the expiration of the Rights and the termination of this Rights Agreement. Section 19. Merger or Consolidation or Change of Name of Rights Agent. Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to all or substantially all the corporate trust or stock transfer business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Rights Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, PROVIDED that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21. In case at the time such successor Rights Agent shall succeed to the agency created by this Rights Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Rights Agreement. In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; 22 24 and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Rights Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes the duties and obligations expressly imposed by this Rights Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound, and no implied duties or obligations shall be read into this Rights Agreement against the Rights Agent. 20.1 Legal Counsel. The Rights Agent may consult with legal counsel selected by it (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. 20.2 Certificates as to Facts or Matters. Whenever in the performance of its duties under this Rights Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer, any Vice President, the Treasurer, the Secretary or any Assistant Treasurer or Assistant Secretary of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Rights Agreement in reliance upon such certificate. 20.3 Standard of Care. The Rights Agent shall be liable hereunder only for its own negligence, bad faith or willful misconduct. 20.4 Reliance on Rights Agreement and Right Certificates. The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Rights Agreement or in the Right Certificates (except as to its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. 20.5 No Responsibility as to Certain Matters. The Rights Agent shall not be under any responsibility in respect of the validity of this Rights Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Rights Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 11.1.2) or 23 25 any adjustment required under the provisions of Sections 3, 11, 13, 23 or 27 or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after actual notice of any such adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Common Shares to be issued pursuant to this Rights Agreement or any Right Certificate or as to whether any Common Shares will, when so issued, be validly authorized and issued, fully paid and nonassessable. 20.6 Further Assurance by Company. The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Rights Agreement. 20.7 Authorized Company Officers. The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer, any Vice President, the Treasurer, the Secretary or any Assistant Treasurer or Assistant Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties under this Rights Agreement, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for these instructions. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent with respect to its duties or obligations under this Rights Agreement and the date on and/or after which such action shall be taken or omitted. The Rights Agent shall not be liable to the Company for any action taken or omitted in accordance with a proposal included in any such application on or after the date specified therein (which date shall not be less than three business days after the date any such officer actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking of any such action (or the effective date in the case of omission), the Rights Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. 20.8 Freedom to Trade in Company Securities. The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Rights Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. 24 26 20.9 Reliance on Attorneys and Agents. The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, omission, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, omission, default, neglect or misconduct, PROVIDED that reasonable care was exercised in the selection and continued employment thereof. 20.10 Rights Holders List. At any time and from time to time after the Distribution Date, upon the written request of the Company, the Rights Agent shall promptly deliver to the Company a list, as of the most recent practicable date (or as of such earlier date as may be specified by the Company), of the holders of record of Rights. 20.11 Risk of Funds. No provision of this Rights Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. 20.12 Notice from Company. The Company agrees to give the rights Agent prompt written notice of any event or ownership which would prohibit the exercise or transfer of the Right Certificates. Section 21. Change of Rights Agent. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Rights Agreement upon thirty (30) days' notice in writing mailed to the Company and to each transfer agent of the Common Shares by registered or certified mail. The Company shall promptly notify the holders of the Right Certificates by first-class mail of any such resignation. The Company may remove the Rights Agent or any successor Rights Agent upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the resigning, removed, or incapacitated Rights Agent shall remit to the Company, or to any successor Rights Agent designated by the Company, all books, records, funds, certificates or other documents or instruments of any kind then in its possession which were acquired by such resigning, removed or incapacitated Rights Agent in connection with its services as Rights Agent hereunder, and shall thereafter be discharged from all duties and obligations hereunder. Following notice of such removal, resignation or incapacity, the Company shall appoint a successor to such Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the Rights Agent or the registered holder of any Right Certificate may apply to any court of 25 27 competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the State of New York (or any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of New York) in good standing, having a principal office in the State of New York, which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by Federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $10 million. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Right Certificates. Notwithstanding any of the provisions of this Rights Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Rights Agreement. In addition, in connection with the issuance or sale of Common Shares following the Distribution Date and prior to the redemption, exchange, termination or expiration of the Rights, the Company (a) shall, with respect to Common Shares so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, granted or awarded as of the Distribution Date, or upon exercise, conversion or exchange of securities hereinafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; PROVIDED, HOWEVER, that (i) no such Right Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the Person to whom such Right Certificate would be issued, (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustment shall otherwise have been made in lieu of the issuance thereof and (iii) at the time of a determination by the Board of Directors to cause the Company to issue a Right Certificate under clause (b) above, there must be Continuing Directors then in office and any such determination shall require the approval of at least a majority of such Continuing Directors. 26 28 Section 23. Redemption. The Rights may be redeemed by action of the Board of Directors pursuant to Section 23.1 or by Stockholder action pursuant to Section 23.2 and shall not be redeemed in any other manner. 23.1 Right to Redeem. The Board of Directors of the Company may, at its option, at any time prior to the close of business on the tenth day following the Shares Acquisition Date, redeem all but not less than all of the then outstanding Rights at a redemption price of $.01 per Right, appropriately adjusted to reflect any stock split, stock dividend, recapitalization or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"), PROVIDED, HOWEVER, that if the Board of Directors of the Company authorizes redemption of the Rights after the time a person becomes an Acquiring Person, then there must be Continuing Directors then in office and such authorization shall require the approval of at least a majority of such Continuing Directors. The preceding sentence notwithstanding, prior to the expiration of the period during which the Rights may be redeemed as specified therein (or such longer period as the Board of Directors of the Company may select pursuant to this sentence), the Board of Directors of the Company may extend, one or more times, the period during which the Rights may be redeemed beyond the close of business on the tenth day following the Shares Acquisition Date; PROVIDED, HOWEVER, that there must be Continuing Directors then in office and any such extension shall require the approval of at least a majority of such Continuing Directors. Anything contained in this Rights Agreement to the contrary notwithstanding, the Rights shall not be exercisable following a transaction or event described in Section 11.1.2 prior to the expiration of the Company's right of redemption hereunder. 23.2 Redemption by Shareholder Action. (1) In the event (i) the Company receives an Offer from any Offeror (as such terms are hereinafter defined), and (ii) within 60 days after such receipt (such sixtieth day being referred to herein as the "Offer Date"), the Board of Directors has not either (x) redeemed all but not less than all of the then outstanding Rights or (y) approved an alternative transaction which the Board of Directors has determined to be financially superior for the holders of shares of Common Stock other than the Offeror and its Affiliates, the Board of Directors shall call a special meeting of stockholders (the "Special Meeting") for the purpose of voting on a precatory resolution requesting the Board of Directors to accept such Offer, as such Offer may be amended or revised by the Offeror from time to time to increase the price per share to be paid to holders of shares of Common Stock (the "Resolution"). The Board of Directors shall select a date for the Special Meeting and shall use its best efforts to ensure that the Special Meeting actually be held on such date, which date shall not be later than the later of (A) the earliest date after the Offer Date on which it is reasonably practicable to arrange a Special Meeting and (B) the date of any meeting of stockholders already scheduled as of the Offer Date; provided, however, that if (x) such other meeting shall have been called for the purpose of voting on a precatory resolution with respect to another Offer and (y) the Offer Date shall be not later than 15 days after the date such other Offer was received by the Company, then both the Resolution and such other resolution 27 29 shall be voted on at such meeting and such meeting shall be deemed to be the Special Meeting. The Board of Directors shall set a date for determining the stockholders of record entitled to notice of and to vote at the Special Meeting in accordance with the Company's Certificate of Incorporation and By-Laws and with applicable law. At the Offeror's request, the Company shall in any proxy soliciting material prepared by it in connection with the Special Meeting proxy soliciting material submitted by the Offeror; provided, however, that the Offeror shall by written agreement with the Company contained in or delivered with such request have indemnified the Company against any and all liabilities resulting from any misstatements, misleading statements and omissions contained in the Offeror's proxy soliciting material and have agreed to pay the Company's incremental costs incurred as a result of including such material in the Company's proxy soliciting material. Notwithstanding the foregoing, no Special Meeting shall be held from and after such time as any Person becomes an Acquiring Person, and any Special Meeting scheduled prior to such time and not theretofore held shall be canceled. (2) If at the Special Meeting the Resolution receives the affirmative vote of a majority of the outstanding Common Shares as of the record date of the Special Meeting, then all of the Rights shall be redeemed by such stockholder action at the Redemption Price, effective immediately prior to the consummation of any tender or exchange offer (provided that such offer is consummated prior to 60 days after the date of the Special Meeting) pursuant to which any Person offers to purchase all of the shares of Common Stock held by Persons other than such Person and its Affiliates at a price per share in cash and/or at an exchange ratio which is financially superior to the cash price and/or the exchange ratio contained in the Resolution approved as the Special Meeting; provided, however, that the Rights shall not be redeemed at any time from and after such time as any Person becomes an Acquiring Person. (3) Nothing contained in this Section 23.2 shall be deemed to be in delegation of the obligation of the Board of Directors of the Company to exercise its fiduciary duty. Without limiting the foregoing, nothing contained herein shall be construed to suggest or imply that the Board of Directors shall not be entitled to reject any Offer, or to recommend that holders of shares of Common Stock reject any tender or exchange offer, or to take any other action (including, without limitation, the commencement, prosecution, defense or settlement of any litigation and the submission of additional or alternative Offers or other proposals to the Special Meeting) with respect to any Offer or any tender or exchange offer that the Board of Directors believes is necessary or appropriate in the exercise of such fiduciary duty. (4) Nothing in this Section 23.2 shall be construed as limiting or prohibiting the Company or any Offeror from proposing or engaging, at any time, in any acquisition, disposition or other transfer of any securities of the Company, any merger or consolidation involving the Company, any sale or other transfer of assets of the Company, any liquidation, dissolution or winding-up of the Company, or any other business combination or other transaction, or any other action by the Company or such Offeror; provided, however, that the holders of Rights shall have the rights set forth in this Agreement with respect to any such 28 30 acquisition, disposition, transfer, merger, consolidation, sale, liquidation, dissolution, winding-up, business combination, transaction or action. (5) An "Offer" shall mean a written proposal delivered to the Company by any Person (an "Offeror"), which proposal: (A) provides for the acquisition at the same price of all of the outstanding shares of Common Stock held by any Person other than the Offeror and its Affiliates. (B) if an offer all or partially for cash consideration, states that the Offeror has obtained written financing commitments from recognized financing sources, and/or has on hand cash or cash equivalents, for the full amount of all financing necessary to consummate the Offer; (C) if an offer all or partially for consideration other than cash, (i) provides for any non-cash consideration to consist only of securities which are listed and trading on the New York Stock Exchange and (ii) is determined by the Board of Directors of the Company to be one of a series of transactions which will provide tax-deferred treatment for the holders of shares of Common Stock other than the Offeror and its Affiliates; (D) is not subject to any financing, funding or similar condition, nor any condition relating to completion of or satisfaction with any due diligence or similar investigation and otherwise provides for usual and customary terms and conditions; and (E) requests the Company to call a special meeting of the holders of Common Stock for the purpose of voting on a precatory resolution requesting the Board of Directors to accept such Offer and contains a written agreement of the Offeror to pay (or share with any other Offeror) at least one-half of the Company's costs of such special meeting (exclusive of the Company's costs of preparing and mailing proxy material for its own solicitation)." 23.3 Redemption Procedures. In the case of a redemption permitted under Section 23.1 or Section 23.2, immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights pursuant to Section 23.1, or upon the effectiveness of the redemption of the Rights pursuant to Section 23.2, evidence of which shall have been filed with the Rights Agent, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. Within ten (10) days after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give, or cause the Rights Agent to give, notice of such redemption to the holders of the then outstanding Rights by mailing such notice to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares pursuant to Section 23.1 or the effectiveness of the redemption of the Rights to 29 31 Section 23.2. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 27, and other than in connection with the purchase of Common Shares prior to the Distribution Date. Section 24. Notice of Certain Events. In case the Company shall propose (a) to pay any dividend payable in stock of any class to the holders of Common Shares or to make any other distribution to the holders of Common Shares (other than a regular periodic cash dividend at a rate not in excess of 125% of the rate of the last regular periodic cash dividend theretofore paid or, in case regular periodic cash dividends have not theretofore been paid, at a rate not in excess of 50% of the average net income per share of the Company for the four quarters ended immediately prior to the payment of such dividends, or a stock dividend on, or a subdivision, combination or reclassification of the Common Shares) or (b) to offer to the holders of Common Shares rights or warrants to subscribe for or to purchase any additional Common Shares or shares of stock of any class or any other securities, rights or options, or (c) to effect any reclassification of its Common Shares (other than a reclassification involving only the subdivision of outstanding Common Shares), or (d) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its subsidiaries to effect any sale or other transfer), in one or more transactions, of more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person (other than pursuant to a merger or other acquisition agreement of the type described in Section 1.3(ii)(A)(2)), or (e) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to the Rights Agent and to each holder of a Right Certificate, in accordance with Section 25, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (a) or (b) above at least ten (10) days prior to the record date for determining holders of the Common Shares for purposes of such action, and in the case of any such other action, at least ten (10) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares, whichever shall be the earlier. In case any event set forth in Section 11.1.2 of this Rights Agreement shall occur, then, in any such case, the Company shall as soon as practicable thereafter give to the Rights Agent and to each holder of a Right Certificate, in accordance with Section 25, a notice of the occurrence of such event, which notice shall describe the event and the consequences of the event to holders of Rights under Section 11.1.2. Notwithstanding anything in this Rights Agreement to the contrary, prior to the Distribution Date a filing by the Company with the Securities and Exchange Commission shall 30 32 constitute sufficient notice to the holders of securities of the Company, including the Rights, for purposes of this Rights Agreement and no other notice need be given. Section 25. Notices. Notices or demands authorized by this Rights Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: New Beverly Holdings, Inc. 5111 Rogers Avenue, Suite 40-A Fort Smith, Arkansas 72919 Attention: Chairman of the Board or President Subject to the provisions of Section 21, any notice or demand authorized by this Rights Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: The Bank of New York 101 Barclay Street New York, New York 10286 Attention: Stock Transfer Administration Notices or demands authorized by this Rights Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 26. Supplements and Amendments. Prior to the Distribution Date and subject to the last sentence of this Section 26, the Company and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Rights Agreement without the approval of any holders of certificates representing Common Shares. From and after the Distribution Date and subject to the last sentence of this Section 26, the Company and the Rights Agent may from time to time supplement or amend this Rights Agreement without the approval of any holders of Right Certificates (i) to cure any ambiguity or to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (ii) to shorten or lengthen any time period hereunder (which shortening or lengthening, following the Shares Acquisition Date, shall be effective only if there are Continuing Directors and shall require the approval of at least a majority of such Continuing Directors) or (iii) so long as the interests of the holders of the 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 changes or provisions in regard to matters or questions arising hereunder which the Company and the Rights Agent may deem necessary or desirable, including but not limited to extending the Final Expiration Date; 31 33 PROVIDED, HOWEVER, that the right of the Board of Directors to extend the Distribution Date or Redemption Date shall not require any amendment or supplement hereunder. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 26, the Rights Agent shall execute such supplement or amendment. Notwithstanding any other provision hereof, the Rights Agent's consent must be obtained regarding any amendment or supplement pursuant to this Section 26 which alters the Rights Agent's rights or duties. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Shares. Without limiting the foregoing, at any time prior to such time as any Person becomes an Acquiring Person, the Company and the Rights Agent may amend this Agreement to lower the thresholds set forth in Sections 1.1 and 3.1 to not less than the greater of (i) any percentage greater than the largest percentage of the outstanding Common Shares then known by the Company to be beneficially owned by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan) and (ii) 10%. Section 27. Exchange. 27.1 Exchange of Common Shares for Rights. The Board of Directors of the Company may, at its option, at any time after the occurrence of a Trigger Event, exchange Common Shares for all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 11.1.2) by exchanging that number of Common Shares having an aggregate value equal to the Spread (with such value being based on the current per share market price (as determined pursuant to Section 11.4) on the date of the occurrence of a Trigger Event) per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such amount per Right being hereinafter referred to as the "Exchange Consideration"). Notwithstanding the foregoing, (i) the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any such Subsidiary, or any entity holding Common Shares for or pursuant to the terms of any such plan), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Shares then outstanding and (ii) the Board shall not be empowered to effect an exchange for more than that number of Rights for which there are sufficient Common Shares authorized but unissued, or held by the Company as treasury shares, to permit the exchange for Rights. 27.2 Exchange Procedures. Immediately upon the action of the Board of Directors of the Company ordering the exchange for any Rights pursuant to Section 27.1 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Exchange Consideration. The Company shall promptly give public notice of any such exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall not affect 32 34 the validity of such exchange. The Company promptly shall mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than the Rights which have become void pursuant to the provisions of Section 11.1.2) held by each holder of Rights. 27.3 No Fractional Shares Upon Exchange. The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Right Certificates, with regard to which such fractional Common Shares would otherwise be issuable, in an amount in cash equal to the same fraction of the current market value of a whole Common Share. For the purposes of this Section 27.3, the current market value of a whole Common Share shall be the current per share market value (as determined pursuant to Section 11.4) for the Trading Day immediately prior to the date of exchange pursuant to this Section 27. Section 28. Successors. All the covenants and provisions of this Rights Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Benefits of this Rights Agreement. Nothing in this Rights Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Rights Agreement; but this Rights Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares). Section 30. Severability. If any term, provision, covenant or restriction of this Rights Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Rights Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. Section 31. Governing Law. This Rights Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State, except that Sections 18, 19, 20 and 21 hereof only shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflicts of laws provisions thereof. 33 35 Section 32. Counterparts. This Rights Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 33. Descriptive Heading. Descriptive headings of the several Sections of this Rights Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Rights Agreement to be duly executed and their respective corporate seals to be hereunto affixed, all as of the day and year first above written. NEW BEVERLY HOLDINGS, INC. By: ------------------------------------ Name: Title: [SEAL] THE BANK OF NEW YORK By: ------------------------------------ Name: Title: 34 36 EXHIBIT A [Form of Right Certificate] Certificate No. R- _______ Rights NOT EXERCISABLE AFTER ______________, 20__ OR EARLIER IF NOTICE OF REDEMPTION OR EXCHANGE IS GIVEN OR IF THE COMPANY IS MERGED OR ACQUIRED PURSUANT TO AN AGREEMENT OF THE TYPE DESCRIBED IN SECTION 1.3(ii)(A)(2) OF THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY, AT $.01 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES (SPECIFIED IN SECTION 11.1.2 OF THE RIGHTS AGREEMENT), RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON, OR ITS AFFILIATES OR ASSOCIATES, OR ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL VOID. [THE RIGHTS REPRESENTED BY THIS CERTIFICATE ARE HELD OR HAVE BEEN HELD BY A PERSON WHO IS OR WAS AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF AN ACQUIRING PERSON OR A NOMINEE THEREOF. THIS RIGHT CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY HAVE BECOME NULL AND VOID AS SPECIFIED IN SECTION 11.1.2 OF THE RIGHTS AGREEMENT.] Right Certificate NEW BEVERLY HOLDINGS, INC. This certifies that ________________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement dated as of _____________, 1997, as the same may be amended from time to time (the "Rights Agreement"), between New Beverly Holdings, Inc., a Delaware corporation (the "Company"), and The Bank of New York, a New York banking corporation, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date and prior to 5:00 P.M. (New York City time) on ____________, 20__, at the offices of the Rights Agent, or its successors as Rights Agent, designated for such purpose, one fully paid, nonassessable common share (the "Common Shares") of the Company, at a purchase price of $__ per share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase and certification duly executed. The number of Rights evidenced by this Right Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of _______________, 1997 based on the Common Shares as constituted at such date. Capitalized terms used in this Right Certificate 35 37 without definition shall have the meanings ascribed to them in the Rights Agreement. As provided in the Rights Agreement, the Purchase Price and the number of Common Shares which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal offices of the Company and the designated office of the Rights Agent. This Right Certificate, with or without other Right Certificates, upon surrender at the offices of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of Common Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Board of Directors may, at its option, (i) redeem the Rights evidenced by this Right Certificate at a redemption price of $.01 per Right at any time prior to ten (10) days after the Shares Acquisition Date or (ii) exchange Common Shares for the Rights evidenced by this Certificate, in whole or in part, after the occurrence of a Trigger Event. The period during which redemption of the Rights is permitted may be extended by the Board of Directors of the Company, but such an extension shall require the concurrence of a majority of the Continuing Directors. Under certain circumstances set forth in the Rights Agreement, the decision to redeem shall require the concurrence of a majority of the Continuing Directors. No fractional Common Shares will be issued upon the exercise of any Right or Rights evidenced hereby, but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Right Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Common Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders 36 38 (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. If any term, provision, covenant or restriction of the Rights Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of the Rights Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. This Right Certificate shall not be valid or binding for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Attest: NEW BEVERLY HOLDINGS, INC. By: By: ------------------------------- ------------------------------- Title: Title: Countersigned: THE BANK OF NEW YORK, as Rights Agent By: ------------------------------- Authorized Signature Date of countersignature: -------------------- 37 39 [Form of Reverse Side of Right Certificate] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Right Certificate.) FOR VALUE RECEIVED _____________________________________________________________ hereby sells, assigns and transfers unto _______________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Please print name and address of transferee) This Right Certificate and the Rights evidenced thereby, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint __________________________ Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution. Dated: ------------------ --------------------------------- Signature Signature Guaranteed: - --------------------------- Signatures must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Rights Agent, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Rights Agent in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended. The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate [ ] are [ ] are not beneficially owned by an Acquiring Person or an Affiliate or an Associate thereof; and (2) after due inquiry and to the best knowledge of the undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any 38 40 person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate thereof. Dated: ------------------- ----------------------------------- Signature 39 41 FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise the Right Certificate.) To: NEW BEVERLY HOLDINGS, INC. The undersigned hereby irrevocably elects to exercise ________________ Rights represented by this Right Certificate to purchase the Common Shares issuable upon the exercise of such Rights and requests that certificates for such shares be issued in the name of: Please insert social security or other identifying number - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- Dated: ------------------ ----------------------------------- Signature Signature Guaranteed: - --------------------------- 40 42 The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate [ ] are [ ] are not beneficially owned by an Acquiring Person or an Affiliate or an Associate thereof; and (2) after due inquiry and to the best knowledge of the undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced by this Right Certificate from any person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate thereof. Dated: ------------------ ----------------------------------- Signature - -------------------------------------------------------------------------------- NOTICE The signature in the foregoing Form of Assignment and Form of Election to Purchase must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment or Form of Election to Purchase is not completed, the Company will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate hereof and, in the case of an Assignment, will affix a legend to that effect on any Right Certificates issued in exchange for this Right Certificate. 41 43 EXHIBIT B As described in the Rights Agreement, Rights which are held by or have been held by Acquiring Persons or Associates or Affiliates thereof (as defined in the Rights Agreement) shall become null and void. SUMMARY OF RIGHTS TO PURCHASE COMMON SHARES On ______________, 1997 the Board of Directors of New Beverly Holdings, Inc. (the "Company") declared a dividend of one Right for each share of common stock, $.10 par value (the "Common Shares"), of the Company outstanding at the close of business on ________________, 1997(the "Record Date"). As long as the Rights are attached to the Common Shares, the Company will issue one Right with each new Common Share so that all such shares will have attached Rights. Each Right entitles the registered holder to purchase from the Company 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 as of _________________, 1997, as the same may be amended from time to time (the "Rights Agreement"), between the Company and The Bank of New York, as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) ten (10) days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the Common Shares or (ii) ten (10) days following the commencement or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the Common Shares (the earlier of (i) and (ii) being called the "Distribution Date," whether or not either such date occurs prior to the Record Date), the Rights will be evidenced, with respect to any of the Common Share certificates outstanding as of the Record Date, by such Common Share certificate together with a copy of this Summary of Rights. The Rights Agreement provides that the Board of Directors, with the concurrence of a majority of the Continuing Directors (as defined below), may postpone the Distribution Date and that, until the Distribution Date, the Rights will be transferred with and only with the Common Shares. Until the Distribution Date (or earlier redemption or expiration of the Rights), new Common Share certificates issued after the close of business on the Record Date upon transfer or new issuance of the Common Shares will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption, exchange, termination or expiration of the Rights), the surrender for transfer of any certificates for Common Shares, with or without a copy of this Summary of Rights, will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") 42 44 will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on __________ , 1998, subject to the Company's right to extend such date (the "Final Expiration Date"), unless earlier redeemed or exchanged by the Company or terminated. The Purchase Price payable, and the number of Common Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of 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 rate of the last regular periodic cash dividend theretofore paid or, in case regular periodic cash dividends have not theretofore been paid, at a rate not in excess of 50% of the average net income per share of the Company 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). In the event that a Person becomes an Acquiring Person (except pursuant to certain cash offers for all outstanding Common Shares approved by the Board) or if the Company were the surviving corporation in a merger with an Acquiring Person or any affiliate or associate of an Acquiring Person and the Common Shares were not changed or exchanged, each holder of a Right, other than Rights that are or were acquired or beneficially owned by the 15% stockholder (which Rights will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the then current Purchase Price of the Right. With certain exceptions, in the event that the Company were acquired in a merger or other business combination transaction or more than 50% of its assets or earning power were 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 a market value of two times the then current Purchase Price of the Right. At any time after a Person becomes an Acquiring Person and prior to the acquisition by such Acquiring Person of 50% or more of the outstanding Common Shares, the Board of Directors may cause the Company to acquire the Rights (other than Rights owned by an Acquiring Person which have become void), in whole or in part, in exchange for that number of Common Shares having an aggregate value equal to the Spread (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) per Right (subject to adjustment). 43 45 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. The Rights may be redeemed in whole, but not in part, at a price of $.01 per Right (the "Redemption Price") by the Board of Directors at any time until ten (10) days following the public announcement that a Person has become an Acquiring Person. The Board of Directors, with the concurrence of a majority of the Continuing Directors, may extend the period during which the Rights are redeemable beyond the ten (10) days following the public announcement that a Person has become an Acquiring Person. Under certain circumstances set forth in the Rights Agreement, the decision to redeem shall require the concurrence of a majority of the Continuing Directors (as defined below). Immediately upon the action of the Board of Directors of the Company electing to redeem the Rights, the Company shall make an announcement thereof, and upon such election, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The term "Continuing Directors" means any member of the Board of Directors of the Company who was a member of the Board prior to the time that any Person becomes an Acquiring Person, and any person who is subsequently elected to the Board if such person is recommended or approved by a majority of the Continuing Directors. Continuing Directors do not include an Acquiring Person, or an affiliate or associate of an Acquiring Person, or any representative of the foregoing. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company beyond those as an existing stockholder, including, without limitation, the right to vote or to receive dividends. Any of the provisions of the Rights Agreement may be amended by the Board of Directors of the Company prior to the Distribution Date. After the Distribution Date, the Company 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 time period under the Rights Agreement (so long as, under certain circumstances, a majority of Continuing Directors approve such shortening or lengthening) or so long as the interests 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 provisions in regard to matters or questions arising thereunder which the Company and the Rights Agent may deem necessary or desirable, including but not limited to extending the Final Expiration Date. The Company may at any time prior to such time as any Person becomes 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 44 46 Common Shares then known by the Company to be beneficially owned by any person or group of affiliated or associated persons and (ii) 10%. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is incorporated herein by reference. 45 EX-10.3 5 AMENDMENT NO. 1 TO 1997 LTIP DATED 12/3/97 1 EXHIBIT 10.3 AMENDMENT NUMBER ONE TO THE NEW BEVERLY HOLDINGS, INC. 1997 LONG-TERM INCENTIVE PLAN Amendment made this 11th day of December, 1997, by Beverly Enterprises, Inc. (the "Corporation"). WITNESSETH: WHEREAS, during the first week of December, 1997, Beverly Enterprises, Inc. (as in existence prior to the "Transaction" referenced below) (hereinafter referred to as "Old Beverly") transferred its healthcare business to a wholly-owned subsidiary of Old Beverly, i.e., New Beverly Holdings, Inc. ("NBHI"), which was then spun-off to the shareholders of Old Beverly, all pursuant to the Agreement and Plan of Distribution by and between ("Capstone") dated as of April 15, 1997; and WHEREAS, immediately following such spin-off, Old Beverly merged with and into Capstone, with Capstone as the surviving corporation, all pursuant to the Agreement and Plan of Merger by and between Old Beverly and Capstone dated as of April 15, 1997 (all the aforementioned transactions to be referred to herein collectively as the "Transaction"); and WHEREAS, pursuant to the Transaction, the Corporation changed its name from NBHI to Beverly Enterprises, Inc. and assumed the sponsorship of the New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan (the "1997 LTIP"); and WHEREAS, the Corporation desires to amend the 1997 LTIP to (i) reflect the new name of the Corporation following the Transaction, (ii) add restrictions on the ability of the Compensation Committee of the Corporation's Board of Directors ("Committee") to reduce or remove restrictions or accelerate vesting with respect to previously granted Performance Awards, Bonus Stock, and Other Stock Unit Awards (as defined in the 1997 LTIP), and (iii) prescribe minimum vesting periods for various awards under the Plan; and WHEREAS, pursuant to Section 14.8 of the 1997 LTIP, the Board of Directors ("Board") may amend the 1997 LTIP at any time; NOW, THEREFORE, effective as of the Closing Date of the Transactions (as hereinabove defined), the 1997 LTIP shall be amended as follows: 1. The title page and Section 2.40 of the 1997 LTIP shall be amended to change the name of the 1997 LTIP to the "Beverly Enterprises, Inc. 1997 Long-Term Incentive Plan" ("1997 LTIP"); 2 2. Sections 1 and 2.13 of the 1997 LTIP shall be amended to change the name of the Company to "Beverly Enterprises, Inc."; 3. A new Section 2.50 is hereby added to the 1997 LTIP to read as follows: 2.50 "Transaction" means, collectively, those transactions which are described in the Agreement and Plan of Distribution by and between Beverly Enterprises, Inc. ("Old Beverly"), New Beverly Holdings, Inc. ("NBHI") and Capstone Pharmacy Services, Inc. ("Capstone"), dated as of April 15, 1997, and the Agreement and Plan of Merger by and between Old Beverly and Capstone dated as of April 15, 1997. 4. Section 9.2 of the 1997 LTIP is hereby amended by adding a new sentence at the end thereof to read as follows: "Except as specifically provided herein, including, without limitation, Section 14.13, the Committee shall have no authority to reduce or remove the Performance Goals or Performance Period without the express consent of the stockholders of the Company. Furthermore, except in the case of the Participant's death or disability, or a Change of Control of the Company, no Performance Unit or Performance Award shall become vested or payable less than one (1) year after its grant." 5. Section 10 of the 1997 LTIP shall be amended by replacing the first paragraph thereof with the following: "Subject to the terms and provisions of the Plan and applicable law, the Committee, at any time and from time to time, may award Shares of Bonus Stock to Participants without cash consideration. The Committee shall determine and indicate in the relevant Agreement restrictions which shall apply to such Bonus Stock, which shall provide for vesting periods and/or periods of restriction which shall be not less stringent than those as contained in Section 8.4 with respect to awards of Restricted Stock and Restricted Stock Units. In addition, such Shares shall be subject to at least the following restrictions:" 6. Section 10 of the 1997 LTIP shall be further amended by adding a new sentence at the end thereof to read as follows: 2 3 "Except as specifically provided herein, including, without limitation, Section 14.13, the Committee shall have no authority to reduce or remove any restrictions or limitations on Bonus Stock without the express consent of the stockholders of the Company." 7. Section 11.2(d) is hereby amended to read as follows: "Other Stock Unit Awards may be subject to a deferred payment schedule. Furthermore, all Other Stock Unit Awards granted under the Plan shall be subject to vesting periods and/or periods of restriction which are not less stringent than those as specified in Section 8.4 with respect to awards of Restricted Stock and Restricted Stock Units." 8. Section 11.2 of the 1997 LTIP is hereby amended by adding a new subsection (f) to read follows: "(f) Except as specifically provided herein, including, without limitation, Sections 11(e) and 14.13, the Committee shall have no authority to reduce or remove any Performance Criteria, vesting schedule, or other restriction or condition imposed on or Other Stock Unit Award without the express consent of the stockholders of the Company." IN WITNESS WHEREOF, the Corporation has caused this Amendment to be executed by a duly authorized representative, as of the day and year first written above. BEVERLY ENTERPRISES, INC. By: ----------------------------- Its: ---------------------------- 3 EX-10.5 6 AMENDMENT NO. 1 TO DIRECTORS OPTION PLAN 12/3/97 1 EXHIBIT 10.5 AMENDMENT NUMBER ONE TO THE NEW BEVERLY HOLDINGS, INC. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN Amendment made this 11th day of December, 1997, by Beverly Enterprises, Inc. (the "Corporation"). W I T N E S S E T H: WHEREAS, effective as of December 3, 1997, Beverly Enterprises, Inc. (as in existence prior to the "Transaction" referenced below) (hereinafter referred to as "Old Beverly") transferred its healthcare business to a wholly-owned subsidiary of Old Beverly, i.e., New Beverly Holdings, Inc. ("NBHI"), which was then spun-off to the shareholders of Old Beverly, all pursuant to the Agreement and Plan of Distribution by and between Old Beverly, NBHI and Capstone Pharmacy Services, Inc. ("Capstone") dated as of April 15, 1997; and WHEREAS, immediately following such spin-off, Old Beverly merged with and into Capstone, with Capstone as the surviving corporation, all pursuant to the Agreement and Plan of Merger by and between Old Beverly and Capstone dated as of April 15, 1997 (all the aforementioned transactions to be referred to herein collectively as the "Transaction"); and WHEREAS, the Corporation adopted the New Beverly Holdings, Inc. Non-Employee Directors' Stock Option Plan on May 29, 1997 (the "Plan"); and WHEREAS, the Corporation desires, in light of the Transaction as hereinabove defined, to amend the Plan to increase the number of options granted under the Plan to reflect adjustments in the value of the Corporation's Stock following the Transaction; and WHEREAS, Section 8.1 of the Plan provides that it may be amended or modified by the Corporation at any time and from time to time; NOW, THEREFORE, Section 3.2 of the Plan is hereby amended to read in its entirety as follows: "Effective as of December 3, 1997, each Non-Employee Director as of his first Grant Date shall automatically be granted an Option to Purchase 3,375 shares of Common Stock, and shall automatically be granted an Option to purchase an additional 3,375 shares of Common Stock as of each Grant Date subsequent to the initial Grant Date applicable to such Non-Employee Director and during the term of this 2 Plan, with each such subsequent grant being effective as of the applicable Grant Date. To be eligible to receive such an Option grant with respect to any such Grant Date, the Non-Employee Director must be a Non-Employee Director on such Grant Date. All Options granted under this Section 3.2 shall be subject to the Common Stock availability provisions of Section 4.1. Each individual who first becomes a Non-Employee Director after the Effective Date shall automatically be granted an Option to purchase 3,375 shares of Common Stock, effective as of the Grant Date which is coincident with or next following the date on which such individual becomes a Non-Employee Director." IN WITNESS WHEREOF, the Corporation has caused this Amendment to be executed by a duly authorized representative, as of the date and year first written above. BEVERLY ENTERPRISES, INC. By: ------------------------------- Its: ------------------------------ 2 EX-10.18 7 AMENDMENT NO. 6 1/1/96 EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.18 AMENDMENT NUMBER SIX TO THE BEVERLY ENTERPRISES, INC. EXECUTIVE RETIREMENT PLAN Amendment made this 11th day of April, 1996, by Beverly Enterprises, Inc. ("Beverly"), but to be effective as of January 1, 1996. W I T N E S S E T H: WHEREAS, Beverly sponsors the Beverly Enterprises, Inc. Executive Retirement Plan (the "Plan"); WHEREAS, Beverly now desires to adopt an amendment to change the date on which a Participant in the Plan must be employed in order to be eligible for matching contributions under the Plan; WHEREAS, Beverly is empowered and authorized to amend the Plan pursuant to Article III of the Plan; NOW, THEREFORE, the Executive Retirement Plan is hereby amended effective as of January 1, 1996, in the following respect: 1. The first sentence of Section 5.1, as previously amended by Amendment 4 to the Executive Retirement Plan, is hereby amended to read as follows: 5.1 Matching Contributions. Subject to the requirements and restrictions of this Article V, and subject also to the amendment or termination of the Plan, as of the last day of each Plan Year, the Company may, in its sole discretion, depending on profits, determine to make a matching contribution on behalf of each Participant who (a) has contributed at least two (2)%) of his Compensation for the Plan Year, (b) is employed by the Company as of December 31 of such year, or who retired during such Plan Year at or over age 59 1/2 with at least 10 Years of Service, and (c) has not withdrawn any funds that were used to calculate the company match from the Plan during that Plan Year. IN WITNESS WHEREOF, Beverly has caused this Amendment Number 6 to be executed by a duly authorized representative, as of the day and year first written above. BEVERLY ENTERPRISES, INC. By: /s/ Robert W. Pommerville ------------------------- Its: Executive Vice President General Counsel and Secretary EX-10.19 8 AMENDMENT NO. 7 9/1/97 EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.19 AMENDMENT NUMBER SEVEN TO THE BEVERLY ENTERPRISES, INC. EXECUTIVE RETIREMENT PLAN Amendment made this 11th day of December, 1997, by Beverly Enterprises, Inc. (the "Corporation"). W I T N E S S E T H: WHEREAS, the Corporation sponsors the Amended and Restated Beverly Enterprises, Inc. Executive Retirement Plan (the "Retirement Plan"); WHEREAS, the Corporation now desires to adopt an amendment to the Retirement Plan to provide for the transfer of a Participant's interest pursuant to domestic relations order entered by a court of competent jurisdiction incident to a divorce; WHEREAS, the Corporation is empowered and authorized to amend the Retirement Plan pursuant to Article VIII of the Plan, as amended; NOW, THEREFORE, the Retirement Plan is hereby amended effective September 1, 1997 in the following respects: 1. The Plan is hereby amended by adding the following paragraph to the end of existing Article 9: Notwithstanding the foregoing, a Participant's benefits under the Plan are subject to division pursuant to a domestic relations order which is entered by a court of competent jurisdiction incident to a divorce, however, the person claiming any interest in the Plan as result of such an order shall be entitled to only those benefits under the Plan to which the affected Participant would have been entitled. Furthermore, the interest of such transferee shall be subject to all the terms and conditions of the Plan, including without limitation those provisions relating to timing and form of payment and vesting of benefits. Moreover, the Company reserves the right to withhold from any payments to such transferee or any compensation due the Participant, any income and FICA taxes, and any other sums, as required by applicable law. IN WITNESS WHEREOF, the Corporation has caused this Amendment to be executed by a duly authorized representative, as of the day and year first written above. BEVERLY ENTERPRISES, INC. By: Its: 1 EX-10.20 9 AMENDMENT NO 8 12/1/97 EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.20 AMENDMENT NUMBER EIGHT TO THE BEVERLY ENTERPRISES, INC. EXECUTIVE RETIREMENT PLAN Amendment made this 11th day of December, 1997, by Beverly Enterprises, Inc. (the "Corporation"). W I T N E S S E T H: WHEREAS, during the first week of December, 1997, Beverly Enterprises, Inc. (as in existence prior to the "Transaction" referenced below) (hereinafter referred to as "Old Beverly") transferred its healthcare business to a wholly-owned subsidiary of Old Beverly, i.e., New Beverly Holdings, Inc. ("NBHI"), which was then spun-off to the shareholders of Old Beverly, all pursuant to the Agreement and Plan of Distribution by and between Old Beverly, NBHI and Capstone Pharmacy Services, Inc. ("Capstone") dated as of April 15, 1997; and WHEREAS, immediately following such spin-off, Old Beverly merged with and into Capstone, with Capstone as the surviving corporation, all pursuant to the Agreement and Plan of Merger by and between Old Beverly and Capstone dated as of April 15, 1997 (all the aforementioned transactions to be referred to herein collectively as the "Transaction"); and WHEREAS, as a result of the Transaction, various employees of Pharmacy Corporation of America ("PCA"), which was a wholly-owned subsidiary of Old Beverly and an affiliate of the Corporation prior to the Transaction, will become part of the Capstone controlled group of corporations; and WHEREAS, the Corporation maintains the Beverly Enterprises, Inc. Executive Retirement Plan (the "Plan"); and WHEREAS, the Plan provides that a Participant must be employed as of the last day of the Plan Year in order to receive a matching contribution thereunder; and WHEREAS, the Corporation desires that all PCA employees who were Participants in the Plan as of the closing date of the Transaction and who are employed by PCA or a PCA affiliate on December 31, 1997 receive a matching contribution under the Plan; and WHEREAS, the Corporation desires to change the name of the Plan to the "Beverly Enterprises, Inc. Executive SavingsPlus Plan"; and 1 2 WHEREAS, the Corporation is empowered and authorized to amend the Plan pursuant to Article VIII thereof; NOW, THEREFORE, the Plan is hereby amended in the following respects: 1. The name of the changed to "Beverly Enterprises, Inc. Executive SavingsPlus Plan." 2. The Plan is further amended by changing the first paragraph of Article I to read as follows: The purpose of the Beverly Enterprises, Inc. Executive SavingsPlus Plan (formerly the Beverly Enterprises, Inc. Executive Retirement Plan)(the "Plan") of Beverly Enterprises, Inc. is to attract and retain highly qualified and loyal executives and managers by providing certain such executives and managers with benefits, a portion of which benefits are in lieu of payment of certain current compensation. 3. The Plan is further amended by amending section 2.12 to read as follows: "Plan" means the Beverly Enterprises, Inc. Executive SavingsPlus Plan, as set forth herein. 4. Paragraph 5.5 of the Retirement Plan is amended by adding a new paragraph at the end of existing Section 5.5 to read as follows: "Notwithstanding anything to the contrary contained herein, a Change in Control shall not include any transfer to a consolidated subsidiary, reorganization, spin-off, split-up, distribution, or other similar or related transaction(s) or any combination of the foregoing in which the core business and assets of the Company and its subsidiaries (taken as a whole) are transferred to another entity ("Controlled") with respect to which (1) the majority of the Board of Directors of the Company (as constituted immediately prior to such transaction(s)) also serve as directors of Controlled and immediately after such transaction(s) constitute a majority of Controlled's board of directors, and (2) more than 70% of the shareholders of the Company 2 3 (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." 5. The Plan is further amended by adding Section 5 as follows: Notwithstanding any provisions to the contrary in this Article V, those Plan Participants who will no longer be employed by the Company or another adopting employer affiliated with the Company as of the last day of the 1997 Plan Year, solely as a result of those Transactions which are described in the Agreement and Plan of Distribution by and between Beverly Enterprises, Inc., New Beverly Holdings, Inc. and Capstone Pharmacy Services, Inc., dated as of April 15, 1997, and the Agreement and Plan of Merger by and between Beverly Enterprises, Inc. and Capstone Pharmacy Services, Inc., dated as of April 15, 1997, as determined by the Committee in its sole discretion, and who remain employed by Pharmacy Corporation of America or an affiliate thereof as of December 31, 1997, shall receive a matching contribution in accordance with Section 5.01 hereof, as if still employed by the Company as of the last day of the Plan Year in which such Transactions occur; IN WITNESS WHEREOF, the Corporation has caused this Amendment to be executed by a duly authorized representative, as of the day and year first written above. BEVERLY ENTERPRISES, INC. By: Its: 3 EX-10.21 10 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1 EXHIBIT 10.21 BEVERLY ENTERPRISES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EFFECTIVE AS OF JANUARY 1, 1998 2
TABLE OF CONTENTS ARTICLE I PURPOSE AND ESTABLISHMENT.......................................................................... 1 1.1 PURPOSE............................................................................................... 1 ARTICLE II DEFINITIONS....................................................................................... 1 2.1 "AFFILIATE"........................................................................................... 1 2.2 "BENEFICIARY"......................................................................................... 1 2.3 "BOARD"............................................................................................... 2 2.4 "CHANGE OF CONTROL"................................................................................... 2 2.5 "CODE"................................................................................................ 3 2.6 "COMMENCEMENT DATE"................................................................................... 3 2.7 "COMMITTEE"........................................................................................... 3 2.8 "COMPENSATION"........................................................................................ 3 2.9 "DISABILITY".......................................................................................... 4 2.10 "EARLY RETIREMENT BENEFIT"............................................................................ 4 2.11 "EFFECTIVE DATE"...................................................................................... 4 2.12 "EMPLOYER"............................................................................................ 4 2.13 "ERISA"............................................................................................... 4 2.14 "FINAL AVERAGE COMPENSATION".......................................................................... 4 2.15 "NORMAL RETIREMENT BENEFIT"........................................................................... 5 2.16 "NORMAL RETIREMENT DATE".............................................................................. 5 2.17 "PARTICIPANT"......................................................................................... 5 2.18 "PLAN"................................................................................................ 5 2.19 "PLAN YEAR"........................................................................................... 5 2.20 "RETIREMENT BENEFIT".................................................................................. 5 2.21 "YEAR OF SERVICE"..................................................................................... 5 ARTICLE III ELIGIBILITY, PARTICIPATION AND VESTING........................................................... 5 3.1 ELIGIBILITY........................................................................................... 5 3.2 PARTICIPATION......................................................................................... 6 3.3 VESTING............................................................................................... 6 ARTICLE IV AMOUNT AND PAYMENT OF RETIREMENT BENEFIT.......................................................... 6 4.1 AMOUNT OF NORMAL RETIREMENT BENEFIT................................................................... 6 4.2 AMOUNT OF EARLY RETIREMENT BENEFIT.................................................................... 7 4.3 PAYMENT OF RETIREMENT BENEFIT......................................................................... 7 4.4 WITHHOLDING AND PAYROLL TAXES......................................................................... 8 4.5 PAYMENT DUE AN INCOMPETENT............................................................................ 8 ARTICLE V DESIGNATION OF BENEFICIARY......................................................................... 9 5.1 BENEFICIARY DESIGNATION............................................................................... 9 5.2 CHANGE OF BENEFICIARY................................................................................. 9 5.3 NO DESIGNATED BENEFICIARY............................................................................. 9 5.4 DOUBT AS TO BENEFICIARY............................................................................... 10 ARTICLE VI APPEALS PROCEDURE AND ARBITRATION................................................................. 10 6.1 CLAIMS AND APPEAL PROCEDURE........................................................................... 10 6.2 BINDING ARBITRATION................................................................................... 11
3 ARTICLE VII UNFUNDED NATURE OF PLAN.......................................................................... 11 7.1 THE PLAN IS UNFUNDED.................................................................................. 11 7.2 EMPLOYER'S RIGHT TO ESTABLISH TRUST FUND.............................................................. 12 ARTICLE VIII ADMINISTRATION; AMENDMENTS AND TERMINATION; RIGHTS AGAINST THE EMPLOYER..................................................................................... 12 8.1 ADMINISTRATION........................................................................................ 12 8.2 LIABILITY OF COMMITTEE; INDEMNIFICATION............................................................... 12 8.3 AMENDMENT AND/OR TERMINATION.......................................................................... 13 8.4 RIGHTS AGAINST THE EMPLOYER........................................................................... 13 8.5 EXPENSES.............................................................................................. 13 ARTICLE IX GENERAL AND MISCELLANEOUS......................................................................... 14 9.1 SPENDTHRIFT CLAUSE.................................................................................... 14 9.2 SEVERABILITY.......................................................................................... 14 9.3 CONSTRUCTION.......................................................................................... 14 9.4 GOVERNING LAW......................................................................................... 14 9.5 SEPARATENESS OF PLAN.................................................................................. 15 9.6 DISCLAIMER............................................................................................ 15 9.7 RELEASE............................................................................................... 15 9.8 SUCCESSORS AND ASSIGNS................................................................................ 15
4 BEVERLY ENTERPRISES, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ARTICLE I PURPOSE AND ESTABLISHMENT 1.1 PURPOSE Effective as of January 1, 1998, Beverly Enterprises, Inc., hereby establishes the "Beverly Enterprises, Inc. Supplemental Executive Retirement Plan," an unfunded plan "maintained by the employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees," within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. This Plan is intended to constitute a "nonqualified deferred compensation plan" for purposes of Section 3121(v)(2) of the Code as well as 4 U.S.C. ss. 114. ARTICLE II DEFINITIONS 2.1 "AFFILIATE" "Affiliate" means (a) a corporation, trade or business that, together with any Employer, is a member of a controlled group of corporations or an affiliated service group or under common control (within the meaning of section 414(b), (c) or (m) of the Code), but only for the period during which such other entity is so affiliated with any Employer, and (b) any other entity required to be aggregated with any Employer pursuant to Department of Treasury regulations under section 414(o) of the Code. 2.2 "BENEFICIARY" "Beneficiary" means one or more persons, trusts, estates or other entities designated or deemed to have been designated in accordance with Article V of this Plan, that are entitled to receive benefits under this Plan in the event of the Participant's death. 5 2.3 "BOARD" "Board" means the Board of Directors of Beverly Enterprises, Inc. 2.4 "CHANGE OF CONTROL" Change in Control" shall be deemed to have occurred if the conditions set forth in any one of the following paragraphs shall have been satisfied: (a) 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, as amended ("Exchange Act"), becomes the beneficial owner of Shares having 30% or more of the total number of votes that may be cast for the election of directors of Beverly Enterprises, Inc. (the "Company"); or (b) As the result of, or in connection with, any tender or exchange offer, merger or other business combination, sale of assets or contested election, 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 (c) If at any time (i) the Company shall consolidate with, or merge with, any other Person and the Company shall not be the continuing or surviving corporation, (ii) 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 stock shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, (iii) 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 (iv) the Company shall sell or 2 6 otherwise transfer 50% or more of the assets or earnings power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons; provided, however, that notwithstanding anything to the contrary set forth above, a Change in Control shall not include any transfer to a consolidated subsidiary, reorganization, spin-off, split-up, distribution, or other similar or related transaction(s) or any combination of the foregoing in which the core business and assets of the Company and its subsidiaries (taken as a whole) are transferred to another entity ("Controlled") with respect to which (1) the majority of the Board of Directors of the Company (as constituted immediately prior to such transaction(s) also serve as directors of Controlled and immediately after such transaction(s) constitute a majority of Controlled's board of directors, and (2) more than 70% of the shareholders of the Company (immediately prior to such transaction(s)) become shareholders or other owners of Controlled and immediately after the transaction(s) control more than 70% of the ownership and voting rights of Controlled. 2.5 "CODE" "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.6 "COMMENCEMENT DATE" "Commencement Date" means the date on which a Participant or, if applicable, a Beneficiary, begins to receive payments under the Plan. 2.7 "COMMITTEE" "Committee" means the Compensation Committee of the Board, or any such other committee designated by the Board. 2.8 "COMPENSATION" "Compensation" means the annual base salary, excluding bonus, commissions, overtime, employee benefits, relocation allowance, incentive payments, directors fees and other special payments or fees, paid to a Participant by any Employer for employment services rendered to any 3 7 Employer, but before reduction for compensation deferred pursuant to all qualified, non-qualified and Code Section 125 plans of any Employer. "Compensation" shall not include any tax gross- up payments, whether made in connection with an employee benefit plan or otherwise. 2.9 "DISABILITY" "Disability" means or refers to a disability that the Committee has found would qualify the Participant (upon the expiration of any applicable waiting period) for payment of benefits under the Employer's long-term disability income plan. If the Employer does not continue to maintain a long-term disability income plan, "Disability" shall mean any physical or mental disability that the Committee determines, in its sole discretion, to be total and permanent. 2.10 "EARLY RETIREMENT BENEFIT" "Early Retirement Benefit" means the monthly Retirement Benefit calculated as described in Section 4.2 of this Plan. 2.11 "EFFECTIVE DATE" "Effective Date" means the effective date of this Plan, which is January 1, 1998. 2.12 "EMPLOYER" "Employer" means Beverly Enterprises, Inc. and any Affiliate that has adopted this Plan with the approval of Beverly Enterprises, Inc. 2.13 "ERISA" "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. 2.14 "FINAL AVERAGE COMPENSATION" "Final Average Compensation" means the average of the Compensation paid to a Participant during the three (3) consecutive full Plan Years immediately preceding (and, if a full Plan Year, including) the Plan Year in which the Participant retires, dies, or becomes Disabled. For purposes of computing Final Average Compensation, Compensation in excess of $1,000,000 in any year shall be disregarded. 4 8 2.15 "NORMAL RETIREMENT BENEFIT" "Normal Retirement Benefit" means the monthly Retirement Benefit calculated as described in Section 4.1 of this Plan. 2.16 "NORMAL RETIREMENT DATE" "Normal Retirement Date" means the date on which the Participant attains age 65. 2.17 "PARTICIPANT" "Participant" means an employee or former employee of the Employer who has satisfied the requirements of Section 3.2 of this Plan. 2.18 "PLAN" "Plan" means the Beverly Enterprises, Inc. Supplemental Executive Retirement Plan, as set forth in this document, and as it may be amended from time to time. 2.19 "PLAN YEAR" "Plan Year" means the twelve (12) consecutive month period commencing on each January 1st and ending on each December 31. 2.20 "RETIREMENT BENEFIT" "Retirement Benefit" means the monthly benefit payable to a Participant under this Plan. 2.21 "YEAR OF SERVICE" "Year of Service" means each full twelve (12) consecutive month period that a Participant has been employed by an Employer, commencing with the Participant's date of hire (and, if rehired, recommencing on his date of rehire). ARTICLE III ELIGIBILITY, PARTICIPATION AND VESTING 3.1 ELIGIBILITY Participation in the Plan shall be limited to a select group of management and highly compensated employees of the Employer. From that group, the Committee shall select from time 5 9 to time, in its sole discretion, employees to participate in the Plan. The Committee also has the authority to terminate an employee's participation in the Plan at any time. 3.2 PARTICIPATION An eligible employee shall become a Participant hereunder on the date as of which both of the following conditions have been satisfied: (a) the Committee determines in its sole discretion that he shall be a Participant and (b) he delivers to the Committee such properly completed enrollment and/or beneficiary designation forms as the Committee may require. The Committee may, in its absolute discretion, from time to time select individuals for or delete individuals from participation in the Plan. 3.3 VESTING A Participant shall have a vested and nonforfeitable interest in the Participant's Retirement Benefit upon (a) completing at least two (2) Years of Service after the Effective Date; (b) attaining age 60; and (c) completing fifteen (15) Years of Service. The fifteen (15) Years of Service requirement may be waived for those Participants specified by the Committee in its sole discretion, but only upon such Participants' attaining age 65. In addition, in the event of a Change in Control, or a Participant's death or Disability, the Participant shall be fully vested in the Participant's Retirement Benefit. The Committee may, in its sole discretion, modify these vesting requirements or accelerate the vesting of the Retirement Benefit of any or all Participants. If a Participant terminates employment with all Employers prior to vesting in his Retirement Benefit, as provided above, he shall forfeit all of his interest hereunder. ARTICLE IV AMOUNT AND PAYMENT OF RETIREMENT BENEFIT 4.1 AMOUNT OF NORMAL RETIREMENT BENEFIT A Participant's Normal Retirement Benefit shall be one-twelfth (1/12) of the product of a) .50 and b) the Participant's Final Average Compensation. A Normal Retirement Benefit is only 6 10 payable upon the Participant (i) attaining age 65 while still actively employed by an Employer, and (ii) satisfying the vesting requirements of Section 3.3. 4.2 AMOUNT OF EARLY RETIREMENT BENEFIT (a) If a Participant retires on or after age 60 but before Normal Retirement Age and he is vested in his Retirement Benefit, he may elect to receive an Early Retirement Benefit. If the Early Retirement Benefit is elected, a Participant is not eligible for the Normal Retirement Benefit. A Participant's Early Retirement Benefit shall be equal to the Participant's Normal Retirement Benefit reduced by 5% for each year retirement occurs before age 65, as indicated below:
Age at Retirement Early Retirement Benefit ----------------- ------------------------ 64 Normal Retirement Benefit reduced by 5% 63 Normal Retirement Benefit reduced by 10% 62 Normal Retirement Benefit reduced by 15% 61 Normal Retirement Benefit reduced by 20% 60 Normal Retirement Benefit reduced by 25%
(b) If a Participant terminates employment prior to age 60, he is not entitled to an Early Retirement Benefit (or to any benefit hereunder) unless he becomes vested by virtue of death, Disability, or a Change in Control. In the event of vesting prior to age 60 due to death, Disability, or a Change in Control, a Participant (or, in the event of his death, his Beneficiary) may elect to receive an Early Retirement Benefit commencing in the calendar year following his termination of employment or at any time thereafter, but the amount of such Early Retirement Benefit shall be equal to the age 60 Early Retirement Benefit specified in (a) above, reduced by an additional 5% for each year prior to age 60 that the benefit commences. 4.3 PAYMENT OF RETIREMENT BENEFIT A Participant's Retirement Benefit shall be paid for 180 months. Unless the Participant or his Beneficiary elects a later date, the Commencement Date shall be as of the first day of January in the calendar year immediately following the calendar year in which the Participant retires, dies or becomes Disabled, or as soon thereafter as is administratively practicable. However, if a 7 11 Participant vests due to death, Disability, or a Change in Control, his Commencement Date shall be delayed until age 60 unless he affirmatively elects otherwise pursuant to Section 4.2(b). However, in no event may a Retirement Benefit commence prior to the calendar year immediately following the calendar year of a Participant's termination of employment. If a Participant dies before the Commencement Date, the 180 payments shall be made to his designated Beneficiary. If a Participant dies after the Commencement Date, but before 180 payments have been made, the remainder of the payments shall be made to his designated Beneficiary. 4.4 WITHHOLDING AND PAYROLL TAXES All amounts payable hereunder to any Participant or Beneficiary shall be reduced by any and all federal, state and local taxes imposed upon the Participant or Beneficiary that are required to be paid or withheld by the Employer, as determined in the sole discretion of the Employer. Employment taxes with respect to amounts credited hereunder shall be payable in accordance with Section 3121(v)(2) of the Code and may be withheld from a Participant's Compensation if due prior to the time of a distribution hereunder. 4.5 PAYMENT DUE AN INCOMPETENT If the Committee receives evidence that a Participant or Beneficiary entitled to receive any payment under the Plan is physically or mentally incompetent to receive such payment, the Committee may, in its sole discretion, direct the payment to any other person or trust which has been legally appointed by a court of competent jurisdiction or, in the event that no such person has been appointed, to any person whom the Committee, in its sole discretion, determines to be responsible for the care of the Participant or Beneficiary. Payment to any person or trust in accordance with this Section will fully discharge the obligations of the Plan and the Employer to such Participant or Beneficiary. ARTICLE V DESIGNATION OF BENEFICIARY 5.1 BENEFICIARY DESIGNATION Each Participant shall have the right to designate his Beneficiary (both primary as well as 8 12 contingent) to receive any benefits payable under the Plan to a Beneficiary upon the death of a Participant. The Beneficiary designated under this Plan may be the same as or different from the Beneficiary designation under any other plan of the Employer in which the Participant participates. A Participant shall make any designation of Beneficiary or Beneficiaries by completing and signing the applicable form and returning it to the Committee or its designated agent. If the Participant names someone other than his spouse as a Beneficiary, a spousal consent, if required by the Committee, must be signed by that Participant's spouse on a form designated by the Committee and returned to the Committee. 5.2 CHANGE OF BENEFICIARY A Participant shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the required form and the Committee's rules and procedures, as in effect from time to time. Upon the acceptance by the Committee of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be canceled. The Committee shall be entitled to rely on the last Beneficiary designation filed with the Committee prior to the Participant's death. 5.3 NO DESIGNATED BENEFICIARY If a Participant fails to designate a Beneficiary as provided in Section 5.1 above or if all designated Beneficiaries predecease the Participant or die prior to the complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be his or her surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan to be paid to a Beneficiary shall be payable to the executor or personal representative of the Participant's estate. 5.4 DOUBT AS TO BENEFICIARY If the Committee has any doubt as to the proper Beneficiary to receive payments pursuant to this Plan, the Committee shall have the right, before a Change in Control, to withhold such payments until this matter is resolved to the Committee's satisfaction. 9 13 ARTICLE VI APPEALS PROCEDURE AND ARBITRATION 6.1 CLAIMS AND APPEAL PROCEDURE Any Participant or Beneficiary of a deceased Participant (a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. The Committee shall consider a Claimant's claim within a reasonable time, and shall notify the Claimant in writing of its determination. If the Committee requires additional information, the Committee shall request such information from the Claimant. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. The Committee shall render a written decision on review within a reasonable period of time after receipt of the Claimant's appeal. A Claimant's compliance with the foregoing provisions of this Section 6.1 is a mandatory prerequisite to a Claimant's right to commence any other action (as described below in Section 6.2) with respect to any claim for benefits under this Plan. 6.2 BINDING ARBITRATION A claimant may contest the Committee's denial of his appeal only by submitting the matter to binding arbitration before a single arbitrator agreed to by the Claimant and the Committee. Any arbitration shall be held in Fort Smith, Arkansas, unless otherwise agreed to by the Committee and the Claimant. The arbitration shall be conducted pursuant to the Commercial 10 14 Arbitration Rules of the American Arbitration Association. The arbitrator's authority shall be limited to the affirmance or reversal of the Committee's denial of the appeal, and the arbitrator shall have no power to alter, add to or subtract from any provision of this Plan. Except as otherwise required by ERISA, the arbitrator's decision shall be final and binding on all parties to the maximum extent allowed by law. The arbitrator shall have no power to award any punitive, exemplary, consequential, or special damages, and under no circumstances shall an award contain any amount that in any way reflects any of such types of damages. Each party shall bear its own attorney's fees and costs of arbitration. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. ARTICLE VII UNFUNDED NATURE OF PLAN 7.1 THE PLAN IS UNFUNDED The Plan is an "unfunded plan primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees," within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA. The Employer shall not be required to segregate funds to pay Retirement Benefits and nothing in this Plan shall be construed as providing for such segregation. The Participant, his Beneficiary and any other person(s) having or claiming a right to payments hereunder or to any interest in this Plan shall have no funded, secured, or preferential right to payment hereunder, but rather shall rely solely on the unsecured promise of the Employer. Nothing herein shall be construed to give the Participant, his Beneficiary or any other person or persons any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the Employer or in which it may have any right, title or interest now or in the future; provided that the Participant or any Beneficiary shall have the right to enforce his claim against the Employer in the same manner as any unsecured creditor of the Employer. Each Participant, by participating hereunder, agrees to waive any priority creditor status for wage payments. 11 15 7.2 EMPLOYER'S RIGHT TO ESTABLISH TRUST FUND Notwithstanding Section 7.1, the Employer may, in its absolute discretion, establish a trust fund and contribute to such trust fund assets that shall be held therein, subject to the claims of the Employer's creditors in the event of the insolvency or bankruptcy of the Employer, until paid to Participants or Beneficiaries in accordance with the terms of the Plan. The Employer shall not establish any trust fund that would cause the Plan to fail to be an unfunded plan for purposes of Title I of ERISA. ARTICLE VIII ADMINISTRATION; AMENDMENTS AND TERMINATION; RIGHTS AGAINST THE EMPLOYER 8.1 ADMINISTRATION (a) The Committee shall administer the Plan and shall have the full and absolute discretionary power and authority to construe and interpret the provisions of the Plan and to determine a Participant's eligibility for benefits hereunder. (b) Any determination made by the Committee pursuant to the authority granted under subsection (a) shall be conclusive and binding on all Participants, Beneficiaries and any other person who at any time have, or claim to have, any interest whatsoever under this Plan. (c) Pursuant to Section 401(a)(1) of ERISA, it is intended that the Plan and the administration thereof shall be exempt from Part 4 of Title I of ERISA. The Committee and the members thereof shall not be deemed to be fiduciaries within the meaning of Section 3(21) of ERISA, and shall not be subject to the terms of Part 4 of Title I of ERISA. 8.2 LIABILITY OF COMMITTEE; INDEMNIFICATION To the extent permitted by law, no member of the Committee shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan, unless attributable to his own gross negligence or willful misconduct. To the maximum extent required or permitted under applicable law, the Employer shall indemnify the members of the Committee against any and all claims, losses, damages, and expenses, including any amounts 12 16 paid in settlement with the Committee's approval and any attorney's fees, arising from their action or failure to act. 8.3 AMENDMENT AND/OR TERMINATION The Employer reserves the right to alter, amend or terminate the Plan or any part hereof. Any such alteration, amendment or termination may be effected by resolution of the Board or Committee acting in accordance with the bylaws (or other applicable governing document) of the Employer, in such manner as the Board or Committee may determine and for any reason whatsoever. Any such amendment or termination shall become effective upon the date stated therein, with or without prior notice, and shall be binding upon all Participants and Beneficiaries. 8.4 RIGHTS AGAINST THE EMPLOYER The establishment of this Plan shall not be construed as giving to any Participant, Beneficiary or other person any legal, equitable or other rights (other than rights expressly granted by the provisions of the Plan) against the Employer, or its officers, directors, agents or shareholders, or as giving to any Participant or Beneficiary any equity or other interest in the assets or business of the Employer or in shares of Employer stock or giving any employee the right to be retained in the employment of the Employer. This Plan does not constitute a contract of employment and all Participants shall be subject to discharge to the same extent they would have been if this Plan had never been adopted. 8.5 EXPENSES The cost of this Plan and the expenses of administering the Plan shall be borne by the Employer. ARTICLE IX GENERAL AND MISCELLANEOUS 9.1 SPENDTHRIFT CLAUSE Except as provided in a domestic relations order, no right, title or interest of any kind in 13 17 the Plan shall be transferable or assignable by any Participant or Beneficiary or be subject to alienation, anticipation, encumbrance, garnishment, attachment, execution or levy of any kind, whether voluntary or involuntary, nor subject to the debts, contracts, liabilities, engagements, or torts of the Participant or Beneficiary. Any attempt to so alienate, anticipate, encumber, sell, transfer, assign, pledge, garnish, attach or otherwise subject to legal or equitable process or dispose of any interest in the Plan shall be void. 9.2 SEVERABILITY In the event that any provision of this Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of this Plan but shall be fully severable and this Plan shall be construed and enforced as if said illegal or invalid provision had never been a part of this Plan. 9.3 CONSTRUCTION The article and section headings are included only for convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of this Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. When used herein, the masculine gender includes the feminine gender. 9.4 GOVERNING LAW The validity and effect of this Plan and the rights and obligations of all persons affected hereby shall be construed and determined in accordance with the laws of the State of Arkansas, unless superseded by federal law. 9.5 SEPARATENESS OF PLAN Nothing in this Plan shall operate or be construed in any way to modify, amend or affect the terms and provisions of any other plan established or maintained by an Employer except as may otherwise be expressly provided. 14 18 9.6 DISCLAIMER The Employer makes no representations, warranties, or assurances and assumes no responsibility as to the state or federal tax consequences of this Plan or participation herein. 9.7 RELEASE As a condition to making any payment under the Plan, or to giving effect to any designation of a Beneficiary or other election or other action under the Plan by any Participant or any other person, the Committee may require such consents or releases as it determines to be appropriate, and further may require any such designation, election or other action to be in writing, in a prescribed form and to be filed with the Committee in a manner prescribed by the Committee. In the event the Committee determines, in its discretion, that multiple conflicting claims may be made as to all or a part of the same benefit, the Committee may delay the making of any payment until such conflict or multiplicity of claims is resolved. 9.8 SUCCESSORS AND ASSIGNS The Plan shall be binding upon and shall inure to the benefit of the Employer, its successors, purchasers, and assigns, and all Participants, Beneficiaries and their heirs, executors, administrators, successors and assigns. IN WITNESS WHEREOF, Beverly Enterprises, Inc., hereby adopts the Plan as of the Effective Date set forth above. ATTEST: BEVERLY ENTERPRISES, INC. By: - ------------------------------------ ---------------------------------- Its: --------------------------------- 15 EX-10.23 11 AMENDMENT NO 1 TO EXECUTIVE DEFERRED COMP PLAN 1 EXHIBIT 10.23 AMENDMENT NUMBER ONE TO THE BEVERLY ENTERPRISES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN Amendment made this 11th day of December, 1997, by Beverly Enterprises, Inc. (the "Corporation"). W I T N E S S E T H: WHEREAS, the Corporation sponsors the Amended and Restated Beverly Enterprises, Inc. Executive Deferred Compensation Plan (the "EDC Plan"); WHEREAS, the Corporation now desires to adopt an amendment to the EDC Plan to provide for the transfer of a Participant's interest pursuant to Domestic Relations Order entered by a court of competent jurisdiction incident to a divorce; WHEREAS, the Corporation is empowered and authorized to amend the EDC Plan pursuant to Section 13 of the EDC Plan; NOW, THEREFORE, the EDC Plan is hereby amended effective September 1, 1997 in the following respects: 1. The Plan is hereby amended by adding the following new paragraph at the end of existing Section 15: Notwithstanding the foregoing, a Participant's interest in the Plan may be transferred pursuant to a domestic relations order which is entered by a court of competent jurisdiction incident to a divorce, however, the person claiming any share of a Participant's interest pursuant to such an order shall not be entitled to receive a distribution from the Plan until such time as distributions commence or could have commenced to the affected Participant. Furthermore, such transferred interest shall be subject to the same terms, conditions, and restrictions of the Plan as were applicable to the Participant. 2. The Plan is amended by replacing the second sentence of existing Section 16 with the following: The Participants, their beneficiaries, personal representatives and any transferee pursuant to a domestic relations order shall bear any and all federal, foreign, state or local income or any other tax imposed on amounts paid under the Plan. 1 2 IN WITNESS WHEREOF, the Corporation has caused this Amendment to be executed by a duly authorized representative, as of the day and year first written above. BEVERLY ENTERPRISES, INC. By: Its: 2 EX-10.24 12 AMENDMENT NO 2 TO EXECTUIVE DEFERRED COMP PLAN 1 EXHIBIT 10.24 AMENDMENT NUMBER TWO TO THE BEVERLY ENTERPRISES, INC. EXECUTIVE DEFERRED COMPENSATION PLAN Amendment made this 11th day of December, 1997, by Beverly Enterprises, Inc. (the "Corporation") W I T N E S S E T H: WHEREAS, during the first week of December, 1997, Beverly Enterprises, Inc. (as in existence prior to the "Transaction" referenced below) (hereinafter referred to as "Old Beverly") transferred its healthcare business to a wholly-owned subsidiary of Old Beverly, i.e., New Beverly Holdings, Inc. ("NBHI"), which was then spun-off to the shareholders of Old Beverly, all pursuant to the Agreement and Plan of Distribution by and between Old Beverly, NBHI and Capstone Pharmacy Services, Inc. ("Capstone") dated as of April 15, 1997; and WHEREAS, immediately following such spin-off, Old Beverly merged with and into Capstone, with Capstone as the surviving corporation, all pursuant to the Agreement and Plan of Merger by and between Old Beverly and Capstone dated as of April 15, 1997 (all the aforementioned transactions to be referred to herein collectively as the "Transaction"); and WHEREAS, pursuant to the Transaction, the Corporation changed its name from NBHI to Beverly Enterprises, Inc. and assumed the sponsorship of the Beverly Enterprises, Inc. Executive Deferred Compensation Plan (as adopted by Old Beverly effective January 1, 1997) (the "Plan"); and WHEREAS, the Corporation desires, in light of the Transaction, to amend the Plan (i) to reflect adjustments to the deemed investment credits under Section 7 of the Plan, and (ii) to allow those employees who will remain employed by Old Beverly after the Transaction to receive a December, 1997 1 2 matching contribution under the Plan; and (iii) to modify the definition of "Change of Control;" and WHEREAS, Section 13 of the Plan provides that it may be amended, modified or terminated at any time by the Compensation Committee, which is a subset of the full Board; 2 3 NOW, THEREFORE, the Plan is hereby amended as follows, effective as of the closing date of the Transaction: 1. Section 2(c) of the Plan is amended by adding a new paragraph at the end of the existing Section 2(c) to read as follows: "Notwithstanding anything to the contrary contained herein, a Change in Control shall not include any transfer to a consolidated subsidiary, reorganization, spin-off, split-up, distribution, or other similar or related transaction(s) or any combination of the foregoing in which the core business and assets of the Company and its subsidiaries (taken as a whole) are transferred to another entity ("Controlled") with respect to which (1) the majority of the Board of Directors of the Company (as constituted immediately prior to such transaction(s)) also serve as directors of Controlled and immediately after such transaction(s) constitute a majority of Controlled's board of directors, and (2) more than 70% of the shareholders of the Company (immediately prior to such transaction(s)) become shareholders or other owners of Controlled and immediately after the transaction(s) control more than 70% of the ownership and voting rights of Controlled." 2. Section 2(e) of the Plan is amended to read as follows: "Company" means Beverly Enterprises, Inc., which shall mean "Old Beverly" prior to the date of the Transaction, and shall mean New Beverly Holdings, Inc. ("NBHI") (which has changed its name to Beverly Enterprises, Inc.) subsequent to said date. 3. The Plan is amended by adding a new Section 2(w) to read as follows: "Transaction" means, collectively, those transactions which are described in the Agreement and Plan of Distribution by and between Beverly Enterprises, Inc. ("Old Beverly"), New Beverly Holdings, Inc. ("NBHI") and Capstone Pharmacy Services, Inc. ("Capstone"), dated as of April 15, 1997, and the Agreement and Plan of Merger by and between Old Beverly and Capstone dated as of April 15, 1997. 3 4 4. The Plan is amended to add a new Section 2(x) to read as follows: "Capstone Stock" means the common stock, par value $0.01 per share, of Capstone Pharmacy Services, Inc., a Delaware corporation, (which has changed its name to PharMerica, Inc.) 5. The Plan is amended to add Section 5(d) as follows: Those Participants who constitute Retained Employees, as that term is defined in the documents describing the Transaction, shall be entitled to receive a matching contribution with respect to their deferrals which were made during the month containing the date of the Transaction, regardless of whether such employees remain employed by the Company as of the first day of the month following the date of the Transaction. 6. Section 6 of the Plan is amended by adding the following sentence at the end thereof: Notwithstanding the foregoing, that portion of a Participant's account balance which is deemed invested in Capstone Stock will be payable pursuant to the terms of this Section 6 in either cash or Capstone Stock, within the complete discretion of the Committee. 7. Section 7 of the Plan is amended by adding the following new paragraphs as follows: Notwithstanding the foregoing, as of the date of the Transaction, the balances of each Participant's Deferral Account, Rollover Account, Supplemental Contributions Account and Matching Account shall be deemed invested in shares of New Beverly Holdings, Inc. ("NBHI") and Capstone Pharmacy Services, Inc. ("Capstone") common stock in the ratio of .44 shares of Capstone common stock and one (1) share of NBHI common stock for each share of Old Beverly Common Stock in which said Accounts were previously deemed invested under this Section 7. Such adjusted Account balances shall be further 4 5 adjusted based upon the fluctuations in value of NBHI and Capstone Stock until distributed to the Participant pursuant to the terms of the Plan. Subsequent to the date of the Transaction, all further additions to a Participant's Deferral Account, Supplemental Contributions Account, Rollover Account, and Matching Account shall be deemed invested solely in shares of NBHI common stock, in accordance with the terms of this Section 7. Therefore, at the end of each Plan Year, each Participant's total account value shall be the sum of (i) the value of each of his accounts as of the date of the Transaction, as adjusted for the performance of NBHI and Capstone common stock, plus (ii) the value of all contributions made subsequent to the date of the Transaction, as adjusted for the change in the value of NBHI common stock. IN WITNESS WHEREOF, the Corporation has caused this Amendment to be executed by a duly authorized representative, as of the day and year first written above. BEVERLY ENTERPRISES, INC. By: Its: 5 EX-10.26 13 AMENDMENT NO. 1 TO DIRECTORS' PLAN - 12/3/97 1 EXHIBIT 10.26 AMENDMENT NUMBER ONE TO THE BEVERLY HOLDINGS, INC. NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN Amendment made this 11th day of December, 1997, by Beverly Enterprises, Inc. (the "Corporation"). W I T N E S S E T H: WHEREAS, effective as of December 3, 1997, Beverly Enterprises, Inc. (as in existence prior to the "Transaction" referenced below) (hereinafter referred to as "Old Beverly") transferred its healthcare business to a wholly-owned subsidiary of Old Beverly, i.e., New Beverly Holdings, Inc. ("NBHI"), which was then spun-off to the shareholders of Old Beverly, all pursuant to the Agreement and Plan of Distribution by and between Old Beverly, NBHI and Capstone Pharmacy Services, Inc. ("Capstone") dated as of April 15, 1997; and WHEREAS, immediately following such spin-off, Old Beverly merged with and into Capstone, with Capstone as the surviving corporation, all pursuant to the Agreement and Plan of Merger by and between Old Beverly and Capstone dated as of April 15, 1997 (all the aforementioned transactions to be referred to herein collectively as the "Transaction"); and WHEREAS, pursuant to the Transaction, the Corporation changed its name from NBHI to Beverly Enterprises, Inc. and assumed the sponsorship of the Beverly Enterprises, Inc. Non-Employee Directors' Stock Deferred Compensation Plan (as adopted by Old Beverly effective May 29, 1997) (the "Plan"); and WHEREAS, the Corporation desires, in light of the Transaction, to amend the Plan to reflect adjustments to the Deferred Share Unit Accounts of the Participants therein; and WHEREAS, the Corporation desires, in light of the Transaction, to amend the Plan to increase the number of Annual Deferred Share Unit Grants under Section 5 thereof to reflect adjustments in the value of the Corporation's Stock following the Transaction; and WHEREAS, Section 12 of the Plan provides that it may be amended, modified or terminated at any time; 2 NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section 2(d) of the Plan is amended to read as follows: "Company" means Beverly Enterprises, Inc., which shall mean "Old Beverly" prior to the date of the Transaction, and shall mean New Beverly Holdings, Inc. ("NBHI") (which has changed its name to Beverly Enterprises, Inc.) subsequent to said date. 2. The Plan is amended by adding a new Section 2(t) to read as follows: "Transaction" means, collectively, those transactions which are described in the Agreement and Plan of Distribution by and between Beverly Enterprises, Inc. ("Old Beverly"), New Beverly Holdings, Inc. ("NBHI"), and Capstone Pharmacy Services, Inc. ("Capstone"), dated as of April 15, 1997, and the Agreement and Plan of Merger by and between Old Beverly and Capstone dated as of April 15, 1997. 3. The Plan is amended by adding a new Section 23 to read as follows: As of the date of the Transaction, each Participant's Accounts under the Plan as expressed as a number of Deferred Share Units, shall be adjusted by dividing the number of Deferred Share Units by the Distribution Stock Fraction, as that term is defined in the documents described in Section 2(t). Subsequent to the Transaction, all subsequent additions to the Plan and all Account balances shall be deemed invested in Common Stock of New Beverly Holdings, Inc. (now known as Beverly Enterprises, Inc.), and shall fluctuate in value accordingly. 4. The Plan is amended by replacing the second sentence of Section 5 thereof with the following: "Beginning with 1988 and each year thereafter, each director will receive a grant of 675 Deferred Share Units, credited as of the last day of the Stock's active trading in the month of January in the respective Plan Year." 2 3 IN WITNESS WHEREOF, the Corporation has caused this Amendment to be executed by a duly authorized representative, as of the day and year first written above. BEVERLY ENTERPRISES, INC. By: ------------------------------------ Its: ----------------------------------- 3 EX-11.1 14 COMPUTION OF NET INCOME (LOSS) PER SHARE 1 EXHIBIT 11.1 BEVERLY ENTERPRISES, INC. COMPUTATION OF NET INCOME (LOSS) PER SHARE (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC: 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Income (loss) before redemption premium on preferred stock and extraordinary charge ................... $ 58,593 $ 52,026 $ (8,123) $ 76,913 $ 57,956 Redemption premium on preferred stock ......................... -- -- -- -- (20,000) --------- --------- --------- --------- --------- Income (loss) before extraordinary charge ..................... 58,593 52,026 (8,123) 76,913 37,956 Extraordinary charge, net of income taxes ..................... -- (1,726) -- (2,412) (2,345) --------- --------- --------- --------- --------- Net income (loss) ............................................. 58,593 50,300 (8,123) 74,501 35,611 Preferred stock dividends ..................................... -- -- (6,875) (8,250) (4,438) --------- --------- --------- --------- --------- Net income (loss) applicable to common shares ................. $ 58,593 $ 50,300 $ (14,998) $ 66,251 $ 31,173 ========= ========= ========= ========= ========= Applicable common shares: Weighted average outstanding shares during the period ....... 102,060 98,574 92,233 85,430 79,735 ========= ========= ========= ========= ========= Income (loss) per share of common stock: Before redemption premium on preferred stock and extraordinary charge ...................................... $ .57 $ .53 $ (.16) $ .80 $ .67 Redemption premium on preferred stock ....................... -- -- -- -- (.25) --------- --------- --------- --------- --------- Before extraordinary charge ................................. .57 .53 (.16) .80 .42 Extraordinary charge, net of income taxes ................... -- (.02) -- (.02) (.03) --------- --------- --------- --------- --------- Net income (loss) per share of common stock ................. $ .57 $ .51 $ (.16) $ .78 $ .39 ========= ========= ========= ========= ========= DILUTED: Income (loss) before redemption premium on preferred stock and extraordinary charge ............................. $ 58,593 $ 52,026 $ (8,123) $ 76,913 $ 57,956 Reduction of interest expense resulting from assumed conversion of 7 5/8% convertible subordinated debentures ..... -- (b) -- (a) -- (a) -- (a) -- (a) Reduction of interest expense resulting from assumed conversion of 5 1/2% convertible subordinated debentures .... -- (c) 8,252 -- (a) -- -- Reduction of interest expense resulting from assumed conversion of 9% convertible subordinated debentures ........ -- -- -- -- (g) 2,711 Reduction of interest expense resulting from assumed conversion of zero coupon notes ............................. -- (d) -- (a) -- (a) -- (a) 116 Less applicable income taxes .................................. -- (4,832) -- -- (933) --------- --------- --------- --------- --------- Adjusted income (loss) before redemption premium on preferred stock and extraordinary charge .................... 58,593 55,446 (8,123) 76,913 59,850 Redemption premium on preferred stock ......................... -- -- -- -- (20,000) --------- --------- --------- --------- --------- Adjusted income (loss) before extraordinary charge ............ 58,593 55,446 (8,123) 76,913 39,850 Extraordinary charge, net of income taxes ..................... -- (1,726) -- (2,412) (2,345) --------- --------- --------- --------- --------- Adjusted net income (loss) .................................... 58,593 53,720 (8,123) 74,501 37,505 Preferred stock dividends ..................................... -- -- (6,875) -- (4,438) --------- --------- --------- --------- --------- Adjusted net income (loss) applicable to common shares ........ $ 58,593 $ 53,720 $ (14,998) $ 74,501 $ 33,067 ========= ========= ========= ========= ========= Applicable common shares: Weighted average outstanding shares during the period ....... 102,186 98,574 92,233 85,430 79,735 Assumed conversion of preferred stock ....................... -- -- -- -- (f) -- (a) Assumed conversion of Preferred Stock ....................... -- -- -- (e) 11,253 -- (a) Weighted average shares issuable upon exercise of common stock equivalents outstanding (principally stock options) using the "treasury stock" method ............... 1,236 899 -- (a) 1,333 1,167 Assumed conversion of 7 5/8% convertible subordinated debentures ............................................... -- (b) -- (a) -- (a) -- (a) -- (a) Assumed conversion of 5 1/2% convertible subordinated debentures ............................................... -- (c) 11,253 -- (a) -- -- Assumed conversion of 9% convertible subordinated debentures ............................................... -- -- -- -- (g) 4,322 Assumed conversion of zero coupon notes ..................... -- (d) -- (a) -- (a) -- (a) 19 --------- --------- --------- --------- --------- Total ....................................................... 103,422 110,726 92,233 98,016 85,243 ========= ========= ========= ========= ========= Income (loss) per share of common stock: Before redemption premium on preferred stock and extraordinary charge ...................................... $ .57 $ .50 $ (.16) $ .78 $ .65 Redemption premium on preferred stock ....................... -- -- -- -- (.23) --------- --------- --------- --------- --------- Before extraordinary charge ................................. .57 .50 (.16) .78 .42 Extraordinary charge, net of income taxes ................... -- (.01) -- (.02) (.03) --------- --------- --------- --------- --------- Net income (loss) per share of common stock ................. $ .57 $ .49 $ (.16) $ .76 $ .39 ========= ========= ========= ========= =========
- ------------------- (a) Conversion would be anti-dilutive and is therefore not assumed in the computation of earnings per share of common stock. (b) The 7 5/8% convertible subordinated debentures were paid off during the fourth quarter of 1997. (c) The 5 1/2% convertible subordinated debentures were converted to 11,189,924 shares of common stock during the third quarter of 1997, with the remaining principal amount redeemed at 103.30%. (d) The zero coupon notes were repurchased during the second quarter of 1997. (e) The $2.75 Cumulative Convertible Exchangeable Preferred Stock (the "Preferred Stock") was exchanged into 5 1/2% convertible subordinated debentures during the fourth quarter of 1995. (f) The cumulative convertible preferred stock (the "preferred stock") was redeemed in January 1994. (g) The 9% convertible subordinated debentures were converted to Common Stock during the third quarter of 1993. EX-21.1 15 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE DECEMBER 31, 1997
STATE OF CORPORATION INCORPORATION - ----------- ------------- A-1 Home Health Services, Inc. Georgia AdviNet, Inc. Delaware AGI-Camelot, Inc. Missouri American Transitional Care Dallas - Fort Worth, Inc. Texas American Transitional Health Care, Inc. Delaware American Transitional Hospitals, Inc. Delaware American Transitional Hospitals - Texas Medical Center, Inc. Delaware American Transitional Hospitals of East Tennessee, Inc. Delaware American Transitional Hospitals of Indiana, Inc. Indiana American Transitional Hospitals of Oklahoma, Inc. Oklahoma American Transitional Hospitals of Tennessee, Inc. Tennessee ATH - Clear Lake, Inc. Delaware ATH - Little Rock, Inc. Delaware ATH - Memphis, Inc. Delaware ATH Columbus, Inc. Delaware ATH Heights, Inc. Texas ATH Oklahoma City, Inc. Oklahoma ATH Tucson, Inc. Arizona Bercy International, Inc. California Beverly Assisted Living, Inc. Delaware Beverly Enterprises International Limited California Beverly Enterprises Medical Equipment Corporation California Beverly Enterprises - Alabama, Inc. California
1 2 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1997
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly Enterprises - Arizona, Inc. California Beverly Enterprises - Arkansas, Inc. California Beverly Enterprises - California, Inc. California Beverly Enterprises - Colorado, Inc. California Beverly Enterprises - Connecticut, Inc. California Beverly Enterprises - Delaware, Inc. California Beverly Enterprises - Distribution Services, Inc. California Beverly Enterprises - District of Columbia, Inc. California Beverly Enterprises - Florida, Inc. California Beverly Enterprises - Garden Terrace, Inc. California Beverly Enterprises - Georgia, Inc. California Beverly Enterprises - Hawaii, Inc. California Beverly Enterprises - Idaho, Inc. California Beverly Enterprises -Illinois, Inc. California Beverly Enterprises - Indiana, Inc. California Beverly Enterprises - Iowa, Inc. California Beverly Enterprises - Kansas, Inc. California Beverly Enterprises - Kentucky, Inc. California Beverly Enterprises - Louisiana, Inc. California Beverly Enterprises - Maine, Inc. California Beverly Enterprises - Maryland, Inc. California Beverly Enterprises - Massachusetts, Inc. California Beverly Enterprises - Michigan, Inc. California
2 3 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1997
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly Enterprises - Minnesota, Inc. California Beverly Enterprises - Mississippi, Inc. California Beverly Enterprises - Missouri, Inc. California Beverly Enterprises - Montana, Inc. California Beverly Enterprises - Nebraska, Inc. California Beverly Enterprises - Nevada, Inc. California Beverly Enterprises - New Hampshire, Inc. California Beverly Enterprises - New Jersey, Inc. California Beverly Enterprises - New Mexico, Inc. California Beverly Enterprises - North Carolina, Inc. California Beverly Enterprises - North Dakota, Inc. California Beverly Enterprises - Ohio, Inc. California Beverly Enterprises - Oklahoma, Inc. California Beverly Enterprises - Oregon, Inc. California Beverly Enterprises - Pennsylvania, Inc. California Beverly Enterprises - Rhode Island, Inc. California Beverly Enterprises - South Carolina, Inc. California Beverly Enterprises - Tennessee, Inc. California Beverly Enterprises - Texas, Inc. California Beverly Enterprises - Utah, Inc. California Beverly Enterprises - Vermont, Inc. California Beverly Enterprises - Virginia, Inc. California Beverly Enterprises - Washington, Inc. California Beverly Enterprises - West Virginia, Inc. California
3 4 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1997
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly Enterprises - Wisconsin, Inc. California Beverly Enterprises - Wyoming, Inc. California Beverly - Bella Vista Holding, Inc. Delaware Beverly Funding Corporation Delaware Beverly Health and Rehabilitation Services, Inc. California Beverly Holdings I, Inc. Delaware Beverly Indemnity, LTD. Vermont Beverly Manor Inc. of Hawaii California Beverly Manor Inc. of Phoenix California Beverly - Missouri Valley Holding, Inc. Delaware Beverly - Rapid City Holding, Inc. Delaware Beverly Real Estate Holdings, Inc. Delaware Beverly Savana Cay Manor, Inc. California Columbia Valley Nursing Home, Inc. Ohio Commercial Management, Inc. Iowa Continental Care Centers of Council Bluffs, Inc. Iowa CS Holding Company Delaware Edgewood Convalescent Hospital California Forest City Building, Ltd. Missouri Hallmark Convalescent Homes, Inc. Michigan Home Medical Systems, Inc. Delaware HomeCare Preferred Choice, Inc. Delaware Hospice Preferred Choice, Inc. Delaware Hospital Facilities Corporation California
4 5 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1997
STATE OF CORPORATION INCORPORATION - ----------- ------------- J. David Butler, L.P.T., Inc. Texas Kenwood View Nursing Home, Inc. Kansas Liberty Nursing Homes, Incorporated Virginia Matrix HealthCare Network, Inc. Delaware Matrix Rehabilitation, Inc. Delaware Medical Arts Health Facility of Lawrenceville, Inc. Georgia Moderncare of Lumberton, Inc. North Carolina Nebraska City S-C-H, Inc. Nebraska Nursing Home Operators, Inc. Ohio Petersen Health Care, Inc. Florida Piedmont No. 1, Inc. Missouri PPI, Inc. New Mexico Shastina Properties, Inc. California Shastina Realty, Inc. California South Alabama Nursing Home, Inc. Alabama South Dakota - Beverly Enterprises, Inc. California Spectra Healthcare Alliance, Inc. Delaware Synergos - Scottsdale, Inc. Arizona Synergos, Inc. California TMD Disposition Company Florida Vantage Healthcare Corporation Delaware
5 EX-23.1 16 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements and amendments thereto: Form S-8 No. 33-21505 Employee Stock Purchase Plan Form S-8 No. 333-41671 Non-Employee Director Deferred Compensation Plan Form S-8 No. 333-41669 1997 Long-Term Incentive Plan Form S-8 No. 333-41673 Executive Deferred Compensation Plan Form S-8 No. 333-42131 Non-Employee Directors' Stock Option Plan of Beverly Enterprises, Inc. and in the related Prospectuses of our report dated February 6, 1998, except for Note 5, paragraph 6, as to which the date is March 4, 1998, with respect to the consolidated financial statements and schedule of Beverly Enterprises, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ ERNST & YOUNG LLP Little Rock, Arkansas March 26, 1998 EX-27.1 17 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 105,230 0 422,147 18,505 30,439 626,318 1,797,163 638,834 2,073,469 344,017 686,941 0 0 10,989 851,516 2,073,469 3,217,099 3,230,300 0 2,888,021 151,060 0 82,713 108,506 49,913 58,593 0 0 0 58,593 .57 .57 Excludes $23,481 of long-term notes receivable. Excludes $2,917 of allowance for long-term notes receivable. Included in Total costs and expenses line.
EX-27.2 18 RESTATED FINANCIAL DATA SCHEDULE FYE 12/31/96
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 DEC-31-1996 69,761 0 541,308 26,019 55,348 697,245 1,891,870 643,085 2,525,082 379,030 1,106,256 0 0 10,443 850,652 2,525,082 3,267,189 3,281,028 0 2,958,942 105,468 0 91,111 125,507 73,481 52,026 0 (1,726) 0 50,300 .51 .49 Excludes $42,257 of long-term notes receivable. Excludes $4,951 of allowance for long-term notes receivable. Included in Total costs and expenses line.
EX-27.3 19 RESTATED FINANCIAL DATA SCHEDULE FYE 12/31/95
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 DEC-31-1995 56,303 0 561,362 23,357 59,109 716,592 1,771,010 581,025 2,506,461 551,545 988,909 0 0 10,262 810,071 2,506,461 3,228,553 3,242,781 0 2,960,832 203,858 0 84,245 (6,154) 1,969 (8,123) 0 0 0 (8,123) (.16) (.16) Excludes $46,868 of long-term notes receivable. Excludes $4,953 of allowance for long-term notes receivable. Included in Total costs and expenses line.
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