-----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, PfD2XSyYFxHgseAmSaElwHyGz75blVhCOuziygi+LqA0k+WWP7pgOWTItKbhohVv 8i8CXhH+9Zk1TB3tQtwJTg== 0000950134-99-002173.txt : 19990330 0000950134-99-002173.hdr.sgml : 19990330 ACCESSION NUMBER: 0000950134-99-002173 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 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-K405 SEC ACT: SEC FILE NUMBER: 001-09550-2B FILM NUMBER: 99576676 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-K405 1 FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1998 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, 1998 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. [X] THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF REGISTRANT WAS $526,153,242 AS OF FEBRUARY 26, 1999. 102,493,655 (NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, NET OF TREASURY SHARES, AS OF FEBRUARY 26, 1999) PART III IS INCORPORATED BY REFERENCE FROM THE PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 27, 1999. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 Pharmacy Corporation of America ("PCA") with Capstone Pharmacy Services, Inc. ("Capstone") (the "Merger"). References to Beverly Enterprises, Inc., or the Company, prior to December 3, 1997 means the predecessor corporation, Old Beverly. References to Beverly Enterprises, Inc., or the Company, on or after December 3, 1997 means New Beverly, and New Beverly is 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 3 of Notes to Consolidated Financial Statements" for additional information. The business of the Company consists principally of providing healthcare services, including the operation of nursing facilities, rehabilitation therapy services, assisted living centers, home care centers and outpatient clinics. In addition, prior to June 30, 1998, the Company operated acute long-term transitional hospitals and, prior to the Merger, institutional and mail service pharmacies. The Company is one of the largest operators of nursing facilities in the United States. At January 31, 1999, the Company operated 561 nursing facilities with 62,171 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, 1999, the Company also operated 36 assisted living centers containing 1,039 units, 194 outpatient clinics, and 75 home care centers. The Company's facilities had average occupancy of 88.7%, 88.9% and 87.4% during the years ended December 31, 1998, 1997 and 1996, respectively. See "Item 2. Properties." This Annual Report on Form 10-K, and other information provided by the Company from time to time, contains certain "forward-looking" statements as that term is defined by the Private Securities Litigation Reform Act of 1995. All statements regarding the Company's expected future financial position, results of operations, cash flows, continued performance improvements, ability to service its debt obligations, ability to finance growth opportunities, response to changes in government regulations, and similar statements including, without limitation, those containing words such as "believes," "anticipates," "expects," "intends," "estimates," "plans," and other similar expressions are forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause the Company's actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors: national and local economic conditions; the effect of government regulation and changes in regulations governing the healthcare industry, including the Company's compliance with such regulations; changes in Medicare and Medicaid payment levels; liabilities and other claims asserted against the Company, including the outcome of the federal government investigation (see "Item 3. Legal Proceedings"); the ability to attract and retain qualified personnel; the availability and terms of capital to fund acquisitions and capital improvements; the competitive environment in which the Company operates; demographic changes; the ability of the Company and its significant vendors, suppliers and payors to timely locate and correct all relevant computer codes and identify and remediate date-sensitive embedded chips prior to the year 2000; and the availability and cost of labor and materials. Given these risks and uncertainties, the Company can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, cautions investors not to place undue reliance on them. 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 1 3 otherwise engages in discussions with, other healthcare companies and financial advisors regarding possible strategic alliances, joint ventures, business combinations and other financial alternatives. OPERATIONS The Company is currently organized into two operating segments, which support the Company's delivery of vertically integrated services to the long-term healthcare market. These operating segments include: (i) Beverly Healthcare, which provides long-term healthcare through the operation of nursing facilities and assisted living centers; and (ii) Beverly Care Alliance, which operates outpatient clinics, home care centers and a rehabilitation services business. Business in each operating segment is conducted by one or more corporations headed by a president who also is a senior officer of the Company and reports directly to the President of the Company. The corporations comprising each of the two operating segments also have separate boards of directors consisting of four senior executives of the Company and the president of the segment. See "Part II, Item 8 -- Note 10 of Notes to Consolidated Financial Statements" for additional information. Beverly Healthcare's nursing facilities provide residents with routine long-term care services, including daily dietary, social and recreational services and a full range of pharmacy services and medical supplies. Beverly Healthcare's highly skilled staff also offers complex and intensive medical services to patients with higher acuity disorders outside the traditional acute care hospital setting. In addition, Beverly Healthcare provides assisted living services. Approximately 90%, 80% and 82% of the Company's total net operating revenues for the years ended December 31, 1998, 1997 and 1996, respectively, were derived from services provided by Beverly Healthcare. Beverly Care Alliance offers industrial rehabilitation, outpatient clinics, acute hospital therapy contracts, management/consulting rehabilitation programs and home care services within the Company's network of facilities and to other healthcare providers. Approximately 7%, 2% and 2% of the Company's total net operating revenues for the years ended December 31, 1998, 1997 and 1996, respectively, were derived from services provided by Beverly Care Alliance. GOVERNMENTAL REGULATION AND REIMBURSEMENT The Company's nursing facilities are subject to compliance with various federal, state and local healthcare statutes and regulations. Compliance with state licensing requirements imposed upon all healthcare facilities is a prerequisite for the operation of the facilities and for participation in government-sponsored healthcare funding programs, such as Medicaid and Medicare. Medicaid is a medical assistance program for the indigent, operated by individual states with the financial participation of the federal government. Medicare is a health insurance program for the aged and certain other chronically disabled individuals, operated by the federal government. Changes in the reimbursement policies of such funding programs as a result of budget cuts by federal and state governments or other legislative and regulatory actions could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. The Company receives payments for services rendered to patients from (a) each of the states in which its nursing facilities are located under the Medicaid program; (b) the federal government under the Medicare program; and (c) private payors, including commercial insurers, managed care payors and Veterans Administration ("VA"). The following table sets forth: (i) patient days derived from the indicated sources of payment as a percentage of total patient days, (ii) room and board revenues derived from the indicated 2 4 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, 1998............ 69% 46% 11% 13% 20% 18% 23% December 31, 1997............ 68% 40% 12% 12% 20% 16% 32% December 31, 1996............ 69% 42% 12% 12% 19% 14% 32%
Consistent with the long-term care industry in general, changes in the mix of the Company's patient population among the Medicaid, Medicare and private categories can significantly affect revenues and profitability. In most states, private patients are the most profitable, and Medicaid patients are the least profitable. Ancillary revenues are derived from providing services to residents beyond room, board and custodial care and include occupational, physical, speech, respiratory and intravenous ("IV") therapy, as well as sales of pharmaceuticals and other services. Such services are currently provided primarily to Medicare and private pay patients, 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. Medicaid programs are currently in existence in all of the states in which the Company operates nursing facilities. While these programs differ in certain respects from state to state, they are all subject to federally-imposed requirements, and at least 50% of the funds available under these programs is provided by the federal government under a matching program. The Medicaid and Medicare programs each contain specific requirements which must be adhered to by healthcare facilities in order to qualify under the programs. Currently, most state Medicaid programs utilize a cost-based reimbursement system for nursing facilities which reimburses facilities for the reasonable direct and indirect allowable costs incurred in providing routine patient care services (as defined by the programs) plus, in certain states, efficiency incentives or a return on equity, subject to certain cost ceilings. These costs normally include allowances for administrative and general costs as well as the costs of property and equipment (e.g. depreciation and interest, fair rental allowance or rental expense). 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 the 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 developing similar payment systems. The Company is unable to estimate the ultimate impact of these changes in payment mechanisms on the Company's future consolidated financial position, results of operations, or cash flows. Healthcare system reform and concerns over rising Medicare and Medicaid costs continue to be high priorities for both the federal and state governments. In August 1997, the President signed into law the Balanced Budget Act of 1997 (the "1997 Act") in which Congress included numerous program changes directed at balancing the federal budget. The legislation changes Medicare and Medicaid policy in a number of ways, including: (i) the phase in of a Medicare prospective payment system ("PPS") for skilled nursing facilities effective July 1, 1998 (see below); (ii) establishment of limitations on Part B therapy charges per beneficiary per year; (iii) a 10% reduction in Part B therapy costs for the period from January 1, 1998 through July 1, 1998, at which time reimbursement for these services will be based on fee schedules established by the Health Care Financing Administration ("HCFA") of the Department of Health and Human Services 3 5 ("HHS"); (iv) development of new Medicare and Medicaid health plan options; (v) creation of additional safeguards against healthcare fraud and abuse; and (vi) repeal of the Medicaid "Boren Amendment" payment standard. The legislation includes new opportunities for providers to focus further on patient outcomes by creating alternative patient delivery structures. The Company currently estimates a decrease in its 1999 net operating revenues of approximately $70,000,000 related to the impact of PPS and estimates a decrease in its 1999 net operating revenues of approximately $30,000,000 related to the impact of Part B therapy cost reductions, including the establishment of beneficiary limits. Future federal budget legislation and federal and state regulatory changes may negatively impact the Company. PPS, which became effective for the Company on January 1, 1999, significantly changes the manner in which its skilled nursing facilities are paid for inpatient services provided to Medicare beneficiaries. PPS will be phased in over a three year period. In year one (1999 for the Company), Medicare PPS rates will be based 75% on 1995 facility-specific Medicare costs (as adjusted for inflation) and 25% will be federally-determined based upon the acuity level of Medicare patients served in the Company's skilled nursing facilities. In year two, Medicare PPS rates will be based 50% on 1995 facility-specific costs (as adjusted for inflation) and 50% on the federally-determined acuity-adjusted rate. In year three, Medicare PPS rates will be based 25% on 1995 facility-specific costs (as adjusted for inflation) and 75% on the federally-determined acuity-adjusted rate. In year four and thereafter, Medicare PPS rates will be based entirely on the federally-determined acuity-adjusted rate. The Company has analyzed its 1995 facility-specific costs, as well as the current acuity level of Medicare patients in its skilled nursing facilities. In addition, the Company has identified the significant changes in its facility-specific costs since 1995 to determine the major reasons for such changes. Based on such analyses, the Company has implemented facility-specific plans to deliver care to Medicare patients at a lower cost and in a manner consistent with PPS requirements. Such plans resulted in material changes in staffing in the Company's skilled nursing facilities, primarily in the area of rehabilitation services. Such staffing changes also resulted in a fourth quarter 1998 charge of approximately $2,500,000. The Company has also determined that other cost reductions can be achieved in its skilled nursing facilities. If the Company is unable to carry out its facility-specific plans to reduce the cost of care to Medicare patients, PPS could have a material adverse effect on the Company's consolidated financial position and results of operations. PPS also imposes significant documentation requirements on skilled nursing facilities to demonstrate the acuity level of Medicare patients and other factors which will directly impact billing and payment rates to the Company, as well as compliance with PPS rules and regulations. The Company has implemented new and enhanced information systems to help ensure compliance with PPS. Company-wide training on PPS and other 1997 Act provisions has been conducted. As a result of these and other preparations, the Company believes it will be positioned to operate effectively under PPS. 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 4 6 regulations also identify alternative remedies and specify the categories of deficiencies for which they will be applied. These remedies include: temporary management; denial of payment for new admissions; denial of payment for all residents; civil money penalties of $50 to $10,000 per day of violation; closure of facility and/or transfer of residents in emergencies; directed plans of correction; and directed in service training. The regulations also specify under what circumstances alternative enforcement remedies or termination, or both, will be imposed on facilities which are not in compliance with the participation requirements. The Company has undertaken an analysis of the procedures with respect to its programs and facilities covered by the final HCFA regulations. Results of HCFA surveys for the past year have determined that the Company continues to improve its regulatory compliance record. The Company's facilities that are cited with deficiencies are cited less frequently than other proprietary, chain facilities. Although the Company could be adversely affected if a substantial portion of its programs or facilities were eventually determined not to be in compliance with the HCFA regulations, the Company believes its programs and facilities are generally in compliance. The Company has a Quality Management ("QM") program to help ensure that high quality care is provided in each of its nursing and outpatient facilities. The Company's nationwide QM network of healthcare professionals includes physician medical directors, registered nurses, dieticians, social workers and other specialists who work in conjunction with regional and facility based QM professionals. Facility based QM is structured through the Company's Quality Assessment and Assurance Committee. With a philosophy of quality improvement, Company-wide clinical indicators are utilized as a database to set goals and monitor thresholds in critical areas directly related to the delivery of healthcare related services. These internal evaluations are used by local quality improvement teams, which include QM advisors, to identify and correct possible problems. The Senior Vice President of QM reports directly to the President of the Company and the QM Committee of the Company's Board of Directors. The Company believes that its facilities are in substantial compliance with currently applicable Medicaid and Medicare conditions of participation. In the ordinary course of its business, however, the Company receives notices of deficiencies for failure to comply with various regulatory requirements. The Company reviews such notices and takes appropriate corrective action. In most cases, the Company and the reviewing agency will agree upon the steps to be taken to bring the facility into compliance with regulatory requirements. In some cases or upon repeat violations, the reviewing agency may take a number of adverse actions against a facility. These adverse actions can include the imposition of fines, temporary suspension of admission of new patients to the facility, decertification from participation in the Medicaid or Medicare programs and, in extreme circumstances, revocation of a facility's license. The Social Security Act and regulations of HHS provide for exclusion of providers and related persons from participation in the Medicare and Medicaid programs if they have been convicted of a criminal offense related to the delivery of an item or service under either of these programs or if they have been convicted, under state or federal law, of a criminal offense relating to neglect or abuse of residents in connection with the delivery of a healthcare item or service. Furthermore, individuals or entities and their affiliates may be excluded from the Medicare and Medicaid programs under certain circumstances including conviction relating to fraud, license revocation or suspension, or failure to furnish services of adequate quality. The "fraud and abuse" anti-kickback provisions of the Social Security Act (presently codified in Section 1128B(b) of the Social Security Act, hereinafter the "Antifraud Amendments") make it a criminal felony offense to knowingly and willfully offer, pay, solicit or receive remuneration in order to induce business for which reimbursement is provided under government health programs, including Medicare and Medicaid. The Antifraud Amendments have been broadly interpreted to make remuneration of any kind, including many types of business and financial arrangements among providers, potentially illegal if any purpose of the remuneration or financial arrangement is to induce a referral. Accordingly, joint ventures, space and equipment rentals, management and personal services contracts, and certain investment arrangements among providers may be suspect. In 1991, HHS promulgated regulations which describe certain arrangements that would not be subject to enforcement action under the Social Security Act (the "Safe Harbors"). The Safe Harbors described in the regulations are narrow, leaving unprotected a wide range of economic relationships that many hospitals, 5 7 physicians and other healthcare providers consider to be legitimate business arrangements not prohibited by the Antifraud Amendments. The regulations do not purport to describe comprehensively all lawful relationships between healthcare providers and referral sources, and clearly provide that arrangements that do not qualify for Safe Harbor protection are not automatically deemed to violate the Antifraud Amendments. Thus, skilled nursing facilities and other healthcare providers having arrangements or relationships that do not fall within a Safe Harbor may not be required to alter them in order to ensure compliance with the Social Security Act provisions. Although failure to qualify for a Safe Harbor may subject a particular arrangement or relationship to increased regulatory scrutiny, the fact that a particular relationship or arrangement does not fall within one of the Safe Harbors does not, in and of itself, mean the relationship or arrangement is unlawful. In 1993, HHS published proposed regulations for comment in the Federal Register establishing additional Safe Harbors. Additionally, in 1994, HHS published a proposed rule aimed at clarifying the existing Safe Harbors. As of January 1, 1999, these regulations had not been adopted in final form. The Company cannot predict the final form that these regulations and rules will take or their effect, if any, on the Company's business. In addition to the Antifraud Amendments, Section 1877 of the Social Security Act (known as the "Stark Law") imposes restrictions on financial relationships between physicians and certain entities. The Stark Law provides that if a physician (or an immediate family member of a physician) has a financial relationship with an entity that furnishes certain designated health services, the physician may not refer a Medicare or Medicaid patient to the entity, and the entity may not bill for services provided unless an exception to the financial relationship exists. Designated health services include certain services furnished by the Company, such as physical therapy, occupational therapy, prescription drugs and home health. The types of financial relationships that can trigger the referral and billing prohibitions are broad and include ownership or investment interests, as well as compensation arrangements. Penalties for violating the law are severe, including denial of payment for services furnished pursuant to prohibited referrals, civil monetary penalties of $15,000 for each item claimed, assessments equal to 200% of the dollar value of each such service provided, and exclusion from the Medicare and Medicaid programs. On August 14, 1995, final regulations were published interpreting the original provisions of the Stark Law that became effective January 1, 1992. These provisions relate to entities that furnish clinical laboratory services, commonly referred to as "Stark I." Expanded restrictions as applied to the additional designated health services (referred to as "Stark II") became effective as of January 1, 1995. Proposed regulations implementing Stark II were published on January 9, 1998. The Company cannot predict the final form that such regulations will take or the effect that Stark II or the regulations promulgated thereunder will have on the Company. Many states in which the Company operates also have laws that prohibit payments to physicians for patient referrals with statutory language similar to the Antifraud Amendments, but with broader effect since they apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties, as well as loss of licensure. Many states also have passed legislation similar to Stark, but with broader effect, since the legislation applies regardless of the source of payment for care. The scope of these state laws is broad and little precedent exists for their interpretation or enforcement. On August 21, 1996, President Clinton signed significant new federal health reform legislation known as the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"). The new law includes comprehensive and far-reaching revisions or supplements to the Antifraud Amendments. Under HIPAA, healthcare fraud, now defined as knowingly and willfully executing or attempting to execute a "scheme or device" to defraud any healthcare benefit program, is made a federal criminal offense. In addition, for the first time, federal enforcement officials will have the ability to exclude from the Medicare and Medicaid programs any investors, officers and managing employees associated with business entities that have committed healthcare fraud, even if the investor, officer or employee had no actual knowledge of the fraud. HIPAA also establishes a new violation for the payment of inducements to Medicare or Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner. Most of the provisions of HIPAA became effective January 1, 1997. HIPAA was followed by the 1997 Act. The 1997 Act also contained a significant number of new fraud and abuse provisions. For example, civil monetary penalties ("CMP") may now be imposed for violations of the anti-kickback provisions of the Medicare and Medicaid 6 8 statute (previously, exclusion or criminal prosecution were the only actions under the anti-kickback statute), as well as contracting with an individual or entity that the provider knows or should know is excluded from a federal healthcare program. The 1997 Act provides for CMP of $50,000 and damages of not more than three times the amount of remuneration in the prohibited activity. In 1976, Congress established the Office of Inspector General ("OIG") at HHS to identify and eliminate fraud, abuse and waste in HHS programs and to promote efficiency and economy in HHS departmental operations. The OIG carries out this mission through a nationwide program of audits, investigations and inspections. In order to provide guidance to healthcare providers on ways to engage in legitimate business practices and avoid scrutiny under the fraud and abuse statutes, the OIG has from time to time issued "fraud alerts" identifying segments of the healthcare industry and particular practices that are vulnerable to abuse. The OIG has issued three fraud alerts targeting the skilled nursing industry: an August 1995 alert relating to the provision of medical supplies to nursing facilities, the fraudulent billing for medical supplies and equipment and fraudulent supplier transactions; a May 1996 alert focusing on the provision of fraudulent professional services to nursing facility residents; and a March 1998 alert addressing the interrelationship between hospice services and the nursing home industry, and potentially illegal practices and arrangements. The fraud alerts encourage persons having information about potentially abusive practices or transactions to report such information to the OIG. In addition to laws addressing referral relationships, several federal laws impose criminal and civil sanctions for fraudulent and abusive billing practices. The federal False Claims Act imposes sanctions, consisting of monetary penalties of up to $10,000 for each claim and treble damages, on entities and persons who knowingly present or cause to be presented a false or fraudulent claim for payment to the United States. Section 1128B(a) of the Social Security Act prohibits the knowingly and willful making of a false statement or representation of a material fact in relation to the submission of a claim for payment under government health programs (including the Medicare and Medicaid programs). Violations of this provision constitute felony offenses punishable by fines and imprisonment. The new HIPAA provisions establish criminal penalties for fraud, theft, embezzlement, and the making of false statements in relation to healthcare benefits programs (which includes private, as well as government programs). Government prosecutors are increasing their use of the federal False Claims Act to prosecute quality of care deficiencies in nursing facilities and other healthcare facilities under the theory that the submission of reimbursement claims for services provided in a manner which falls short of quality of care standards can constitute the submission of a false claim in violation of the federal False Claims Act. A joint federal/state initiative, Operation Restore Trust, was created in 1995 to apply to nursing homes, home health agencies, and suppliers of medical equipment to these providers in five states: New York, Florida, California, Illinois and Texas. The program was subsequently expanded to hospices in these states as well. The program is designed to focus audit and law enforcement efforts on geographic areas and provider types receiving large concentrations of Medicare and Medicaid funds. According to HHS statistics, the targeted states account for nearly 40% of all Medicare and Medicaid beneficiaries. Under Operation Restore Trust, the OIG and HCFA have undertaken a variety of activities to address fraud and abuse by nursing homes, home health providers and medical equipment suppliers. These activities include financial audits, creation of a Fraud and Waste Report Hotline, and increased investigations and enforcement activity. On May 20, 1997, HHS announced that Operation Restore Trust would be expanded during the next two years to include twelve additional states (Arizona, Colorado, Georgia, Louisiana, Massachusetts, Missouri, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia and Washington), as well as several other types of healthcare services. Over the longer term, it is anticipated that Operation Restore Trust investigative techniques will be used in all 50 states, and will be applied throughout the Medicare and Medicaid programs. In addition to increasing the resources devoted to investigating allegations of fraud and abuse in the Medicare and Medicaid programs, federal and state regulatory and law enforcement authorities are taking an increasingly strict view of the requirements imposed on healthcare providers by the Social Security Act and Medicare and Medicaid regulations. Although the Company believes that it is in material compliance with such laws, a determination that the Company has violated such laws, or even the public announcement that 7 9 the Company was being investigated concerning possible violations, could have a material adverse effect on the Company. See "Item 3. Legal Proceedings." The Nursing Home Resident Protection Amendments of 1999, which were signed into law on March 25, 1999 and amend Section 1919(c)(2) of the Social Security Act, are designed to protect Medicaid patients living in nursing facilities that decide to withdraw from the Medicaid program. Under the amended version of Section 1919(c)(2), a nursing facility is required to continue providing care to residents currently qualifying for assistance under the Medicaid program, as well as residents who may qualify under Medicaid in the future, even if the facility decides to withdraw from the Medicaid program. In addition, if a nursing facility decides to stop admitting Medicaid patients to its facility, it must also notify any existing residents not currently relying on assistance from the Medicaid program that they could potentially be denied services from the facility if they eventually need to rely on Medicaid. While federal regulations do not provide states with grounds to curtail funding of their Medicaid cost reimbursement programs due to state budget deficiencies, states have nevertheless curtailed funding in such circumstances in the past. No assurance can be given that states will not do so in the future or that the future funding of Medicaid programs will remain at levels comparable to the present levels. The United States Supreme Court ruled in 1990 that healthcare providers could use the Boren Amendment to require states to comply with their legal obligation to adequately fund Medicaid programs. The 1997 Act repeals the Boren Amendment and authorizes states to develop their own standards for setting payment rates. It requires each state to use a public process for establishing proposed rates whereby the methodologies and justifications used for setting such rates are available for public review and comment. This requires facilities to become more involved in the rate setting process since failure to do so may interfere with a facility's ability to challenge rates later. 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, 1998, the Company had approximately 73,000 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. 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. However, it is becoming more 8 10 difficult to attract and retain certain other nursing home personnel, such as certified nursing assistants and nurses' aides, for whom the Company competes with other service industries. 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 8% 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 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, 1999, the Company operated 561 nursing facilities, 36 assisted living centers, 194 outpatient clinics and 75 home care centers in 33 states and the District of Columbia. Most of the Company's 190 leased nursing facilities are subject to "net" leases which require the Company to pay all taxes, insurance and maintenance costs. Most of these leases have original terms from ten to fifteen years and contain at least one renewal option, which could extend the original term of the leases by five to fifteen years. Many of these leases also contain purchase options. The Company considers its physical properties to be in good operating condition and suitable for the purposes for which they are being used. Certain of the nursing facilities and assisted living centers owned by the Company are included in the collateral securing the obligations under its various debt agreements. See "Part II, Item 8 -- Note 5 of Notes to Consolidated Financial Statements." 9 11 The following is a summary of the Company's nursing facilities, assisted living centers, outpatient clinics and home care centers at January 31, 1999:
NURSING ASSISTED HOME FACILITIES LIVING CENTERS OUTPATIENT CARE ---------------------- -------------- CLINICS CENTERS TOTAL TOTAL ---------- ------- NUMBER LICENSED BEDS NUMBER UNITS NUMBER NUMBER ------ ------------- ------ ----- ---------- ------- LOCATION Alabama...................... 21 2,725 -- -- -- -- Arizona...................... 3 480 -- -- -- -- Arkansas..................... 36 4,256 4 80 1 2 California................... 69 7,423 2 113 36 20 Colorado..................... -- -- -- -- 17 -- Delaware..................... -- -- -- -- 4 -- District of Columbia......... 1 355 -- -- -- -- Florida...................... 51 6,311 5 311 -- -- Georgia...................... 18 2,147 3 72 24 2 Hawaii....................... 2 396 -- -- -- -- Illinois..................... 3 275 -- -- -- -- Indiana...................... 26 3,817 1 16 -- 1 Kansas....................... 32 2,059 3 39 -- -- Kentucky..................... 8 1,039 -- -- -- -- Maryland..................... 4 585 1 16 12 -- Massachusetts................ 24 2,402 -- -- -- -- Michigan..................... 2 206 -- -- -- -- Minnesota.................... 35 3,041 3 33 -- -- Mississippi.................. 21 2,466 -- -- -- -- Missouri..................... 29 3,038 3 101 -- 1 Nebraska..................... 24 2,161 1 16 -- 4 Nevada....................... -- -- -- -- -- 1 New Jersey................... 1 120 -- -- -- -- North Carolina............... 11 1,398 1 16 11 31 Ohio......................... 12 1,433 -- -- 4 -- Pennsylvania................. 42 4,791 3 53 9 4 South Carolina............... 3 302 -- -- 15 -- South Dakota................. 17 1,232 1 36 -- -- Tennessee.................... 7 948 2 57 -- 6 Texas........................ -- -- -- -- 49 2 Virginia..................... 16 2,113 3 80 -- -- Washington................... 10 1,000 -- -- 12 -- West Virginia................ 3 310 -- -- -- -- Wisconsin.................... 30 3,342 -- -- -- 1 --- ------ -- ----- --- -- 561 62,171 36 1,039 194 75 === ====== == ===== === == CLASSIFICATION Owned........................ 369 40,315 31 815 -- -- Leased....................... 190 21,721 5 224 194 75 Managed...................... 2 135 -- -- -- -- --- ------ -- ----- --- -- 561 62,171 36 1,039 194 75 === ====== == ===== === ==
10 12 ITEM 3. LEGAL PROCEEDINGS. On March 4, 1998, a jury in California returned a verdict of $95,100,000 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 $94,700,000 in punitive damages. At a post-trial hearing on June 3, 1998, the trial judge reduced the compensatory damages to $125,000 and reduced the punitive damages to $3,000,000. The Company believes that these reduced damages are excessive and has appealed on this basis. The plaintiff has cross-appealed. The Company intends to aggressively pursue all appellate remedies available. The Company is the subject of a federal government investigation relating to the allocation to the Medicare program of certain nursing labor costs in its skilled nursing facilities from 1990 to 1997. The federal government has not disclosed the origin of this investigation or its intended scope. The investigation is being conducted by the Office of Inspector General of the Department of Health and Human Services and by the Department of Justice. The Company has received subpoenas and has provided substantial information voluntarily. The Company's independent auditors, Ernst & Young LLP, also received a subpoena relating to its evaluation of the Company's internal controls. In addition, the Company has been notified that a federal grand jury in San Francisco is currently investigating practices which are the subject of the above civil investigation. Two former employees of the Company have received letters from the United States Attorney for the Northern District of California indicating they are targets of the grand jury investigation. To date, four current employees of the Company have served as witnesses before the grand jury. The Company has cooperated with the United States Attorney's office in its investigation. In addition, the Company's current Medicare fiscal intermediary, Blue Cross of California, is examining cost reports of the Company's facilities with respect to the areas that are the focus of the government investigation. Skilled nursing facilities are required to allocate nursing labor costs to Medicare-certified units on an equitable basis. The Company has relied on a variety of internal and external processes and practices that are designed to ensure compliance with this requirement. The Company believes that its cost reporting policies and procedures are consistent with government regulations and reflect industry norms for determination of these cost allocations. While it is not possible to predict the outcome of this investigation, a determination that the Company has violated these regulations could have a material adverse effect on the Company's consolidated financial position and results of operations, which could include the payment of fines and penalties and exclusion from participation in the Medicare and Medicaid programs. See "Item 1. Business -- Governmental Regulation and Reimbursement". On October 2, 1998, a purported class action lawsuit was filed in the United States District Court for the Eastern District of Arkansas by Jack Kushner against the Company and certain of its officers. The class action lawsuit alleges, among other things, that the Company and certain of its officers committed violations of the federal securities laws by materially inflating the Company's revenues and earnings through practices that are the subject of the federal government investigation (see above) and disseminating false and misleading statements concerning compliance with Medicare regulations. The class action lawsuit seeks damages, costs and expenses. The Company intends to aggressively pursue all defenses 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 that are generally not covered by insurance. The Company does not believe that the ultimate resolution of such other matters will have a material adverse effect on the Company's consolidated financial position or results of operations. 11 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of the Company's security holders during the last quarter of its fiscal year ended December 31, 1998. 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, 1999.
NAME POSITION AGE ---- -------- --- David R. Banks(1)............................... Chairman of the Board, Chief Executive Officer and Director 62 Boyd W. Hendrickson(1).......................... President, Chief Operating Officer and Director 54 William A. Mathies.............................. Executive Vice President and President -- Beverly Healthcare 39 T. Jerald Moore................................. Executive Vice President 58 Robert W. Pommerville........................... Executive Vice President, General Counsel and Secretary 58 Bobby W. Stephens............................... Executive Vice President -- Asset Management 54 Scott M. Tabakin................................ Executive Vice President and Chief Financial Officer 40 Mark D. Wortley................................. Executive Vice President and President -- Beverly Care Alliance 43 Philip W. Small................................. Executive Vice President -- Strategic Planning and Operations Support 42 Schuyler Hollingsworth, Jr. .................... Senior Vice President and Treasurer 52 Pamela H. Daniels............................... Vice President, Controller and Chief Accounting Officer 35 Beryl F. Anthony, Jr.(1)(3)(5).................. Director 61 Carolyne K. Davis, R.N., Ph.D.(1)(4)*........... Director 67 James R. Greene(2)(3)(4)........................ Director 77 Edith E. Holiday(2)(4)(5)....................... Director 47 Jon E.M. Jacoby(1)(2)........................... Director 60 Risa J. Lavizzo-Mourey, M.D.(3)(4)*............. Director 44 Marilyn R. Seymann(2)(4)(5)..................... Director 56
- --------------- (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. * Dr. Davis and Dr. Lavizzo-Mourey were made honorary members of the Audit Committee to deal with the oversight of the OIG investigation. In February 1999, the Board formed a separate Litigation and Compliance Committee which now has oversight of the OIG investigation. Mr. Banks has been a director of the Company since 1979 and has served as Chief Executive Officer since May 1989 and Chairman of the Board since March 1990. Mr. Banks was President of the Company from 1979 to September 1995. Mr. Banks is a director of Nationwide Health Properties, Inc., Ralston Purina Company, and trustee for Occidental College. Mr. Banks also serves as a director of PharMerica, Inc., a major supplier of institutional pharmacy services to the Company. 12 14 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 the corporations within 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. and Superior Financial Corp. Mr. Mathies joined the Company in 1981 as an Administrator in training. He was an Administrator until 1986 at which time he became a Regional Manager. In 1988, Mr. Mathies was elected Vice President of Operations for the California region and was elected Executive Vice President of the Company and President of the corporations within Beverly Healthcare in September 1995. Mr. Moore joined the Company as Executive Vice President in December 1992 and served as President of the corporations within Beverly Specialty Hospitals from June 1996 to June 1998. Mr. Moore was employed at Aetna Life and Casualty from 1963 to 1992 and was elected Senior Vice President in 1990. 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 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. Mr. Small joined the Company in January 1986 as Reimbursement Manager, was promoted to Division Controller in September 1986 and Director of Finance for the California Region in 1989. He was elected Vice President -- Reimbursement in September 1990, Senior Vice President -- Finance in 1995 and Executive Vice President -- Strategic Planning and Operations Support in August 1998. Mr. Hollingsworth joined the Company in June 1985 as Assistant Treasurer. He was elected Treasurer in 1988, Vice President in 1990 and Senior Vice President in March 1992. Mr. Hollingsworth is a director of Sparks Regional Medical Center. 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 13 15 director of Beckman Coulter, Inc., The Prudential Insurance Company of America, Inc., 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. 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. She is a director of Managed Care Solutions, Inc. and Hanger Orthopedic Group, Inc. She has been a director of the Company since March 1995. Ms. Seymann is President and Chief Executive Officer of M One, Inc., a management and information systems consulting firm specializing in the financial services industry. She is a director of Community First Bankshares, Inc. and True North Communications, Inc. She has been a director of the Company since March 1995. During 1998, there were six 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 1998, 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. Such fees can be deferred, at the option of the director, as provided for under the Non-Employee Director Deferred Compensation Plan (discussed below). Mr. Banks, the Company's current Chairman of the Board and Chief Executive Officer, 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 was approved. Such plan provides each nonemployee director the opportunity to receive awards equivalent to shares of Common Stock ("deferred share units") and to defer receipt of compensation for services rendered to the Company. There are three types of contributions available under the plan. First, nonemployee directors can defer all or part of retainer and meeting fees to a pre-tax deferred compensation account with two investment options. The first investment option is a cash account which is credited with interest, and the second investment option is a deferred share unit account, with each unit having a value equivalent to one share of Common Stock. The second type of contribution is a Company matching contribution whereby the Company matches 25% of the amount of fees deferred, to the extent the deferral is in the deferred share unit account. Third, as a replacement for the prior benefits under the retirement plan for outside directors, each nonemployee director receives a grant of 675 deferred share units each year which is automatically credited to the deferred share unit account. Distributions under the plan will commence upon retirement, termination, death or disability and will be made in shares of Common Stock unless the Board of Directors approves payment in cash. 14 16 During 1997, the New Beverly Non-Employee Directors Stock Option Plan (the "Non-Employee Directors Stock Option Plan") was approved. Such plan became effective December 3, 1997 and will remain in effect until December 31, 2007, subject to early termination by the Board of Directors. Such plan replaced the Nonemployee Directors' Plan entered into in 1994. There are 300,000 shares of the Company's $.10 par value common stock ("Common Stock") authorized for issuance, subject to certain adjustments, under the Non-Employee Directors Stock Option Plan. The Non-Employee Directors Stock Option Plan was amended by the Board of Directors on December 11, 1997 to provide that 3,375 stock options be granted to each nonemployee director on June 1 of each year until the plan is terminated, subject to the availability of shares. Stock option grants have been made since 1994 to each of the nonemployee directors. Such stock options are granted at a purchase price equal to fair market value on the date of grant, become exercisable one year after date of grant and expire ten years after date of grant. 15 17 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 ---- --- 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............................................. $ 15 9/16 $ 12 1/4 Second Quarter............................................ 16 1/4 13 1/2 Third Quarter............................................. 14 13/16 7 3/8 Fourth Quarter............................................ 8 1/8 5 1/4 1999 First Quarter (through March 18).......................... $ 6 15/16 $ 4 1/2
- --------------- (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 1998 and 1997, no cash dividends were paid on the Company's Common Stock and no future dividends are currently planned. At March 18, 1999, there were 5,585 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, 1998 related to this plan was approximately $2,435,000. At December 31, 1998, there were approximately 4,800 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. 16 18 ITEM 6. SELECTED FINANCIAL DATA. The following table of selected financial data should be read in conjunction with the Company's consolidated financial statements and related notes thereto for 1998, 1997 and 1996 included elsewhere in this Annual Report on Form 10-K.
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 1998 1997(1) 1996 1995 1994 ------------ ------------ ------------ ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net operating revenues......................... $ 2,812,232 $ 3,217,099 $ 3,267,189 $ 3,228,553 $ 2,969,239 Interest income................................ 10,708 13,201 13,839 14,228 14,578 ------------ ------------ ------------ ----------- ----------- Total revenues......................... 2,822,940 3,230,300 3,281,028 3,242,781 2,983,817 Costs and expenses: Operating and administrative................. 2,633,135 2,888,021 2,958,942 2,960,832 2,715,496 Interest..................................... 65,938 82,713 91,111 84,245 64,792 Depreciation and amortization................ 93,722 107,060 105,468 103,581 88,734 Workforce reductions, asset impairments, transaction costs and other unusual items...................................... 69,443 44,000 -- 100,277 -- Year 2000 remediation........................ 9,719 -- -- -- -- Investigation costs.......................... 1,865 -- -- -- -- ------------ ------------ ------------ ----------- ----------- Total costs and expenses............... 2,873,822 3,121,794 3,155,521 3,248,935 2,869,022 ------------ ------------ ------------ ----------- ----------- Income (loss) before provision for (benefit from) income taxes, extraordinary charge and cumulative effect of change in accounting for start-up costs............................... (50,882) 108,506 125,507 (6,154) 114,795 Provision for (benefit from) income taxes...... (25,936) 49,913 73,481 1,969 37,882 Extraordinary charge, net of income tax benefit of $1,057 in 1998, $1,099 in 1996 and $1,188 in 1994...................................... (1,660) -- (1,726) -- (2,412) Cumulative effect of change in accounting for start-up costs, net of income tax benefit of $2,811....................................... (4,415) -- -- -- -- ------------ ------------ ------------ ----------- ----------- Net income (loss).............................. $ (31,021) $ 58,593 $ 50,300 $ (8,123) $ 74,501 ============ ============ ============ =========== =========== Net income (loss) applicable to common shares....................................... $ (31,021) $ 58,593 $ 50,300 $ (14,998) $ 66,251 ============ ============ ============ =========== =========== Diluted income (loss) per share of common stock: Before extraordinary charge and cumulative effect of change in accounting for start-up costs...................................... $ (.24) $ .57 $ .50 $ (.16) $ .78 Extraordinary charge......................... (.02) -- (.01) -- (.02) Cumulative effect of change in accounting for start-up costs............................. (.04) -- -- -- -- ------------ ------------ ------------ ----------- ----------- Net income (loss)............................ $ (.30) $ .57 $ .49 $ (.16) $ .76 ============ ============ ============ =========== =========== Shares used to compute per share amounts..... 103,762,000 103,422,000 110,726,000 92,233,000 98,016,000 CONSOLIDATED BALANCE SHEET DATA: Total assets................................... $ 2,160,511 $ 2,073,469 $ 2,525,082 $ 2,506,461 $ 2,322,578 Current portion of long-term obligations....... $ 27,773 $ 31,551 $ 38,826 $ 84,639 $ 60,199 Long-term obligations, excluding current portion...................................... $ 878,270 $ 686,941 $ 1,106,256 $ 1,066,909 $ 918,018 Stockholders' equity........................... $ 776,206 $ 862,505 $ 861,095 $ 820,333 $ 827,244 OTHER DATA: Average occupancy percentage(2)................ 88.7% 88.9% 87.4% 88.1% 88.5% Number of nursing home beds.................... 62,293 63,552 71,204 75,669 78,058
- --------------- (1) Amounts for 1997 include the operations of PCA up until the effective date of the Merger (as discussed herein). (2) Average occupancy percentage for 1998 and 1997 was based on operational beds, and for all periods prior to 1997, such percentage was based on licensed beds. Average occupancy percentage for 1998 and 1997 based on licensed beds was 86.9% and 87.1%, respectively. 17 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL GOVERNMENTAL REGULATION AND REIMBURSEMENT Healthcare system reform and concerns over rising Medicare and Medicaid costs continue to be high priorities for both the federal and state governments. In August 1997, the President signed into law the Balanced Budget Act of 1997 (the "1997 Act") in which Congress included numerous program changes directed at balancing the federal budget. The legislation changes Medicare and Medicaid policy in a number of ways, including: (i) the phase in of a Medicare prospective payment system ("PPS") for skilled nursing facilities effective July 1, 1998 (see below); (ii) establishment of limitations on Part B therapy charges per beneficiary per year; (iii) a 10% reduction in Part B therapy costs for the period from January 1, 1998 through July 1, 1998, at which time reimbursement for these services will be based on fee schedules established by the Health Care Financing Administration ("HCFA") of the Department of Health and Human Services ("HHS"); (iv) development of new Medicare and Medicaid health plan options; (v) creation of additional safeguards against healthcare fraud and abuse; and (vi) repeal of the Medicaid "Boren Amendment" payment standard. The legislation includes new opportunities for providers to focus further on patient outcomes by creating alternative patient delivery structures. The Company currently estimates a decrease in its 1999 net operating revenues of approximately $70,000,000 related to the impact of PPS and estimates a decrease in its 1999 net operating revenues of approximately $30,000,000 related to the impact of Part B therapy cost reductions, including the establishment of beneficiary limits. Future federal budget legislation and federal and state regulatory changes may negatively impact the Company. PPS, which became effective for the Company on January 1, 1999, significantly changes the manner in which its skilled nursing facilities are paid for inpatient services provided to Medicare beneficiaries. PPS will be phased in over a three year period. In year one (1999 for the Company), Medicare PPS rates will be based 75% on 1995 facility-specific Medicare costs (as adjusted for inflation) and 25% will be federally-determined based upon the acuity level of Medicare patients served in the Company's skilled nursing facilities. In year two, Medicare PPS rates will be based 50% on 1995 facility-specific costs (as adjusted for inflation) and 50% on the federally-determined acuity-adjusted rate. In year three, Medicare PPS rates will be based 25% on 1995 facility-specific costs (as adjusted for inflation) and 75% on the federally-determined acuity-adjusted rate. In year four and thereafter, Medicare PPS rates will be based entirely on the federally-determined acuity-adjusted rate. The Company has analyzed its 1995 facility-specific costs, as well as the current acuity level of Medicare patients in its skilled nursing facilities. In addition, the Company has identified the significant changes in its facility-specific costs since 1995 to determine the major reasons for such changes. Based on such analyses, the Company has implemented facility-specific plans to deliver care to Medicare patients at a lower cost and in a manner consistent with PPS requirements. Such plans resulted in material changes in staffing in the Company's skilled nursing facilities, primarily in the area of rehabilitation services. Such staffing changes also resulted in a fourth quarter 1998 charge of approximately $2,500,000 (See "-- Operating Results"). The Company has also determined that other cost reductions can be achieved in its skilled nursing facilities. If the Company is unable to carry out its facility-specific plans to reduce the cost of care to Medicare patients, PPS could have a material adverse effect on the Company's consolidated financial position and results of operations. PPS also imposes significant documentation requirements on skilled nursing facilities to demonstrate the acuity level of Medicare patients and other factors which will directly impact billing and payment rates to the Company, as well as compliance with PPS rules and regulations. The Company has implemented new and enhanced information systems to help ensure compliance with PPS. Company-wide training on PPS and other 1997 Act provisions has been conducted. As a result of these and other preparations, the Company believes it will be positioned to operate effectively under PPS. 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 18 20 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. YEAR 2000 REMEDIATION GENERAL Computer programs and embedded chips that utilize a two digit year in their processing logic may interpret the year "00" as the year 1900 rather than the year 2000. This could result in 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 is addressing its own processing logic issues, as well as those of third parties, which may impact the Company through the year 2000 Project (the "Y2K Project"). In 1996, the Company began a major systems initiative to upgrade or replace all of its integrated financial application software to facilitate the adoption of a new standard chart of accounts. As part of that major initiative, the Company took the necessary steps to upgrade or replace the applications with year 2000 compliant releases of the software whenever possible. For those purchased software applications where the year 2000 release was not available at that time, the upgrades to the compliant releases are being addressed as part of the Y2K Project. The Company has not postponed any of its other information technology projects as a result of the Y2K Project. Y2K PROJECT The Company's Y2K Project is divided into four major components: technology infrastructure; applications software; third party vendors, suppliers and major customers; and business unit operating equipment. The phases of the Y2K Project that are common to all components include: inventory of date-dependent hardware, software, and operating equipment; assessment of identified items to determine current year 2000 compliance status; repair or replacement of material non-compliant items; testing of material items for compliance; and development of contingency plans for each operating unit. The technology infrastructure component and the applications software component, together, comprise all of the Company's hardware and systems software, as well as all electronic interfaces with external parties. The testing phase for these components is divided into two distinct types of testing, each with its own timetable. The initial phase of year 2000 testing is ongoing as hardware and software is remediated, upgraded, or replaced; and upon successful completion of this phase of testing, the application is moved back into the production environment. The second phase of year 2000 testing will occur after the applications have been remediated, upgraded, or replaced, and have been successfully tested and put back into production. At that time, year 2000 compliance testing will be done in a parallel operating environment in which the internal system clock will be set forward in time to cross over the century time boundary. The remediation, upgrade, replacement, and initial testing of all mission critical mainframe hardware and software was approximately 83% complete as of December 31, 1998, with the remaining mission critical applications expected to be completed by the second quarter of 1999. The trans-century compliance testing began during the first quarter of 1999 and is scheduled to be completed by the end of the second quarter of 1999. The third party vendors, suppliers and major customers component of the Y2K Project includes the process of identifying and prioritizing critical vendors, suppliers and customers, and communicating with them about their plans and progress in addressing the year 2000 problem. The Company has completed the inventory phase of this component of the Y2K Project and has initiated formal communications with all of the vendors, suppliers, and customers identified as critical to the Company's operations and initiated follow-up inquiries during the fourth quarter of 1998 with any that did not respond to the first communication. Detailed evaluations of the responses for the most critical third parties were initiated during the fourth quarter of 1998. 19 21 Based on the data obtained and the detailed evaluations being performed, contingency planning began in the fourth quarter of 1998 and will continue throughout 1999. The Company has no means of ensuring that third parties will be year 2000 ready. The inability of third parties to complete their year 2000 resolution process in a timely manner could materially impact the Company. The Company cannot determine the effect of non-compliance by third parties. For the business unit operating equipment component of the Y2K Project, the inventories of each individual operating unit were completed during the third quarter of 1998, and the data has been compiled and summarized by major operating category, including: medical devices and equipment; environmental systems; security systems; telecommunication and office equipment. The Company is utilizing external resources to test critical equipment impacted by the year 2000 problem, retrofit or replace equipment where necessary, and certify year 2000 compliance of all material date-sensitive equipment. The Company estimates that all such remediation and testing will be completed by the third quarter of 1999. COSTS The Company has, and will continue to, utilize both internal and external resources to reprogram or replace, test, and implement the software and operating equipment for year 2000 modifications. The total cost of the Company's Y2K Project is estimated at approximately $41,000,000 and is being funded through operating cash flows. The total amount expended on the Y2K Project through December 31, 1998 was approximately $11,000,000 ($10,000,000 expensed and $1,000,000 capitalized for new systems and equipment), related to the activities completed to date for all components and phases of the Y2K Project. Of the total remaining Y2K Project costs, $13,000,000 is attributable to the purchase of new hardware, software and operating equipment, which will be capitalized. The remaining $17,000,000 relates to remediation of hardware, software, and operating equipment, and will be expensed as incurred. RISKS The failure to correct a material year 2000 problem could result in significant disruptions in, or failures of, normal business activities. Due to the general uncertainty inherent in the year 2000 problem, due in part to the uncertainty of the year 2000 readiness of third party vendors, suppliers and customers, the Company is unable to determine at this time if it will be impacted by year 2000 disruptions or failures, or whether the consequences of such year 2000 disruptions or failures will have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company believes that, with the completion of all phases of each component of the Y2K Project as scheduled, the possibility of significant disruptions of normal operations should be significantly reduced. However, in the event that the Company fails to complete the remaining phases of any component of the Y2K Project, a possible worst case scenario might be that the Company would be unable to provide uninterrupted service to its patients, invoice customers, or collect payments. In addition, due to the Company's dependence on Medicare and Medicaid revenue sources, disruptions in the processing and payment of Medicare or Medicaid claims could also materially adversely affect the Company. The General Accounting Office has reported that HCFA, which runs Medicare, is behind schedule in taking steps to deal with the year 2000 issue, and that it is highly unlikely that all of the Medicare systems will be compliant in time to ensure the delivery of uninterrupted benefits and services into the year 2000. The Company does not know at this time whether there will in fact be a disruption of Medicare or Medicaid reimbursements and is, therefore, unable to determine the impact on the Company, its operations or cash flows. In addition, the Company could be subject to litigation for equipment shutdown or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company is in the process of developing contingency plans for certain critical applications and will continue development of such plans for all other applications throughout 1999. These contingency plans involve, among other actions, manual workarounds, increasing inventories, and adjusting staffing. The dates on which the Company believes the Y2K Project will be completed are based on management's best estimates, which were derived utilizing assumptions of future events, including the continued 20 22 availability of certain resources, third party modification plans, and other factors. However, there can be no assurance that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Y2K Project. Specific factors that could cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability to locate and correct all relevant computer codes, timely responses to and corrections by third parties, and similar uncertainties. OPERATING RESULTS 1998 COMPARED TO 1997 RESULTS OF OPERATIONS Operating results for 1997 included the operations of Pharmacy Corporation of America ("PCA") up until the effective date of the Merger (as discussed herein). Net loss was $31,021,000 for the year ended December 31, 1998, as compared to net income of $58,593,000 for the same period in 1997. Net loss for 1998 included a pre-tax charge of approximately $69,400,000 for workforce reductions, impaired long-lived assets and other unusual items (as discussed herein). In addition, net loss for 1998 included a $1,660,000 extraordinary charge, net of income taxes, related to the write-off of unamortized deferred financing costs associated with the repayment of certain debt instruments, as well as certain bond refundings, and a cumulative effect adjustment of $4,415,000, net of income taxes, related to the adoption of SOP 98-5 (as defined below). Net income for 1997 included a pre-tax charge of $44,000,000 relating to the December 3, 1997 Reorganization (as discussed herein). In preparing for the January 1, 1999 implementation of the new Medicare Prospective Payment System ("PPS"), as well as responding to other legislative and regulatory changes, the Company reorganized its therapy operations, analyzed its businesses for impairment issues and implemented new care-delivery and tracking software. These initiatives, among others, resulted in a fourth quarter 1998 pre-tax charge of approximately $69,400,000, including $3,800,000 for workforce reductions, $58,700,000 for asset impairments and $6,900,000 for various other items. During the fourth quarter of 1998, the Company reorganized all employed therapy associates into a newly formed subsidiary, Beverly Rehabilitation, Inc. ("Bev Rehab"), in order to create a more consolidated, strategic approach to managing the Company's rehabilitation business under PPS. The Company believes that this reorganization should allow for a more cost-effective and efficient therapy staff. Bev Rehab also may facilitate the development of additional rehabilitation business outside the Company. The Company accrued approximately $2,500,000 related to the termination of 835 therapy associates in conjunction with this reorganization. Substantially all of the terminated therapy associates will receive their severance packages and leave the Company during the first quarter of 1999. In addition, the Company's home care and outpatient therapy units underwent the consolidation and relocation of certain services, including billing and collections, which resulted in a workforce reduction charge of approximately $1,300,000 associated with the termination of 236 associates. Of these 236 associates, 74 associates had been paid and left the Company by December 31, 1998. The Company paid approximately $233,000 to these 74 associates during the year ended December 31, 1998. The remaining 162 terminated home care and outpatient therapy associates will receive their severance packages and leave the Company during the first quarter of 1999. Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121") requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the 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. SFAS No. 121 also requires that long-lived assets held for disposal be carried at the lower of carrying value or fair value less costs to sell, once management has committed the organization to a plan of disposal. As previously reported, the Company estimated that the impact of PPS on its 1999 net operating revenues would be a decrease of approximately $70,000,000, as compared to 1998 Medicare Part A revenues, and the additional decrease related to Part B therapy limitations and per beneficiary caps would be 21 23 approximately $30,000,000. These significant regulatory changes were an indicator to management that the carrying values of certain of its nursing facilities may not be fully recoverable. In addition, there were certain assets that had 1998 operating losses, and anticipated future operating losses, which led management to believe that these assets were impaired. Accordingly, management estimated the undiscounted future cash flows to be generated by each facility and reduced the carrying value to its estimate of fair value, resulting in an impairment charge of approximately $9,000,000. Management calculated the fair values 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. Also during the fourth quarter of 1998, management identified nine nursing facilities with an aggregate carrying value of approximately $14,000,000 which needed to be replaced in order to increase operating efficiencies, attract additional census or upgrade the nursing home environment. Management committed to a plan to construct new facilities to replace these buildings and reduced the carrying values of these facilities to their estimated salvage values. These assets are included in the total assets of the Company's Beverly Healthcare segment. In addition, management committed to a plan to dispose of 24 home care centers and nine outpatient clinics which had 1998 and expected future period operating losses. These businesses had an aggregate carrying value of approximately $16,500,000 and were written down to their fair value less costs to sell. These assets generated pre-tax losses for the Company of approximately $5,100,000 during the year ended December 31, 1998. Substantially all of these assets were purchased during 1998. The Company expects to dispose of these assets during 1999. These assets are included in the total assets of the Company's Beverly Care Alliance segment. The Company incurred a charge of approximately $30,300,000 related to these replacements, closings and planned disposals. These assets are included in the consolidated balance sheet captions "Property and equipment, net" and "Goodwill, net." In addition to the workforce reduction and the SFAS No. 121 charges, the Company recorded a fourth quarter 1998 impairment charge for other long-lived assets of approximately $19,400,000 primarily related to the write-off of software and software development costs. In conjunction with the implementation of business process changes, and the need for enhanced data-gathering and reporting required to operate effectively under PPS, the Company installed new clinical software in each of its nursing homes during late-1998, which made obsolete the previously employed software. In addition, certain of the Company's other ongoing software development projects were abandoned or written down due to obsolescence, feasibility or cost recovery issues. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which provides guidance on the financial reporting of start-up and organization costs. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. Prior to 1998, the Company capitalized start-up costs in connection with the opening of new facilities and businesses. The Company adopted the provisions of SOP 98-5 in its financial statements for the year ended December 31, 1998. The effect of adopting SOP 98-5 was to decrease the Company's pre-tax loss from continuing operations in 1998 by approximately $1,000,000 and to record a charge for the cumulative effect of an accounting change, as of January 1, 1998, of $4,415,000, net of income taxes, or $0.04 per share, to expense costs that had previously been capitalized. INCOME TAXES The Company had an annual effective tax rate of 51% for the year ended December 31, 1998, compared to an annual effective tax rate of 46% for the same period in 1997. The annual effective tax rate in 1998 was different than the federal statutory rate primarily due to the impact of the sale of American Transitional Hospitals, Inc. ("ATH"), the benefit of certain tax credits and the pre-tax charge of $69,400,000 (as discussed above) which reduced the Company's pre-tax income to a level where the impact of permanent tax differences and state income taxes had a more significant impact on the effective tax rate. The annual effective tax rate in 1997 was different than the federal statutory rate primarily due to the impact of nondeductible transaction costs associated with the Reorganization. At December 31, 1998, the Company had federal net 22 24 operating loss carryforwards of $50,989,000 for income tax purposes which expire in 2018. At December 31, 1998, the Company had general business tax credit carryforwards of $5,270,000 for income tax purposes which expire in years 2008 through 2014. For financial reporting purposes, the federal net operating loss carryforwards and the general business tax credit carryforwards have been utilized to offset existing net taxable temporary differences reversing during the carryforward periods. NET OPERATING REVENUES The Company reported net operating revenues of $2,812,232,000 during the year ended December 31, 1998 compared to $3,217,099,000 for the same period in 1997. Approximately 90% and 80% of the Company's total net operating revenues for the years ended December 31, 1998 and 1997, respectively, were derived from services provided by the Company's Beverly Healthcare segment. The decrease in net operating revenues of approximately $404,900,000 for the year ended December 31, 1998, as compared to the same period in 1997, consists of the following: a decrease of approximately $599,900,000 due to the disposition of, or lease terminations on, 26 nursing facilities and ATH in 1998 and 68 nursing facilities and PCA in 1997; partially offset by an increase of approximately $155,100,000 due to the acquisitions of nursing facilities and outpatient, home care and hospice businesses during 1998 and 1997; and an increase of approximately $39,900,000 due to facilities which the Company operated during each of the years ended December 31, 1998 and 1997 ("same facility operations"). The decrease in net operating revenues of approximately $599,900,000 for 1998, as compared to the same period in 1997, resulting from dispositions and lease terminations that occurred during the years ended December 31, 1998 and 1997 are described below. During the year ended December 31, 1998, the Company sold or terminated the leases on 26 nursing facilities (3,203 beds) and certain other assets for cash proceeds of approximately $52,500,000 (approximately $35,600,000 of which was included in accounts receivable-nonpatient at December 31, 1998), notes receivable of approximately $21,300,000, assumed debt of approximately $4,600,000 and closing and other costs of approximately $2,300,000. The Company did not operate seven of these nursing facilities (893 beds) which were leased to other nursing home operators in prior year transactions. The Company recognized net pre-tax gains, which were included in net operating revenues, during the year ended December 31, 1998 of approximately $17,900,000 as a result of these dispositions. During the year ended December 31, 1997, the Company sold or terminated the leases on 68 nursing facilities (8,314 beds) and certain other assets for cash proceeds of approximately $146,800,000. The Company recognized net pre-tax gains, which were included in net operating revenues, during the year ended December 31, 1997 of approximately $19,900,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. In June 1998, the Company completed the sale of its ATH subsidiary to Select Medical Corporation for cash of approximately $65,300,000 and assumed debt of approximately $2,400,000. Prior to the sale, ATH operated 15 transitional hospitals (743 beds) in eight states which addressed the needs of patients requiring intense therapy regimens, but not necessarily the breadth of services provided within traditional acute care hospitals. The Company recognized a pre-tax gain, which was included in net operating revenues, of approximately $16,000,000 during the year ended December 31, 1998 as a result of this disposition. The operations of ATH were immaterial to the Company's consolidated financial position and results of operations. On December 3, 1997, the Company completed the merger of PCA with Capstone Pharmacy Services, Inc. (the "Merger"). As a result of the Merger, the Company received approximately $281,000,000 of cash as partial repayment for PCA's intercompany debt, with a charge to the Company's retained earnings of approximately $45,100,000 for the remaining intercompany balance which was not repaid. Pursuant to the Reorganization, each of the Company's stockholders of record at the close of business on December 3, 1997 received .4551 shares of PharMerica, Inc.'s common stock for each share of the Company's Common Stock held. The conversion ratio was based on a total of 109,873,230 outstanding shares of the Company's Common Stock at the close of business on December 3, 1997 divided into the 50,000,000 shares issued by PharMerica, Inc. 23 25 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 and 1996 were approximately $564,200,000 and $516,400,000, respectively. Total net operating revenues for PCA for the year ended December 31, 1997 represent the operations of PCA prior to the Merger. The increase in net operating revenues of approximately $155,100,000 for 1998, as compared to the same period in 1997, resulting from acquisitions which occurred during the years ended December 31, 1998 and 1997 are described below. During the year ended December 31, 1998, the Company purchased 111 outpatient clinics, 50 home care centers, eight nursing facilities (823 beds), one assisted living center (48 units), two previously leased nursing facilities (228 beds) and certain other assets for cash of approximately $163,200,000, acquired debt of approximately $8,000,000 and closing and other costs of approximately $7,000,000. 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 clinics, for cash of approximately $60,800,000 and closing and other costs of approximately $9,500,000. The acquisitions of such facilities and certain other assets were accounted for as purchases. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. The increase in net operating revenues of approximately $39,900,000 for same facility operations for the year ended December 31, 1998, as compared to the same period in 1997, was due to the following: approximately $92,300,000 due to increases in room and board rates and approximately $6,100,000 due to various other items; partially offset by approximately $30,400,000 decrease in ancillary revenues due to a decline in the Company's Medicare census and, to a lesser extent, as a result of hiring therapists on staff as opposed to contracting for their services; approximately $19,900,000 due to a decrease in same facility occupancy to 89.3% for the year ended December 31, 1998, as compared to 90.1% for the same period in 1997; and approximately $8,200,000 due to a shift in the Company's patient mix. The Company's Medicare, private and Medicaid census for same facility operations was 10%, 20% and 69%, respectively, for the year ended December 31, 1998, as compared to 12%, 19% and 68%, respectively, for the same period in 1997. OPERATING AND ADMINISTRATIVE EXPENSES The Company reported operating and administrative expenses of $2,633,135,000 during the year ended December 31, 1998 compared to $2,888,021,000 for the same period in 1997. The decrease of approximately $254,900,000 consists of the following: a decrease of approximately $534,700,000 due to dispositions; partially offset by an increase of approximately $141,400,000 due to acquisitions; and an increase of approximately $138,400,000 due to same facility operations. (See above for a discussion of dispositions and acquisitions). The increase in operating and administrative expenses of approximately $138,400,000 for same facility operations for the year ended December 31, 1998, as compared to the same period in 1997, was due to the following: approximately $66,500,000 due to an increase in the provision for insurance and related items; approximately $61,400,000 due to increased wages and related expenses principally due to higher wages and greater benefits required to attract and retain qualified personnel and the hiring of therapists on staff as opposed to contracting for their services; approximately $32,900,000 due to increases in purchased ancillary products, nursing supplies and other variable costs; and approximately $13,300,000 due to various other items. These increases in operating and administrative expenses were partially offset by approximately $35,700,000 24 26 due to a decrease in contracted therapy expenses as a result of hiring therapists on staff as opposed to contracting for their services. On December 31, 1998, Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company, completed a risk transfer of substantially all of its pre-May 1998 auto liability, general liability and workers' compensation claims liability to a third party insurer effected through a loss portfolio transfer valued as of December 31, 1998. In exchange for a premium of approximately $116,000,000 (paid primarily from restricted cash and investments), the Company acquired reinsurance of approximately $180,000,000 to insure such auto liability, general liability and workers' compensation losses. In addition, in exchange for a premium of approximately $4,000,000, the Company acquired excess coverage of approximately $20,000,000 for general liability losses. Based upon estimates and analyses by its outside actuaries, the Company believes that the risk of such liabilities exceeding the aggregate limit is remote, although there can be no assurance that such liabilities will not exceed the aggregate limit. The Company's provision for insurance and related items increased approximately $82,200,000 during the fourth quarter of 1998 primarily as a result of this transaction. INTEREST EXPENSE, NET Net interest expense decreased approximately $14,300,000 to $55,230,000 for the year ended December 31, 1998, as compared to $69,512,000 for the same period in 1997 primarily due to the conversion of the Company's 5 1/2% convertible subordinated debentures to Common Stock in the third quarter of 1997, as well as the repayments of the Company's 7 5/8% convertible subordinated debentures, the 8 3/4% Notes and certain other notes and mortgages during the fourth quarter of 1997 with the proceeds from the PCA transaction. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense decreased approximately $13,300,000 to $93,722,000 for the year ended December 31, 1998, as compared to $107,060,000 for the same period in 1997. Such decrease was affected by the following: approximately $25,900,000 decrease due to the dispositions of, or lease terminations on, certain nursing facilities, ATH and PCA; partially offset by an increase of approximately $12,600,000 due to acquisitions, as well as capital additions and improvements. NEW ACCOUNTING STANDARDS In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which is required to be adopted by the Company in the first quarter of 1999. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. The Company does not expect the adoption of SOP 98-1 to have a material effect on its consolidated financial position or results of operations. 1997 COMPARED TO 1996 RESULTS OF OPERATIONS Operating results for 1997 included the operations of PCA up until the effective date of the Merger (as discussed above). 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 December 3, 1997 Reorganization (as discussed above). 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. INCOME TAXES 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 25 27 associated with the Reorganization. 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 the Company's MedView Services unit ("MedView"). NET OPERATING REVENUES The Company reported net operating revenues of $3,217,099,000 during the year ended December 31, 1997 compared to $3,267,189,000 for the same period in 1996. Approximately 80% and 82% of the Company's total net operating revenues for the years ended December 31, 1997 and 1996, respectively, were derived from services provided by the Company's Beverly Healthcare segment. Approximately 15% and 13% of the Company's total net operating revenues for the years ended December 31, 1997 and 1996, respectively, were derived from services provided by the Company's PCA segment. The decrease in net operating revenues of approximately $50,100,000 for the year ended December 31, 1997, as compared to the same period in 1996, consists of the following: a decrease of approximately $246,500,000 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 an increase of approximately $100,300,000 due to facilities which the Company operated during each of the years ended December 31, 1997 and 1996 ("same facility operations"); an increase of approximately $57,800,000 due to the acquisitions of nursing facilities, outpatient and hospice businesses during 1997 and 1996; and an increase of approximately $38,300,000 due to the operations of PCA. The decrease in net operating revenues of approximately $246,500,000 for 1997, as compared to the same period in 1996, resulting from dispositions and lease terminations that occurred during the year ended December 31, 1996 are described below. (See above for discussion of 1997 dispositions). During the year ended December 31, 1996, the Company sold or terminated the leases on 83 nursing facilities (5,230 beds) 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, which were included in net operating revenues, during the year ended December 31, 1996 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 unit for cash of approximately $89,700,000 (approximately $2,200,000 of which was included in accounts receivable-nonpatient at December 31, 1996). Prior to the sale, MedView provided a full range of managed care services to the workers' compensation market. It also offered case management and injury reporting and tracking services. The Company recognized a pre-tax gain, which was included in net operating revenues, of approximately $14,700,000 during the year ended December 31, 1996 as a result of this disposition. The operations of MedView were immaterial to the Company's consolidated financial position and results of operations. The increase in net operating revenues of approximately $100,300,000 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 net operating revenues of approximately $57,800,000 for 1997, as compared to the same period in 1996, resulting from acquisitions which occurred during the year ended December 31, 1996 are described below. (See above for discussion of 1997 acquisitions). 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 businesses, for cash of approximately $80,800,000, acquired debt of approximately $7,500,000, closing and other costs of approximately $7,000,000, reduction in receivables of approximately $4,800,000 and security and other deposits of approximately $1,900,000. The Company did not 26 28 operate three of these nursing facilities which had been subleased to other nursing home operators in prior year transactions. The acquisitions of these facilities and certain other assets were accounted for as purchases. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. OPERATING AND ADMINISTRATIVE EXPENSES The Company reported operating and administrative expenses of $2,888,021,000 during the year ended December 31, 1997 compared to $2,958,942,000 for the same period in 1996. The decrease of approximately $70,900,000 consists of the following: a decrease of approximately $215,900,000 due to dispositions; partially offset by an increase of approximately $77,600,000 due to same facility operations; an increase of approximately $51,500,000 due to acquisitions; and an increase of approximately $15,900,000 due to the operations of PCA. (See above for a discussion of dispositions and acquisitions). The increase in operating and administrative expenses of approximately $77,600,000 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 $66,000,000 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 $7,800,000 due to various other items. These increases in operating and administrative expenses 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 and approximately $8,000,000 due to a decrease in insurance-related expenses primarily due to a reduction in loss payments for the Company's workers' compensation claims liability. INTEREST EXPENSE, NET Net interest expense decreased approximately $7,800,000 to $69,512,000 for the year ended December 31, 1997, as compared to $77,272,000 for 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% convertible subordinated 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 above). DEPRECIATION AND AMORTIZATION Depreciation and amortization expense increased approximately $1,600,000 to $107,060,000 for the year ended December 31, 1997, as compared to $105,468,000 for the same period in 1996. Such increase 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. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had approximately $17,300,000 in cash and cash equivalents and net working capital of approximately $338,800,000. The Company anticipates that approximately $4,000,000 of its existing cash at December 31, 1998, while not legally restricted, will be utilized primarily to fund certain workers' compensation and general liability claims and expenses, and the Company does not expect to use such cash for other purposes. The Company had approximately $93,800,000 of unused commitments under its Revolver/Letter of Credit Facility as of December 31, 1998. Net cash provided by operating activities for the year ended December 31, 1998 decreased approximately $137,400,000 to $6,800,000 as compared to $144,200,000 for 1997, primarily due to an increase in accounts 27 29 receivable-patient. This increase was primarily the result of changes in certain Medicare documentation requirements which has lengthened the billing period for these and other related receivables. Net cash used for investing activities and net cash provided by financing activities were approximately $230,600,000 and $135,800,000, respectively, for the year ended December 31, 1998. The Company received net cash proceeds of approximately $82,100,000 from the dispositions of facilities and other assets and approximately $9,500,000 from the issuance of long-term obligations. Such net cash proceeds, along with cash generated from operations, net borrowings of approximately $251,000,000 under its Revolver/Letter of Credit Facility and cash on hand, were used to fund acquisitions of approximately $163,000,000, to fund capital expenditures totaling approximately $150,500,000, to repay approximately $70,900,000 of long-term obligations and to repurchase shares of Common Stock for approximately $56,800,000. During 1998, the Company entered into promissory notes totaling approximately $9,500,000 in conjunction with the construction or renovation of certain nursing facilities. Such debt instruments bear interest at rates ranging from 7.29% to 8.75%, require monthly installments of principal and interest, and are secured by mortgage interests in the real property and security interests in the personal property of the nursing facilities. The Company has a $125,000,000 financing arrangement available for the construction of certain facilities. The Company will lease the facilities, under operating leases with the creditor, upon completion of construction. The Company will have the option to purchase these facilities at the end of the initial lease terms. Total construction advances under the financing arrangement as of December 31, 1998 were approximately $54,000,000. In June 1996, the Company announced that its Board of Directors had authorized a stock repurchase program whereby the Company may repurchase, from time to time on the open market, up to a total of 10,000,000 shares of its outstanding Common Stock. In December 1997, the Company repurchased 4,000,000 shares of its Common Stock through an accelerated stock repurchase transaction at a cost of approximately $56,100,000 (approximately $5,700,000 of which was paid during 1998). During 1998, the Company repurchased 3,000,000 shares of its Common Stock, through a similar transaction, and approximately 900,000 shares on the open market at a total cost of approximately $51,100,000. The repurchases were financed primarily through borrowings under the Company's Revolver/Letter of Credit Facility. On June 2, 1998, the Company announced that its Board of Directors had authorized an increase in its stock repurchase program. The Company may repurchase from time to time on the open market, up to an additional 10,000,000 shares of its outstanding Common Stock. Since June 1996, the Company has repurchased approximately 10,200,000 shares of its outstanding Common Stock under the stock repurchase program. The Company is subject to certain restrictions under its credit arrangements related to the repurchase of its outstanding Common Stock. 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 $27,800,000, 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, 1999. Any settlement of the federal government investigation could result in a substantial additional liability for the Company. The timing and amount of such ultimate liability cannot, at this time, be reasonably estimated; however, it is possible that the ultimate resolution of this investigation could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. See "Item 3. Legal Proceedings." As of December 31, 1998, the Company had total indebtedness of approximately $906,000,000 and total stockholders' equity of approximately $776,200,000. 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 28 30 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to market risk because it utilizes financial instruments. The market risks inherent in these instruments are represented by the potential loss due to adverse changes in the general level of U.S. interest rates. The Company manages its interest rate risk exposure by maintaining a mix of fixed and variable rates for debt and notes receivable. The following table provides information regarding the Company's market sensitive financial instruments and constitutes a forward-looking statement.
FAIR VALUE JANUARY 1, EXPECTED MATURITY DATES 1999 2000 2001 2002 2003 THEREAFTER TOTAL 1999 - ----------------------- ------- ------- -------- ------- ------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Total long-term obligations: Fixed Rate........... $27,129 $28,867 $ 23,851 $21,561 $28,491 $430,181 $560,080 $585,394 Average Interest Rate............... 8.32% 8.21% 8.39% 8.16% 8.42% 8.85% Variable Rate........ $ 644 $40,657 $266,775 $23,799 $ 920 $ 13,168 $345,963 $344,060 Average Interest Rate............... 5.91% 5.58% 6.07% 5.61% 5.86% 5.81% Total notes receivable: Fixed Rate........... $20,616 $12,257 $ 5,728 $ 425 $ 3,724 $ 890 $ 43,640 $ 43,600 Average Interest Rate............... 9.53% 10.07% 10.73% 9.50% 9.13% 10.28% Variable Rate........ $ 42 $ 51 $ 53 $ 59 $ 64 $ 933 $ 1,202 $ 1,300 Average Interest Rate............... 8.75% 8.75% 8.75% 8.75% 8.75% 8.75%
29 31 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... 31 Consolidated Balance Sheets................................. 32 Consolidated Statements of Operations....................... 33 Consolidated Statements of Stockholders' Equity............. 34 Consolidated Statements of Cash Flows....................... 35 Notes to Consolidated Financial Statements.................. 36 Supplementary Data (Unaudited) -- Quarterly Financial Data...................................................... 58
30 32 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, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, 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 3, 1999 31 33 BEVERLY ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- Current assets: Cash and cash equivalents................................. $ 17,278 $ 105,230 Accounts receivable -- patient, less allowance for doubtful accounts: 1998 -- $21,764; 1997 -- $17,879....................... 463,822 384,833 Accounts receivable -- nonpatient, less allowance for doubtful accounts: 1998 -- $441; 1997 -- $626............................. 85,585 14,400 Notes receivable.......................................... 21,075 4,409 Operating supplies........................................ 32,133 30,439 Deferred income taxes..................................... 56,512 27,304 Prepaid expenses and other................................ 19,565 59,703 ---------- ---------- Total current assets.............................. 695,970 626,318 Property and equipment, net................................. 1,120,315 1,158,329 Other assets: Notes receivable, less allowance for doubtful notes: 1998 -- $2,921; 1997 -- $2,917......................... 21,263 20,564 Designated and restricted funds........................... 4,029 64,233 Goodwill, net............................................. 217,066 99,280 Other, net................................................ 101,868 104,745 ---------- ---------- Total other assets................................ 344,226 288,822 ---------- ---------- $2,160,511 $2,073,469 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 85,533 $ 75,791 Accrued wages and related liabilities..................... 96,092 123,146 Accrued interest.......................................... 12,783 15,108 Other accrued liabilities................................. 134,975 98,421 Current portion of long-term obligations.................. 27,773 31,551 ---------- ---------- Total current liabilities......................... 357,156 344,017 Long-term obligations....................................... 878,270 686,941 Deferred income taxes payable............................... 114,962 111,388 Other liabilities and deferred items........................ 33,917 68,618 Commitments and contingencies Stockholders' equity: Preferred stock, shares authorized: 25,000,000............ -- -- Common stock, shares issued: 1998 -- 110,275,714; 1997 -- 109,890,205............................................ 11,028 10,989 Additional paid-in capital................................ 876,383 874,335 Retained earnings (deficit)............................... (4,782) 26,239 Accumulated other comprehensive income.................... 760 1,332 Treasury stock, at cost: 1998 -- 7,886,800 shares; 1997 -- 4,000,000 shares............................... (107,183) (50,390) ---------- ---------- Total stockholders' equity........................ 776,206 862,505 ---------- ---------- $2,160,511 $2,073,469 ========== ==========
See accompanying notes. 32 34 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, ------------------------------------ 1998 1997 1996 ---------- ---------- ---------- Net operating revenues................................... $2,812,232 $3,217,099 $3,267,189 Interest income.......................................... 10,708 13,201 13,839 ---------- ---------- ---------- Total revenues................................. 2,822,940 3,230,300 3,281,028 Costs and expenses: Operating and administrative: Wages and related................................... 1,664,741 1,713,224 1,749,855 Provision for insurance and related items........... 154,267 87,780 95,807 Other............................................... 814,127 1,087,017 1,113,280 Interest............................................... 65,938 82,713 91,111 Depreciation and amortization.......................... 93,722 107,060 105,468 Workforce reductions, asset impairments, transaction costs and other unusual items....................... 69,443 44,000 -- Year 2000 remediation.................................. 9,719 -- -- Investigation costs.................................... 1,865 -- -- ---------- ---------- ---------- Total costs and expenses....................... 2,873,822 3,121,794 3,155,521 ---------- ---------- ---------- Income (loss) before provision for (benefit from) income taxes, extraordinary charge and cumulative effect of change in accounting for start-up costs................ (50,882) 108,506 125,507 Provision for (benefit from) income taxes................ (25,936) 49,913 73,481 ---------- ---------- ---------- Income (loss) before extraordinary charge and cumulative effect of change in accounting for start-up costs...... (24,946) 58,593 52,026 Extraordinary charge, net of income tax benefit of $1,057 in 1998 and $1,099 in 1996............................. (1,660) -- (1,726) Cumulative effect of change in accounting for start-up costs, net of income tax benefit of $2,811............. (4,415) -- -- ---------- ---------- ---------- Net income (loss)........................................ $ (31,021) $ 58,593 $ 50,300 ========== ========== ========== Income (loss) per share of common stock: Basic: Before extraordinary charge and cumulative effect of change in accounting for start-up costs........... $ (.24) $ .57 $ .53 Extraordinary charge................................ (.02) -- (.02) Cumulative effect of change in accounting for start-up costs.................................... (.04) -- -- ---------- ---------- ---------- Net income (loss)................................... $ (.30) $ .57 $ .51 ========== ========== ========== Shares used to compute per share amounts............ 103,762 102,060 98,574 ========== ========== ========== Diluted: Before extraordinary charge and cumulative effect of change in accounting for start-up costs........... $ (.24) $ .57 $ .50 Extraordinary charge................................ (.02) -- (.01) Cumulative effect of change in accounting for start-up costs.................................... (.04) -- -- ---------- ---------- ---------- Net income (loss)................................... $ (.30) $ .57 $ .49 ========== ========== ========== Shares used to compute per share amounts............ 103,762 103,422 110,726 ========== ========== ==========
See accompanying notes. 33 35 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
ACCUMULATED ADDITIONAL RETAINED OTHER PREFERRED COMMON PAID-IN EARNINGS COMPREHENSIVE TREASURY STOCK STOCK CAPITAL (DEFICIT) INCOME STOCK TOTAL --------- ------- ---------- --------- ------------- --------- --------- Balances at January 1, 1996......... $ -- $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 and total comprehensive 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 Comprehensive income: Unrealized gains on securities, net of income taxes of $896... -- -- -- -- 1,332 -- 1,332 Net income...................... -- -- -- 58,593 -- -- 58,593 --------- Total comprehensive income........ -- -- -- -- -- -- 59,925 ------- ------- -------- --------- ----------- --------- --------- Balances at December 31, 1997....... -- 10,989 874,335 26,239 1,332 (50,390) 862,505 Employee stock transactions, net............................. -- 39 2,048 -- -- -- 2,087 Purchase of 3,886,800 shares of common stock for treasury....... -- -- -- -- -- (51,120) (51,120) Settlement of amounts due from 1997 purchase of 4,000,000 shares of common stock for treasury........................ -- -- -- -- -- (5,673) (5,673) Comprehensive income (loss): Unrealized gains on securities, net of income taxes of $795... -- -- -- -- 1,183 -- 1,183 Adjustment to unrealized gains on securities, net of income tax benefit of $1,180......... -- -- -- -- (1,755) -- (1,755) Net loss........................ -- -- -- (31,021) -- -- (31,021) --------- Total comprehensive loss.......... -- -- -- -- -- -- (31,593) ------- ------- -------- --------- ----------- --------- --------- Balances at December 31, 1998....... $ -- $11,028 $876,383 $ (4,782) $ 760 $(107,183) $ 776,206 ======= ======= ======== ========= =========== ========= =========
See accompanying notes. 34 36 BEVERLY ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Net income (loss)......................................... $ (31,021) $ 58,593 $ 50,300 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................... 93,722 107,060 105,468 Provision for reserves on patient, notes and other receivables, net...................................... 25,249 34,341 28,544 Amortization of deferred financing costs................ 2,336 3,163 3,210 Workforce reductions, asset impairments, transaction costs and other unusual items......................... 69,443 44,000 -- Extraordinary charge.................................... 2,717 -- 2,825 Cumulative effect of change in accounting for start-up costs................................................. 7,226 -- -- Gains on dispositions of facilities and other assets, net................................................... (33,853) (19,901) (20,951) Deferred taxes.......................................... (28,105) 20,247 33,765 Insurance related accounts.............................. 39,587 (25,432) (22,336) Changes in operating assets and liabilities, net of acquisitions and dispositions: Accounts receivable -- patient....................... (132,199) (46,639) (25,851) Operating supplies.................................... (1,239) (3,911) 3,226 Prepaid expenses and other receivables................ 240 (18,749) 771 Accounts payable and other accrued expenses........... 24,945 3,377 (53,029) Income taxes payable.................................. (27,729) (7,305) 26,711 Other, net............................................ (4,530) (4,640) 527 ----------- ----------- ----------- Total adjustments.................................. 37,810 85,611 82,880 ----------- ----------- ----------- Net cash provided by operating activities.......... 6,789 144,204 133,180 Cash flows from investing activities: Capital expenditures...................................... (150,451) (133,087) (136,442) Payments for acquisitions, net of cash acquired........... (162,969) (61,567) (80,981) Proceeds from dispositions of facilities and other assets.................................................. 82,119 421,412 121,660 Collections on notes receivable and REMIC investment...... 6,089 32,273 12,809 Other, net................................................ (5,374) (28,178) (8,547) ----------- ----------- ----------- Net cash provided by (used for) investing activities....................................... (230,586) 230,853 (91,501) Cash flows from financing activities: Revolver borrowings....................................... 1,328,000 1,604,000 1,308,000 Repayments of Revolver borrowings......................... (1,077,000) (1,745,000) (1,230,000) Proceeds from issuance of long-term obligations........... 9,495 31,137 228,862 Repayments of long-term obligations....................... (70,878) (166,369) (318,447) Purchase of common stock for treasury..................... (56,793) (65,126) (15,445) Proceeds from exercise of stock options................... 3,092 5,401 3,620 Deferred financing costs.................................. (730) (1,251) (7,560) Dividends paid on preferred stock......................... -- -- (688) Proceeds from designated funds, net....................... 659 (2,380) 3,437 ----------- ----------- ----------- Net cash provided by (used for) financing activities....................................... 135,845 (339,588) (28,221) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents........ (87,952) 35,469 13,458 Cash and cash equivalents at beginning of year.............. 105,230 69,761 56,303 ----------- ----------- ----------- Cash and cash equivalents at end of year.................... $ 17,278 $ 105,230 $ 69,761 =========== =========== =========== Supplemental schedule of cash flow information: Cash paid during the year for: Interest (net of amount capitalized).................... $ 65,927 $ 81,411 $ 81,193 Income taxes (net of refunds)........................... 26,030 36,971 11,906
See accompanying notes. 35 37 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 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 Pharmacy Corporation of America ("PCA") with Capstone Pharmacy Services, Inc. ("Capstone") (the "Merger"). References to Beverly Enterprises, Inc., or the Company, prior to December 3, 1997 means the predecessor corporation, Old Beverly. References to Beverly Enterprises, Inc., or the Company, on or after December 3, 1997 means New Beverly, and New Beverly is treated for accounting purposes as the continuing reporting entity with respect to the historical and future operations of the Company. See Note 3 for additional information. The Company provides healthcare services in 33 states and the District of Columbia. Its operations include nursing facilities, rehabilitation therapy services, assisted living centers, home care centers and outpatient clinics. In addition, prior to June 30, 1998, the Company operated acute long-term transitional hospitals and, prior to the Merger, institutional and mail service pharmacies. The consolidated financial statements of the Company include the accounts of the Company and all of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include time deposits and certificates of deposit with original maturities of three months or less. Property and Equipment Property and equipment is stated at cost less accumulated depreciation or, where appropriate, the present value of the related capital lease obligations less accumulated amortization. Depreciation and amortization are computed by the straight-line method over the estimated useful lives of the assets. Intangible Assets Goodwill (stated at cost less accumulated amortization of $25,547,000 in 1998 and $21,610,000 in 1997) is being amortized over 40 years using the straight-line method. Operating and leasehold rights and licenses, which are included in the consolidated balance sheet caption "Other, net," (stated at cost less accumulated amortization of $18,307,000 in 1998 and $17,442,000 in 1997) 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 36 38 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) cash flows over the remaining amortization period, the carrying value of the intangible will be reduced by such shortfall. As of December 31, 1998, the Company does not believe there is any indication that the carrying value or the amortization period of its intangibles needs to be adjusted; however, certain adjustments were made to the carrying value of the Company's intangibles during 1998. See Note 2. 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. See Note 2. Insurance On December 31, 1998, Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company, completed a risk transfer of substantially all of its pre-May 1998 auto liability, general liability and workers' compensation claims liability to a third party insurer effected through a loss portfolio transfer ("LPT") valued as of December 31, 1998. In exchange for a premium of approximately $116,000,000 (paid primarily from restricted cash and investments), the Company acquired reinsurance of approximately $180,000,000 to insure such auto liability, general liability and workers' compensation losses. In addition, in exchange for a premium of approximately $4,000,000, the Company acquired excess coverage of approximately $20,000,000 for general liability losses. Based upon estimates and analyses by its outside actuaries, the Company believes that the risk of such liabilities exceeding the aggregate limit is remote, although there can be no assurance that such liabilities will not exceed the aggregate limit. The Company's provision for insurance and related items increased approximately $82,200,000 during the fourth quarter of 1998 primarily as a result of this transaction. Prior to the LPT, and for periods not covered by the LPT, the Company insures the majority of its auto liability, general liability and workers' compensation risks through insurance policies with third parties, some of which are subject to reinsurance agreements between the insurer and Beverly Indemnity, Ltd. The liabilities for estimated incurred losses not covered by third party insurance are discounted at 10% to their present value based on expected loss payment patterns determined by independent actuaries. Had the discount rate been reduced by one-half of a percentage point, the Company would have incurred a pre-tax charge of approximately $200,000 for the year ended December 31, 1998. The discounted insurance liabilities are included in the consolidated balance sheet captions as follows (in thousands):
1998 1997 ------- ------- Accrued wages and related liabilities....................... $ -- $28,484 Other accrued liabilities................................... -- 6,874 Other liabilities and deferred items........................ 18,151 50,366 ------- ------- $18,151 $85,724 ======= =======
On an undiscounted basis, the total insurance liabilities as of December 31, 1998 and 1997 were $22,800,000 and $111,200,000, respectively. As of December 31, 1998, the Company had deposited approximately $1,600,000 in funds (the "Beverly Indemnity funds") that are restricted for the payment of insured claims. In addition, the Company anticipates that approximately $4,000,000 of its existing cash at 37 39 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) December 31, 1998, while not legally restricted, will be utilized primarily to fund certain workers' compensation and general liability claims and expenses, and the Company does not expect to use such cash for other purposes. During 1998, the Company purchased traditional indemnity insurance coverage for its 1998 workers' compensation and auto liabilities. During 1997, the Company transferred a portion of its liabilities for workers' compensation and general liability related to certain of its sold nursing facilities to a third-party indemnity insurance company and purchased traditional indemnity insurance coverage for its 1997 workers' compensation and auto liabilities. 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 which are issued at market value on the date of grant. See Note 7 for the pro forma effects on the Company's reported net income (loss) and diluted earnings per share assuming the election had been made to recognize compensation expense on stock-based awards in accordance with SFAS No. 123. Revenues The Company's revenues are derived primarily from providing long-term healthcare services. Approximately 74%, 74% and 75% of the Company's net operating revenues for 1998, 1997 and 1996, respectively, were derived from funds under federal and state medical assistance programs, and approximately 62% and 68% of the Company's net patient accounts receivable at December 31, 1998 and 1997, respectively, are due from such programs. The Company accrues for revenues when services are provided at standard charges adjusted to amounts estimated to be received under governmental programs and other third-party contractual arrangements. These revenues and receivables are reported at their estimated net realizable amounts and are subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered and are adjusted in the period of settlement. Changes in estimates related to third party receivables resulted in the recording of approximately $10,900,000, $8,900,000 and $10,900,000 of net operating revenues for the years ended December 31, 1998, 1997 and 1996, respectively. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations; however, as disclosed in Note 6, the Company is the subject of an investigation involving allegations of potential wrongdoing. Compliance with such laws and regulations is subject to government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. Concentration of Credit Risk The Company has significant accounts receivable, notes receivable and other assets whose collectibility or realizability is dependent upon the performance of certain governmental programs, primarily Medicaid and Medicare. These receivables and other assets represent the only concentration of credit risk for the Company. 38 40 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an adequate provision has been made for the possibility of these receivables and other assets proving uncollectible and continually monitors and adjusts these allowances as necessary. Income Taxes The Company follows the liability method in accounting for income taxes. The liability method provides that deferred tax assets and liabilities are recorded at currently enacted tax rates based on the difference between the tax basis of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Earnings per Share In 1997, the Company adopted 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 similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been presented to conform with the requirements of SFAS No. 128. The following table sets forth the computation of basic and diluted income (loss) per share for the years ended December 31 (in thousands):
1998 1997 1996 -------- -------- -------- NUMERATOR: Numerator for basic income (loss) per share from continuing operations........................... $(24,946) $ 58,593 $ 52,026 Effect of dilutive securities: 5 1/2% Debentures, net of income taxes.......... -- -- 3,420 -------- -------- -------- Numerator for diluted income (loss) per share from continuing operations........................... $(24,946) $ 58,593 $ 55,446 ======== ======== ======== DENOMINATOR: Denominator for basic income (loss) per share -- weighted average shares................ 103,762 102,060 98,574 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 income (loss) per share -- adjusted weighted average shares and assumed conversions..................................... 103,762 103,422 110,726 ======== ======== ======== Basic income (loss) per share........................ $ (0.24) $ 0.57 $ 0.53 ======== ======== ======== Diluted income (loss) per share...................... $ (0.24) $ 0.57 $ 0.50 ======== ======== ========
39 41 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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 requires the presentation of comprehensive income in a company's financial statement disclosures. Comprehensive income includes net income (loss), as well as charges and credits directly to stockholders' equity which are excluded from net income (loss). Accumulated other comprehensive income, net of income taxes, consists of unrealized gains on securities of approximately $760,000 and $1,332,000 at December 31, 1998 and 1997, respectively. 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 provides revised disclosure guidelines for segments of a company based on a management approach to defining operating segments. See Note 10 for additional information. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which provides guidance on the financial reporting of start-up and organization costs. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. Prior to 1998, the Company capitalized start-up costs in connection with the opening of new facilities and businesses. The Company adopted the provisions of SOP 98-5 in its financial statements for the year ended December 31, 1998. The effect of adopting SOP 98-5 was to decrease the Company's pre-tax loss from continuing operations in 1998 by approximately $1,000,000 and to record a charge for the cumulative effect of an accounting change, as of January 1, 1998, of $4,415,000, net of income taxes, or $0.04 per share, to expense costs that had previously been capitalized. In March 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which is required to be adopted by the Company in the first quarter of 1999. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. The Company does not expect the adoption of SOP 98-1 to have a material effect on its consolidated financial position or results of operations. Other Certain prior year amounts have been reclassified to conform with the 1998 presentation. 2. WORKFORCE REDUCTIONS, ASSET IMPAIRMENTS AND OTHER UNUSUAL ITEMS In preparing for the January 1, 1999 implementation of the new Medicare Prospective Payment System ("PPS"), as well as responding to other legislative and regulatory changes, the Company reorganized its therapy operations, analyzed its businesses for impairment issues and implemented new care-delivery and tracking software. These initiatives, among others, resulted in a fourth quarter 1998 pre-tax charge of approximately $69,400,000, including $3,800,000 for workforce reductions, $58,700,000 for asset impairments and $6,900,000 for various other items. During the fourth quarter of 1998, the Company reorganized all employed therapy associates into a newly formed subsidiary, Beverly Rehabilitation, Inc. ("Bev Rehab"), in order to create a more consolidated, strategic approach to managing the Company's rehabilitation business under PPS. The Company believes that this reorganization should allow for a more cost-effective and efficient therapy staff. Bev Rehab also may facilitate the development of additional rehabilitation business outside the Company. The Company accrued 40 42 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 2. WORKFORCE REDUCTIONS, ASSET IMPAIRMENTS AND OTHER UNUSUAL ITEMS -- (CONTINUED) approximately $2,500,000 related to the termination of 835 therapy associates in conjunction with this reorganization. Substantially all of the terminated therapy associates will receive their severance packages and leave the Company during the first quarter of 1999. In addition, the Company's home care and outpatient therapy units underwent the consolidation and relocation of certain services, including billing and collections, which resulted in a workforce reduction charge of approximately $1,300,000 associated with the termination of 236 associates. Of these 236 associates, 74 associates had been paid and left the Company by December 31, 1998. The Company paid approximately $233,000 to these 74 associates during the year ended December 31, 1998. The remaining 162 terminated home care and outpatient therapy associates will receive their severance packages and leave the Company during the first quarter of 1999. SFAS No. 121 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. SFAS No. 121 also requires that long-lived assets held for disposal be carried at the lower of carrying value or fair value less costs to sell, once management has committed the organization to a plan of disposal. As previously reported, the Company estimated that the impact of PPS on its 1999 net operating revenues would be a decrease of approximately $70,000,000, as compared to 1998 Medicare Part A revenues, and the additional decrease related to Part B therapy limitations and per beneficiary caps would be approximately $30,000,000. These significant regulatory changes were an indicator to management that the carrying values of certain of its nursing facilities may not be fully recoverable. In addition, there were certain assets that had 1998 operating losses, and anticipated future operating losses, which led management to believe that these assets were impaired. Accordingly, management estimated the undiscounted future cash flows to be generated by each facility and reduced the carrying value to its estimate of fair value, resulting in an impairment charge of approximately $9,000,000. Management calculated the fair values 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. Also during the fourth quarter of 1998, management identified nine nursing facilities with an aggregate carrying value of approximately $14,000,000 which needed to be replaced in order to increase operating efficiencies, attract additional census or upgrade the nursing home environment. Management committed to a plan to construct new facilities to replace these buildings and reduced the carrying values of these facilities to their estimated salvage values. These assets are included in the total assets of Beverly Healthcare (See Note 10). In addition, management committed to a plan to dispose of 24 home care centers and nine outpatient clinics which had 1998 and expected future period operating losses. These businesses had an aggregate carrying value of approximately $16,500,000 and were written down to their fair value less costs to sell. These assets generated pre-tax losses for the Company of approximately $5,100,000 during the year ended December 31, 1998. Substantially all of these assets were purchased during 1998. The Company expects to dispose of these assets during 1999. These assets are included in the total assets of Beverly Care Alliance (See Note 10). The Company incurred a charge of approximately $30,300,000 related to these replacements, closings and planned disposals. These assets are included in the consolidated balance sheet captions "Property and equipment, net" and "Goodwill, net." In addition to the workforce reduction and the SFAS No. 121 charges, the Company recorded a fourth quarter 1998 impairment charge for other long-lived assets of approximately $19,400,000 primarily related to the write-off of software and software development costs. In conjunction with the implementation of business 41 43 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 2. WORKFORCE REDUCTIONS, ASSET IMPAIRMENTS AND OTHER UNUSUAL ITEMS -- (CONTINUED) process changes, and the need for enhanced data-gathering and reporting required to operate effectively under PPS, the Company installed new clinical software in each of its nursing homes during late-1998, which made obsolete the previously employed software. In addition, certain of the Company's other ongoing software development projects were abandoned or written down due to obsolescence, feasibility or cost recovery issues. 3. ACQUISITIONS AND DISPOSITIONS During the year ended December 31, 1998, the Company purchased 111 outpatient clinics, 50 home care centers, eight nursing facilities (823 beds), one assisted living center (48 units), two previously leased nursing facilities (228 beds) and certain other assets for cash of approximately $163,200,000, acquired debt of approximately $8,000,000 and closing and other costs of approximately $7,000,000. The acquisitions of such facilities and other assets were accounted for as purchases and resulted in the Company recording goodwill of approximately $143,000,000. Also, during such period, the Company sold or terminated the leases on 26 nursing facilities (3,203 beds) and certain other assets for cash proceeds of approximately $52,500,000 (approximately $35,600,000 of which was included in accounts receivable-nonpatient at December 31, 1998), notes receivable of approximately $21,300,000, assumed debt of approximately $4,600,000 and closing and other costs of approximately $2,300,000. The Company did not operate seven of these nursing facilities (893 beds) which were leased to other nursing home operators in prior year transactions. The Company recognized net pre-tax gains, which were included in net operating revenues, during the year ended December 31, 1998 of approximately $17,900,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. In June 1998, the Company completed the sale of its American Transitional Hospitals, Inc. ("ATH") subsidiary to Select Medical Corporation for cash of approximately $65,300,000 and assumed debt of approximately $2,400,000. Prior to the sale, ATH operated 15 transitional hospitals (743 beds) in eight states which addressed the needs of patients requiring intense therapy regimens, but not necessarily the breadth of services provided within traditional acute care hospitals. The Company recognized a pre-tax gain, which was included in net operating revenues, of approximately $16,000,000 during the year ended December 31, 1998 as a result of this disposition. The operations of ATH were immaterial to the Company's consolidated financial position and results of operations. 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 clinics, for cash of approximately $60,800,000 and closing and other costs of approximately $9,500,000. The acquisitions of such facilities and other assets were accounted for as purchases. Also during such period, the Company sold or terminated the leases on 68 nursing facilities (8,314 beds) and certain other assets for cash proceeds of approximately $146,800,000. The Company recognized net pre-tax gains, which were included in net operating revenues, during the year ended December 31, 1997 of approximately $19,900,000 as a result of these dispositions. The operations of these facilities and certain other assets were immaterial to the Company's consolidated financial position and results of operations. On December 3, 1997, the Company completed the 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. 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 42 44 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 3. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED) 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 and 1996 were approximately $564,200,000 and $516,400,000, respectively. Total net operating revenues for PCA 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 businesses, for cash of approximately $80,000,000, acquired debt of approximately $7,500,000, closing and other costs of approximately $7,000,000, reduction in receivables of approximately $4,800,000 and security and other deposits of approximately $1,900,000. The acquisitions of such facilities and other assets were accounted for as purchases. The Company did not operate three of these nursing facilities which had been 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, which were included in net operating revenues, during the year ended December 31, 1996 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). Prior to the sale, MedView provided a full range of managed care services to the workers' compensation market. It also offered case management and injury reporting and tracking services. The Company recognized a pre-tax gain, which was included in net operating revenues, of approximately $14,700,000 during the year ended December 31, 1996 as a result of this disposition. The operations of MedView were immaterial to the Company's consolidated financial position and results of operations. 43 45 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 4. 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 ----------------------- ----------------------- ----------------- 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- ---------- ------- ------- Land, buildings and improvements............ $1,433,170 $1,437,334 $1,393,839 $1,395,859 $39,331 $41,475 Furniture and equipment... 350,410 329,222 344,484 324,309 5,926 4,913 Construction in progress................ 31,057 30,607 31,057 30,607 -- -- ---------- ---------- ---------- ---------- ------- ------- 1,814,637 1,797,163 1,769,380 1,750,775 45,257 46,388 Less accumulated depreciation and amortization............ 694,322 638,834 662,281 606,541 32,041 32,293 ---------- ---------- ---------- ---------- ------- ------- $1,120,315 $1,158,329 $1,107,099 $1,144,234 $13,216 $14,095 ========== ========== ========== ========== ======= =======
The Company provides depreciation and amortization using the straight-line method over the following estimated useful lives: land improvements -- 5 to 15 years; buildings -- 35 to 40 years; building improvements -- 5 to 20 years; leasehold improvements -- 5 to 20 years or term of lease, if less; furniture and equipment -- 5 to 15 years. Capitalized lease assets are amortized over the remaining initial terms of the leases. Depreciation and amortization expense related to property and equipment, including the amortization of assets under capital lease obligations, for the years ended December 31, 1998, 1997 and 1996 was $81,722,000, $87,286,000 and $85,221,000, respectively. 44 46 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 5. LONG-TERM OBLIGATIONS Long-term obligations consist of the following at December 31 (dollars in thousands):
1998 1997 -------- -------- Credit Agreement due December 31, 2001...................... $266,000 $ 15,000 9% Senior Notes due February 15, 2006, unsecured............ 180,000 180,000 Notes and mortgages, less imputed interest: 1998 -- $92, 1997 -- $203; due in installments through the year 2031, at effective interest rates of 5.57% to 12.50%, a portion of which is secured by property, equipment and other assets with a net book value of $182,681 at December 31, 1998...................................................... 167,268 170,738 Industrial development revenue bonds, less imputed interest: 1998 -- $13, 1997 -- $19; due in installments through the year 2013, at effective interest rates of 4.00% to 10.49%, a portion of which is secured by property and other assets with a net book value of $193,527 at December 31, 1998............... 169,306 188,711 Term Loan under the GE Capital Facility..................... 5,471 10,505 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 $17,180 at December 31, 1998...................................................... 14,219 18,750 8 5/8% First Mortgage Bonds due October 1, 2008, secured by first mortgages on 10 nursing facilities with an aggregate net book value of $27,833 at December 31, 1998............ 21,540 28,195 7 3/4% Note due in quarterly installments through June 1, 2001 (repaid in July 1998)................................ -- 21,437 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 $56,793 at December 31, 1998, which cannot be used to satisfy claims of the Company or any of its subsidiaries other than Beverly Funding Corporation............................... 40,000 40,000 -------- -------- 888,804 698,336 Present value of capital lease obligations, less imputed interest: 1998 -- $419, 1997 -- $456, at effective interest rates of 5.94% to 13.00%......................... 17,239 20,156 -------- -------- 906,043 718,492 Less amounts due within one year............................ 27,773 31,551 -------- -------- $878,270 $686,941 ======== ========
During 1998, the Company entered into promissory notes totaling approximately $9,500,000 in conjunction with the construction or renovation of certain nursing facilities. Such debt instruments bear interest at rates ranging from 7.29% to 8.75%, require monthly installments of principal and interest, and are secured by mortgage interests in the real property and security interests in the personal property of the nursing facilities. In addition, the Company incurred a $1,660,000 extraordinary charge, net of income taxes, in 1998 related to the write-off of unamortized deferred financing costs associated with the repayment of certain debt instruments, as well as certain bond refundings. The Company has a $375,000,000 Credit Agreement (the "Credit Agreement") which provides for a Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). At December 31, 1998, the Company had approximately $15,200,000 of outstanding letters of credit under the Revolver/LOC Facility. Borrowings 45 47 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 5. LONG-TERM OBLIGATIONS -- (CONTINUED) under the 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 $93,800,000 of unused commitments under such facility at December 31, 1998. The Credit Agreement is guaranteed by substantially all of the Company's present and future subsidiaries (collectively, the "Subsidiary Guarantors") and imposes on the Company certain financial tests and restrictive covenants. The Company has $180,000,000 of 9% Senior Notes due February 15, 2006 (the "Senior Notes") which were sold through a public offering (the "Senior Notes offering"). The Senior Notes are unsecured obligations guaranteed by the Subsidiary Guarantors and impose on the Company certain restrictive covenants. Separate financial statements of the Subsidiary Guarantors are not considered to be material to holders of the Senior Notes since the guaranty of each of the Subsidiary Guarantors is joint and several and full and unconditional (except that liability thereunder is limited to an aggregate amount equal to the largest amount that would not render its obligations thereunder subject to avoidance under Section 548 of the Bankruptcy Code of 1978, as amended, or any comparable provisions of applicable state law), and Beverly Enterprises, Inc., the parent, has no operations or assets separate from its investment in its subsidiaries. Maturities and sinking fund requirements of long-term obligations, including capital leases, for the years ended December 31 are as follows (in thousands):
1999 2000 2001 2002 2003 THEREAFTER TOTAL ------- ------- -------- ------- ------- ---------- -------- Future minimum lease payments............. $ 3,129 $ 2,755 $ 2,561 $ 2,616 $ 1,965 $ 18,934 $ 31,960 Less interest.......... 1,584 1,443 1,327 1,201 1,081 8,085 14,721 ------- ------- -------- ------- ------- -------- -------- Net present value of future minimum lease payments............. 1,545 1,312 1,234 1,415 884 10,849 17,239 Notes, mortgages and bonds................ 26,228 68,212 289,392 43,945 28,527 432,500 888,804 ------- ------- -------- ------- ------- -------- -------- $27,773 $69,524 $290,626 $45,360 $29,411 $443,349 $906,043 ======= ======= ======== ======= ======= ======== ========
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 1998, 1997, or 1996. 46 48 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 6. 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, 1998, are as follows (in thousands):
YEAR ENDING DECEMBER 31, - ------------ 1999........................................................ $ 76,472 2000........................................................ 56,256 2001........................................................ 43,095 2002........................................................ 33,583 2003........................................................ 19,041 Thereafter.................................................. 54,017 -------- $282,464 ========
Total future minimum rental commitments are net of approximately $17,863,000 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: 1998 -- $113,762,000; 1997 -- $114,694,000; 1996 -- $116,718,000. Sublease rent income was approximately $6,772,000, $5,638,000 and $4,595,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Contingent rent expense, based primarily on revenues, was approximately $17,000,000, $18,000,000 and $18,000,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company has a $125,000,000 financing arrangement available for the construction of certain facilities. The Company will lease the facilities, under operating leases with the creditor, upon completion of construction. The Company will have the option to purchase these facilities at the end of the initial lease terms. Total construction advances under the financing arrangement as of December 31, 1998 were approximately $54,000,000. In 1992, the Company entered into an agreement to outsource its management information systems functions for a period of seven years, with an option to renew based on mutual agreement among the parties. Such agreement was renegotiated during 1997 to allow the Company to bring the programming functions under its direct control but continue to outsource the data processing functions and to extend the term of the agreement. The future minimum commitments as of December 31, 1998 required under such agreement are as follows: 1999 -- $4,033,000; 2000 -- $3,944,000; 2001 -- $3,859,000; 2002 -- $2,849,000. The Company incurred approximately $5,673,000, $4,498,000 and $8,711,000 under such agreement during the years ended December 31, 1998, 1997 and 1996, respectively. The Company is contingently liable for approximately $76,520,000 of long-term obligations maturing on various dates through 2019, as well as annual interest and letter of credit fees of approximately $7,027,000. 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 $25,795,000 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 8% 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 47 49 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 6. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) 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 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 $95,100,000 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 $94,700,000 in punitive damages. At a post-trial hearing on June 3, 1998, the trial judge reduced the compensatory damages to $125,000 and reduced the punitive damages to $3,000,000. The Company believes that these reduced damages are excessive and has appealed on this basis. The plaintiff has cross-appealed. The Company intends to aggressively pursue all appellate remedies available. The Company is the subject of a federal government investigation relating to the allocation to the Medicare program of certain nursing labor costs in its skilled nursing facilities from 1990 to 1997. The federal government has not disclosed the origin of this investigation or its intended scope. The investigation is being conducted by the Office of Inspector General of the Department of Health and Human Services and by the Department of Justice. The Company has received subpoenas and has provided substantial information voluntarily. The Company's independent auditors, Ernst & Young LLP, also received a subpoena relating to its evaluation of the Company's internal controls. In addition, the Company has been notified that a federal grand jury in San Francisco is currently investigating practices which are the subject of the above civil investigation. Two former employees of the Company have received letters from the United States Attorney for the Northern District of California indicating they are targets of the grand jury investigation. To date, four current employees of the Company have served as witnesses before the grand jury. The Company has cooperated with the United States Attorney's office in its investigation. In addition, the Company's current Medicare fiscal intermediary, Blue Cross of California, is examining cost reports of the Company's facilities with respect to the areas that are the focus of the government investigation. Skilled nursing facilities are required to allocate nursing labor costs to Medicare-certified units on an equitable basis. The Company has relied on a variety of internal and external processes and practices that are designed to ensure compliance with this requirement. The Company believes that its cost reporting policies and procedures are consistent with government regulations and reflect industry norms for determination of these cost allocations. While it is not possible to predict the outcome of this investigation, a determination that the Company has violated these regulations could have a material adverse effect on the Company's consolidated financial position and results of operations, which could include the payment of fines and penalties and exclusion from participation in the Medicare and Medicaid programs. On October 2, 1998, a purported class action lawsuit was filed in the United States District Court for the Eastern District of Arkansas by Jack Kushner against the Company and certain of its officers. The class action lawsuit alleges, among other things, that the Company and certain of its officers committed violations of the federal securities laws by materially inflating the Company's revenues and earnings through practices that are the subject of the federal government investigation (see above) and disseminating false and misleading statements concerning compliance with Medicare regulations. The class action lawsuit seeks damages, costs and expenses. The Company intends to aggressively pursue all defenses 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 that are generally not covered by insurance. The Company does not believe that the ultimate resolution of such other matters will have a material adverse effect on the Company's consolidated financial position or results of operations. 48 50 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 7. STOCKHOLDERS' EQUITY The Company had 300,000,000 shares of authorized $.10 par value common stock ("Common Stock") at December 31, 1998 and 1997. 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, 1998 and 1997, all of which remain unissued. The Board of Directors has authority, without further stockholder action, to set rights, privileges and preferences for any unissued shares of preferred stock. In June 1996, the Company announced that its Board of Directors had authorized a stock repurchase program whereby the Company may repurchase, from time to time on the open market, up to a total of 10,000,000 shares of its outstanding Common Stock. In December 1997, the Company repurchased 4,000,000 shares of its Common Stock through an accelerated stock repurchase transaction at a cost of approximately $56,100,000 (approximately $5,700,000 of which was paid during 1998). During 1998, the Company repurchased 3,000,000 shares of its Common Stock, through a similar transaction, and approximately 900,000 shares on the open market at a total cost of approximately $51,100,000. The repurchases were financed primarily through borrowings under the Company's Revolver/LOC Facility. On June 2, 1998, the Company announced that its Board of Directors had authorized an increase in its stock repurchase program. The Company may repurchase from time to time on the open market, up to an additional 10,000,000 shares of its outstanding Common Stock. Since June 1996, the Company has repurchased approximately 10,200,000 shares of its outstanding Common Stock under the stock repurchase program. The Company is subject to certain restrictions under its credit arrangements related to the repurchase of its outstanding Common Stock. During 1997, the New Beverly 1997 Long-Term Incentive Plan was approved (the "1997 Long-Term Incentive Plan"). Such plan became effective December 3, 1997 and will remain in effect until December 31, 2006, subject to early termination by the Board of Directors. 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 has complete discretion in determining the number of shares or units to be granted, in setting performance goals and in applying other restrictions to awards, as needed, under the plan. The Company has 10,000,000 shares of Common Stock authorized for issuance, subject to certain adjustments, under the 1997 Long-Term Incentive Plan in the form of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, performance awards, bonus stock and other stock unit awards. Except for options granted upon the assumption of, or in substitution for, options of another company in which the Company participates in a corporate transaction or the options affected by the Reorganization (as discussed below), nonqualified and incentive stock options must be granted at a purchase price equal to the market price on the date of grant. Options shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine and expire no later than 10 years from the grant date. Stock appreciation rights may be granted alone, in tandem with an option or in addition to an option. Stock appreciation rights shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine and expire no later than 10 years from the grant date. Restricted stock awards are outright stock grants which have a minimum vesting period of one year for performance-based awards and three years for other awards. Performance awards, bonus stock and other stock unit awards may be granted based on the achievement of certain performance or other goals and will carry certain restrictions, as defined. During 1997, the New Beverly Non-Employee Directors Stock Option Plan was approved (the "Non-Employee Directors Stock Option Plan"). Such plan became effective December 3, 1997 and will remain in effect until December 31, 2007, subject to early termination by the Board of Directors. Such plan replaced the Nonemployee Directors' Plan. The Company has 300,000 shares of Common Stock authorized for issuance, 49 51 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 7. STOCKHOLDERS' EQUITY -- (CONTINUED) subject to certain adjustments, under the Non-Employee Directors Stock Option Plan. The Non-Employee Directors Stock Option Plan was amended by the Board of Directors on December 11, 1997 to provide that each nonemployee director be granted an option to purchase 3,375 shares of the Company's Common Stock on June 1 of each year until the plan is terminated, subject to the availability of shares. Such options are granted at a purchase price equal to fair market value on the date of grant, become exercisable one year after date of grant and expire 10 years after date of grant. 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:
1998 1997 1996 ---------------------- ---------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE ---------- --------- ---------- --------- --------- --------- Options outstanding at beginning of year................................. 6,561,903 $9.29 4,908,727 $10.55 4,394,382 $ 9.02 Changes during the year: Granted.............................. 3,341,994 8.81 2,944,522 10.87 1,696,500 12.38 Exercised............................ (428,069) 6.89 (1,047,423) 8.06 (833,587) 5.41 Cancelled............................ (1,312,263) 9.42 (243,923) 14.64 (348,568) 12.39 ---------- ---------- --------- Options outstanding at end of year..... 8,163,565 9.20 6,561,903 9.29 4,908,727 10.55 ========== ========== ========= Options exercisable at end of year..... 3,761,259 8.50 5,073,903 8.23 2,560,209 8.75 ========== ========== ========= Options available for grant at end of year................................. 1,701,426 3,738,097 3,052,403 ========== ========== ========= Restricted stock outstanding at beginning of year.................... -- 145,200 306,052 Changes during the year: Granted.............................. -- 10,500 29,000 Vested............................... -- (134,711) (148,352) Forfeited............................ -- (20,989) (41,500) ---------- ---------- --------- Restricted stock outstanding at end of year................................. -- -- 145,200 ========== ========== ========= Phantom units outstanding at beginning of year.............................. -- 76,769 90,942 Changes during the year: Granted.............................. -- -- -- Vested............................... -- (76,316) (6,982) Cancelled............................ -- (453) (7,191) ---------- ---------- --------- Phantom units outstanding at end of year................................. -- -- 76,769 ========== ========== ========= 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 ========== ========== =========
50 52 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 7. STOCKHOLDERS' EQUITY -- (CONTINUED) Exercise prices for options outstanding as of December 31, 1998 ranged from $3.24 to $16.06. The weighted-average remaining contractual life of these options is eight years. The following table provides certain information with respect to stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING ----------------------------------------------- OPTIONS EXERCISABLE WEIGHTED- ---------------------------- WEIGHTED- AVERAGE WEIGHTED- OPTIONS AVERAGE REMAINING OPTIONS AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE - ------------------------ ----------- -------------- ---------------- ----------- -------------- $ 3.24-$ 6.50................. 3,143,678 $ 5.73 7.87 920,091 $ 3.85 $ 7.13-$10.00................. 1,888,575 9.14 7.45 1,724,460 9.20 $10.19-$13.81................. 2,188,833 12.05 8.06 1,116,708 11.25 $14.00-$16.06................. 942,479 14.26 9.17 -- -- --------- --------- $ 3.24-$16.06................. 8,163,565 $ 9.20 7.98 3,761,259 $ 8.50 ========= =========
As a result of the Reorganization (as discussed herein), immediately prior to the Distribution, (i) each option to purchase the Company's Common Stock then outstanding became fully vested and exercisable, (ii) all restrictions on outstanding restricted shares lapsed and became fully vested, (iii) each outstanding award of phantom units became fully vested, and (iv) each outstanding performance share became fully vested. The Company incurred expenses of approximately $18,000,000 as it related to these stock-based awards, which was included in the $44,000,000 of transaction costs. In addition, all options outstanding immediately after the Distribution were cancelled and replaced with new options issued by the Company under the 1997 Long-Term Incentive Plan. Such options are exercisable upon the same terms and conditions (except that all options are 100% vested) as under the applicable option agreement issued thereunder, except that (i) the number of shares for which such options may be converted, and (ii) the option exercise price per share of such options were adjusted to take into account the effect of the Reorganization. The Company recognizes compensation expense for its restricted stock grants, performance share grants (when the performance targets are achieved) and other stock unit awards. The Company did not incur any charges related to these stock-based awards during the year ended December 31, 1998. The total charges to the Company's consolidated statements of operations for the years ended December 31, 1997 and 1996 related to these stock-based awards were approximately $19,767,000 and $509,000, 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 1998, 1997 and 1996 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, 1998, 1997 and 1996, respectively: risk-free interest rates of 5.0%, 5.9% and 6.5%; volatility factors of the expected market price of the Company's Common Stock of .41, .35 and .34; and weighted-average expected option lives of 10 years, 8 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 1998, 1997 and 1996 of $5.35 per share, $7.84 per share and $7.30 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. 51 53 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 7. STOCKHOLDERS' EQUITY -- (CONTINUED) 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, 1998, 1997 and 1996 would have been a net loss of $32,202,000 or $.31 per share, net income of $47,244,000 or $.46 per share and net income of $48,964,000 or $.49 per share, respectively. The pro forma amounts for 1997 reflect the impact of the Reorganization on the Company's outstanding stock options (as discussed above). Such pro forma effects are not necessarily indicative of the effect on future years. The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and restated) enables all full-time employees having completed one year of continuous service to purchase shares of Common Stock at the current market price through payroll deductions. The Company makes contributions in the amount of 30% of the participant's contribution. Each participant specifies the amount to be withheld from earnings per two-week pay period, subject to certain limitations. The total charges to the Company's consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996 related to this plan were approximately $2,435,000, $2,449,000 and $2,258,000, respectively. 8. INCOME TAXES The provision for (benefit from) taxes on income (loss) before extraordinary charge and cumulative effect of change in accounting for start-up costs (see Note 1) consists of the following for the years ended December 31 (in thousands):
1998 1997 1996 -------- ------- ------- Federal: Current.............................................. $ -- $22,997 $31,615 Deferred............................................. (28,227) 20,404 29,466 State: Current.............................................. 2,169 6,669 8,101 Deferred............................................. 122 (157) 4,299 -------- ------- ------- $(25,936) $49,913 $73,481 ======== ======= =======
The Company had an annual effective tax rate of 51% for the year ended December 31, 1998, compared to annual effective tax rates of 46% and 59% for the years ended December 31, 1997 and 1996, respectively. The annual effective tax rate in 1998 was different than the federal statutory rate primarily due to the impact of the sale of ATH (see Note 3), the benefit of certain tax credits, and the pre-tax charge of approximately $69,400,000 (see Note 2) which reduced the Company's pre-tax income to a level where the impact of permanent tax differences and state income taxes had a more significant impact on the effective tax rate. The annual effective tax rate in 1997 was different than the federal statutory rate primarily due to the impact of nondeductible transaction costs associated with the Reorganization (see Note 3). The annual effective tax rate 52 54 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 8. INCOME TAXES -- (CONTINUED) in 1996 was different than the federal statutory rate primarily due to the impact of nondeductible goodwill associated with the MedView disposition (see Note 3). 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):
1998 1997 1996 -------------- ------------- ------------- AMOUNT % AMOUNT % AMOUNT % -------- --- ------- --- ------- --- Tax (benefit) at statutory rate......... $(17,809) 35 $37,977 35 $43,927 35 General business tax credits............ (2,315) 5 -- -- -- -- State tax provision, net................ 1,489 (3) 4,233 4 8,060 6 Nondeductible amortization of intangibles........................... (74) -- 1,702 2 20,881 17 Sale of ATH............................. (6,867) 13 -- -- -- -- Effect of Reorganization and Merger..... -- -- 5,618 5 -- -- Other................................... (360) 1 383 -- 613 1 -------- -- ------- -- ------- -- $(25,936) 51 $49,913 46 $73,481 59 ======== == ======= == ======= ==
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, 1998 and 1997 are as follows (in thousands):
DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------- -------------------- ASSET LIABILITY ASSET LIABILITY -------- --------- -------- --------- Insurance reserves......................... $ 11,988 $ -- $ 36,104 $ -- General business tax credit carryforwards............................ 5,270 -- -- -- Alternative minimum tax credit carryforwards............................ 16,568 -- 13,969 -- Provision for dispositions................. 37,805 3,152 32,591 5,776 Depreciation and amortization.............. 12,711 136,096 29 140,062 Operating supplies......................... -- 13,241 -- 12,907 Federal net operating loss carryforwards... 17,846 -- -- -- Other...................................... 22,728 30,877 18,304 26,336 -------- -------- -------- -------- $124,916 $183,366 $100,997 $185,081 ======== ======== ======== ========
At December 31, 1998, the Company had federal net operating loss carryforwards of $50,989,000 for income tax purposes which expire in 2018. At December 31, 1998, the Company had general business tax credit carryforwards of $5,270,000 for income tax purposes which expire in years 2008 through 2014. For financial reporting purposes, the federal net operating loss carryforwards and the general business tax credit carryforwards have been utilized to offset existing net taxable temporary differences reversing during the carryforward periods. 9. 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 53 55 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 9. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED) techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents The carrying amount reported in the consolidated balance sheets for cash and cash equivalents approximates its fair value. Notes Receivable, Net (Including Current Portion) For variable-rate notes that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed-rate notes are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Beverly Indemnity Funds The fair value of the Beverly Indemnity funds is based on information obtained from the trustee and the manager of such funds. These funds are invested primarily in United States government securities with maturity dates ranging primarily from one to five years. The carrying amount of these funds is 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. During the fourth quarter of 1998, Beverly Indemnity, Ltd. completed a risk transfer of substantially all of its pre-May 1998 auto liability, general liability and workers' compensation claims liability to a third party insurer effected through a loss portfolio transfer (see Note 1) which resulted in the sale of securities with a book value of approximately $61,600,000. Also during 1998, various other securities were sold with a book value of approximately $33,700,000. Beverly Indemnity, Ltd. received gross proceeds of approximately $98,000,000 from the sale of these securities and recognized gross gains on the sales of these securities of approximately $3,000,000. In addition, an adjustment was recorded to unrealized gains on securities of $1,755,000, net of income taxes, for gains on sales of securities included in net income. 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. 54 56 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 9. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED) The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Cash and cash equivalents.................... $ 17,278 $ 17,278 $105,230 $105,230 Notes receivable, net (including current portion)................................... 42,338 44,900 24,973 26,400 Beverly Indemnity funds...................... 1,600 1,600 80,804 80,804 Long-term obligations (including current portion)................................... 906,043 929,454 718,492 746,439
During 1998, the Company defeased long-term obligations with an aggregate carrying value of $5,740,000. The fair values of such long-term obligations are estimated using discounted cash flow analyses, based on the Company's incremental borrowing rates for similar types of borrowing arrangements, and were approximately $5,819,000 at December 31, 1998. In order to consummate certain dispositions and other transactions, the Company has agreed to guarantee the debt assumed or acquired by the purchaser or the performance under a lease, by the lessor. It is not practicable to estimate the fair value of the Company's off-balance sheet guarantees (See Note 6). 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. 10. SEGMENT INFORMATION 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"). SFAS No. 131 provides revised disclosure guidelines for segments of a company based on a management approach to defining operating segments. Description of the Types of Services from which each Operating Segment Derives its Revenues At December 31, 1998, the Company was organized into two operating segments, which support the Company's delivery of vertically integrated services to the long-term healthcare market. These operating segments included: (i) Beverly Healthcare, which provides long-term healthcare through the operation of nursing facilities and assisted living centers; and (ii) Beverly Care Alliance, which operates outpatient clinics, home care centers and a rehabilitation services business. At December 31, 1997, in addition to the two operating segments mentioned above, the Company owned Beverly Specialty Hospitals, which operated the Company's transitional hospitals. In June 1998, the Company completed the sale of this segment to Select Medical Corporation (see Note 3). At December 31, 1996, in addition to the three operating segments mentioned above, the Company owned PCA, which operated the Company's institutional and mail service pharmacy businesses. In December 1997, the Company completed the Merger of PCA with Capstone (see Note 3). 55 57 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 10. SEGMENT INFORMATION -- (CONTINUED) Measurement of Segment Income or Loss and Segment Assets The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (see Note 1). The Company evaluates performance and allocates resources based on income or loss from operations before income taxes, excluding any unusual items. Factors Management Used to Identify the Company's Operating Segments The Company's operating segments are strategic business units that offer different services within the long-term healthcare continuum. Business in each operating segment is conducted by one or more corporations headed by a president who also is a senior officer of the Company and reports directly to the President of the Company. The corporations comprising each operating segment also have separate boards of directors consisting of four senior executives of the Company and the president of the segment. 56 58 BEVERLY ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 10. SEGMENT INFORMATION -- (CONTINUED) The following table summarizes certain information for each of the Company's operating segments (in thousands):
BEVERLY BEVERLY PHARMACY BEVERLY CARE SPECIALTY CORPORATION HEALTHCARE ALLIANCE HOSPITALS OF AMERICA ALL OTHER(1) TOTALS ---------- -------- --------- ----------- ------------ ---------- Year ended December 31, 1998 Revenues from external customers.................. $2,531,496 $192,627 $61,775 -- $ 26,334 $2,812,232 Intercompany revenues......... -- 13,518 539 -- 10,682 24,739 Interest income............... 410 160 3 -- 10,135 10,708 Interest expense.............. 29,359 108 93 -- 36,378 65,938 Depreciation and amortization............... 78,269 8,662 1,578 -- 5,213 93,722 Pre-tax income (loss)......... 165,707 6,878 (670) -- (222,797) (50,882) Total assets.................. 1,526,091 303,913 -- -- 330,507 2,160,511 Capital expenditures.......... 87,209 15,149 4,937 -- 43,156 150,451 Year ended December 31, 1997 Revenues from external customers.................. $2,583,758 $ 60,103 $99,783 $472,861 $ 594 $3,217,099 Intercompany revenues......... -- 15,643 1,708 91,338 10,269 118,958 Interest income............... 302 -- 3 125 12,771 13,201 Interest expense.............. 32,264 19 275 14,965 35,190 82,713 Depreciation and amortization............... 77,162 3,402 2,517 18,281 5,698 107,060 Pre-tax income (loss)......... 173,363 2,801 819 33,450 (101,927) 108,506 Total assets.................. 1,504,437 101,364 48,964 -- 418,704 2,073,469 Capital expenditures.......... 90,699 6,468 5,198 11,725 18,997 133,087 Year ended December 31, 1996 Revenues from external customers.................. $2,678,025 $ 65,516 $80,363 $434,238 $ 9,047 $3,267,189 Intercompany revenues......... -- 15,314 1,269 82,162 9,957 108,702 Interest income............... 603 54 19 177 12,986 13,839 Interest expense.............. 32,230 -- 219 16,000 42,662 91,111 Depreciation and amortization............... 77,169 4,108 2,437 16,385 5,369 105,468 Pre-tax income (loss)......... 164,463 3,718 (1,576) 21,215 (62,313) 125,507 Total assets.................. 1,580,162 53,202 41,440 449,086 401,192 2,525,082 Capital expenditures.......... 97,807 6,294 2,769 10,895 18,677 136,442
- --------------- (1) All Other consists of the operations of the Company's corporate headquarters and related overhead. 57 59 BEVERLY ENTERPRISES, INC. SUPPLEMENTARY DATA (UNAUDITED) QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following is a summary of the quarterly results of operations for the years ended December 31, 1998 and 1997.
1998 ------------------------------------------------------- 1ST 2ND 3RD 4TH TOTAL -------- -------- -------- --------- ---------- Total revenues........................... $697,427 $717,648 $700,635 $ 707,230 $2,822,940 ======== ======== ======== ========= ========== Income (loss) before provision for (benefit from) income taxes, extraordinary charge and cumulative effect of change in accounting for start-up costs.......................... $ 29,099 $ 31,803 $ 32,822 $(144,606) $ (50,882) Provision for (benefit from) income taxes................................... 11,058 10,258 11,487 (58,739) (25,936) -------- -------- -------- --------- ---------- Income (loss) before extraordinary charge and cumulative effect of change in accounting for start-up costs........... 18,041 21,545 21,335 (85,867) (24,946) Extraordinary charge..................... -- -- -- (1,660) (1,660) Cumulative effect of change in accounting for start-up costs...................... (4,415) -- -- -- (4,415) -------- -------- -------- --------- ---------- Net income (loss)........................ $ 13,626 $ 21,545 $ 21,335 $ (87,527) $ (31,021) ======== ======== ======== ========= ========== Income (loss) per share of common stock: Basic: Before extraordinary charge and cumulative effect of change in accounting for start-up costs......... $ .17 $ .21 $ .21 $ (.84) $ (.24) Extraordinary charge.................... -- -- -- (.02) (.02) Cumulative effect of change in accounting for start-up costs......... (.04) -- -- -- (.04) -------- -------- -------- --------- ---------- Net income (loss)....................... $ .13 $ .21 $ .21 $ (.86) $ (.30) ======== ======== ======== ========= ========== Shares used to compute per share amounts............................... 106,006 103,682 103,019 102,389 103,762 ======== ======== ======== ========= ========== Diluted: Before extraordinary charge and cumulative effect of change in accounting for start-up costs......... $ .17 $ .20 $ .21 $ (.84) $ (.24) Extraordinary charge.................... -- -- -- (.02) (.02) Cumulative effect of change in accounting for start-up costs......... (.04) -- -- -- (.04) -------- -------- -------- --------- ---------- Net income (loss)....................... $ .13 $ .20 $ .21 $ (.86) $ (.30) ======== ======== ======== ========= ========== Shares used to compute per share amounts............................... 107,479 105,112 103,610 102,389 103,762 ======== ======== ======== ========= ========== Common stock price range: High.................................... $ 15.56 $ 16.25 $ 14.81 $ 8.13 Low..................................... $ 12.25 $ 13.50 $ 7.38 $ 5.25 1997 ------------------------------------------------------ 1ST 2ND 3RD 4TH TOTAL -------- -------- -------- -------- ---------- Total revenues........................... $820,281 $820,664 $807,926 $781,429 $3,230,300 ======== ======== ======== ======== ========== Income (loss) before provision for (benefit from) income taxes, extraordinary charge and cumulative effect of change in accounting for start-up costs.......................... $ 30,772 $ 34,950 $ 45,222 $ (2,438) $ 108,506 Provision for (benefit from) income taxes................................... 12,309 13,980 18,089 5,535 49,913 -------- -------- -------- -------- ---------- Income (loss) before extraordinary charge and cumulative effect of change in accounting for start-up costs........... 18,463 20,970 27,133 (7,973) 58,593 Extraordinary charge..................... -- -- -- -- -- Cumulative effect of change in accounting for start-up costs...................... -- -- -- -- -- -------- -------- -------- -------- ---------- Net income (loss)........................ $ 18,463 $ 20,970 $ 27,133 $ (7,973) $ 58,593 ======== ======== ======== ======== ========== Income (loss) per share of common stock: Basic: Before extraordinary charge and cumulative effect of change in accounting for start-up costs......... $ .19 $ .21 $ .26 $ (.07) $ .57 Extraordinary charge.................... -- -- -- -- -- Cumulative effect of change in accounting for start-up costs......... -- -- -- -- -- -------- -------- -------- -------- ---------- Net income (loss)....................... $ .19 $ .21 $ .26 $ (.07) $ .57 ======== ======== ======== ======== ========== Shares used to compute per share amounts............................... 98,144 97,736 103,508 108,719 102,060 ======== ======== ======== ======== ========== Diluted: Before extraordinary charge and cumulative effect of change in accounting for start-up costs......... $ .18 $ .20 $ .26 $ (.07) $ .57 Extraordinary charge.................... -- -- -- -- -- Cumulative effect of change in accounting for start-up costs......... -- -- -- -- -- -------- -------- -------- -------- ---------- Net income (loss)....................... $ .18 $ .20 $ .26 $ (.07) $ .57 ======== ======== ======== ======== ========== Shares used to compute per share amounts............................... 110,386 109,993 107,751 108,719 103,422 ======== ======== ======== ======== ========== Common stock price range: High.................................... $ 16.13 $ 16.88 $ 17.50 $ 17.50 Low..................................... $ 12.25 $ 13.13 $ 14.56 $ 12.13(1)
- --------------- (1) After the effect of the Reorganization on December 3, 1997 (as discussed herein). The Company had an annual effective tax rate of 51% for the year ended December 31, 1998 compared to an annual effective tax rate of 46% for the year ended December 31, 1997. The annual effective tax rate in 1998 was different than the federal statutory rate primarily due to the impact of the sale of ATH (see Note 3), the benefit of certain tax credits, and the $69,400,000 pre-tax charge (see Note 2) which reduced the Company's pre-tax income to a level where the impact of permanent tax differences and state income taxes had a significant impact on the effective tax rate. In addition, 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). Results of operations for the first quarter of 1998 have been restated for the cumulative effect of a change in accounting for start-up costs resulting from the adoption of SOP 98-5 (see Note 1). The adoption of SOP 98-5 did not have a significant impact on previously reported results from continuing operations and, therefore, such results have not been restated. 58 60 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 27, 1999, 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 27, 1999, 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 27, 1999, to be filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Jon E.M. Jacoby, a director, serves as Executive Vice President, Chief Financial Officer and director of Stephens Group, Inc. During the years ended December 31, 1998, 1997 and 1996, the Company used Stephens Group, Inc., or its affiliates, for investment banking services. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1 and 2. The Consolidated Financial Statements and Consolidated Financial Statement Schedule The consolidated financial statements and consolidated financial statement schedule listed in the accompanying index to consolidated financial statements and financial statement schedules are filed as part of this annual report. 3. Exhibits The exhibits listed in the accompanying index to exhibits are incorporated by reference herein or are filed as part of this annual report. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1998. (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. 59 61 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...... 31 Consolidated Balance Sheets at December 31, 1998 and 1997.................................................. 32 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1998..... 33 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1998.............................................. 34 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998..... 35 Notes to Consolidated Financial Statements............. 36 Supplementary Data (Unaudited) -- Quarterly Financial Data.................................................. 58 2. Consolidated financial statement schedule for each of the three years in the period ended December 31, 1998: II -- Valuation and Qualifying Accounts................ 61
All other schedules are omitted because they are either not applicable or the items do not exceed the various disclosure levels. 60 62 BEVERLY ENTERPRISES, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (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, 1998: Allowance for doubtful accounts: Accounts receivable -- patient..... $17,879 $25,549 $(19,807) $(1,857) $ -- $21,764 Accounts receivable -- nonpatient................ 862 (90) (13) (82) -- 677* Notes receivable............ 2,917 (210) (66) -- 280 2,921 ------- ------- -------- ------- ------ ------- $21,658 $25,249 $(19,886) $(1,939) $ 280 $25,362 ======= ======= ======== ======= ====== ======= Year ended December 31, 1997: Allowance for doubtful accounts: Accounts receivable -- patient..... $25,618 $35,343 $(34,858) $(8,224) $ -- $17,879 Accounts receivable -- nonpatient................ 637 209 (218) -- 234 862* Notes receivable............ 4,951 (1,211) (306) (1,453) 936 2,917 ------- ------- -------- ------- ------ ------- $31,206 $34,341 $(35,382) $(9,677) $1,170 $21,658 ======= ======= ======== ======= ====== ======= 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 ======= ======= ======== ======= ====== =======
- --------------- * Includes amounts classified in long-term other assets as well as current assets. 61 63 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. (incorporated by reference to Exhibit 3.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 3.2 -- Form of Certificate of Amendment of Certificate of Incorporation of New Beverly Holdings Inc., changing its name to Beverly Enterprises, Inc. (incorporated by reference to Exhibit 3.2 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 3.3 -- By-Laws of Beverly Enterprises, Inc. (incorporated by reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on June 4, 1997 (File No. 333-28521)) 4.1 -- Indenture dated as of February 1, 1996 between Beverly Enterprises, Inc. and Chemical Bank, as Trustee, with respect to Beverly Enterprises, Inc.'s 9% Senior Notes due February 15, 2006 (the "9% Indenture") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995) 4.2 -- Form of Supplemental Indenture No. 2 to the 9% Indenture dated as of November 19, 1997 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on September 8, 1997 (File No. 333-35137)) 4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage Bond Indenture"), among Beverly Enterprises, Inc., Delaware Trust Company, as Corporate Trustee, and Richard N. Smith, as Individual Trustee, with respect to First Mortgage Bonds (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.4 -- First Supplemental Indenture dated as of April 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 3/4% First Mortgage Bonds due 2008 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 5/8% First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated July 15, 1993) (incorporated by reference to Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 4.6 -- Trust Indenture dated as of December 1, 1994 from Beverly Funding Corporation, as Issuer, to Chemical Bank, as Trustee (the "Chemical Indenture") (incorporated by reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No.33-57663))
62 64
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.7 -- 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)) In accordance with item 601(b)(4)(iii) of Regulation S-K, certain instruments pertaining to Beverly Enterprises, Inc.'s long-term obligations have not been filed; copies thereof will be furnished to the Securities and Exchange Commission upon request. 10.1* -- Beverly Enterprises, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.2* -- New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan (the "1997 LTIP") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 8, 1997 (File No. 333-41669)) 10.3* -- Amendment No. 1 to the 1997 LTIP dated as of December 3, 1997 (incorporated by reference to Exhibit 10.3 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.4* -- New Beverly Holdings, Inc. Non-Employee Directors' Stock Option Plan (the "Directors' Option Plan") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 12, 1997 (File No. 333-42131)) 10.5* -- Amendment No. 1 to the Directors' Option Plan dated as of December 3, 1997 (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.6* -- Executive Medical Reimbursement Plan (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987) 10.7* -- Amended and Restated Beverly Enterprises, Inc. Executive Life Insurance Plan and Summary Plan Description (the "Executive Life Plan") (incorporated by reference to Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993) 10.8* -- Amendment No. 1, effective September 29, 1994, to the Executive Life Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.9* -- Executive Physicals Policy (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 10.10* -- Amended and Restated Deferred Compensation Plan effective July 18, 1991 (incorporated by reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 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))
63 65
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.12* -- Executive Retirement Plan (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987) 10.13* -- Amendment No. 1, effective as of July 1, 1991, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.14* -- Amendment No. 2, effective as of December 12, 1991, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 10.15* -- Amendment No. 3, effective as of July 31, 1992, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992) 10.16* -- Amendment No. 4, effective as of January 1, 1993, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.17* -- Amendment No. 5, effective as of September 29, 1994, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.18* -- Amendment No. 6, effective as of January 1, 1996, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.19* -- Amendment No. 7, effective as of September 1, 1997, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.20* -- Amendment No. 8, dated as of December 11, 1997, to the Executive Retirement Plan, changing its name to the "Executive SavingsPlus Plan" (incorporated by reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.21* -- Beverly Enterprises, Inc.'s Supplemental Executive Retirement Plan effective as of January 1, 1998 (incorporated by reference to Exhibit 10.21 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.22* -- Beverly Enterprises, Inc.'s Executive Deferred Compensation Plan (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 5, 1997 (File No. 333-41673)) 10.23* -- Amendment No. 1 to the Executive Deferred Compensation Plan made as of December 11, 1997 (incorporated by reference to Exhibit 10.23 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.24* -- Amendment No. 2 to the Executive Deferred Compensation Plan made as of December 11, 1997 (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 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)
64 66
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.26* -- Amendment No. 1, effective as of December 3, 1997, to the Directors' Plan (incorporated by reference to Exhibit 10.26 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.27* -- Beverly Enterprises, Inc.'s Supplemental Long-Term Disability Plan (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996) 10.28* -- Form of Indemnification Agreement between Beverly Enterprises, Inc. and its officers, directors and certain of its employees (incorporated by reference to Exhibit 19.14 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1987) 10.29* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or directors relating to indemnification rights (incorporated by reference to Exhibit 19.5 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.30* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or employees relating to indemnification rights (incorporated by reference to Exhibit 19.6 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.31* -- Agreement dated December 29, 1986 between Beverly Enterprises, Inc. and Stephens Inc. (incorporated by reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on January 18, 1990 (File No. 33-33052)) 10.32* -- Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and David R. Banks (incorporated by reference to Exhibit 10.17 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.33* -- Form of Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and certain of its officers (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.34* -- Executive Stock Option Agreement, effective as of February 19, 1998, between Beverly Enterprises, Inc. and David R. Banks (incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 10.35 -- Master Lease Document -- General Terms and Conditions dated December 30, 1985 for Leases between Beverly California Corporation and various subsidiaries thereof as lessees and Beverly Investment Properties, Inc. as lessor (incorporated by reference to Exhibit 10.12 to Beverly California Corporation's Annual Report on Form 10-K for the year ended December 31, 1985) 10.36 -- 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)
65 67
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.37 -- Participation Agreement, dated as of August 28, 1998, among Vantage Healthcare Corporation, Petersen Health Care, Inc., Beverly Savana Cay Manor, Inc., Beverly Enterprises -- Georgia, Inc., Beverly Enterprises -- California, Inc., Beverly Health and Rehabilitation Services, Inc., Beverly Enterprises -- Arkansas, Inc., Beverly Enterprises -- Florida, Inc. and Beverly Enterprises -- Washington, Inc. as Lessees and Structural Guarantors; Beverly Enterprises, Inc. as Representative, Construction Agent and Parent Guarantor; Bank of Montreal Global Capital Solutions, Inc. as Agent Lessor and Lessor; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency, Bank of America National Trust and Savings Association and Bank of Montreal, as Lenders; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency as Arranger; and Bank of Montreal as Co-Arranger and Syndication Agent and Administrative Agent for the Lenders with respect to the Lease Financing of New Headquarters for Beverly Enterprises, Inc., Assisted Living and Nursing Facilities for Beverly Enterprises, Inc. 10.38 -- Amended and Restated Credit Agreement, dated as of April 30, 1998, among Beverly Enterprises, Inc., the Banks listed therein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent 10.39 -- 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) 10.40 -- Form of Irrevocable Trust Agreement for the Beverly Enterprises, Inc. Executive Benefits Plan (incorporated by reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s Registration Statement of Form S-4 filed on February 13, 1995 (File No. 33-57663)) 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, 1998
- --------------- * Exhibits 10.1 through 10.34 are the management contracts, compensatory plans, contracts and arrangements in which any director or named executive officer participates. 66 68 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 25, 1999 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 March 25, 1999 - ----------------------------------------------------- Executive Officer and David R. Banks Director /s/ BOYD W. HENDRICKSON President, Chief Operating March 25, 1999 - ----------------------------------------------------- Officer and Director Boyd W. Hendrickson /s/ SCOTT M. TABAKIN Executive Vice President and March 25, 1999 - ----------------------------------------------------- Chief Financial Officer Scott M. Tabakin /s/ PAMELA H. DANIELS Vice President, Controller and March 25, 1999 - ----------------------------------------------------- Chief Accounting Officer Pamela H. Daniels /s/ BERYL F. ANTHONY, JR. Director March 25, 1999 - ----------------------------------------------------- Beryl F. Anthony, Jr. /s/ CAROLYNE K. DAVIS Director March 25, 1999 - ----------------------------------------------------- Carolyne K. Davis /s/ JAMES R. GREENE Director March 25, 1999 - ----------------------------------------------------- James R. Greene /s/ EDITH E. HOLIDAY Director March 25, 1999 - ----------------------------------------------------- Edith E. Holiday Director March 25, 1999 - ----------------------------------------------------- Jon E. M. Jacoby Director March 25, 1999 - ----------------------------------------------------- Risa J. Lavizzo-Mourey /s/ MARILYN R. SEYMANN Director March 25, 1999 - ----------------------------------------------------- Marilyn R. Seymann
67 69 BEVERLY ENTERPRISES, INC. INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Form of Restated Certificate of Incorporation of New Beverly Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 3.2 -- Form of Certificate of Amendment of Certificate of Incorporation of New Beverly Holdings Inc., changing its name to Beverly Enterprises, Inc. (incorporated by reference to Exhibit 3.2 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 3.3 -- By-Laws of Beverly Enterprises, Inc. (incorporated by reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on June 4, 1997 (File No. 333-28521)) 4.1 -- Indenture dated as of February 1, 1996 between Beverly Enterprises, Inc. and Chemical Bank, as Trustee, with respect to Beverly Enterprises, Inc.'s 9% Senior Notes due February 15, 2006 (the "9% Indenture") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1995) 4.2 -- Form of Supplemental Indenture No. 2 to the 9% Indenture dated as of November 19, 1997 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on September 8, 1997 (File No. 333-35137)) 4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage Bond Indenture"), among Beverly Enterprises, Inc., Delaware Trust Company, as Corporate Trustee, and Richard N. Smith, as Individual Trustee, with respect to First Mortgage Bonds (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.4 -- First Supplemental Indenture dated as of April 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 3/4% First Mortgage Bonds due 2008 (incorporated by reference to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1993) 4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to the First Mortgage Bond Indenture, with respect to 8 5/8% First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to Beverly Enterprises, Inc.'s Current Report on Form 8-K dated July 15, 1993) (incorporated by reference to Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 4.6 -- Trust Indenture dated as of December 1, 1994 from Beverly Funding Corporation, as Issuer, to Chemical Bank, as Trustee (the "Chemical Indenture") (incorporated by reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 4.7 -- 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)) 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.
70
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1* -- Beverly Enterprises, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.4 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.2* -- New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan (the "1997 LTIP") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 8, 1997 (File No. 333-41669)) 10.3* -- Amendment No. 1 to the 1997 LTIP dated as of December 3, 1997 (incorporated by reference to Exhibit 10.3 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.4* -- New Beverly Holdings, Inc. Non-Employee Directors' Stock Option Plan (the "Directors' Option Plan") (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 12, 1997 (File No. 333-42131)) 10.5* -- Amendment No. 1 to the Directors' Option Plan dated as of December 3, 1997 (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.6* -- Executive Medical Reimbursement Plan (incorporated by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1987) 10.7* -- Amended and Restated Beverly Enterprises, Inc. Executive Life Insurance Plan and Summary Plan Description (the "Executive Life Plan") (incorporated by reference to Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1993) 10.8* -- Amendment No. 1, effective September 29, 1994, to the Executive Life Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed on February 13, 1995 (File No. 33-57663)) 10.9* -- Executive Physicals Policy (incorporated by reference to Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1993) 10.10* -- Amended and Restated Deferred Compensation Plan effective July 18, 1991 (incorporated by reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991) 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)
71
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.15* -- Amendment No. 3, effective as of July 31, 1992, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992) 10.16* -- Amendment No. 4, effective as of January 1, 1993, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.17* -- Amendment No. 5, effective as of September 29, 1994, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1994) 10.18* -- Amendment No. 6, effective as of January 1, 1996, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.19* -- Amendment No. 7, effective as of September 1, 1997, to the Executive Retirement Plan (incorporated by reference to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.20* -- Amendment No. 8, dated as of December 11, 1997, to the Executive Retirement Plan, changing its name to the "Executive SavingsPlus Plan" (incorporated by reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.21* -- Beverly Enterprises, Inc.'s Supplemental Executive Retirement Plan effective as of January 1, 1998 (incorporated by reference to Exhibit 10.21 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.22* -- Beverly Enterprises, Inc.'s Executive Deferred Compensation Plan (incorporated by reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-8 filed on December 5, 1997 (File No. 333-41673)) 10.23* -- Amendment No. 1 to the Executive Deferred Compensation Plan made as of December 11, 1997 (incorporated by reference to Exhibit 10.23 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.24* -- Amendment No. 2 to the Executive Deferred Compensation Plan made as of December 11, 1997 (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.25* -- Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan (the "Directors' Plan") (incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997) 10.26* -- Amendment No. 1, effective as of December 3, 1997, to the Directors' Plan (incorporated by reference to Exhibit 10.26 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997) 10.27* -- Beverly Enterprises, Inc.'s Supplemental Long-Term Disability Plan (incorporated by reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996) 10.28* -- Form of Indemnification Agreement between Beverly Enterprises, Inc. and its officers, directors and certain of its employees (incorporated by reference to Exhibit 19.14 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1987)
72
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.29* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or directors relating to indemnification rights (incorporated by reference to Exhibit 19.5 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.30* -- Form of request by Beverly Enterprises, Inc. to certain of its officers or employees relating to indemnification rights (incorporated by reference to Exhibit 19.6 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1987) 10.31* -- Agreement dated December 29, 1986 between Beverly Enterprises, Inc. and Stephens Inc. (incorporated by reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on January 18, 1990 (File No. 33-33052)) 10.32* -- Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and David R. Banks (incorporated by reference to Exhibit 10.17 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.33* -- Form of Employment Contract, made as of August 22, 1997, between New Beverly Holdings, Inc. and certain of its officers (incorporated by reference to Exhibit 10.20 to Amendment No. 2 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on September 22, 1997 (File No. 333-28521)) 10.34* -- Executive Stock Option Agreement, effective as of February 19, 1998, between Beverly Enterprises, Inc. and David R. Banks (incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1998) 10.35 -- Master Lease Document -- General Terms and Conditions dated December 30, 1985 for Leases between Beverly California Corporation and various subsidiaries thereof as lessees and Beverly Investment Properties, Inc. as lessor (incorporated by reference to Exhibit 10.12 to Beverly California Corporation's Annual Report on Form 10-K for the year ended December 31, 1985) 10.36 -- 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)
73
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.37 -- Participation Agreement, dated as of August 28, 1998, among Vantage Healthcare Corporation, Petersen Health Care, Inc., Beverly Savana Cay Manor, Inc., Beverly Enterprises -- Georgia, Inc., Beverly Enterprises -- California, Inc., Beverly Health and Rehabilitation Services, Inc., Beverly Enterprises -- Arkansas, Inc., Beverly Enterprises -- Florida, Inc. and Beverly Enterprises -- Washington, Inc. as Lessees and Structural Guarantors; Beverly Enterprises, Inc. as Representative, Construction Agent and Parent Guarantor; Bank of Montreal Global Capital Solutions, Inc. as Agent Lessor and Lessor; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency, Bank of America National Trust and Savings Association and Bank of Montreal, as Lenders; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency as Arranger; and Bank of Montreal as Co-Arranger and Syndication Agent and Administrative Agent for the Lenders with respect to the Lease Financing of New Headquarters for Beverly Enterprises, Inc., Assisted Living and Nursing Facilities for Beverly Enterprises, Inc. 10.38 -- Amended and Restated Credit Agreement, dated as of April 30, 1998, among Beverly Enterprises, Inc., the Banks listed therein and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent 10.39 -- 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) 10.40 -- Form of Irrevocable Trust Agreement for the Beverly Enterprises, Inc. Executive Benefits Plan (incorporated by reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s Registration Statement of Form S-4 filed on February 13, 1995 (File No. 33-57663)) 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, 1998
- --------------- * Exhibits 10.1 through 10.34 are the management contracts, compensatory plans, contracts and arrangements in which any director or named executive officer participates. EX-10.37 2 PARTICIPATION AGREEMENT DATED AUGUST 28, 1998 1 EXHIBIT 10.37 ================ AMENDED AND RESTATED PARTICIPATION AGREEMENT dated as of August 28, 1998 amending and restating the 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., BEVERLY ENTERPRISES-CALIFORNIA, INC., BEVERLY HEALTH AND REHABILITATION SERVICES, INC., BEVERLY ENTERPRISES - ARKANSAS, INC., BEVERLY ENTERPRISES - FLORIDA, INC. and BEVERLY ENTERPRISES - WASHINGTON, INC. as Lessees and Structural Guarantors BEVERLY ENTERPRISES, INC. as Representative, Construction Agent and Parent Guarantor, BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC., as Agent Lessor and Lessor, THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION and BANK OF MONTREAL, as Lenders, THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY as Arranger and BANK OF MONTREAL, as Co-Arranger, Syndication Agent and Administrative Agent for the Lenders ---------------------- Lease Financing of New Headquarters for Beverly Enterprises, Inc. and Assisted Living and Nursing Facilities for Beverly Enterprises, Inc. ================ 2 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS; INTERPRETATION ARTICLE II DOCUMENTATION DATE Section 2.1 Documentation Date...............................................................3 ARTICLE III FUNDING OF ADVANCES Section 3.1 Advances.........................................................................5 Section 3.2 Lessors' Commitments.............................................................6 Section 3.3 Lenders' Commitments.............................................................6 Section 3.4 Procedures for Advances..........................................................7 Section 3.5 Interest Rate; Yield Rate........................................................7 Section 3.6 Interest Period Selection/ Continuation/Conversion Elections.....................8 ARTICLE IV YIELD; INTEREST; FEES Section 4.1 Yield............................................................................9 Section 4.2 Interest on Loans...............................................................10 Section 4.3 Reductions in Commitments and Prepayments.......................................10 Section 4.4 Fees............................................................................11 Section 4.5 Place and Manner of Payments....................................................12 Section 4.6 Pro Rata Treatment..............................................................13 Section 4.7 Sharing of Payments.............................................................13
i 3 ARTICLE V CERTAIN INTENTIONS OF THE PARTIES Section 5.1 Nature of Transaction...........................................................14 Section 5.2 Amounts Due Under the Lease.....................................................15 ARTICLE VI CONDITIONS PRECEDENT: ACQUISITION DATES; FUNDING DATES Section 6.1 Acquisition Dates...............................................................15 Section 6.2 Funding Dates...................................................................20 Section 6.3 Conditions to Completion Date...................................................23 ARTICLE VII DISTRIBUTIONS Section 7.1 Basic Rent.....................................................................23 Section 7.2 Purchase Payments by the Representative and the Lessees........................23 Section 7.3 Payment of Loan Balance........................................................24 Section 7.4 Sales Proceeds of Remarketing of Properties....................................24 Section 7.5 Supplemental Rent..............................................................25 Section 7.6 Distribution of Payments after Lease Event of Default..........................25 Section 7.7 Other Payments.................................................................28 Section 7.8 Casualty and Condemnation Amounts..............................................28 Section 7.9 Order of Application...........................................................29 Section 7.10 Payments to Account............................................................29 ARTICLE VIII REPRESENTATIONS Section 8.1 Representations of the Participants.............................................29 Section 8.2 Representations of the Beverly Entities.........................................29 Section 8.3 Representations with Respect to each Funding Date and Acquisition Date..........37 ARTICLE IX PAYMENT OF CERTAIN EXPENSES Section 9.1 Transaction Expenses............................................................38 Section 9.2 Brokers' Fees and Stamp Taxes...................................................38 Section 9.3 Loan Agreement and Related Obligations..........................................39
ii 4 ARTICLE X OTHER COVENANTS AND AGREEMENTS Section 10.1 Affirmative Covenants of the Representative....................................39 Section 10.2 Negative Covenants of the Representative.......................................44 Section 10.3 Affirmative Covenant of the Agent Lessor.......................................55 ARTICLE XI RENEWALS Section 11.1 Extensions of Maturity Date and Expiration Date; Replacement of Participants..............................................55 Section 11.2 Replacement of Defaulting Participant..........................................56 ARTICLE XII TRANSFERS OF PARTICIPANTS' INTERESTS Section 12.1 Assignments....................................................................57 Section 12.2 Participations.................................................................57 Section 12.3 Withholding Taxes; Disclosure of Information; Pledge Under Regulation A........58 ARTICLE XIII INDEMNIFICATION Section 13.1 General Indemnification.......................................................59 Section 13.2 End of Term Indemnity.........................................................62 Section 13.3 Environmental Indemnity.......................................................63 Section 13.4 Proceedings in Respect of Claims..............................................64 Section 13.5 General Tax Indemnity.........................................................66 Section 13.6 Indemnity Payments in Addition to Lease Obligations...........................70 Section 13.7 Eurodollar Rate Lending Unlawful..............................................70 Section 13.8 Deposits Unavailable..........................................................70 Section 13.9 Increased Costs, etc..........................................................71 Section 13.10 Funding Losses................................................................72 Section 13.11 Capital Adequacy..............................................................73
iii 5 ARTICLE XIV THE AGENT LESSOR Section 14.1 Appointment and Authorization.................................................74 Section 14.2 Delegation of Duties..........................................................75 Section 14.3 Agent Lessor and Affiliates...................................................75 Section 14.4 Action by Agent Lessor........................................................75 Section 14.5 Consultation with Experts.....................................................75 Section 14.6 Exculpatory Provisions........................................................75 Section 14.7 Reliance on Communications....................................................76 Section 14.8 Notice of Default.............................................................76 Section 14.9 Non-Reliance on Agent Lessor and Other Participants...........................76 Section 14.10 Indemnification...............................................................77 Section 14.11 Failure to Act................................................................77 Section 14.12 Resignation and Removal.......................................................78 Section 14.13 Distributions.................................................................78 Section 14.14 Rights of Each Beverly Entity.................................................78 ARTICLE XV MISCELLANEOUS Section 15.1 Survival of Agreements........................................................79 Section 15.2 No Broker, etc................................................................79 Section 15.3 Notices.......................................................................79 Section 15.4 Counterparts..................................................................80 Section 15.5 Amendments, etc...............................................................80 Section 15.6 Headings, etc.................................................................81 Section 15.7 Parties in Interest...........................................................81 Section 15.8 Governing Law.................................................................81 Section 15.9 Severability..................................................................82 Section 15.10 Liability Limited.............................................................82 Section 15.11 Further Assurances............................................................82 Section 15.12 Submission To Jurisdiction....................................................83 Section 15.13 Setoff........................................................................83 Section 15.14 Waiver of Jury Trial..........................................................83 Section 15.15 No Participant Responsible for Other Participants.............................84 Section 15.16 Each Lessor to Have an Undivided Interest.....................................84 Section 15.17 Authority of Representative...................................................84
iv 6 EXHIBIT A - FORM OF LEGAL OPINION OF LESSEE AND GUARANTORS EXHIBIT B - FORM OF FUNDING REQUEST EXHIBIT C - FORM OF INTEREST PERIOD SELECTION/CONTINUATION/CONVERSION NOTICE EXHIBIT D-1 - FORM OF OFFICER'S CERTIFICATE EXHIBIT D-2 - FORM OF SECRETARY'S CERTIFICATE EXHIBIT D-3 - FORM OF RESPONSIBLE OFFICER'S CERTIFICATE EXHIBIT E - FORM OF COMPLIANCE CERTIFICATE EXHIBIT F - FORM OF ASSIGNMENT AGREEMENT EXHIBIT G - FORM OF LEGAL OPINION OF LOCAL COUNSEL TO LESSEE EXHIBIT H - FORM OF COMPLETION CERTIFICATE v 7 PARTICIPATION AGREEMENT THIS AMENDED AND RESTATED PARTICIPATION AGREEMENT (this "Participation Agreement"), dated as of August 28, 1998, is entered into by and among BEVERLY ENTERPRISES, INC., a Delaware corporation, as the Representative, Construction Agent and Parent Guarantor (in its capacity as Representative, the "Representative"; in its capacity as Construction Agent, the "Construction Agent"; and, in its capacity as Parent Guarantor, the "Parent Guarantor") and together with the Guarantors listed on the signature page to the Guaranty (each a "Guarantor") and the Structural Guarantors, the "Guarantors"); BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC. (formerly known as BMO Leasing (U.S.) Inc.) , a Delaware corporation, as a Lessor (together with any permitted successors and assigns thereto, each a "Lessor" and collectively the "Lessors"); BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC. (formerly known as BMO Leasing (U.S.) Inc.), as Agent Lessor for the Lessors (in such capacity, the "Agent Lessor"); THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY ("LTCB"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, BANK OF MONTREAL, a Canadian banking organization ("BMO"), and the other various financial institutions as are or may from time to time become lenders (the "Lenders") under the Loan Agreement; LTCB as Arranger (in such capacity, the "Arranger"); and BMO, as Co- Arranger, Syndication Agent and Administrative Agent for the Lenders (in such capacity, the "Administrative Agent"), amending and restating the Participation Agreement, dated as of March 21, 1997, among the aforementioned parties (the "Existing Participation Agreement"). W I T N E S S E T H: WHEREAS, on each Acquisition Date, the Agent Lessor will either (a) purchase from one or more third parties designated by the Construction Agent, or (b) with respect to Property that is not Improved Property lease pursuant to a ground lease, parcels of Land, together with any Improvements thereon; WHEREAS, the Representative, as Construction Agent, has constructed and will construct, at Lessor's expense, additional Improvements on each Property that is not Improved Property which as constructed will be the property of the Agent Lessor and will become part of each Property that is not Improved Property; WHEREAS, the Agent Lessor desire to lease to the respective Lessees, and the respective Lessees desire to lease from the Agent Lessor, such Property; and 8 WHEREAS, the Lessors are willing to provide the funding of the costs of the acquisition of Land, all Improvements thereon and the construction of such other Improvements; WHEREAS, the Lenders are willing to provide financing to the Lessor for a portion of the costs of acquisition of Land, all Improvements thereon and the construction of such other Improvements and; WHEREAS, to secure such financing (a) the Lessors will have the benefit of (i) the Parent Guaranty from the Parent Guarantor and the Guaranty from the other Guarantors (other than the Structural Guarantors) and (ii) a first priority Lien on the Properties and (b) the Lenders will have the benefit of (i) the Structural Guaranties from the Structural Guarantors, the Parent Guaranty from the Parent Guarantor and the Guaranty from the other Guarantors, (ii) a Lien on the Agent Lessor's right, title and interest in the Properties, and (iii) an assignment of certain of the Agent Lessor's rights against the Lessees under the Lease and against the Construction Agent under the Construction Agency Agreement; WHEREAS, the parties hereto wish to amend and restate the terms of the Existing Participation Agreement and to increase the commitments of the Lessors and Lenders to provide financing for the acquisition of additional Land and construction of additional Improvements; WHEREAS, the parties hereto acknowledge that all advances made prior to the date hereof are subject to the benefit of the security arrangements contemplated by the Existing Participation Agreement without interruption; WHEREAS, contemporaneous with the execution and delivery of this Participation Agreement BMO and LTCB have assigned to BoA shares of the outstanding Loan Balance such that after such assignment the outstanding Loan Balance of each Lender is proportional to its respective Commitment Percentage; NOW THEREFORE, in consideration of the mutual agreements contained in this Participation Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS; INTERPRETATION Unless the context shall otherwise require, capitalized terms used and not defined herein shall have the meanings assigned thereto in Appendix A hereto for all 2 9 purposes hereof (as such Appendix A may be amended, supplemented, amended and restated or otherwise modified from time to time, "Appendix A to this Participation Agreement"); and the rules of interpretation set forth in Appendix A to this Participation Agreement shall apply to this Participation Agreement. ARTICLE II DOCUMENTATION DATE Section 2.1 Documentation Date. The Documentation Date for the transaction contemplated by the Participation Agreement occurred on March 21, 1997. Section 2.2 Effectiveness of this Agreement. This Amended and Restated Participation Agreement shall be in effect upon satisfaction or waiver of each of the following conditions precedent; the date of such effectiveness being hereinafter referred to as the "Effective Date". (a) Participation Agreement. This Participation Agreement shall have been duly authorized, executed and delivered by the parties hereto. (b) Master Lease. The Master Lease shall have been duly authorized, executed and delivered by the parties thereto. (c) Construction Agency Agreement. The Construction Agency Agreement shall have been duly authorized, executed and delivered by the parties thereto. (d) Construction Agency Agreement Assignment; Construction Documents Assignment. The Construction Agency Agreement Assignment and the Construction Documents Assignment shall have been duly authorized, executed and delivered by the Agent Lessor and consented to and acknowledged by the Construction Agent. (e) Loan Agreement and Notes. The Loan Agreement and each Lender's Note shall have been duly authorized, executed and delivered by the parties thereto. (f) Assignment of Lease and Rent. The Assignment of Lease and Rent shall have been duly authorized, executed and delivered by the Agent Lessor, as assignor, to the Administrative Agent, as assignee, and the 3 10 Assignment of Lease and Rent shall have been consented to and acknowledged by the Lessees. (g) Guaranties. The Structural Guaranties shall have been duly authorized, executed and delivered by each Structural Guarantor, the Parent Guaranty shall have been duly authorized, executed and delivered by the Parent Guarantor and the Guaranty shall have been duly authorized, executed and delivered by each of the other Guarantors. (h) Fees. The Administrative Agent and each Participant, as applicable, shall have received all fees then due and payable pursuant to Section 4.4. (i) Certain Transaction Expenses. Mayer, Brown & Platt ("MBP"), as special counsel for the Agent Lessor, shall have received, to the extent then invoiced, payment in full in cash of all Transaction Expenses payable to such counsel pursuant to Section 9.1. (j) Corporate Documents; Certificates; Acceptance Letter. Each of the Lessees and the Representative shall have delivered, or shall have caused to be delivered, to the Administrative Agent, the Agent Lessor, each Lender and each Lessor the following: (i) Good Standing. To the extent the following has not previously been delivered with respect to any Lessee, copies of certificates of good standing, existence or its equivalent, certified as of a recent date by the appropriate governmental authorities of the state of its incorporation and, for each Lessee, of the state where the Property leased to it is located. (ii) Opinions of Counsel. An opinion of (i) Weil, Gotshal & Manges LLP, New York counsel, (ii) the vice president and deputy general counsel for the Beverly Entities, and (iii) Mayer, Brown & Platt, counsel to the Agent Lessor, and Thomas R. Sizer, Esq., internal counsel for the Agent Lessor, each dated the Effective Date and, with respect to (i) and (ii), addressed to the Administrative Agent, the Agent Lessor, each of the Lenders and each of the Lessors, covering the matters set forth in Exhibit A. (k) No Default. No Default or Event of Default shall have occurred and be continuing on the Effective Date unless such Default or Event of Default shall have been waived in accordance with the Operative Documents. 4 11 (l) Governmental Approvals. All Governmental Actions required by any Requirement of Law for the purpose of authorizing each Beverly Entity, the Agent Lessor, the Administrative Agent and each Participant to enter into the amended and restated Operative Documents shall have been obtained or made and be in full force and effect. All documents and instruments required to be delivered pursuant to this Section 2.1 shall be delivered at the offices of Mayer, Brown & Platt, 1675 Broadway, New York, New York 10019 or at such other location as may be determined by the Agent Lessor, the Administrative Agent and the Representative, and in such numbers as shall be reasonably requested by the Administrative Agent. ARTICLE III FUNDING OF ADVANCES Section 3.1 Advances. Subject to the conditions and terms hereof, the Agent Lessor shall take the following actions at the written request of the Representative from time to time during the Commitment Period with respect to each Property: (a) the Agent Lessor shall make Advances (out of funds provided by the Lessors and the Lenders) to the Construction Agent, for the purpose of financing the acquisition of Land, with respect to Property that is not Improved Property, or leasehold interests therein (and Improvements existing thereon, if any) and the Construction of Improvements thereon, and the proceeds of such Advances shall be made directly to the Construction Agent or to such parties designated in writing by the Construction Agent to the Agent Lessor; (b) the Agent Lessor shall acquire the Land, with respect to Property that is not Improved Property, or leasehold interests therein, and Improvements, if any (using funds provided by the Lessors and the Lenders); and (c) the Agent Lessor shall lease (or in the case of leaseholds, sublease) the Land and Improvements to the relevant Lessee under the Master Lease and the respective Lease Supplement. Notwithstanding any other provision hereof, the Agent Lessor shall not be obligated to make any Advance with respect to any Property if, after giving effect thereto, (i) the aggregate outstanding amounts of the Loans and the Lessor Amounts would exceed the Aggregate Commitment Amount, or (ii) the Property Balance for such Property would exceed the lesser of (x) 110% of the Estimated Improvements Costs 5 12 plus Land Acquisition Cost, as set forth in the Funding Request relating to the Acquisition Date for such Property, and (y) the Fair Market Sales Value of such Property as set forth in (A) the As-Built Appraisal thereof delivered pursuant to clause (i) or (ii) of Section 6.2(b) , or (iii) with respect to the New Beverly Headquarters, the aggregate Property Cost thereof would exceed $40,000,000. Notwithstanding the foregoing, but subject to the rights and remedies of the Agent Lessor under the Construction Agency Agreement and to Article VI hereof, the Construction Agent is entitled to obtain Advance for the purpose of reimbursing it for Project Costs expended by it in connection with the construction of Improvements on a Property. Furthermore, until the Unavailable Commitment Termination Date, no Lessor or Lender shall be obligated to make available any Lessor Amount or Loan if, after giving effect to the proposed Lessor Amount or Loan, the outstanding aggregate amount of the Lessor Amounts and Loans would exceed (I) with respect to any Improved Property, the Fair Market Sales Value of such Property as set forth in the Improved Property Appraisal thereof delivered pursuant to clause (i) of Section 6.1(d) and (II) with respect to any Property that is not Improved Property, the difference between (x) the Aggregate Commitment Amount and (y) the Unavailable Commitment. There shall not be a Funding Date with respect to any Improved Property after the Acquisition Date of such Property. Section 3.2 Lessors' Commitments. Subject to the conditions and terms hereof, each of the Lessors shall make available to the Agent Lessor at the request of the Construction Agent from time to time during the Commitment Period on any Funding Date or Acquisition Date, as appropriate, an amount (relative to such Lessor, a "Lessor Amount") in immediately available funds equal to such Lessor's Commitment Percentage of the amount of the Advance being funded on such Funding Date or Acquisition Date. Notwithstanding any other provision hereof, no Lessor shall be obligated to make available any Lessor Amount if, after giving effect to the proposed Lessor Amount, the outstanding aggregate amount of the Lessor Amounts of such Lessor would exceed such Lessor's Commitment. Section 3.3 Lenders' Commitments. Subject to the conditions and terms hereof, each of the Lenders shall make Loans to the Agent Lessor at the request of the Construction Agent from time to time during the Commitment Period on any Funding Date or Acquisition Date, as appropriate, an amount (relative to such Lender, a "Loan") in immediately available funds equal to such Lender's Commitment Percentage of the amount of the Advance being funded on such Funding Date or Acquisition Date. Notwithstanding any other provision hereof, no Lender shall be obligated to make any Loan if, after giving effect to the proposed Loan, the outstanding aggregate amount of such Lender's Loans would exceed such Lender's Commitment. 6 13 Section 3.4 Procedures for Advances. (a) With respect to each Advance, the Construction Agent shall give the Agent Lessor and the Administrative Agent prior written notice pursuant to a Funding Request substantially in the form of Exhibit B (a "Funding Request"), which Funding Request shall be delivered not later than 10:00 a.m. (New York City time), three (3) Business Days prior to the proposed Acquisition Date or the proposed Funding Date, specifying: (i) the proposed Acquisition Date or Funding Date, (ii) the amount of Advance requested, (iii) whether such proposed Funding Date will also be an Acquisition Date, and (iv) the Properties to which such Advance is being allocated and the amount allocated to each Property. With respect to any Funding Request related to the acquisition of a Property (or leasehold interest therein), in addition to the foregoing, the Representative shall also specify: (i) the Property to be acquired or leased, (ii) the seller or lessor of the Property and the related Land Acquisition Cost, and, with respect to Improved Property, the Property Improvement Costs (iii) the Estimated Improvement Costs for such Property. Such Loans and Lessor Amounts made with respect to each Advance (i) if made on a day other than a Scheduled Payment Date or an Acquisition Date, shall be Base Rate Loans/Lessor Amounts and (ii) if made on a Scheduled Payment Date or an Acquisition Date, shall be Eurodollar Loans/Lessor Amounts, and the duration of the initial Interest Period with respect to such Advance shall begin on the proposed Acquisition Date or Funding Date and end on the next succeeding Scheduled Payment Date (the "Initial Interest Period"). Subject to timely delivery of a Funding Request and the other terms and conditions of the Operative Documents, each Participant shall make its Commitment Percentage of the requested Advance available to the Agent Lessor by 2:00 p.m., Eastern time, on the requested Acquisition Date or Funding Date, as applicable, and the Agent Lessor will forward any such amounts so received to the Construction Agent not later than 3:00 p.m., Eastern time, on the same day. The Agent Lessor and the Administrative Agent shall calculate the amounts of the Lessor Amounts and the Loans required to fund the requested Advance as it relates to each Property. No more than two (2) Funding Requests shall be made during each Interest Period other than Funding Requests made pursuant to Section 6.1. (b) Except as the Participants may otherwise agree in writing, Advances shall be made solely to provide the Construction Agent with funds with which to pay any Land Acquisition Costs or pay or reimburse itself for Property Improvement Costs, as the case may be. Section 3.5 Interest Rate; Yield Rate. Each Loan and Lessor Amount shall accrue interest or Yield, as the case may be, by reference to the Base Rate or the Adjusted Eurodollar Rate in accordance with Section 3.6. 7 14 Section 3.6 Interest Period Selection/ Continuation/Conversion Elections. (a) By delivering an Interest Period Selection/Continuation/Conversion Notice to the Agent Lessor and Administrative Agent with respect to Loans and Lessor Amounts, the Representative may from time to time during the Basic Lease Term irrevocably select, on not less than three (3) nor more than five (5) Business Days' notice, that all or any portion of the outstanding Loans and Lessor Amounts be, in the case of Base Rate Loans/Lessor Amounts, converted into Eurodollar Loans/Lessor Amounts or, in the case of Eurodollar Loans/Lessor Amounts, converted into Base Rate Loans/Lessor Amounts or continued as Eurodollar Rate Loans/Lessor Amounts and, with respect to Eurodollar Loans/Lessor Amounts, select the duration for the next succeeding Interest Period; provided, however, that (a) in the absence of a delivery of an Interest Period Selection/Continuation/Conversion Notice with respect to any Eurodollar Loan/Lessor Amount at least three (3) Business Days before the last day of the then current Interest Period with respect thereto, the Representative (on behalf of all Lessees) shall be deemed to have selected that such Eurodollar Loan/Lessor Amount be converted into a Base Rate Loan/Lessor Amount on such last day, (b) each such conversion or continuation shall be pro rated among the applicable outstanding Loans and Lessor Amounts of all Participants, (c) no portion of any Loan or Lessor Amount may be continued as, or converted into, a Eurodollar Loan/Lessor Amount when any Lease Default has occurred and is continuing, and (d) the outstanding Loans and Lessor Amounts may not be apportioned into more than three (3) separate Loans and Lessor Amounts pursuant to this Section 3.6(a) at any one time. (b) the Representative, with respect to any Loans and Lessor Amounts outstanding during the Interim Lease Term, shall be deemed to have (i) converted Base Rate Loans/Lessor Amounts into Eurodollar Loans/Lessor Amounts at the end of the Initial Interest Period, (ii) as of each Scheduled Payment Date (other than the Interim Termination Date), continued all outstanding Eurodollar Loans/Lessor Amounts as Eurodollar Loans/Lessor Amounts and (iii) as of each Scheduled Payment Date (other than the Interim Termination Date) selected an Interest Period ending on the earlier of the next succeeding Scheduled Payment Date and the Interim Termination Date. Each Interest Period Selection/Continuation/Conversion Notice so delivered or deemed delivered by the Representative shall be deemed an effective election by the Lessors of the method for computing interest on the Loans under the Loan Agreement. 8 15 ARTICLE IV YIELD; INTEREST; FEES Section 4.1 Yield. (a) the amount of the Lessor Amounts outstanding from time to time shall accrue yield ("Yield") at the Yield Rate, calculated using the actual number of days elapsed and, when the Yield Rate is based on the Adjusted Eurodollar Rate, a 360-day year basis and, if calculated at the Base Rate, a 360-day year basis if the Base Rate is calculated at the Federal Funds Rate, and a 365-, or, if applicable, 366-, day year basis if the Base Rate is calculated at the Prime Rate. If all or any portion of the Lessor Amounts, any Yield payable thereon or any other amount payable hereunder shall not be paid when due (whether at stated maturity, acceleration thereof or otherwise), such overdue amount shall bear interest at a rate per annum which is equal to the Overdue Rate. Upon the occurrence, and during the continuance of an Event of Default, the principal of and, to the extent permitted by law, interest on (or Yield on) the Lessor Amounts and any other amounts owing hereunder or under the other Operative Documents shall bear interest, payable on demand, at a per annum rate of 2% greater than the rate which would otherwise be applicable (or if no rate is applicable, whether in respect of interest, fees or other amounts, then 2% greater than the Base Rate). The Administrative Agent shall, as soon as practicable, but in no event later than 1:00 p.m., Eastern time, two Business Days before the effectiveness of each Adjusted Eurodollar Rate, cause to be determined such Adjusted Eurodollar Rate, the resulting Yield and Lessor Basic Rent, and notify each Lessor thereof. (b) the Administrative Agent shall distribute, in accordance with Article VII, the Lessor Basic Rent and all other amounts due with respect to the Lessor Amounts paid to the Administrative Agent by the Lessees under the Lease from time to time. (c) yield on outstanding Lessor Amounts made with respect to each Property shall that is not Improved Property be paid from Advances by the Lessors deemed to have been requested by the Representative pursuant to Section 3.4 on each Scheduled Payment Date occurring prior to the earlier of the Completion Date and the Outside Completion Date for such Property, and the Property Improvement Costs of such Property shall be increased on the date of each such Advance by an amount equal to such Advance; provided that if a Completion Certificate is delivered less than three (3) Business Days prior to a Scheduled Payment Date, solely for purposes of this clause (c) such Completion Certificate shall not be effective until the day after such Scheduled Payment Date. (d) after the earlier of the Completion Date and the Outside Completion Date for any Property, that is not Improved Property Yield on outstanding Lessor Amounts 9 16 made with respect to each Improved Property shall be due and payable in cash on each Scheduled Payment Date and not funded pursuant to deemed Advances as referred to in clause (c) above. (e) if not repaid sooner, the outstanding aggregate Lessor Amounts shall be repaid in full on the Maturity Date. Section 4.2 Interest on Loans. (a) Each Loan shall accrue interest computed and payable in accordance with the terms of the Loan Agreement. Each Loan shall become due and payable at the dates and times provided under the Loan Agreement. (b) The Administrative Agent shall distribute, in accordance with Article VII, the Lender Basic Rent and all other amounts due with respect to the Loans paid to the Administrative Agent by any Lessees under the Lease from time to time. Section 4.3 Reductions in Commitments and Prepayments. (a) Voluntary Reduction of Commitments. The Representative may from time to time permanently reduce the Aggregate Commitment Amount in whole or in part (in each such case in a minimum aggregate amount of $2,000,000 and integral multiples of $1,000,000 in excess thereof) upon three (3) Business Days' prior written notice to the Administrative Agent; provided, however, that no such reduction shall be effective if the aggregate amount of outstanding Loans and Lessor Amounts exceeds the remaining Loan Commitment or Lessor Commitment, as the case may be. (b) Voluntary Prepayments. The Representative shall have the right to prepay an amount equal to the aggregate outstanding Property Balance in whole, but not in part, in respect of any one or more of the Properties pursuant to the exercise of purchase options permitted under the Lease without premium or penalty, provided that such prepayment is in connection with the sale of such Property to a Person other than a Beverly Entity or any Affiliate thereof and that no Beverly Entity shall operate or manage such Property after its sale (other than on a temporary basis in connection with such sale). (c) Mandatory Prepayments. (i) If at any time the sum of the aggregate amount of outstanding Loans and Lessor Amounts shall exceed the Available Commitments or the Aggregate Commitment Amount, each of Lessees shall immediately make payment on the Loans or Lessor Amounts in an amount sufficient to eliminate their pro rata share of such excess. Payments required to be made hereunder 10 17 shall be applied to Base Rate Loans or Lessor Amounts and then to Eurodollar Loans or Lessor Amounts in direct order of their Interest Period maturities. (ii) All amounts payable by the Representative or any Lessee pursuant to Article XV, XVI, XVIII or XX of the Master Lease shall be applied to the Loans and the Lessor Amounts in the manner set forth in Article VII. (d) Notice. The Representative will provide notice to the Administrative Agent of any prepayment by 11:00 A.M. (New York City time) at least three (3) Business Days prior to the date of prepayment. Section 4.4 Fees. The Representative agrees to pay the fees set forth in this Section 4.4. (a) Commitment Fees. The Representative agrees to pay to the Administrative Agent for the account of each Participant, for the period (including any portion thereof when its Commitment is suspended by reason of any Lessee's inability to satisfy any condition of Article VI) commencing on the Effective Date and continuing through the Interim Termination Date, a Commitment fee (collectively, the "Commitment Fees") as follows: (i) from the Effective Date to and excluding the Unavailable Commitment Termination Date, the Commitment Fee, with respect to each Participant, shall be calculated (x) at a rate per annum of 0.25% on such Participant's Commitment Percentage of the average daily Available Commitments and (y) at a rate per annum of 0.125% on such Participant's Commitment Percentage of the Unavailable Commitments; and (ii) from and including the Unavailable Commitment Termination Date to and including the Interim Termination Date, the Commitment Fee, with respect to each Participant, shall be at a rate per annum of 0.25% on such Participant's Commitment Percentage of the average daily Available Commitments from and including the Unavailable Commitment Termination Date to and including the Interim Termination Date. The Commitment Fees shall be payable by the Representative in arrears on each Quarterly Payment Date, commencing with the first such day following the Documentation Date, and on the Interim Termination Date; provided, however, in the event the Unavailable Commitment Termination Date occurs prior to August 1, 1997, the Commitment Fees shall be immediately payable by the Representative in arrears on the Unavailable Commitment Termination Date, together with an amount equal to 11 18 the difference between (x) the Commitment Fees as calculated from the Documentation Date to but excluding the Unavailable Commitment Termination Date pursuant to the method under clause (ii) above less (y) the Commitment Fees paid to the Administrative Agent from the Documentation Date through the Unavailable Commitment Termination Date (such difference, the "Commitment Fee Shortfall Amounts"). The Commitment Fees and Commitment Fee Shortfall Amounts, as applicable, shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such Commitment Fees and Commitment Fee Shortfall Amounts, as applicable, are payable over a year of 360 days. (b) Up-Front Fees. The Representative agrees to pay to the Arranger and the Co-Arranger the Up-Front Fees in accordance with the Arranger's Fee Letter and each Fee Letter executed in connection with an increase of the Commitment. (c) Administrative Agent's Fees. The Representative agrees to pay to the Administrative Agent for its own account the non-refundable fees set forth in the Arranger's Fee Letter annually in arrears on each anniversary of the Documentation Date during the Lease Term and on the Expiration Date. (d) Other Fees. The Representative agrees to pay to the Agent Lessor for its own account, with respect to each Property acquired pursuant to Section 6.1 in excess of 10 Properties from the Documentation Date, a non-refundable fee of $2,500 on the Acquisition Date for such Property. Section 4.5 Place and Manner of Payments. Except as otherwise specifically provided herein, all payments by any Beverly Entity hereunder, under the Master Lease or under any other Operative Document shall be made to the Administrative Agent in Dollars in immediately available funds, without offset, deduction, counterclaim or withholding of any kind, to the Account in New York, New York not later than 1:00 p.m. (New York City time) on the date when due. Payments received after such time shall be deemed to have been received on the next succeeding Business Day. Each Beverly Entity shall, at the time it makes any payment under any Operative Document, specify to the Administrative Agent the Loans and Lessor Amounts, fees or other amounts payable by the Lessees or the Representative, as the case may be, hereunder to which such payment is to be applied (and in the event that it fails so to specify, or if such application would be inconsistent with the terms hereof, the Administrative Agent shall distribute such payment to the Lenders and the Lessors in such manner as the Administrative Agent may determine to be appropriate in respect of obligations owing by such Beverly Entity, subject to the terms of Section 4.6). The Administrative Agent will distribute such payments to such Lenders and Lessors in accordance with Article VII, if any such payment is received prior to 3:00 12 19 p.m. (New York City time) on a Business Day in like funds as received prior to such time, and otherwise the Administrative Agent will distribute such payment to such Lenders and Lessors on the next succeeding Business Day. Whenever any payment hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day (subject to accrual of interest and fees for the period of such extension), except that in the case of Eurodollar Loans or Lessor Amounts, if the extension would cause the payment to be made in the next following calendar month, then such payment shall instead be made on the next preceding Business Day. Section 4.6 Pro Rata Treatment. Except to the extent otherwise provided herein, each Advance, each payment or repayment of principal on any outstanding Loan or Lessor Amount, each payment of interest or Yield, and each reduction of the Aggregate Commitment Amount, shall be allocated pro rata among the relevant Lenders and Lessors, as the case may be, in accordance with the respective applicable Commitments (or, if the Commitments of such Lenders or Lessors have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans or Lessor Amounts, as the case may be). Section 4.7 Sharing of Payments. The Participants agree among themselves that, in the event that any Participant shall obtain payment in respect of any Loan or Lessor Amount or any other obligation owing to such Participant under the Operative Documents through the exercise of a right of setoff, banker's lien or counterclaim, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Participant under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, in excess of its pro rata share of such payment as provided for in this Agreement, such Participant shall promptly purchase from the other Participants a participation in such Loans or Lessor Amounts and other obligations in such amounts, and make such other adjustments from time to time, as shall be equitable to the end that all Participants share such payment in accordance with their respective ratable shares as provided for in this Agreement. The Participants further agree among themselves that if payment to a Participant obtained by such Participant through the exercise of a right of setoff, banker's lien, counterclaim or other event as aforesaid shall be rescinded or must otherwise be restored, each Participant which shall have shared the benefit of such payment shall, by repurchase of a participation theretofore sold, return its share of that benefit (together with its share of any accrued interest payable with respect thereto) to each Participant whose payment shall have been rescinded or otherwise restored. Each Beverly Entity agrees that any Participant so purchasing such a participation may, to the fullest extent permitted by law, exercise all rights of payment, including setoff, banker's lien or counterclaim, with respect to such participation as fully as if such Participant were a holder of such Loan or Lessor Amount or other obligation in the 13 20 amount of such participation. Except as otherwise expressly provided herein, if any Participant, the Agent Lessor or the Administrative Agent shall fail to remit to the Administrative Agent, the Agent Lessor or any other Participant an amount payable by such party to the Administrative Agent, the Agent Lessor or such other Participant pursuant to the Operative Documents on the date when such amount is due, such payments shall be made together with interest thereon for each date from the date such amount is due until the date such amount is paid to the Administrative Agent, the Agent Lessor or such other Participant at a rate per annum equal to the Federal Funds Rate. If under any applicable bankruptcy, insolvency or other similar law, any Participant receives a secured claim in lieu of a setoff to which this Section 4.7 applies, such Participant shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Participants under this Section 4.7 to share in the benefits of any recovery on such secured claim. ARTICLE V CERTAIN INTENTIONS OF THE PARTIES Section 5.1 Nature of Transaction. (a) The parties hereto intend that (i) for financial accounting purposes with respect to the Lessees, the Agent Lessor will be treated as the owner and the lessor of the Properties and the Lessees will be treated as the lessees of their respective Properties and (ii) for all other purposes, including federal and all state and local income tax purposes, state real estate and commercial law and bankruptcy purposes, (i) the Lease will be treated as a financing arrangement, (ii) the Lessors and the Lenders will be deemed lenders making loans to the Lessees in an amount equal to the sum of the Lessor Amounts and the outstanding principal amount of the Loans, which amounts are secured by the Properties, and (iii) the Lessees will be treated as the owners of the Properties described in their respective Lease Supplements and will be entitled to all tax benefits ordinarily available to an owner of properties like the Properties for such tax purposes. Nevertheless, the Lessees acknowledge and agree that (other than the representations and covenants of the Agent Lessor and its parent to the Representative in the Lessor Letter Agreement) neither the Agent Lessor, the Administrative Agent nor any of the Lessors or Lenders has made any representations or warranties to the Lessees concerning the tax, accounting or legal characteristics of the Operative Documents and that the 14 21 Lessees have obtained and relied upon such tax, accounting and legal advice concerning the Operative Documents as they deem appropriate. (b) Specifically, without limiting the generality of clause (a) of this Section 5.1, the parties hereto intend and agree that in the event of any insolvency or receivership proceedings or a petition under the United States bankruptcy laws or any other applicable insolvency laws or statute of the United States of America or any State or Commonwealth thereof affecting any Beverly Entity, the Lessors, or the Lenders or any collection actions, the transactions evidenced by the Operative Documents shall be regarded as loans made by the Lessors and the Lenders as unrelated third party lenders of the Lessees. Section 5.2 Amounts Due Under the Lease. Anything herein or elsewhere to the contrary notwithstanding, it is the intention of Lessee, the Lessors and the Lenders that: (i) with respect to each Lessee, the amount and timing of installments of Basic Rent due and payable from time to time from such Lessee under the Lease shall be equal to the aggregate payments due and payable as interest on the Loans and Yield on the Lessor Amounts on each Scheduled Payment Date; (ii) if the Representative elects the Purchase Option or any Lessee becomes obligated to purchase any of the Properties under the Lease, the Loans, the Lessor Amounts, and all interest, Yield and Commitment Fees thereon and all other obligations of the Representative and the Lessor or Lessees with respect to such Property, as the case may be, owing to the Administrative Agent, the Agent Lessor, the Lessors and the Lenders shall be immediately due and payable in full by such parties; (iii) if the Representative properly elects the Remarketing Option, the Representative shall only be required to pay to the Administrative Agent the proceeds of the sale of each of the Properties, the Loan Balance, Lessor Amounts that are allocable to Qualified Land and any amounts due pursuant to Article XIII hereof and Section 20.2 of the Master Lease (which aggregate amounts may be less than the Lease Balance); and (iv) upon an Event of Default resulting in an acceleration of the Representative's obligation to purchase the Properties under the Lease, the amounts then due and payable by the Representative under the Lease shall include all amounts necessary to pay in full the Lease Balance, plus all other amounts then due from the Representative and the Lessees to the Participants under the Operative Documents. ARTICLE VI CONDITIONS PRECEDENT: ACQUISITION DATES; FUNDING DATES Section 6.1 Acquisition Dates. Each closing date with respect to an acquisition of Land or leasehold interests therein (and the Improvements existing thereon, if any) (each an "Acquisition Date") shall occur on the date on which all the 15 22 conditions precedent thereto set forth in this Section 6.1 with respect to such acquisition of Land or leasehold interests therein shall have been satisfied or waived by the applicable parties as set forth herein; provided that no Acquisition Date shall occur within six months of the Interim Termination Date. The obligation of the Lessors to acquire any Land or leasehold interests therein on an Acquisition Date, the obligation of each Lessor to make available any related Lessor Amount on such Acquisition Date and the obligation of each Lender to make any related Loan on such Acquisition Date, are subject to satisfaction or waiver of the following conditions precedent: (a) Funding Request. Each of the Administrative Agent and the Agent Lessor shall have received a fully executed counterpart of the applicable Funding Request in accordance with Section 3.4. Each of the delivery of a Funding Request and the acceptance of the proceeds of such Advance shall constitute a representation and warranty by the Beverly Entities that on the applicable Acquisition Date (both immediately before and after giving effect to the making of such Advance and the application of the proceeds thereof), the statements made in such Funding Request and Section 8.2 are true and correct. (b) Fees. All fees due and payable pursuant to this Participation Agreement shall have been paid, and the Participants shall have received all Commitment Fees due and payable pursuant to Section 4.4(a). (c) Representations and Warranties. On the applicable Acquisition Date, the representations and warranties of each Beverly Entity in this Agreement and in each of the other Operative Documents shall be true and correct in all material respects as though made on and as of such date, except to the extent such representations or warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date. (d) Appraisal. At least three (3) Business Days prior to such Acquisition Date, the Agent Lessor and the Administrative Agent shall have received an Appraisal, in form and substance satisfactory to the Administrative Agent and the Agent Lessor, which Appraisal shall show (i) with respect to each Improved Property, that the Fair Market Sales Value of such Improved Property as of the Acquisition Date and the end of the Base Term and each Renewal Term for such Property is not less than the sum of the Land Acquisition Cost and Property Improvement Cost for such Property (which, in each case, shall be an Improved Property Appraisal) and (ii) with respect to each Property other than an Improved Property, that the Fair Market Sales 16 23 Value of such Land is not less than the Land Acquisition Cost for such Property. (e) Governmental Approvals. All necessary Governmental Actions required by any Requirement of Law for the purpose of authorizing the Lessors to acquire the applicable Property shall have been obtained or made and be in full force and effect. With respect to each Improved Property, such Property shall be ready for occupancy and operation, and all appropriate Governmental Action (including the issuance by the appropriate Governmental Authority of a permanent certificate of occupancy) shall have been taken for the occupancy and operation of such Property. (f) Responsible Officer's Certificate. The Agent Lessor and the Administrative Agent shall have received a Responsible Officer's Certificate of the Representative, in substantially the form of Exhibit D-3 attached hereto, addressed to the Administrative Agent, the Agent Lessor, each Lender and each Lessor and dated as of the applicable Acquisition Date, stating that (i) to such Responsible Officer's knowledge the representations and warranties of each Beverly Entity contained in the Participation Agreement and each other Operative Document to which it is a party is true and correct in all material respects on and as of the respective Acquisition Date; (ii) to such Responsible Officer's knowledge no Default or Event of Default has occurred and is continuing under any Operative Document to which it is a party with respect to each Beverly Entity; (iii) to such Responsible Officer's knowledge each Operative Document to which each Beverly Entity is a party is in full force and effect with respect to it; and (iv) each Beverly Entity has duly performed and complied with all conditions contained herein or in any other Operative Document required to be performed or complied with by it on or prior to the respective Acquisition Date. (g) Evidence of Property Insurance. The Agent Lessor and the Administrative Agent shall have received evidence that the insurance maintained by the applicable Lessee with respect to such Property satisfies the requirements set forth in Article XIII of the Master Lease, setting forth the respective coverage, limits of liability, carrier, policy number and period of coverage. (h) Environmental Audit. At least ten (10) Business Days prior to such Acquisition Date, the Agent Lessor and the Administrative Agent shall have received an Environmental Audit with respect to the Property demonstrating as to any preexisting environmental issue identified in such audit that the risk of loss therefrom is remote and otherwise in form and 17 24 substance reasonably satisfactory to the Agent Lessor and the Administrative Agent. (i) Deed or Ground Lease. The Agent Lessor shall have received either (A) in the case of Land being acquired from a third-party Seller, at least one (1) Business Day prior to such Acquisition Date a Deed with respect to such Property (and/or all Improvements located thereon) being purchased on such Acquisition Date, conveying fee simple title to such Property (and/or all Improvements located thereon) to the Agent Lessor and containing all customary seller's warranties and subject only to Permitted Property Liens or (B) in the case of Land owned in fee simple by the applicable Lessee or an Affiliate of any Guarantor, at least ten (10) days prior to such Acquisition Date, a ground lease, in form and substance satisfactory to the Agent Lessor, duly executed by such Lessee or such Affiliate as the case may be, as ground Lessor thereunder, conveying to the Agent Lessor a leasehold interest in such Land, which Land shall be a separate tax lot and a legal subdivision under all applicable zoning laws. Notwithstanding any other provision of this Participation Agreement or the other Operative Documents, the Agent Lessor shall receive a Deed for each Improved Property and in no event shall Improved Property be subject to a ground lease as provided in clause (B) of this Section. (j) Bill of Sale. On or prior to such Acquisition Date, the Agent Lessor shall have received a special warranty bill of sale (a "Bill of Sale"), conveying title to the Agent Lessor in any Improvements and other personal property (other than inventory) comprising part of the applicable Property. (k) Construction Agency Agreement Supplement. On or prior to such Acquisition Date, the Construction Agent and the Agent Lessor shall have delivered to the Lessors and the Lenders a Construction Agency Agreement Supplement with respect to the applicable Property fully executed by the Construction Agent and the Agent Lessor. (l) Supplement to Assignment of Lease and Rent. On or prior to such Acquisition Date, the Agent Lessor shall have delivered to the Administrative Agent a supplement to the Assignment of Lease and Rent with respect to the applicable Property substantially in the form of Exhibit A thereto, together with a consent to and acknowledgment of such supplement duly executed by the applicable Lessee. (m) Lease Supplement. On or prior to such Acquisition Date, the applicable Lessee and the Agent Lessor shall have delivered the original 18 25 counterpart of the Lease Supplement executed by such Lessee and the Agent Lessor with respect to the applicable Property to the Lenders. (n) Lessor Financing Statements. On or prior to such Acquisition Date, the applicable Lessee shall have delivered to the Agent Lessor all Lessor Financing Statements relating to such Property as the Agent Lessor or any other Lessor may reasonably request in order to protect the interests of the Agent Lessor and each of the Lessors under the Master Lease and the Lease Supplement relating to the applicable Property to the extent the Master Lease and such Lease Supplement constitute security agreements. (o) Recordation of Lessor Mortgage and Lessor Financing Statements; Search Results. Each of the Participants shall have received (x) evidence reasonably satisfactory to it that each of (i) the Lease Supplement and any other instrument constituting a Lessor Mortgage and (ii) the Lessor Financing Statements, in each case relating to such Property, has been, or are being, recorded in a manner sufficient to properly perfect each of their interests therein and (y) copies of file search reports from the Uniform Commercial Code filing officer in the jurisdiction (i) in which is located such Property or (ii) in which is located a place of business or the chief executive office of the applicable Lessee that owns or holds any right, title or interest in any Property, setting forth the results of such Uniform Commercial Code file searches. (p) Property Survey. At least five (5) Business Days prior to such Acquisition Date, the Representative shall have delivered to each of the Agent Lessor and the Administrative Agent an American Land Title Association ("ALTA")/1992 (Urban) Survey of such Property certified to the Participants and the title company and otherwise in form reasonably acceptable to the Participants. (q) Title Insurance. On or prior to such Acquisition Date, the Representative shall have delivered to the Administrative Agent and the Agent Lessor a commitment to deliver an ALTA extended owners and lenders title insurance policy covering such Property in favor of the Agent Lessor, the Administrative Agent and the Participants, respectively, such policy in an amount not less than (i) with respect to Improved Property, the sum of the related Land Acquisition Cost and Property Improvement Costs and (ii) with respect to any other Property, the sum of the related Land Acquisition Cost and Estimated Improvement Costs and to be reasonably satisfactory to the Required Lenders and the Lessors with such customary endorsements and affirmative assurances issued by the title company as a routine matter, if requested by the Agent Lessor or the Administrative Agent. 19 26 (r) No Default. There shall not have occurred and be continuing any Default or Event of Default under any of the Operative Documents, and no Default or Event of Default under any of the Operative Documents will have occurred after giving effect to the acquisition of the Land requested by such Funding Request. (s) Opinion of Counsel and of Local Counsel to the Lessee. The Agent Lessor and the Administrative Agent shall have received (i) an opinion of counsel qualified with respect to the laws of the jurisdiction in which the applicable Property is situated, addressed to the Administrative Agent, the Agent Lessor, each Lender and each Lessor, substantially in the form of Exhibit G and (ii) if requested by the Agent Lessor and the Administrative Agent, opinions from such other counsel and covering such issues as they may reasonably request. (t) Approval of Proposed Acquisition. The applicable Property shall have been disclosed to and approved by the Agent Lessor and Administrative Agent prior to the first anniversary of the Effective Date. All documents and instruments required to be delivered pursuant to this Section 6.1 shall be delivered at the offices of Mayer, Brown & Platt, 1675 Broadway, New York, New York 10019-5820, or at such other location as may be determined by the Agent Lessor, the Administrative Agent and the Lessee. Section 6.2 Funding Dates. The obligations of the Agent Lessor to make an Advance on each Funding Date occurring after an Acquisition Date, the obligation of the Lessors to make any related Lessor Amount on such Funding Date, and the obligation of the Lenders to make available any related Loan on such Funding Date, are subject to satisfaction or waiver of the following conditions precedent: (a) Funding Request. Each of the Administrative Agent and the Agent Lessor shall have received a fully executed counterpart of the applicable Funding Request in accordance with Section 3.4. Each of the delivery of a Funding Request and the acceptance of the proceeds of such Advance shall constitute a representation and warranty by the Beverly Entities that on the applicable Funding Date (both immediately before and after giving effect to the making of such Advance and the application of the proceeds thereof), the statements made in Section 8.3 are true and correct. (b) As-Built Appraisal. (i) On the earlier of (x) three (3) Business Days prior to the Initial Construction Date for each Property that is not an Improved Property and (y) ninety (90) days following the Acquisition Date for such Property, the Agent Lessor and the Administrative Agent shall have 20 27 received an As-Built Appraisal of the applicable Property, in form and substance satisfactory to the Administrative Agent and the Agent Lessor, which As-Built Appraisal shall show that as of each of the Completion Date, the last day of the Base Term and the last day of any Renewal Term for such Property, the Fair Market Sales Value of such Land and the Improvements to be constructed thereon in accordance with the Plans and Specifications for such Property shall not be less than 100% of the sum of the Land Acquisition Cost and Estimated Improvement Costs for such Property and (ii) at least three (3) Business Days prior to the Funding Date in the event the Property Balance for any Property, after giving effect to such Advance, would be greater than the Fair Market Sales Value for any date indicated in the As- Built Appraisal delivered under clause (i) and subject to Section 3.1 of the Construction Agency Agreement, a subsequent As-Built Appraisal which shall show that as of each of the Completion Date, the last day of the Base Term and the last day of any Renewal Term for such Property, the Fair Market Sales Value of such Property shall not be less than the Property Balance after giving effect to such Advance. (c) Lease Supplement Covering Improvements. If (x) such Funding Date is an Initial Construction Date for any Property that is not an Improved Property and (y) the Fair Market Sales Value for such Property as of the Completion Date therefor, as set forth in the As-Built Appraisal delivered with respect to such Property pursuant to clause (b), is greater than or equal to four times the Land Acquisition Cost for the related Land, then, on or prior to such Initial Construction Date, the applicable Lessee and the Agent Lessor shall have delivered to the Lenders the original counterpart of a Lease Supplement executed by such Lessee and the Agent Lessor covering the Improvements then located on the applicable Property and all additional Improvements thereafter located on such Property. (d) Fees. All fees due and payable pursuant to this Participation Agreement shall have been paid, and the Participants shall have received all Commitment Fees due and payable pursuant to Section 4.4(a). (e) Representations and Warranties. On the applicable Funding Date, the representations and warranties of each Beverly Entity in this Agreement and in each of the other Operative Documents shall be true and correct in all material respects as though made on and as of such date, except to the extent such representations or warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects on and as of such earlier date. 21 28 (f) Litigation. On the applicable Funding Date, there shall not be any actions, suits or proceedings pending or, to the knowledge of any Beverly Entity, threatened with respect to any Beverly Entity (i) that are reasonably likely to have a Material Adverse Effect, or (ii) that could reasonably be expected to have a Material Adverse Effect on the title to, or the use, operation or value of, the Property which is the subject of the current Advance. (g) No Default. There shall not have occurred and be continuing any Default or Event of Default, and no Default or Event of Default will have occurred after giving effect to the making of the Advance requested by such Funding Request. (h) Available Commitments. After giving effect to the applicable Advance, the conditions set forth in Article III shall not be violated. (i) Construction Costs. After giving effect to the applicable Advance, the estimated as yet unpaid cost to the Construction Agent of completing the Construction pursuant to the Construction Documents shall not exceed the Available Commitments, net of any portion of the Available Commitments that shall be allocated for Advances deemed to have been requested pursuant to Section 4.1(c) or the Construction Budget for such Property. (j) Construction Budget. On or prior to the Initial Construction Date with respect to each Property, the Construction Agent shall have delivered a Construction Budget to the Administrative Agent and Agent Lessor in such detail with respect to the Construction of such Property, and such Construction Budget shall be reasonably satisfactory to the Administrative Agent and the Agent Lessor. (k) Taxes. All taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of the Operative Documents shall have been paid or provisions for such payment shall have been made by the Representative to the reasonable satisfaction of the Agent Lessor, the Administrative Agent, the Lessors and the Lenders. (l) Prime Contracts and Subcontracts. All prime contracts and principal subcontracts with respect to the Construction of each Property shall contain provisions requiring the Construction Agent to withhold not less than 10% of total amounts due under such contract or subcontract until the scope of work covered by such prime or subcontract has been completed. 22 29 Section 6.3 Conditions to Completion Date. The Completion Date with respect to any Property shall be deemed to have occurred for purposes of the Operative Documents on the earliest date on which each of the following events shall have occurred: (a) the Construction relating to such Property shall have been substantially completed in accordance with the applicable Plans and Specifications and all Applicable Law; (b) such Property shall be ready for occupancy and operation in accordance with the Plans and Specifications therefor, and all appropriate Governmental Action (including the issuance by the appropriate Governmental Authority of a permanent certificate of occupancy) shall have been taken for the occupancy and operation of such Property; (c) the Representative shall have provided to the Administrative Agent and the Agent Lessor an updated title report for such Property in form and substance reasonably satisfactory to each of the Administrative Agent and the Agent Lessor; and (d) the Agent Lessor, the Administrative Agent, the Lessors and the Lenders shall have received a Completion Certificate from the Construction Agent substantially in the form of Exhibit H hereto (a "Completion Certificate"). ARTICLE VII DISTRIBUTIONS Section 7.1 Basic Rent. Each payment of Basic Rent (and any payment of interest on overdue installments of Basic Rent) received by the Administrative Agent shall be distributed by the Administrative Agent to the Lessors and the Lenders pro rata in accordance with, and for application to, the Lender Basic Rent and Lessor Basic Rent then due, as well as any overdue interest or Yield due to the Lessors or the Lenders (to the extent permitted by Applicable Law). Section 7.2 Purchase Payments by the Representative and the Lessees. Any payment received by the Administrative Agent as a result of: (a) the purchase of any or all of the Properties in connection with the exercise of the Purchase Option under Section 18.1 of the Master Lease, or 23 30 compliance with the obligation to purchase (or cause its designee to purchase) all of the Properties in accordance with Section 18.2 or 18.3 of the Master Lease, or (b) compliance with the obligation to purchase all unsold Properties in accordance with Section 16.2(f) of the Master Lease, or (c) any amounts received pursuant to Section 20.3(b) of the Master Lease, or (d) the payment of the Property Balance with respect to any Property in accordance with Section 15.1 of the Master Lease or Section 4.3(b) of the Participation Agreement, or (e) the payment of the Property Balance with respect to any Property in accordance with Section 5.3 of the Construction Agency Agreement, shall be distributed by the Administrative Agent to the Lessors and the Lenders pro rata without priority of one over the other, in the proportion that the Participant Balance of each of the Lenders and the Lessor bears to the aggregate of all of the Participant Balances. Section 7.3 Payment of Loan Balance. In accordance with Section 20.2(f) of the Master Lease upon the exercise of the Remarketing Option, the payment of the Loan Balance to the Administrative Agent shall be distributed to the Lenders for application to pay in full the Participant Balance of each Lender, and the payment of the aggregate amount of Lessor Amounts that are allocable to Qualified Land shall be distributed to the Lessors. Section 7.4 Sales Proceeds of Remarketing of Properties. Any payments received by the Administrative Agent as proceeds from the sale of the Properties sold pursuant to the exercise of the Remarketing Option pursuant to Article XX of the Master Lease, together with any payment made as a result of an appraisal pursuant to Section 13.2, shall be distributed by the Administrative Agent in the funds so received in the following order of priority: first, to the Lessors in an amount equal to (x) the aggregate Lessor Balance minus (y) 3% of the sum of (i) the largest principal amount outstanding of Lessor Amounts at any one time prior to the distribution hereunder and (ii) the largest principal amount outstanding of Loans at any one time prior to the distribution hereunder (such amount under clause (y), the "Equity Amount"), shall be distributed to the Lessors for application to the Participant Balance of each Lessor, pro rata among the Lessors without priority of one over the other in the proportion that the 24 31 Participant Balance of each such Lessor bears to the aggregate Participant Balances of all Lessors and, in the case where the amounts so distributed shall be insufficient to pay in full as aforesaid, then pro rata among the Lessors without priority of one over the other in the proportion that the Participant Balance of each such Lessor bears to the aggregate Participant Balances of all Lessors; second, an amount equal to the Equity Amount shall be distributed to the Lessors for application to pay in full the Participant Balance of each Lessor, pro rata among the Lessors without priority of one over the other in the proportion that the Participant Balance of each such Lessor bears to the aggregate Participant Balance of all Lessors, third, the balance, if any, shall be promptly paid to the Lessors to be distributed as provided in the Lease. Section 7.5 Supplemental Rent. All payments of Supplemental Rent received by the Administrative Agent (excluding any amounts payable pursuant to the preceding provisions of this Article VII) shall be distributed promptly by the Administrative Agent upon receipt thereof to the Persons entitled thereto pursuant to the Operative Documents. Section 7.6 Distribution of Payments after Lease Event of Default. (a) During the continuance of a Lease Event of Default and subject to clauses (b) and (c) below, all proceeds from the sale of all or any part of any one or more Properties shall be distributed by the Administrative Agent in the following order of priority: first, so much of such payment or amount as shall be required to pay or reimburse the Administrative Agent and the Agent Lessor for any tax, fees, expense, indemnification or other loss incurred by the Administrative Agent or the Agent Lessor (to the extent incurred in connection with any duties as the Administrative Agent or Agent Lessor, as the case may be), shall be distributed to the Administrative Agent and the Agent Lessor without priority of one over the other for their own accounts in accordance with the amount of such payment or amount payable to such Person; second, so much of such payments or amounts as shall be required to pay the Lenders and the Lessors the amounts payable to them pursuant to any expense reimbursement or indemnification provisions of the Operative Documents shall be distributed to each such Lender and Lessor without priority of one over the other in accordance with the amount of such payment or payments payable to each such Person; 25 32 third, to the Lessors in an amount equal to the aggregate Lessor Balance minus the Equity Amount shall be distributed to the Lessors for application to the Participant Balance of each Lessor, pro rata among the Lessors without priority of one over the other in the proportion that the Participant Balance of each such Lessor bears to the aggregate Participant Balances of all Lessors and, in the case where the amounts so distributed shall be insufficient to pay in full as aforesaid, then pro rata among the Lessors without priority of one over the other in the proportion that the Participant Balance of each such Lessor bears to the aggregate Participant Balances of all Lessors; fourth, to the Lenders for application to pay in full the Loan Balance, pro rata among the Lenders without priority of one over the other in the proportion that the Participant Balance of each such Lender bears to the aggregate Participant Balances of all Lenders and, in the case where the amounts so distributed shall be insufficient to pay in full as aforesaid, then pro rata among the Lenders without priority of one over the other in the proportion that the Participant Balance of each such Lender bears to the aggregate Participant Balances of all Lenders; fifth, an amount equal to the Equity Amount shall be distributed to the Lessors for application to pay in full the Participant Balance of each Lessor, pro rata among the Lessors without priority of one over the other in the proportion that the Participant Balance of each such Lessor bears to the aggregate Participant Balance of all Lessors, sixth, the balance, if any, of such payment or amounts remaining thereafter shall be promptly distributed to, or as directed by, the Representative. (b) All payments received and amounts realized by the Administrative Agent in connection with any Casualty or Condemnation during the continuance of a Lease Event of Default shall be distributed by the Administrative Agent as follows: (i) in the event that the Agent Lessor (at the direction of the Lessors) and the Administrative Agent elect to pay all or a portion of such amounts to the appropriate Lessee for the repair of damage caused by such Casualty or Condemnation in accordance with Section 14.1(a) of the Master Lease, then such amounts shall be distributed to such Lessee, and (ii) in the event that the Agent Lessor (at the direction of the Lessors) and the Administrative Agent elect to apply all or a portion of such amounts to the purchase price of the related Property in accordance with Section 14.1(a) and Article XV of the Master Lease, then such amounts shall be distributed in accordance with clause (a). 26 33 (c) During the continuance of a Construction Agency Event of Default during which recourse is limited by Section 5.4 of the Construction Agency Agreement, all payments received and amounts realized with respect to the relevant Properties by the Administrative Agent shall be distributed by the Administrative Agent as follows: first, so much of such payment or amount as shall be required to pay or reimburse the Administrative Agent and the Agent Lessor for any tax, fees, expense, indemnification or other loss incurred by the Administrative Agent or the Agent Lessor (to the extent incurred in connection with any duties as the Administrative Agent or Agent Lessor, as the case may be), shall be distributed to the Administrative Agent and the Agent Lessor without priority of one over the other for their own accounts in accordance with the amount of such payment or amount payable to such Person; second, so much of such payments or amounts as shall be required to pay the Lenders and the Lessors the amounts payable to them pursuant to any expense reimbursement or indemnification provisions of the Operative Documents shall be distributed to each such Lender and Lessor without priority of one over the other in accordance with the amount of such payment or payments payable to each such Person; third, to the Lenders for application to pay in full the Loan Balance, pro rata among the Lenders without priority of one over the other in the proportion that the Participant Balance of each such Lender bears to the aggregate Participant Balances of all Lenders and, in the case where the amounts so distributed shall be insufficient to pay in full as aforesaid, then pro rata among the Lenders without priority of one over the other in the proportion that the Participant Balance of each such Lender bears to the aggregate Participant Balances of all Lenders; fourth, to the Lessors in an amount equal to the aggregate Lessor Balance minus the Equity Amount shall be distributed to the Lessors for application to the Participant Balance of each Lessor, pro rata among the Lessors without priority of one over the other in the proportion that the Participant Balance of each such Lessor bears to the aggregate Participant Balances of all Lessors and, in the case where the amounts so distributed shall be insufficient to pay in full as aforesaid, then pro rata among the Lessors without priority of one over the other in the proportion that the Participant Balance of each such Lessor bears to the aggregate Participant Balances of all Lessors; fifth, an amount equal to the Equity Amount shall be distributed to the Lessors for application to pay in full the Participant Balance of each Lessor, pro rata among the Lessors without priority of one over the other in the proportion that the 27 34 Participant Balance of each such Lessor bears to the aggregate Participant Balance of all Lessors, sixth, the balance, if any, of such payment or amounts remaining thereafter shall be promptly distributed to, or as directed by, the Representative. Section 7.7 Other Payments. (a) Except as otherwise provided in Sections 7.1, 7.2, 7.6 and clause (b) below, any payment received by the Administrative Agent for which no provision as to the application thereof is made in the Operative Documents or elsewhere in this Article VII (including any balance remaining after the application in full of amounts to satisfy any expressed provision) shall be distributed pro rata among the Lenders and the Lessors without priority of one over the other, in the proportion that the Participant Balance of each bears to the aggregate of all the Participant Balances. (b) Except as otherwise provided in Sections 7.1, 7.2 and 7.6, all payments received and amounts realized by the Administrative Agent or the Agent Lessor under the Master Lease or otherwise with respect to the Properties to the extent received or realized at any time after indefeasible payment in full of the Participant Balances of all of the Lenders and the Lessors and any other amounts due and owing to the Lenders or the Lessors, shall be distributed forthwith by the Administrative Agent or the Agent Lessor, as the case may be, in the order of priority set forth in Section 7.6(a). (c) Except as otherwise provided in Sections 7.1 and 7.2, any payment received by the Administrative Agent or the Agent Lessor for which provision as to the application thereof is made in an Operative Document but not elsewhere in this Article VII shall be distributed forthwith by the Agent Lessor or the Administrative Agent to the Person and for the purpose for which such payment was made in accordance with the terms of such Operative Document. Section 7.8 Casualty and Condemnation Amounts. Subject to Section 7.6(b), any amounts payable to the Administrative Agent as a result of a Casualty or Condemnation pursuant to Section 14.1 of the Master Lease and the Assignment of Lease and Rent shall be distributed as follows: (a) all amounts payable to the appropriate Lessee for the repair of damage caused by such Casualty or Condemnation in accordance with Section 14.1(a) of the Master Lease shall be distributed to such Lessee, and (b) all amounts that are to be applied to the purchase price of the related Property in accordance with Section 14.1(a) and Article XV of the Master Lease shall be distributed by the Administrative Agent to the Lenders 28 35 and the Lessors pro rata without priority of one over the other, in the proportion that the Participant Balance of each bears to the aggregate of all of the Participant Balances. Section 7.9 Order of Application. To the extent any payment made to any Lender or any Lessor pursuant to sections 7.2, 7.3, 7.4, 7.6 or 7.7 is insufficient to pay in full the Participant Balance of such Lender or Lessor, then each such payment shall first be applied to accrued interest or Yield and then to principal on the Loans or the Lessor Amounts, as applicable. Section 7.10 Payments to Account. All payments made to the Administrative Agent pursuant to the Operative Documents shall be made to the Account. ARTICLE VIII REPRESENTATIONS Section 8.1 Representations of the Participants. Each Participant represents and warrants to each other Participant, the Agent Lessor, the Administrative Agent, the Representative and each Lessee that: (a) ERISA. Such Participant is not and will not be making its Loans or funding its Lessor Amounts hereunder, and is not performing its obligations under the Operative Documents, with the assets of an "employee benefit plan" (as defined in Section 3(3) of ERISA) which is subject to Title I of ERISA, or "plan" (as defined in Section 4975(e)(1) of the Code). (b) Status. Such Participant meets at least one of the definitions (other than as a "Lessor" or a "Lender") of the term "Eligible Assignee". (c) Securities. Each Participant is participating in the Transactions for its own account and not with a view toward redistribution; provided that disposition of its rights hereunder shall remain in its control and the foregoing shall not affect the ability of any Participant to assign or sell participations in its rights in accordance with the Operative Documents. Section 8.2 Representations of the Beverly Entities. Each of the Lessees and the Representative hereby represents and warrants to each Participant, the Agent Lessor and the Administrative Agent that: (a) Organization; Powers. Each Beverly Entity and their respective Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all 29 36 requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (iii) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a Material Adverse Effect, (iv) has the corporate power and authority to execute, deliver and perform its obligations under each of the Operative Documents and each other agreement or instrument contemplated thereby to which it is or will be a party hereunder, and (v) has its chief executive office located at 5111 Rogers Avenue, Suite 40-A, Fort Smith, Arkansas 72919. (b) Authorization. The execution, delivery and performance by each Beverly Entity of each of the Operative Documents to which it is a party (i) have been duly authorized by all requisite corporate and, if required, stockholder action and (ii) will not (A) violate (x) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or bylaws of such Beverly Entity or any of its Subsidiaries (y) any order, writ, ruling, injunction or decree of any Governmental Authority or (z) any provision of any indenture, agreement or other instrument to which such Beverly Entity or any of its Subsidiaries is a party or by which any of them, or any of their property is or may be bound, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (C) result in the creation or imposition of (or the obligation to create or impose) any Lien upon or with respect to any property or assets now owned or hereafter acquired by such Beverly Entity or any of its Subsidiaries. (c) Enforceability. (i) This Participation Agreement has been duly executed and delivered by the Representative and each Lessee and constitutes, and each other Operative Document to which a Beverly Entity is a party when executed and delivered by such party will constitute, a legal, valid and binding obligation of such Beverly Entity enforceable against it in accordance with its terms. (ii) Each of the Lessor Financing Statements, Lessor Mortgages and the Lease Supplements relating to each Property create valid security interests in and mortgage liens on the Property purported to be covered thereby, which security interests and mortgage liens are and will remain perfected security interests and mortgage liens, prior to all Liens other than Permitted Property Liens. 30 37 (d) Governmental and Other Approvals. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority or any third party is or will be required in connection with the activities of any Beverly Entity pursuant to the Transactions or the enforceability of any Operative Document against any Beverly Entity to which such Beverly Entity is a party, except such as have been made or obtained and are in full force and effect and except with respect to Properties for which Advances have not been made. (e) Financial Statements. The Representative has heretofore furnished to the Administrative Agent, the Agent Lessor and each Participant the consolidated balance sheet of the Representative and its Consolidated Subsidiaries as of December 31, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, together with the notes thereto, included in the Representative's 1997 Form 10-K and reported on by Ernst & Young LLP (the "Submitted Financial Statements"). Such financial statements present fairly the consolidated financial condition and consolidated results of operations of the Representative and its Consolidated Subsidiaries (including the Lessees) as of such date and for such period. Such financial statements were prepared in conformity with GAAP. (f) No Material Adverse Change. There has been no material adverse change in the business, financial position, results of operations or prospects of the Representative and its Consolidated Subsidiaries, considered as a whole, since June 30, 1998. (g) Title to Properties; Possession Under Leases. (i) The Representative and its Subsidiaries have good and marketable title to all of the properties and other assets (real or personal, tangible, intangible or mixed) they own or purport to own. (ii) All leases to which the Representative or any of its Subsidiaries is a party as lessee or sublessee are in full force and effect, except for such defects in title and such invalidity or unenforceability of leases as, in the aggregate, could not materially adversely affect the condition (financial or otherwise), earnings, business affairs or business prospects of the Representative and its Subsidiaries taken as a whole. (h) Subsidiaries. Item 8.2(h) of Schedule III sets forth as of the Effective Date a list of the Representative's Subsidiaries and the percentage ownership interest of the Representative therein. The capital stock of each 31 38 such Subsidiary is duly authorized, validly issued and fully paid and nonassessable. Each Guarantor (other than the Parent Guarantor) and each Lessee is a Wholly-Owned Subsidiary of the Representative, and each Wholly-Owned Subsidiary of the Representative (other than Beverly Funding, Inc., Beverly Indemnity, Limited and Pharmacy and its Subsidiaries) is a Guarantor. (i) Litigation; Compliance with Laws. Except as disclosed in the Representative's 1997 Form 10-K or the Representative's quarterly report for the fiscal quarter ended June 30, 1998 as filed with the Securities and Exchange Commission on Form 10-Q, there are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of any Beverly Entity threatened against or affecting the Representative or any of its Subsidiaries or any business, property or rights of any such Person (A) which involve any Operative Document or the Transactions or (B) as to which there is a reasonable possibility of an adverse determination and which, if adversely determined, could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Representative and its Consolidated Subsidiaries. (j) Federal Reserve Regulations. (i) No Beverly Entity or any of its respective Subsidiaries is engaged in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (ii) No part of the proceeds of any Advance will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (A) to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose, or (B) for any purpose which entails a violation of, or which is inconsistent with the provisions of the Regulations of the F.R.S. Board, including Regulation G, U or X. (k) Governmental Regulation. No Beverly Entity or any of its respective Subsidiaries is an "investment company" or a company "controlled" by an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (ii) subject to regulation under the Public Utility Holding Company Act of 1935. 32 39 (l) Use of Proceeds. The proceeds of each Advance will be used only for the purpose of financing the acquisition of Land or leasehold interests therein (and Improvements existing thereon, if any) and the payment of Property Improvement Costs incurred in connection therewith. (m) Tax Returns. United States Federal income tax returns of the Representative and its Subsidiaries have been closed through the fiscal year ended December 31, 1992. The Representative and its respective Subsidiaries have filed or caused to be filed all United Stated Federal income tax returns and all other material tax returns which are required to have been filed by it and has paid or caused to be paid all Taxes shown to be due and payable on such returns or on any assessments received by it, except Taxes that are being contested in good faith by appropriate proceedings and for which such Beverly Entity or such Subsidiary shall have set aside on its respective books adequate reserves in conformity with GAAP. The charges, accruals and reserves on the books of the Representative and its Subsidiaries in respect of Taxes or other governmental charges are, in the opinion of the Representative, adequate. (n) No Material Misstatements. No information, report, financial statement, exhibit or schedule furnished by or on behalf of any Beverly Entity or any of its respective Subsidiaries to the Administrative Agent, the Agent Lessor or any Participant in connection with the negotiation of any Operative Document or included therein or delivered pursuant thereto contained, contains or will contain any material misstatement of fact or omitted, omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading. (o) Employee Benefit Plan. Each member of the ERISA Group has complied with its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standards under Section 412 of the Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan, or made any amendment to any Plan, which has resulted or could reasonable be expected to result, prior to the first anniversary of the Expiration Date, in the imposition of a Lien or the posting of a bond or other security under Section 302(f) of ERISA or Section 401(a)(29) or 412(n) of the Code, (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA or (iv) within the preceding five plan years, with respect to any Other 33 40 Plan, engaged in any transaction described in Section 4069 or Section 4212(c) of ERISA. (p) Environmental and Safety Matters. (a) In the ordinary course of its business, the Representative conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Representative and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs. On the basis of this review, the Representative has reasonably concluded that Environmental Laws are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Representative and its Consolidated Subsidiaries, considered as a whole. (b) As of the Documentation Date and the Effective Date, to the knowledge of the Representative and its Subsidiaries no material claim, investigation or written inquiry has been made, and the Representative is not aware of any circumstance which would warrant or give rise to such a claim, investigation or inquiry, with regard to the Representative or any of its Subsidiaries, in respect of any facility owned, or to the knowledge of the Representative and its Subsidiaries, leased or operated, either now or in the past, by the Representative or any of its Subsidiaries, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended and in effect, or pursuant to any other Environmental Law, or by the Environmental Protection Agency or by any state, local, municipal or foreign enforcement agency having jurisdiction over the protection of the environment, or by any other Person in respect of or under any Environmental Law. (q) Patents, Licenses, Franchises and Formulas. Each Beverly Entity and its respective Subsidiaries own all the patents, trademarks, permits, service marks, trade names, copyrights, licenses, franchises and formulas, or rights with respect to the foregoing, and has obtained assignments of all leases and other rights of whatever nature, necessary for the present conduct of its business, without any known conflict with the rights of others which, or the failure to obtain which, as the case may be, would result in a Material Adverse Effect on the business, operations, property, assets, condition (financial or otherwise) or prospects of such Person or of the Beverly Entities and their respective Subsidiaries taken as a whole. 34 41 (r) Offer of Securities, etc. No Beverly Entity or any of its respective Subsidiaries or any Person authorized to act on their behalf has, directly or indirectly, offered any interest in any Property or any other interest similar thereto (the sale or offer of which would be integrated with the sale or offer of such interest in each such Property), for sale to, or solicited any offer to acquire any of the same from, any Person other than each Participant and the Administrative Agent, the Agent Lessor and other "accredited investors" (as defined in Regulation D of the Securities and Exchange Commission). (s) Property. Each Property as improved in accordance with the applicable Plans and Specifications and the contemplated use thereof by the applicable Lessee and its agents, assignees, employees, lessees, licensees and tenants will comply with all Requirements of Law (including, without limitation, all zoning and land use laws and Environmental Laws) and Material Insurance Requirements, except for such Requirements of Law as it shall be contesting in good faith by appropriate proceedings. There is no action, suit or proceeding (including any proceeding in condemnation or eminent domain or under any Environmental Law) pending or, to the best of its knowledge, threatened with respect to it, its Affiliates, or any Property which materially adversely affects the title to, or the use, operation or value of, any Property. (t) Plans and Specifications. Upon Completion of the applicable Construction for each Property, all water, sewer, electric, gas, telephone and drainage facilities and all other utilities required to adequately service the applicable Improvements for such Property's intended use will be available pursuant to adequate permits (including any that may be required under applicable Environmental Laws). No fire or other casualty with respect to any Property has occurred which fire or other casualty has had a Material Adverse Effect on any such Property. Upon Completion of the applicable Construction, each Property will have available all Material services of public facilities and other utilities necessary for use and operation of each Property and the other Improvements for their primary intended purposes including, without limitation, adequate water, gas and electrical supply, storm and sanitary sewerage facilities, telephone, other required public utilities and means of access between such Improvements and public highways for pedestrians and motor vehicles. All utilities serving each Property, or proposed to serve each Property in accordance with the applicable Plans and Specifications, are located in, and vehicular access to the Improvements on each Property is provided by, either public rights-of-way abutting each Property or Appurtenant Rights. All Material licenses, approvals, authorizations, consents, permits (including, without limitation, building, demolition and environmental permits, licenses, approvals, authorizations and consents), easements and rights-of-way, including proof and dedication, 35 42 required for (x) the use, treatment, storage, transport, disposal or disposition of any Hazardous Substance on, at, under or from each Property during the construction of the Improvements thereon, and (y) construction of the Improvements on each Property in accordance with the applicable Plans and Specifications and the Construction Agency Agreement have either been irrevocably obtained from the appropriate Governmental Authorities having jurisdiction or from private parties, as the case may be, or will be irrevocably obtained from the appropriate Governmental Authorities having jurisdiction or from private parties, as the case may be, prior to commencing any such construction or use and operation, as applicable. Prior to any Advance with respect of any Land or Improvements, each Lessee has obtained (or will obtain prior to the Completion Date of the respective Property) all appropriate Governmental Action, and has and will keep in full force and effect, all operating permits necessary to allow for Property to be operated in accordance with its intended use. (u) Deeds; Ground Leases. Each Deed is in form and substance sufficient to convey good and marketable title to the applicable Property in fee simple. Each ground lease conveys to the Agent Lessor a leasehold interest in the Land covered thereby, which Land is a separate tax lot and a legal subdivision under all applicable zoning laws, and the term of each ground lease is for a term not less than the reasonably estimated useful life of the Improvements to be constructed on the applicable Land. (v) Insurance. Each Lessee has obtained insurance coverage covering its Properties which meets the requirements of the Master Lease, and such coverage is in full force and effect. Each Beverly Entity carries insurance with reputable insurers in respect of its material assets in such manner, in such amounts and against such risks as is customarily maintained by other Persons of similar size engaged in similar business. (w) Flood Hazard Areas. Except as otherwise identified on the applicable survey delivered pursuant to Section 6.1(p), no portion of any Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency. If any Property is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Property in accordance with Article XIII of the Master Lease and in accordance with the National Flood Insurance Act of 1968, as amended. (x) Title to Assets. Each Beverly Entity and its respective Subsidiaries have good and marketable title to all of its Material assets 36 43 reflected on the balance sheets in the Submitted Financial Statements, except for such assets as have been disposed of in the ordinary course of business (or as have been disclosed to the Participants on or prior to the Effective Date), and all such assets are free and clear of any Lien, except as reflected in the Submitted Financial Statements and/or notes thereto or as otherwise permitted by the provisions hereof or under the Operative Documents, and except for Permitted Property Liens. Each Beverly Entity and its respective Subsidiaries have such trademarks, trademark rights, trade names, trade name rights, franchises, copyrights, patents, patent rights and licenses as to allow it to conduct its business as now operated, without known conflict with the rights of others. (y) Solvency. The Representative and its Consolidated Subsidiaries, taken as a whole, are Solvent. Section 8.3 Representations with Respect to each Funding Date and Acquisition Date. Each of the Lessees and the Representative represents and warrants to the Administrative Agent, the Agent Lessor and each Participant as of each Funding Date and Acquisition Date as follows: (a) Representations and Warranties. The representations and warranties set forth in Section 8.2 are true and correct on and as of such Funding Date or Acquisition Date, except to the extent such representations or warranties relate solely to an earlier date, in which case such representations and warranties shall have been true and correct on and as of such earlier date. Each Beverly Entity is in compliance with its obligations under the Operative Documents and there exists no Default or Event of Default. No Default or Event of Default will occur as a result of, or after giving effect to, the Advance requested by the Funding Request on such date. (b) Improvements. The Construction of the Improvements on the applicable Land to date has, to the best of each Beverly Entity's knowledge, been performed in a good and workmanlike manner, substantially in accordance with the applicable Plans and Specifications and the Construction Budget for such Property and in compliance with all Insurance Requirements and Requirements of Law. (c) Liens. No Beverly Entity has permitted any Liens to be placed against any Property other than Permitted Property Liens. (d) Advance. The amount of the Advance requested represents amounts advanced or to be advanced by the Construction Agent to third parties (except for the Construction Agency Fee) in connection with Land 37 44 Acquisition Costs or Property Improvement Costs or amounts paid by the Construction Agent in respect of Property Improvements Costs. With respect to each Advance, the conditions precedent to such Advance and the related Lessor Amounts and Loans set forth in Article VI have been satisfied. ARTICLE IX PAYMENT OF CERTAIN EXPENSES The Representative agrees, for the benefit of the Arranger, the Agent Lessor, the Administrative Agent, the Lessors and the Lenders, that: Section 9.1 Transaction Expenses. (a) The Representative shall request Advances for and pay from such Advances from time to time all Transaction Expenses in respect of the transactions on the Documentation Date, the Effective Date, each Acquisition Date and each Funding Date; provided, however, that, if the Representative has not received written invoices therefor at least two (2) Business Days prior to such date, such Transaction Expenses shall be paid within thirty (30) days after the Representative has received written invoices therefor. (b) The Representative shall pay or cause to be paid (i) all Transaction Expenses incurred by the Agent Lessor, the Administrative Agent or the Arranger in entering into any future amendments or supplements with respect to any of the Operative Documents, whether or not such amendments or supplements are ultimately entered into, or giving or withholding of waivers or consents hereto or thereto, in each case which have been requested by or approved by the Representative, (ii) all Transaction Expenses incurred by the Arranger, the Agent Lessor, the Administrative Agent, the Lenders or the Lessors in connection with any purchase of the Property by the Lessee or other Person pursuant to Articles XVIII and XXI of the Master Lease and (iii) after the occurrence and during the continuance of a Lease Event of Default or a Construction Agency Event of Default all Transaction Expenses incurred by any of the Participants, the Agent Lessor, the Administrative Agent or the Arranger in respect of enforcement of any of their rights or remedies against any Beverly Entity of any of the foregoing in respect of the Operative Documents. Section 9.2 Brokers' Fees and Stamp Taxes. The Representative shall pay or cause to be paid any brokers' fees and any and all stamp, transfer and other similar taxes, fees and excises, if any, including any interest and penalties, which are payable 38 45 in connection with the transactions contemplated by this Participation Agreement and the other Operative Documents. Section 9.3 Loan Agreement and Related Obligations. The Representative shall pay, without duplication of any other obligation of the Representative to pay any such amount under the Operative Documents, before the due date thereof, all costs, expenses and other amounts (other than principal and interest on the Loans which are payable to the extent otherwise required by the Operative Documents) required to be paid by the Agent Lessor, Administrative Agent or any of the Lenders or Lessors under the Loan Agreement, the Assignment of Lease and Rent and the Construction Agency Agreement Assignment. ARTICLE X OTHER COVENANTS AND AGREEMENTS Section 10.1 Affirmative Covenants of the Representative. The Representative covenants and agrees with the Arranger, the Agent Lessor, the Administrative Agent, the Lessors and the Lenders that, so long as this Participation Agreement shall remain in effect or the principal or interest on any Loan, any Lessor Amount or Yield thereon, or any Commitment Fees, other fees or any other expenses or amounts payable under any Operative Document shall be unpaid, and until all Commitments shall have been permanently terminated, unless the Required Participants shall otherwise consent in writing, the Representative will, and will cause each of its Subsidiaries (including all other Beverly Entities) to: (a) Existence; Businesses and Properties. The Representative will keep, and will cause each of its Subsidiaries to keep, all property necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) Insurance. The Representative will, and will cause each of its Subsidiaries to, maintain (either in the name of the Representative or in such Subsidiary's own name) with financially sound and responsible insurance companies, insurance on all their respective properties in at least such amounts and against at least such risks (and with such risk retention and self insurance) as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business at a substantial number of different facilities. The Representative will furnish to the Participants, upon request from the Administrative Agent or Agent Lessor, information presented in reasonable detail as to the insurance so carried. 39 46 (c) Compliance with Laws. The Representative will comply, and will cause each of its Subsidiaries to comply, with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder)(except (i) where the failure to so comply would not materially adversely affect the business, consolidated financial position or consolidated results of operations of the Representative and its Subsidiaries and would not in any manner draw into question the validity of any Operative Document or (ii) where the necessity of compliance therewith is contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with generally accepted accounting principles) and will maintain and cause each of its Subsidiaries to maintain all governmental licenses, approvals, authorizations and consents necessary for the conduct of the business of the Representative and its Subsidiaries (except where the failure to maintain such governmental licenses, approvals, authorizations and consents would not materially adversely affect the business, consolidated financial position or consolidated results of operations of the Representative and its Subsidiaries and would not in any manner draw into question the validity of any Operative Documents). (d) Financial Statements, Reports, etc. In the case of the Representative, furnish to the Administrative Agent, each Lender, each Lessor and the Agent Lessor: (i) as soon as available and in any event within forty-five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Representative, consolidated balance sheets of the Representative and its Consolidated Subsidiaries (including the other Beverly Entities), as at the end of such period, and the related consolidated statements of operations and cash flows for such fiscal quarter and for the portion of the Representative's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding periods of the previous fiscal year, all certified by a Financial Officer of the Representative that they fairly present the financial condition of the Representative and its Consolidated Subsidiaries and that they consistently comply with Section C of Appendix A to this Participation Agreement, subject to changes resulting from normal year-end adjustment; (ii) as soon as available and in any event within ninety (90) days after the end of each fiscal year of the Representative, consolidated balance sheets of the Representative and its Consolidated Subsidiaries, as at the end of such year, and the related consolidated 40 47 statements of operations, stockholders' equity and cash flows for such fiscal year, setting forth in each case, in comparative form the consolidated figures for the previous year, all in reasonable detail and reported in a manner acceptable to the Securities and Exchange Commission by Ernst & Young LLP or other independent certified public accountants of recognized national standing selected by the Representative and certified by a Financial Officer of the Representative that they fairly present the financial condition of the Representative and its Consolidated Subsidiaries and that they consistently comply with Section C of Appendix A to this Participation Agreement; (iii) together with each delivery of financial statements of the Representative and its Subsidiaries pursuant to Sections 10.1(d)(i) and 10.1(d)(ii) above, (A) a certificate of a Financial Officer (x) stating that the signer thereof has reviewed the terms of this Participation Agreement and the Master Lease and has made, or caused to be made under his supervision, a review in reasonable detail of the transactions and condition of the Representative and its Subsidiaries (including the other Beverly Entities) during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signer does not have knowledge of the existence as at the date of such certificate, of any condition or event which constitutes a Lease Event of Default or Lease Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Representative has taken, is taking and proposes to take with respect thereto and (y) setting forth in reasonable detail calculations of the Pricing Ratio as of the date of the Balance Sheet contained therein and for the period of four fiscal quarters ending on such date; and (B) a Compliance Certificate demonstrating in reasonable detail compliance during and at the end of such accounting periods with the restrictions contained in Section 10.2(a), Section 10.2(b), Section 10.2(c), clause v of Section 10.2(e), Section 10.2(f), Section 10.2(g), Section 10.2(i) and Section 10.2(l); (iv) promptly upon (i) the mailing thereof to the shareholders of the Representative generally, copies of all financial statements, reports and proxy statements so mailed and (ii) the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statement on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the 41 48 Representative shall have filed with the Securities and Exchange Commission; (v) forthwith upon the occurrence of any Default or Event of Default, a certificate of a Financial Officer setting forth the details thereof and the action the Representative has taken, is taking and proposes to take with respect thereto; and (vi) with reasonable promptness, such other information with respect to the financial position or business of the Representative or any of its Subsidiaries (including the other Beverly Entities) as from time to time may be reasonably requested by any Participant. (e) ERISA. If and when any member of the ERISA Group (i) provides or is required to provide notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has provided or is required to provide notice of any such reportable event, a copy of the notice of such reportable event provided or required to be provided to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV or ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standards under Section 412 of the Code with respect to any Plan, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and such other information as is filed with the PBGC in connection therewith; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; (vii) receives notice from the PBGC or any plan administrator of an intent to impose liability on any member of the ERISA Group with respect to any Other Plan on account of a transaction described in Section 4069 or 4212(c) of ERISA, a copy of such notice; (viii) receives notice from the PBGC or any plan administrator of an intent to impose liability on any member of the ERISA Group with respect to any Other Plan on the basis that such member of the ERISA Group is a member of the "controlled group" with respect to such Other Plan under Section 412(c)(11) of the Code or Section 4001(a)(14) of ERISA, a copy of such notice; or (ix) fails to make any payment or contribution to any Plan or Multiemployer Plan or makes any amendment to any Plan which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under Section 42 49 302(f) of ERISA or Section 401(a)(29) or 412(n) of the Code, a certificate of an Authorized Financial Officer of the Representative setting forth all material and relevant details as to such occurrence or event and the action, if any, which the Representative, the Representative or the applicable member of the ERISA Group proposes or, after consultation with counsel, believes that it is required to take. (f) Maintaining Records; Access to Properties and Inspections. The Representative will keep, and will cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities and will permit, and will cause each such Subsidiary to permit, representatives of any Participant to visit and inspect any of its properties, to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers, employees and independent public accountants, all at such reasonable times and upon reasonable notice to the Representative and as often as may reasonably be desired; provided that (i) subject to the provisions of Article IX, the Representative shall not be obligated to pay the expenses of the Participants' respective representatives and (ii) the Representative will have an opportunity to participate in any discussions that take place between representatives of any Participant and the Representative's independent public accountants. (g) Use of Proceeds. Use the proceeds of Advances only as contemplated by the Operative Documents. (h) Corporate Franchises, Patents and Licenses. Do or cause to be done, all things necessary to preserve and keep in full force and effect its existence and its material rights, franchises, licenses and patents; provided, however, that nothing in this Section 10.1(h) shall prevent the withdrawal by the Representative or any of its Subsidiaries (including the other Beverly Entities) of its qualification as a foreign corporation in any jurisdiction where such withdrawal could not have a Material Adverse Effect on the business, operations, property, assets, condition (financial or otherwise) or prospects of the Representative or such Subsidiary. (i) Additional Lessees and Guarantors. The Representative agrees to cause each Person, other than a Special Purpose Receivables Financing Subsidiary, that shall, at any time after the Documentation Date, become a Wholly-Owned Subsidiary of the Representative to enter into the Guaranty promptly (and in any event within 10 Business Days thereafter) after becoming a Wholly-Owned Subsidiary, and to provide written evidence thereof reasonably satisfactory to the Administrative Agent. Upon written request 43 50 from the Representative, the Agent Lessor and the Administrative Agent may in their sole discretion permit a wholly-owned Subsidiary of the Representative to enter into the Operative Documents as a "Lessee" in place of a then current Lessee provided the Agent Lessor and Administrative Agent shall have received executed documentation reasonably satisfactory to it confirming such substitution. (j) Construction with respect to each Property. The Representative, as Construction Agent, agrees to cause Construction for each Property within the period specified in Section 2.7(g) of the Construction Agency Agreement. (k) Liquidity Facility. The Representative shall at all times maintain sufficient undrawn credit facilities to ensure adequate liquidity to meet working capital and other needs. Section 10.2 Negative Covenants of the Representative. The Representative covenants and agrees with the Arranger, the Agent Lessor, the Administrative Agent, the Lessors and the Lenders that, so long as this Participation Agreement shall remain in effect or the principal of or interest on any Loan, any Lessor Amount or Yield thereon, or any Commitment Fees, other fees or any other expenses or amounts payable under any Operative Document shall be unpaid, and until all Commitments have been permanently terminated, unless Required Participants shall otherwise consent in writing, the Representative and each Lessee will not, and will not cause or permit any of their Subsidiaries (including all other Beverly Entities) to: (a) Minimum Consolidated Net Worth. Permit Consolidated Net Worth of the Representative to be less than the sum of (i) $690,000,000 plus (ii) 50% of the aggregate positive Consolidated Net Income of the Representative and its Consolidated Subsidiaries (excluding any consolidated net loss) for each fiscal quarter ending after January 1, 1998. (b) Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio at any date during the periods specified below to be less than the ratio set forth below opposite the period in which such date falls: 44 51
======================================================================================== Period Ratio - ---------------------------------------------------------------------------------------- Amendment Effective Date through (and including) 1.25 to 1.0 March 30, 1999 - ---------------------------------------------------------------------------------------- March 31, 1999 through (and including) March 30, 2000 1.35 to 1.0 - ---------------------------------------------------------------------------------------- March 31, 2000 through (and including) March 30, 2001 1.45 to 1.0 - ---------------------------------------------------------------------------------------- March 31, 2001 and thereafter 1.50 to 1.0 ========================================================================================
(c) Adjusted Consolidated Debt Ratio. Permit the Adjusted Consolidated Debt Ratio at any date during the periods specified below to be more than the ratio set forth below opposite the period in which such date falls:
======================================================================================== Period Ratio - ---------------------------------------------------------------------------------------- Amendment Effective Date through (and including) 4.95 to 1.0 June 29, 1999 - ---------------------------------------------------------------------------------------- June 30, 1999 through (and including) December 30, 1999 4.85 to 1.0 - ---------------------------------------------------------------------------------------- December 31, 1999 through (and including) June 29, 2000 4.75 to 1.0 - ---------------------------------------------------------------------------------------- June 30, 2000 through (and including) December 30, 2000 4.60 to 1.0 - ---------------------------------------------------------------------------------------- December 31, 2000 through (and including) June 29, 2001 4.50 to 1.0 - ---------------------------------------------------------------------------------------- June 30, 2001 and thereafter 4.45 to 1.0 ========================================================================================
(d) Ownership of Stock of Wholly-Owned Subsidiaries. Fail to at all times maintain, or cause a Wholly-Owned Subsidiary of the Representative to maintain, ownership of 100% of each class of voting securities of, and all other equity securities (except for directors' qualifying shares) in, each of their Subsidiaries that are Wholly-Owned Subsidiaries of the Representative on the Effective Date and each Person that shall become a Wholly-Owned Subsidiary of the Representative after the Effective Date, except in each case (i) any such Wholly-Owned Subsidiary that shall hereafter be disposed of in its entirety, consolidated or merged with or into the Representative or another such Wholly-Owned Subsidiary or liquidated, (ii) any Subsidiary of Pharmacy that shall hereafter be consolidated or merged with or into Pharmacy or any Wholly-Owned Subsidiary of Pharmacy or liquidated, in each case in accordance with the provisions hereof, or (iii) sales or dispositions of Pharmacy and any Subsidiary of Pharmacy in whole or in part at any time. 45 52 (e) Investments. Make or acquire after the Effective Date any Investment in any Person other than: (i) Investments in the Representative or in Persons that are Subsidiaries of the Representative (including any other Beverly Entity) on the Effective Date (other than, after the Release Date, Pharmacy and the Subsidiaries of Pharmacy) (ii) Investments in Persons that are (i) primarily engaged in the health-care business and (ii) after the making of such Investment, are Subsidiaries of the Representative; (iii) Temporary Cash Investments; (iv) extensions of credit or Guarantees of obligations of one or more other Persons (other than Encore Nursing Center Partners, Ltd.-85 and Encore Retirement Partners, Ltd.-85) as an integral part of the financing of the acquisition, construction, equipping or improving of facilities from which the Representative or its Subsidiaries (including the other Beverly Entities) will provide medical or related services; (v) other miscellaneous Investments related to the acquisition and financing (in the ordinary course of the Representative's business) of health-care facilities through industrial development revenue bonds issued for the benefit of the Representative and its Subsidiaries (including the other Beverly Entities); (vi) capital contributions required to be made by the Representative to Beverly Indemnity, Ltd. in accordance with applicable law and insurance regulations; (vii) stock, obligations or securities received from nursing home patients in the ordinary course of business of the Representative and its Subsidiaries; (viii) negotiable instruments endorsed for deposit or collection or similar instruments in the ordinary course of business; (ix) promissory notes and other Investments received as consideration for facilities sold, provided that the aggregate net book value of all outstanding Investments permitted by this clause (ix) shall not, at any time, exceed $25,000,000; 46 53 (x) Guarantees permitted by Section 10.2(i); (xi) any Investment made by the Representative or any of its Subsidiaries (including the other Beverly Entities) in connection with and as part of a Workout Transaction; (xii) Investments made by the Representative or any of its Subsidiaries (including the other Beverly Entities) in one or more Special Purpose Receivables Financing Subsidiaries by means of the sale of, or the granting of security interests in, Medicare, Medicaid or other patient accounts receivable owing to the Representative or such Subsidiary (including the other Beverly Entities), in either case to such Special Purpose Receivables Financing Subsidiaries pursuant to a Receivables Financing Program, provided that the net amount of all uncollected accounts receivable owing to the Representative or any of its Subsidiaries (including the other Beverly Entities) that have been so sold or in which a security interest has been so granted shall not exceed 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding; (xiii) Investments made in Beverly Japan Corporation in an aggregate amount outstanding at any time not to exceed $10,000,000; (xiv) Investments made in Persons that are primarily engaged in the health-care business, the consideration for which consists exclusively of common stock of the Representative or Permitted Preferred Stock; and (xv) any Investment not otherwise permitted by the foregoing clauses of this Section (other than promissory notes and other Investments received as consideration for facilities sold) in any Person engaged primarily in the health-care business if, immediately after such Investment is made or acquired, the aggregate net book value of all such Investments then held by the Representative or its Subsidiaries (including the other Beverly Entities) and permitted by this clause (xv) does not exceed $75,000,000. (f) Restricted Payments on Stock. (x) Declare or make any dividend payment or other distribution on any capital stock of the Representative (other than dividends payable solely in shares of the Representative's capital stock) or (y) declare or make any payment on account of the purchase, redemption, retirement or acquisition of the Representative's capital stock; provided that, 47 54 so long as at the time of and after giving effect to any such payment no Event of Default shall have occurred and be continuing, (i) the Representative may make any such payment or distribution from the proceeds of the sale by the Representative (other than a sale to a Subsidiary of the Representative, including any other Beverly Entity) after the Documentation Date of its common stock, (ii) the Representative may make dividend payments with respect to its preferred stock (A) from any source in an amount not to exceed an aggregate of $2,500,000 in any fiscal quarter and (B) from proceeds of the sale by the Representative (other than a sale to a Subsidiary of the Representative, including the other Beverly Entities) after the Documentation Date of Permitted Preferred Stock in any amount, (iii) the Representative may make payments on account of the purchase, redemption, retirement or acquisition of its preferred stock from the proceeds of the sale by the Representative (other than a sale to a Subsidiary of the Representative) after the Documentation Date of any Permitted Preferred Stock, (iv) the Representative may make odd-lot repurchases of their common stock for an aggregate consideration not exceeding $10,000 in any calendar year, (v) the Representative may consummate the New BEI Spin-Off as part of the Pharmacy Divestiture Transaction on the Release Date, and (vi) the Representative may make any such payment or distribution if, after giving effect thereto, the aggregate amount of all such payments or distributions made after the Amendment Effective Date (including, without limitation, any such payments or distributions permitted under subclause (ii)(A) or clause (iv) above) does not exceed the sum of $75,000,000 plus 50% of Consolidated Net Income for the period after June 30, 1997 through the date of such declaration, payment or distribution. Nothing in this Section shall prohibit the payment of any dividend or distribution within 45 days after the declaration thereof if such declaration was not prohibited by this Section. 48 55 (g) Negative Pledge. Create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (1) Liens existing on the Documentation Date securing Indebtedness and other obligations outstanding on the Documentation Date; (2) Liens created by the Operative Documents; (3) any Lien on any asset of any corporation that becomes a Consolidated Subsidiary of the Representative after the Documentation Date that exists at the time such corporation becomes such a Consolidated Subsidiary and (other than in a Workout Transaction) not created in contemplation thereof; (4) any Lien existing on any asset prior to the acquisition thereof, acquired after the Documentation Date by the Representative or a Subsidiary of the Representative (including any other Beverly Entity) and (other than in a Workout Transaction) not created in contemplation thereof; (5) any Lien on any asset securing Indebtedness or lease obligations incurred or assumed for the purpose of fi nancing all or any part of the cost of acquiring or constructing such asset or reconstructing substantially all of such asset, provided that such Lien attaches to such asset concurrently with or within one year after such acquisition, construction or reconstruction; (6) any Lien on any asset securing Indebtedness or lease obligations incurred or assumed for the purpose of im proving or making any addition to such asset, provided that (x) such Lien attaches to such asset concurrently with or within one year after the completion of the improvement thereof or addition thereto and (y) the aggregate outstanding principal amount of all such Indebtedness incurred after the Documentation Date secured by such Liens shall not, at any time, exceed $30,000,000; 49 56 (7) Liens securing Indebtedness incurred in connection with Lease Cancellation Payments, provided that the aggregate amount of all such Indebtedness incurred after the Documentation Date secured by such Liens shall not, at any time, exceed $20,000,000; (8) Liens securing industrial development revenue bonds (or securing contingent obligations to issuers of letters of credit issued to support industrial development revenue bonds) arising in connection with the conversion of the inter est rate on such bonds from floating to long-term fixed rates or from fixed rates to other long-term fixed rates; (9) any Lien arising out of the refinancing, extension, renewal or refunding of any Indebtedness secured by any Lien permitted by any of the foregoing clauses of this Section, provided that the principal amount of such Indebtedness is not increased and such Indebtedness is not secured by any additional assets other than assets that relate directly to the facility subject to the original financing; (10) Liens on Medicare, Medicaid or other patient accounts receivable of the Representative or any of its Subsidiaries (including the other Beverly Entities), or on Permitted Receivables Financing Securities, granted to secure Permitted Receivables Financing Securities, provided that the net amount of all uncollected accounts receivable owing to the Representative or any of its Subsidiaries (including the other Beverly Entities) over which such a Lien is granted, together, without duplication, with the net amount of all uncollected accounts receivable owing to the Representative or any of its Subsidiaries (including the other Beverly Entities) that are assigned to secure such Permitted Receivables Financing Securities, shall not exceed, at any time, 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding; (11) Liens incidental to the conduct of its business or the ownership of its assets which (x) do not secure Indebtedness or Derivatives Obligations and (y) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; 50 57 (12) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $10,000,000; (13) Liens on nursing homes and related real estate improvements and equipment ("Mortgage Assets") given in substitution for Liens on Mortgage Assets existing on the Documentation Date or for Liens on Mortgage Assets incurred pursuant to this clause (13) or clause (15) below, provided that the sum of (A) the excess of the Appraised Value of all Mortgage Assets subjected to Liens pursuant to this clause (13) on or after the Amendment Effective Date over the Appraised Value of all such Mortgage Assets released from Liens on or after the Amendment Effective Date and (B) all Indebtedness incurred after the Amendment Effective Date and secured by Liens permitted under clause (15) below shall not at any time exceed $50,000,000; (14) Liens on the capital stock of Pharmacy and its Subsidiaries securing the Morgan Credit Agreement as of the Release Date and Liens consisting of the pledge of the capital stock of the Subsidiaries of the Representative in favor of the lenders under the Morgan Credit Agreement in the event that Pharmacy and its Subsidiaries are no longer Wholly-Owned Subsidiaries of the Representative and the capital stock of Pharmacy and its Subsidiaries is released from such Liens; provided, that after the Release Date, no capital stock of any Subsidiary of the Representative shall be pledged in replacement of or in addition to any capital stock of any Subsidiary pledged in favor of the lenders under the Morgan Credit Agreement as of the Release Date, and no capital stock of any Subsidiary released from such pledge on any date shall be pledged after such date; and (15) Liens not otherwise permitted under clauses (1) through (14) of this Section, provided that the sum of the amounts set forth in subclause (A) of clause (13) above and the aggregate principal amount of all indebtedness incurred after the Documentation Date and secured by Liens permitted under this clause (15) shall not at any time exceed $50,000,000.; 51 58 (h) Consolidations, Mergers and Sales of Assets. (i)(A) Consolidate or merge with or into any other Person, unless the Representative or, except in the case of a merger or consolidation to which the Representative is a party, a Wholly-Owned Subsidiary of the Representative is the surviving corporation, or (B) sell, lease or otherwise transfer all or any substantial part of the assets of the Representative and its Subsidiaries (including the other Beverly Entities), taken as a whole, to any other Person, provided that (I) this Section shall not apply to mergers, dissolutions, reorganizations or liquidations of Subsidiaries of the Representative that have disposed of all or substantially all of their assets in accordance with the terms of this Agreement, (II) the Representative and its Subsidiaries (other than Pharmacy or any of its Subsidiaries) may assign or grant security interests in their Medicare, Medicaid or other patient accounts receivable to a Special Purpose Receivables Financing Subsidiary to secure Permitted Receivables Financing Securities (provided that the net amount at any time of all uncollected accounts receivable owing to the Representative or any of its Subsidiaries that are so assigned or in which a security interest is so granted shall not exceed 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding) and (III) this Section shall not prohibit the consummation of the Pharmacy Divestiture Transaction or the Merger on the Release Date. (ii) So long as Pharmacy is a Wholly-Owned Subsidiary of the Representative, permit Pharmacy or any of its Subsidiaries to (A) consolidate or merge with or into any other Person, unless Pharmacy or, except in the case of a merger or consolidation to which Pharmacy is a party, a Wholly-Owned Subsidiary of Pharmacy is the surviving corporation or (B) sell, lease or otherwise transfer all or any substantial part of its assets to any Person other than Pharmacy. (i) Incurrence of Indebtedness. Incur, assume or suffer to exist any Indebtedness, except: (1) Indebtedness outstanding on the Effective Date and included in the Base Financials or listed under item 10.2(i) in Schedule III hereto; (2) Indebtedness incurred after the Effective Date in connection with Lease Cancellation Payments, provided that the aggregate principal amount of all such Indebtedness outstanding at any time shall not exceed $20,000,000; 52 59 (3) Indebtedness secured by a Lien permitted pursuant to clause (4) of Section 10.2(g); (4) Indebtedness of any corporation that becomes a Consolidated Subsidiary of the Representative after the Documentation Date that exists at the time such corporation becomes such a Consolidated Subsidiary and (other than in a Workout Transaction) not created in contemplation thereof; (5) Indebtedness ("Refinancing Indebtedness") incurred to refinance Indebtedness ("Refinanced Indebtedness") permitted under clauses (1) through (4) above, provided that (I) the principal amount of such Refinancing Indebtedness shall not exceed the principal amount of such Refinanced Indebtedness and (II) such Refinancing Indebtedness shall have a weighted average life of not less than the remaining weighted average life of such Refinanced Indebtedness or such Refinancing Indebtedness shall not have any required payments of principal prior to the fifth anniversary of the Documentation Date; (6) Permitted Receivables Financing Securities, provided that the aggregate principal and redemption amount of all Permitted Receivables Financing Securities outstanding at any time shall not exceed $150,000,000; (7) Indebtedness incurred under the Operative Documents; (8) guarantees by any Subsidiary of the Representative of any obligation of the Representative or any of its Subsidiaries (including the other Beverly Entities) that such guaranteeing Subsidiary would have been permitted to incur hereunder as a primary obligation; (9) Indebtedness consisting of advances from the Representative or any of its Subsidiaries in connection with the normal operation of the business of the Representative and its Subsidiaries (including the other Beverly Entities); (10) Indebtedness incurred in connection with and as part of a Workout Transaction; 53 60 (11) Indebtedness incurred or assumed for the purpose of financing the cost of acquiring, constructing or improving an asset of the Representative or any of its Subsidiaries (including the other Beverly Entities); (12) Permitted Preferred Stock; (13) Indebtedness under the Morgan Credit Agreement; and (14) Indebtedness not otherwise permitted under clauses (1) through (13) of this Section, provided that the aggregate principal amount of all Indebtedness permitted under this clause (14) that is incurred on or after the Amendment Effective Date shall not at any time exceed $75,000,000 (j) Lease Conversions. Make any Lease Conversion in any calendar year unless: (i) the aggregate consideration paid or to be paid by the Representative and its Subsidiaries (including the other Beverly Entities) in connection with the termination of leases or the acquisition of facilities and related property pursuant to such Lease Conver sion and all other Lease Conversions made during such calendar year would not exceed $100,000,000; (ii) to the extent such Lease Conversion is financed or will be financed with Indebtedness of the Representative or any of its Subsidiaries (including the other Beverly Entities), such Indebtedness is incurred within one year of such Lease Conversion; and (iii) such Lease Conversion, after giving effect thereto, will not result in an Event of Default. (k) Transactions with Affiliates. Enter into any transaction or arrangement with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate), except in the ordinary course of and pursuant to the reasonable requirements of the Representative's or such Subsidiary's (as the case may be) business and upon fair and reasonable terms no less favorable to the Representative or such Subsidiary than would be obtained in a comparable arm's-length transaction with a Person other than an Affiliate. 54 61 Section 10.3 Affirmative Covenant of the Agent Lessor. The Agent Lessor covenants and agrees with the Arranger, the Representative, the Administrative Agent and the Lenders that, so long as this Participation Agreement shall remain in effect or the principal or interest on any Loan, or any Commitment Fees, other fees or any other expenses or amounts payable under any Operative Document to the Administrative Agent or the Lenders shall be unpaid, and until all Commitments of the Lenders shall have been permanently terminated, unless the Required Lenders shall otherwise consent in writing, the Agent Lessor will, upon the written request of the Required Lenders after the occurrence and during the continuance of an Event of Default qualify to do business in every jurisdiction where such qualification is necessary for the Agent Lessor to exercise its remedies under the Master Lease or any other Operative Document. ARTICLE XI RENEWALS Section 11.1 Extensions of Maturity Date and Expiration Date; Replacement of Participants. (a) So long as the Representative has not elected the Remarketing Option on behalf of the Lessees, the Representative may, not earlier than six months and not later than three months prior to the Maturity Date, direct a written request to the Agent Lessor and the Administrative Agent that the Expiration Date then in effect under the Master Lease be extended to the date occurring one year after such Expiration Date and concurrently therewith request that the Administrative Agent and the Agent Lessor direct a written request to the Lessors and the Lenders that the applicable Maturity Date be extended to the same date (each such additional year, a "Renewal Term"). In no event may the Expiration Date or the Maturity Date be extended more than twice pursuant to this Section 11.1(a). Each Participant may grant or deny its consent to a Renewal Term in its sole discretion by notifying the Administrative Agent and the Agent Lessor in writing (with a copy to the Representative); provided, however, that any Participant that fails to respond to such request for a Renewal Term within sixty (60) days after its receipt thereof shall be deemed to have denied such request for a Renewal Term. (b) In connection with a written request of the Representative for a Renewal Term, upon the request of the Representative, the Administrative Agent and the Agent Lessor shall be permitted to replace any non-consenting Participant and any Participant that fails to respond to the Administrative Agent's and the Agent Lessor's written request for a Renewal Term within the time period specified in clause (a) above (each, a "Non-Consenting Participant") with a replacement bank or other 55 62 financial institution (a "Replacement Participant") satisfactory to the Representative, the Lessors and the Lenders, with such replacement to be effective as of the Expiration Date and Maturity Date in effect prior to the requested Renewal Term; provided, however, that (i) such replacement does not conflict with any Requirement of Law, (ii) the Replacement Participant shall purchase from the Non-Consenting Participant (A) at par, all Loans, in the case of a Lender, and all Lessor Amounts, in the case of a Lessor, (B) all accrued interest, in the case of a Lender, and all accrued Yield, in the case of a Lessor, and (C) all other amounts owing to such Non-Consenting Participant on or prior to the date of replacement, in each case, (iii) the Representative shall be liable to such Non-Consenting Participant under Section 13.10 if any Loan or Lessor Amount, as the case may be, owing to such Non-Consenting Participant shall be prepaid (or purchased) other than on the last day of the Interest Period or Interest Periods relating thereto, (iv) such replacement shall be made in accordance with the provisions of Article XII (provided that the Representative or the relevant Replacement Participant shall be obligated to pay the Transaction Expenses arising in connection therewith), and (v) the Replacement Participant shall have agreed to be subject to all of the terms and conditions of the applicable Operative Documents (including the extension of the Maturity Date contemplated by the relevant request for a Renewal Term and the related extension). The Administrative Agent and the Agent Lessor hereby agree to cooperate with the Representative in its efforts to arrange one or more Replacement Participants as contemplated by this Section 11.1(b). (c) Any Renewal Term and extension of the Maturity Date and the Expiration Date as contemplated by Section 11.1(a) shall be effective only upon the consent of all Participants after giving effect to the provisions of Section 11.1(b). Except as otherwise provided in this Article XI, all other terms of the Operative Documents shall remain unchanged and with the same force and effect (including the Pricing Categories and Pricing Ratios), and there shall not be any additional up-front fee in connection with such Renewal Term. Section 11.2 Replacement of Defaulting Participant. The Representative shall have the right (but not the obligation) to require any Defaulting Participant to assign and delegate in accordance with Section 12.1 all of such Lender's or Lessor's total Loans or Lessor Amounts, as the case may be, and Commitment to any other financial institution selected by the Representative that, in each case, is willing to accept such assignment and delegation and shall be satisfactory to the Administrative Agent and the Agent Lessor. 56 63 ARTICLE XII TRANSFERS OF PARTICIPANTS' INTERESTS Section 12.1 Assignments. Each Participant may, with the prior written consent of the Representative, the Administrative Agent and the Agent Lessor (which consents shall not be unreasonably withheld), assign all or a portion of its rights and obligations hereunder pursuant to an assignment agreement substantially in the form of Exhibit F to one or more Eligible Lender Assignees, with respect to Lender Commitments and Loans, and/or Eligible Lessor Assignees with respect to Lessor Commitments and Lessor Amounts, each such assignment shall be of a constant, not varying, percentage of all of the assigning Participant's rights and obligations under the Operative Documents. In the case of assignments made by a Lender, any such assignment shall be in a minimum aggregate amount of $5,000,000 of its Loan Commitment (or the balance of such Loan Commitment, if less) and the aggregate remaining Loan Commitment of the assigning Lender shall, after giving effect to the proposed assignment, be at least $5,000,000 or if less, zero. In the case of assignments made by a Lessor, any such assignment shall be in a minimum aggregate amount of $1,000,000 of its Lessor Commitment (or the balance of such Lessor Commitment, if less) and the aggregate remaining Lessor Commitment of the assigning Lessor shall, after giving effect to the proposed assignment, be at least $1,000,000 or if less, zero. Any assignment hereunder shall be effective upon delivery to the Administrative Agent and the Agent Lessor of written notice of the assignment together with a transfer fee of $2,500 payable by the assignor Participant or the assignee Participant to the Administrative Agent for its own account. The assigning Participant will give prompt notice to the Administrative Agent of any such assignment. Upon the effectiveness of any such assignment (and after notice to and consent of the Lessee, the Administrative Agent and the Agent Lessor, as provided herein), the assignee shall become a "Lender" or "Lessor", as the case may be, for all purposes of the Operative Documents and, to the extent of such assignment, the assigning Participant shall be relieved of its obligations hereunder to the extent of the Loans or Lessor Amounts, as the case may be, and Commitment components being assigned. The Administrative Agent agrees that upon notice of any such assignment and surrender of the appropriate Note or Notes, it will promptly provide to the assigning Lender and to the assignee separate promissory notes in the amount of their respective interests substantially in the form of the original Note (but with notation thereon that it is given in substitution for and replacement of the original Note or any replacement notes thereof). The Representative shall not be responsible for any costs or expenses incurred by any Participant in connection with an assignment of all or any of its rights and obligations in connection with an assignment pursuant to this Section 12.1. Section 12.2 Participations. Each Participant may sell, transfer, grant or assign participations in all or any part of such Participant's interests and obligations hereunder; provided that (i) such selling Participant shall remain a "Lender" or "Lessor", as the case may be, for all purposes under the Operative Documents (such selling Participant's obligations under the Operative Documents remaining 57 64 unchanged) and the sub-participant shall not constitute a Lender or a Lessor, as the case may be, hereunder, (ii) no such sub-participant shall have, or be granted, rights to approve any amendment or waiver relating to the Operative Documents except to the extent any such amendment or waiver would (A) reduce the principal of or rate of interest on or fees in respect of any Loans or Lessor Amounts in which the sub-participant is participating, (B) postpone the date fixed for any payment of principal (including extension of the Expiration Date or the date of any mandatory prepayment), interest or fees in which the sub-participant is participating, or (C) release all or substantially all of the collateral or guarantees (except as expressly provided in the Operative Documents) supporting any of the Loans or Lessor Amounts or Commitments in which the sub-participant is participating, and (iii) sub-sub-participations by the sub-participant (except to an Affiliate, parent company or Affiliate of a parent company of the participant) shall be prohibited. In the case of any such participation, the sub-participant shall not have any rights under the Operative Documents (the sub-participant's rights against the selling Participant in respect of such participation to be those set forth in the participation agreement with such Participant creating such participation) and all amounts payable by any Beverly Entity hereunder shall be determined as if such Participant had not sold such participation; provided, however, that such sub-participant shall be entitled to receive additional amounts under Sections 13.5, 13.10 and 13.11 on the same basis as if it were a Participant (but only to the extent that the Participant would have been entitled to receive such additional amounts with respect to the interest participated had it not sold such participation). No Beverly Entity shall be responsible for any costs or expenses incurred by any Participant in connection with a sale, transfer, grant or assignment of participations pursuant to this Section 12.2. Section 12.3 Withholding Taxes; Disclosure of Information; Pledge Under Regulation A. (a) If any Participant (or the assignee of or subparticipant of a Participant, each a "Transferee") is organized under the laws of any jurisdiction other than the United States or any State thereof, then such Participant or the Transferee of such Participant, as applicable, shall (as a condition precedent to acquiring or participating in such Loan or Lessor Amount and as a continuing obligation to the Lessor and the Lender) (i) furnish to each of the Administrative Agent, the Agent Lessor and the Representative in duplicate, for each taxable year of such Participant or Transferee during the term of the Lease, a properly completed and executed copy of either Internal Revenue Service Form 4224 or Internal Revenue Service Form 1001 and Internal Revenue Service Form W-8 or Internal Revenue Service Form W-9 and any additional form (or such other form) as is necessary to claim complete exemption from United States withholding taxes (wherein such Transferee claims entitlement to complete exemption from United States withholding taxes on all payments hereunder), and (ii) provide to each of the Administrative Agent, the Agent Lessor 58 65 and the Representative a new Internal Revenue Service Form 4224 or Internal Revenue Service Form 1001 and Internal Revenue Service Form W-8 or Internal Revenue Service Form W-9 and any such additional form (or any successor form or forms) upon the expiration or obsolescence of any previously delivered form and comparable statements in accordance with applicable United States laws and regulations and amendments duly executed and completed by such Participant or Transferee, and to comply from time to time with all applicable United States laws and regulations with regard to such withholding tax exemption. By its acceptance of a participation or assignment hereunder, each Transferee shall be deemed bound by the provisions set forth in this Article XII. (b) Any Participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Article XII, disclose to such assignee or participant or proposed assignee or participant, any information relating to any Beverly Entity or the Transactions, subject to appropriate confidentiality requirements relating to such information. (c) Anything in this Article XII to the contrary notwithstanding, any Participant may without the consent of any Beverly Entity, the Administrative Agent or the Agent Lessor, assign and pledge all or any portion of the Notes held by it to any Federal Reserve Bank, the United States Treasury or to any other financial institution as collateral security pursuant to Regulation A of the F.R.S. Board and any operating circular issued by the Federal Reserve System and/or the Federal Reserve Bank or otherwise; provided, any payment by any Beverly Entity for the benefit of the assigning or pledging Participant shall be deemed to satisfy such Beverly Entity's obligations with respect thereto. ARTICLE XIII INDEMNIFICATION Section 13.1 General Indemnification. (a) The Representative agrees that, with respect to each Completed Property and Improved Property, to assume liability for, and to indemnify, protect, defend, save and keep harmless each Indemnitee, on an After Tax Basis, from and against any and all Claims that may be imposed on, incurred by or asserted against such Indemnitee (whether because of action or omission by such Indemnitee or otherwise), whether or not such Indemnitee shall also be indemnified as to any such Claim by any other Person and whether or not such Claim arises or accrues prior to the applicable Acquisition Date or after the Expiration Date, in any way relating to or arising out of: 59 66 (i) any of the Operative Documents or any of the transactions contemplated thereby, and any amendment, modification or waiver in respect thereof; (ii) the Properties or any part thereof or interest therein; (iii) the purchase, design, construction, preparation, installation, inspection, delivery, nondelivery, acceptance, rejection, ownership, management, possession, operation, rental, lease, sublease, repossession, maintenance, repair, alteration, modification, addition or substitution, storage, transfer of title, redelivery, use, financing, refinancing, disposition, operation, condition, sale (including, without limitation, any sale pursuant to Section 16.2(d) or 16.2(f) of the Master Lease or any sale pursuant to Article XV, XVIII or XX of the Master Lease), return or other disposition of all or any part or any interest in the Properties or the imposition of any Lien (or incurring of any liability to refund or pay over any amount as a result of any Lien) thereon, including, without limitation: (1) Claims or penalties arising from any violation of law or in tort (on the basis of strict liability or otherwise), (2) latent or other defects, whether or not discoverable, (3) any Claim based upon a violation or alleged violation of the terms of any restriction, easement, condition or covenant or other matter affecting title to the Properties, (4) the making of any Modifications in violation of any standards imposed by any insurance policies required to be maintained by each Lessee pursuant to the Lease which are in effect at any time with respect to the Properties or any part thereof, (5) any Claim for patent, trademark or copyright infringement, and (6) Claims arising from any public improvements with respect to the Properties resulting in any change or special assessments being levied against the Property or any plans to widen, modify or realign any street or highway adjacent to any of the Properties, or any Claim for utility "tap-in" fees; (iv) the breach by any Beverly Entity of any covenant, representation or warranty made by it or deemed made by it in any Operative Document or any certificate reclaimed to be delivered by any Operative Document; (v) the retaining or employment of any broker, finder or financial advisor by any Beverly Entity to act on its behalf in connection with this Participation Agreement or any other Operative Document; (vi) the existence of any Lien on or with respect to the Properties, the Improvements, any Basic Rent or Supplemental Rent, title thereto, or any interest therein including any Liens which arise out of the possession, use, occupancy, construction, repair or rebuilding of the Property or by reason of 60 67 labor or materials furnished or claimed to have been furnished to any Lessee, or any of its contractors or agents or by reason of the financing of any personalty or equipment purchased or leased by any Lessee or Modifications constructed by such Lessee, except Lessor Liens and Liens in favor of the Lenders or the Lessors; (vii) subject to the accuracy of any Participant's representation set forth in Section 8.1(a), as to such Participant, the transactions contemplated by the Lease or by any other Operative Document, in respect of the application of Parts 4 and 5 of Subtitle B of Title I of ERISA and any prohibited transaction described in Section 4975(c) of the Code. (b) The Representative agrees that, with respect to each Construction Period Property, to assume liability for, and to indemnify, protect, defend, save and keep harmless each Lessor (which right to indemnity may be assigned by such Lessor), from and against any and all Claims that may be imposed on, incurred by or asserted against such Lessor, whether or not such Lessor shall also be indemnified as to any such Claim by any other Person and whether or not such claim arise or accrues prior to the applicable Acquisition Date, in any way relating to or arising out of the circumstances described in clauses (i) through (vii) of paragraph 13.1(a) where such Claims relate to the action or omission of any Beverly Entity while any such Beverly Entity is located on, in possession of, controlling or acting or failing to act with respect to such Construction Period Property. Provided, however, that the Representative shall not be required to indemnify any Indemnitee under this Section 13.1 for any of the following: (1) any Claim to the extent resulting from the willful misconduct or gross negligence of such Indemnitee (it being understood that the Representative shall be required to indemnify an Indemnitee even if the ordinary (but not gross) negligence of such Indemnitee caused or contributed to such Claim) or the breach of any representation, warranty or covenant of such Indemnitee set forth in any Operative Document, (2) any Claim resulting from Lessor Liens which the Agent Lessor, the Administrative Agent or any of the Lessors or Lenders is responsible for discharging under the Operative Documents, (3) any Claim arising from a breach or alleged breach by the Lenders or the Lessors of any agreement entered into in connection with the assignment or participation of any Loan or Lessor Amount and (4) any Claim arising in respect to any Property in the period after the respective Lessee ceases to lease such Property from the Lessors under the related Lease, provided that the facts supporting such Claim occur after such period. It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of and shall be separate and independent from any remedy under the Lease or any other Operative Document. Without limiting the express rights of any Indemnitee under this Section 13.1, this Section 13.1 shall be 61 68 construed as an indemnity only and not a guaranty of residual value of the Properties or as a guaranty of the Notes. Section 13.2 End of Term Indemnity. (a) If the Representative elects the Remarketing Option and there would, after giving effect to the proposed remarketing transactions, be a Shortfall Amount, then prior to the Expiration Date and as a condition to the Representative's right to complete the remarketing of the Properties pursuant to Article XX of the Master Lease, the Representative shall cause to be delivered to the Agent Lessor at least one hundred twenty (120) days prior to the Expiration Date, at the Representative's sole cost and expense, a report from the Appraiser in form and substance satisfactory to the Agent Lessor, the Administrative Agent and the Participants (the "End of the Term Report") which shall state the appraiser's conclusions as to the reason for any decline in the Fair Market Sales Value of any of the Property from that anticipated for such date in the As-Built Appraisal delivered with respect to such Property. (b) On or prior to the Expiration Date the Representative shall pay to the Agent Lessor for the account of each of the Lessors an amount (not to exceed the Shortfall Amount) equal to the portion of the Shortfall Amount that the End of the Term Report demonstrates was the result of a decline in the Fair Market Sales Value of the applicable Property due to (i) extraordinary use; failure to maintain, repair, restore, rebuild or replace; failure to comply with all applicable laws; failure to use; workmanship; method of installation or removal or maintenance, repair, rebuilding or replacement, (excepting in each case ordinary wear and tear), or (ii) any change to the Plans and Specifications, or any Modification made to, or any rebuilding of, the applicable Properties or any part thereof by the applicable Lessee or the Construction Agent, or (iii) the existence of any Hazardous Activity, Hazardous Materials or Environmental Violations, the indemnity for which shall not exceed the cost of the remediation thereof, or (iv) any restoration or rebuilding carried out by the applicable Lessee or the Construction Agent, or (v) any condemnation of any portion of any of the applicable Properties pursuant to Article XIV of the Master Lease, or 62 69 (vi) any use of any of the applicable Properties or any part thereof by the Lessee or any sublessee other than (i) with respect to the New Beverly Headquarters, an office headquarters for the Representative and the other Beverly Entities and other office and retail facilities customarily found in office buildings and (ii) with respect to each other Property, an assisted living facility or nursing facility as contemplated by the applicable As-Built Appraisal, or (vii) any grant, release, dedication, transfer, annexation or amendment made pursuant to Section 11.2 of the Master Lease, or (viii) the failure of the Lessors to have good and marketable title to any of the applicable Properties free and clear of all Liens (excluding Permitted Property Liens), or (ix) the existence of any sublease relating to any of the applicable Properties that shall survive the Expiration Date. Section 13.3 Environmental Indemnity. Without limitation of the other provisions of this Article XIII, the Representative hereby agrees to indemnify, hold harmless and defend each Indemnitee from and against any and all claims (including, without limitation, third party claims for personal injury or real or personal property damage), losses (including but not limited to, to the extent the Lease Balance has not been fully paid, any loss of value of the Property related thereto), damages, liabilities, fines, penalties, charges, administrative and judicial proceedings (including informal proceedings) and orders, judgments, remedial action, requirements, enforcement actions of any kind, and all reasonable and documented costs and expenses incurred in connection therewith (including but not limited to reasonable and documented attorneys' and/or paralegals' fees and expenses), including, but not limited to, all costs incurred in connection with any investigation or monitoring of site conditions or any clean-up, remedial, removal or restoration work by any federal, state or local Governmental Authority, arising in whole or in part, out of: (a) the presence on or under any of the Properties of any Hazardous Materials, or any Releases of any Hazardous Materials on, under, from or onto any of the Properties, (b) any activity, including, without limitation, construction, carried on or undertaken on or off any of the Properties, and whether by any Lessee or any predecessor in title or any employees, agents, contractors or subcontractors of any Lessee or any predecessor in title, or any other Persons (including such Indemnitee), or in connection with the handling, treatment, removal, storage, decontamination, clean-up, transport or disposal of any Hazardous Materials that at any time are located or present on or under or 63 70 that at any time migrate, flow, percolate, diffuse or in any way move onto or under any of the Properties, (c) loss of or damage to any property or the environment (including, without limitation, clean-up costs, response costs, remediation and removal costs, costs of corrective action, costs of financial assurance, fines and penalties and natural resource damages), or death or injury to any Person, and all expenses associated with the protection of wildlife, aquatic species, vegetation, flora and fauna, and any mitigative action required by or under Hazardous Materials Laws, (d) any claim concerning lack of compliance with Hazardous Materials Laws, or any act or omission causing an environmental condition that requires remediation or would allow any Governmental Authority to record a Lien on the land records, or (e) any residual contamination on or under any of the Land, or affecting any natural resources, and to any contamination of any property or natural resources arising in connection with the generation, use, handling, storage, transport or disposal of any such Hazardous Materials, and irrespective of whether any of such activities were or will be undertaken in accordance with applicable laws, regulations, codes and ordinances; provided, however, that the Representative shall not be required to indemnify any Indemnitee under this Section 13.3 for any Claim (i) to the extent resulting from the willful misconduct or gross negligence of such Indemnitee and (ii) relating to an Environmental Violation which preexisted the acquisition of the Property by the Agent Lessor but solely to the extent that (x) such Environmental Violation was identified in the Environmental Audit delivered pursuant to Section 6.1(h) hereof, (y) such Audit indicated that the risk of loss with respect to such Environmental Violation was less than remote and (z) notwithstanding the requirements of Section 6.1(h), the Property was acquired by the Agent Lessor. It is expressly understood and agreed that the indemnity provided for herein shall survive the expiration or termination of the Lease Term with respect to any Claim based on facts or circumstances arising prior to or during the Lease Term, and shall be separate and independent from any remedy under the Lease or any other Operative Document. Section 13.4 Proceedings in Respect of Claims. In case any action, suit or proceeding shall be brought against any Indemnitee, such Indemnitee shall notify the Representative of the commencement thereof, and the Representative shall be entitled, at the Representative's expense, to participate in, and, to the extent that the Representative desires to, assume and control the defense 64 71 thereof; provided, however, that the Representative shall have acknowledged in writing its obligation to fully indemnify such Indemnitee in respect of such action, suit or proceeding, and the Representative shall keep such Indemnitee fully apprised of the status of such action, suit or proceeding and shall provide such Indemnitee with all information with respect to such action, suit or proceeding as such Indemnitee shall reasonably request, and provided, further, that the Representative shall not be entitled to assume and control the defense of any such action, suit or proceeding if and to the extent that, (A) in the reasonable opinion of such Indemnitee, (x) such action, suit or proceeding involves any risk of imposition of criminal liability or will involve a risk of the sale, forfeiture or loss of, or the creation of any Lien (other than a Permitted Property Lien) on any Property or any part thereof unless, in the case of civil liability, the Representative shall have posted a bond or other security satisfactory to take relevant Indemnitees in respect to such risk or (y) the control of such action, suit or proceeding would involve an actual or potential conflict of interest, (B) such proceeding involves Claims not fully indemnified by the Representative which the Representative and the Indemnitee have been unable to sever from the indemnified claim(s), or (C) an Event of Default under the Lease has occurred and is continuing. The Indemnitee will join in the Representative's efforts to sever such action. The Indemnitee may participate at its own expense and with its own counsel in any proceeding conducted by the Representative in accordance with the foregoing. The Representative shall not enter into any settlement or other compromise with respect to any Claim which is entitled to be indemnified under Section 13.1 or 13.3 without the prior written consent of the Indemnitee, which consent shall not be unreasonably withheld in the case of a money settlement not involving an admission of liability of such Indemnitee. Each Indemnitee shall at the expense of the Representative supply the Representative with such information and documents reasonably requested by the Representative as are necessary or advisable for the Representative to participate in any action, suit or proceeding to the extent permitted by Section 13.1 or 13.3. Upon payment in full of any Claim by the Representative pursuant to Section 13.1 or 13.3 to or on behalf of an Indemnitee, the Representative, without any further action, shall be subrogated to any and all claims that such Indemnitee may have relating thereto (other than claims in respect of insurance policies maintained by such Indemnitee at its own expense), and such Indemnitee shall execute such instruments of assignment and conveyance, evidence of claims and payment and such other documents, instruments and agreements as may be necessary to preserve any such claims and otherwise cooperate with the Representative and give such further assurances as are necessary or advisable to enable the Representative vigorously to pursue such claims. 65 72 Any amount payable to an Indemnitee pursuant to Section 13.1 or 13.3 shall be paid to such Indemnitee promptly upon receipt of a written demand therefor from such Indemnitee, accompanied by a written statement describing in reasonable detail the basis for such indemnity and the computation of the amount so payable. Section 13.5 General Tax Indemnity. (a) Indemnification. The Representative shall pay and assume liability for, and does hereby agree to indemnify, protect and defend the applicable Property and all Tax Indemnitees, and hold them harmless against, all Impositions on an After Tax Basis. (b) Contests. If any claim shall be made against any Tax Indemnitee or if any proceeding shall be commenced against any Tax Indemnitee (including a written notice of such proceeding) for any Imposition as to which the Representative may have an indemnity obligation pursuant to this Section 13.5, or if any Tax Indemnitee shall determine that any Imposition to which the Representative may have an indemnity obligation pursuant to this Section 13.5 may be payable, such Tax Indemnitee shall promptly (and in any event, within 30 days) notify the Representative in writing (provided that failure to so notify the Representative within 30 days shall not alter such Tax Indemnitee's rights under this Section 13.5 except to the extent such failure precludes or materially adversely affects the ability to conduct a contest of any Impositions) and shall not take any action with respect to such claim, proceeding or Imposition without the written consent of the Representative (such consent not to be unreasonably withheld or unreasonably delayed) for 30 days after the receipt of such notice by the Representative; provided, however, that in the case of any such claim or proceeding, if such Tax Indemnitee shall be required by law or regulation to take action prior to the end of such 30-day period, such Tax Indemnitee shall in such notice to the Representative, so inform the Representative and such Tax Indemnitee shall not take any action with respect to such claim, proceeding or Imposition without the consent of the Representative (such consent not to be unreasonably withheld or unreasonably delayed) for 10 days after the receipt of such notice by the Representative unless such Tax Indemnitee shall be required by law or regulation to take action prior to the end of such 10-day period. The Representative shall be entitled for a period of 30 days from receipt of such notice from such Tax Indemnitee (or such shorter period as such Tax Indemnitee has notified the Lessee is required by law or regulation for such Tax Indemnitee to commence such contest), to request in writing that such Tax Indemnitee contest the imposition of such Tax, at the Representative's expense. If (x) such contest can be pursued in the name of the Representative and independently from any other proceeding involving a Tax liability of such Tax Indemnitee for which the Representative has not agreed to indemnify such Tax Indemnitee, (y) such contest 66 73 must be pursued in the name of such Tax Indemnitee, but can be pursued independently from any other proceeding involving a Tax liability of such Tax Indemnitee for which the Representative has not agreed to indemnify such Tax Indemnitee or (z) such Tax Indemnitee so requests, then the Representative shall be permitted to control the contest of such claim, provided that in the case of a contest described in clause (y), if such Tax Indemnitee determines reasonably and in good faith that such contest by the Representative could have a material adverse impact on the business or operations of such Tax Indemnitee and provides a written explanation to the Representative of such determination, such Tax Indemnitee may elect to control or reassert control of the contest, and provided that by taking control of the contest, the Representative acknowledges that it is responsible for the Imposition ultimately determined to be due by reason of such claim, and provided, further, that in determining the application of clauses (x) and (y) above, each Tax Indemnitee shall take any and all reasonable steps to segregate claims for any Taxes for which the Representative indemnifies hereunder from Taxes for which the Representative is not obligated to indemnify hereunder, so that the Representative can control the contest of the former. In all other claims requested to be contested by the Representative, such Tax Indemnitee shall control the contest of such claim, acting through counsel reasonably acceptable to the Representative. In no event shall the Representative be permitted to contest (or such Tax Indemnitee required to contest) any claim, (A) if such Tax Indemnitee provides the Representative with a legal opinion of counsel reasonably acceptable to the Representative that such action, suit or proceeding involves a risk of imposition of criminal liability or will involve a material risk of the sale, forfeiture or loss of, or the creation of any Lien (other than a Permitted Lien) on any Property or any part thereof unless the Representative shall have posted and maintained a bond or other security satisfactory to the relevant Tax Indemnitee in respect to such risk, (B) if an Event of Default has occurred and is continuing, (C) unless the Representative shall have agreed to pay and shall pay, to such Tax Indemnitee on demand all reasonable out-of-pocket costs, losses and expenses that such Tax Indemnitee may incur in connection with contesting such Imposition including all reasonable legal, accounting and investigatory fees and disbursements, or (D) if such contest shall involve the payment of the Tax prior to the contest, unless the Representative shall provide to such Tax Indemnitee an interest-free advance in an amount equal to the Imposition that the Indemnitee is required to pay (with no additional net after-tax costs to such Tax Indemnitee). In addition for Tax Indemnitee controlled contests and claims contested in the name of such Tax Indemnitee in a public forum, no contest shall be required: (A) unless the amount of the potential indemnity (taking into account all similar or logically related claims that have been or could be raised in any audit involving any or all such Tax Indemnitees with respect to any period for which the Representative may be liable to pay an indemnity under this Sec 13.5(b)) exceeds $75,000 and (B) unless, if requested by such Tax Indemnitee, the Representative shall have provided to such Tax Indemnitee an opinion of counsel selected by the Representative (which may be in-house counsel) (except, in the case 67 74 of income taxes indemnified hereunder, in which case such opinion shall be an opinion of independent tax counsel selected by such Tax Indemnitee and reasonably acceptable to the Representative) that a reasonable basis exists to contest such claim. In no event shall a Tax Indemnitee be required to appeal an adverse judicial determination to the United States Supreme Court. The party conducting the contest shall consult in good faith with the other party and its counsel with respect to the contest of such claim for Taxes (or claim for refund) but the decisions regarding what actions to be taken shall be made by the controlling party in its sole judgment, provided, however, that if such Tax Indemnitee is the controlling party and the Representative recommends the acceptance of a settlement offer made by the relevant Governmental Authority and such Tax Indemnitee rejects such settlement offer then the amount for which the Representative required to indemnify such Tax Indemnitee with respect to the Taxes subject to such offer shall not exceed the amount which it would have owed if such settlement offer had been accepted. In addition, the controlling party shall keep the non-controlling party reasonably informed as to the progress of the contest, and shall provide the noncontrolling party with a copy of (or appropriate excerpts from) and reports or claims issued by the relevant auditing agents or taxing authority to the controlling party thereof, in connection with such claim or the contest thereof. Each Tax Indemnitee shall, at the Representative's expense, supply the Representative with such information and documents reasonably requested by the Representative as are necessary or advisable for the Representative to participate in any action, suit or proceeding to the extent permitted by this Section 13.5(b). Notwithstanding anything in this Section 13.5(b) to the contrary, no Tax Indemnitee shall enter into any settlement or other compromise or fail to appeal an adverse ruling with respect to any claim which is entitled to be indemnified under this Section 13.5 (and with respect to which contest is required under this Section 13.5(b)) without the prior written consent of the Representative, unless such Tax Indemnitee waives its right to be indemnified under this Section 13.5 with respect to such claim. Notwithstanding anything contained herein to the contrary, a Tax Indemnitee will not be required to contest (and the Representative shall not be permitted to contest) a claim with respect to the imposition of any Tax if such Tax Indemnitee shall waive its right to indemnification under this Section 13.5 with respect to such claim (and any claim with respect to such year or any other taxable year the contest of which is materially adversely affected as a result of such waiver). (c) [Intentionally left blank] (d) Payments. Any Imposition indemnifiable under this Section 13.5 shall be paid directly when due to the applicable taxing authority if direct payment is 68 75 practicable and permitted. If direct payment to the applicable taxing authority is not permitted or is otherwise not made, any amount payable to a Tax Indemnitee pursuant to Section 13.5 shall be paid within thirty (30) days after receipt of a written demand therefor from such Tax Indemnitee accompanied by a written statement describing in reasonable detail the amount so payable, but not before two Business Days prior to the date that the relevant Taxes are due. Any payments made pursuant to this Section 13.5 shall be made directly to such Tax Indemnitee entitled thereto or the Representative, as the case may be, in immediately available funds at such bank or to such account as specified by the payee in written directions to the payor, or, if no such direction shall have been given, by check of the payor payable to the order of the payee by certified mail, postage prepaid at its address as set forth in Schedule II hereto. Upon the request of any Tax Indemnitee with respect to a Tax that the Representative is required to pay, the Representative shall furnish to such Tax Indemnitee the original or a certified copy of a receipt for the Representative's payment of such Tax or such other evidence of payment as is reasonably acceptable to such Tax Indemnitee. (e) Reports. In the case of any report, return or statement required to be filed with respect to any Taxes that are subject to indemnification under this Section 13.5 and of which the Representative or any Lessee has knowledge, the Representative shall promptly notify such Tax Indemnitee of such requirement and, at the Representative's expense (i) if the Representative is permitted (unless otherwise requested by such Tax Indemnitee) by Applicable Law, timely file such report, return or statement in its own name or (ii) if such report, return or statement is required to be in the name of or filed by such Tax Indemnitee or such Tax Indemnitee otherwise requests that such report, return or statement be filed in its name, prepare and finish such statement for filing by such Tax Indemnitee in such manner as shall be satisfactory to such Tax Indemnitee and send the same to such Tax Indemnitee for filing no later than 15 days prior to the due date therefor. In any case in which such Tax Indemnitee will file any such report, return or statement, the Representative shall, upon written request of such Tax Indemnitee, provide such Tax Indemnitee with such information as is reasonably necessary to allow such Tax Indemnitee to file such report, return or statement. (f) [Intentionally left blank] (g) Tax Ownership. Each Tax Indemnitee represents and warrants that it will not, prior to the termination of the Master Lease, claim ownership of (or any tax benefits, including depreciation, with respect to) any Property for any income tax purposes (unless required to do so by a Governmental Authority), it being understood that the Lessees are and will remain the owners of the Properties for such income tax purposes until the termination of the Master Lease. 69 76 Section 13.6 Indemnity Payments in Addition to Lease Obligations. The Representative acknowledges and agrees that the Representative's obligations to make indemnity payments under this Article XIII are separate from, in addition to, and do not reduce, any Beverly Entity's obligation to pay any amounts owing from time to time under the Lease. Section 13.7 Eurodollar Rate Lending Unlawful. Notwithstanding any other provision herein, if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof occurring after the Documentation Date shall make it unlawful for any Participant to make, continue or maintain Eurodollar Loans/Lessor Amounts as contemplated by the Operative Documents, (i) such Participant shall promptly give written notice of such circumstances to the Representative, the Lessor Agent and the Administrative Agent (which notice shall be withdrawn whenever such circumstances no longer exist), (ii) the commitment of such Lender or Lessor, as the case may be, hereunder to make, continue or maintain Eurodollar Loans/Lessor Amounts shall forthwith be canceled and, until such time as it shall no longer be unlawful for such Participant to make, continue or maintain Eurodollar Loans/Lessor Amounts, such Participant shall then have a commitment only to make or maintain Base Rate Loans/Lessor Amounts when a Eurodollar Loans/Lessor Amounts is requested and (c) such Participant's Loans and Lessor Amounts then outstanding as Eurodollar Loans/Lessor Amounts, if any, shall be converted automatically to Base Rate Loans/Lessor Amounts on the respective last days of the then current Interest Periods with respect to such Loans and Lessor Amounts or within such earlier period as required by law. If any such conversion of Eurodollar Loans/Lessor Amounts occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Representative shall pay to such Participant such amounts, if any, as may be required pursuant to Section 13.10. In any such case, interest and principal (if any) shall be payable contemporaneously with the related Eurodollar Loans/Lessor Amounts of the other Participants. Section 13.8 Deposits Unavailable. If any of the Participants shall have determined that: (a) Dollar deposits in the relevant amount and for the relevant Interest Period are not available to the Participant in its relevant market; or (b) by reason of circumstances affecting the Participant's relevant market, adequate means do not exist for ascertaining the interest rate or Yield, as the case may be, applicable to such Participant's Eurodollar Loans/Lessor Amounts; then, upon notice from such Participant to the Representative, the Lessor Agent, the Administrative Agent and the other Participants, (x) the obligations of the Participants 70 77 to make or continue any Loans or Lessor Amounts as, or to convert any Loans or Lessor Amounts into Eurodollar Loans/Lessor Amounts shall be suspended, and (y) each outstanding Eurodollar Loan/Lessor Amount shall automatically convert into a Base Rate Loan/Lessor Amount on the last day of the then current Interest Period applicable thereto. Section 13.9 Increased Costs, etc. (a) If the adoption of or any change in a Requirement of Law or in the interpretation or application thereof applicable to any Participant, or compliance by any Participant with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority, in each case made subsequent to the Documentation Date (or, if later, the date on which such Participant becomes a Participant): (i) shall subject such Participant to any tax of any kind whatsoever with respect to any Eurodollar Loans/Lessor Amounts made, continued or maintained by it or its obligation to make, continue or maintain Eurodollar Loans/Lessor Amounts, or change the basis of taxation of payments to such Participant in respect thereof (except for excluded Impositions, any changes in taxes measured by or imposed upon the overall gross or net income, franchise or other taxes (imposed in lieu of such net income tax), of such Participant or its applicable lending office, branch, or any affiliate thereof); or (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, Loans and Lessor Amounts, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Participant which is not otherwise included in the determination of the Adjusted Eurodollar Rate hereunder; or (iii) shall impose on such Participant any other condition (excluding any Tax of any kind) whatsoever in connection with the Operative Documents; and the result of any of the foregoing is to increase the cost to such Participant, by an amount which such Participant deems to be material, of making, continuing or maintaining Eurodollar Loans/Lessor Amounts or to reduce any amount receivable hereunder in respect thereof, then, in any such case, upon notice to the Representative from such Participant, through the Administrative Agent and/or the Agent Lessor, in accordance herewith, the Representative shall pay such Participant any additional amounts necessary to compensate such Participant for such increased cost or reduced amount receivable; provided that, in any such case, the Representative may elect to 71 78 convert the Eurodollar Loans/Lessor Amounts made by such Participant hereunder to Base Rate Loans/Lessor Amounts by giving the Administrative Agent at least one Business Day's notice of such election, in which case the Representative shall promptly pay to such Participant, upon demand, without duplication, such amounts, if any, as may be required pursuant to Section 13.10. All payments required by this Section 13.9(a) shall be made by the Representative within 10 Business Days after demand by the affected Participant. The Representative shall not be obligated to reimburse any Participant for any increased cost or reduced return incurred more than 120 days after the date that such Participant receives actual notice of such increased cost or reduced return unless such Participant gives notice thereof to the Representative in accordance with this Section 13.9 during such 120 day period. If any Participant becomes entitled to claim any additional amounts pursuant to this subsection, it shall provide prompt notice thereof to the Representative, through the Administrative Agent and/or the Agent Lessor, certifying (x) that one of the events described in this clause (a) has occurred and describing in reasonable detail the nature of such event, (y) as to the increased cost or reduced amount resulting from such event and (z) as to the additional amount demanded by such Participant and a reasonably detailed explanation of the calculation thereof (including the method by which such Participant allocated such amounts to the applicable Lessee or Lessees). Such a certificate as to any additional amounts payable pursuant to this clause submitted by such Participant, through the Administrative Agent and/or the Agent Lessor, to the Representative shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and Lessor Amounts and all other amounts payable hereunder. (b) Each Participant shall use its reasonable efforts to reduce or eliminate any claim for compensation pursuant to this Section 13.9, including, without limitation, a change in the office of such Participant at which its obligations related to this Participation Agreement are maintained if such change will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable judgment of such Participant, be otherwise disadvantageous to it. If any such claim for compensation shall not be eliminated or waived, the Representative shall have the right to replace the affected Participant with a new financial institution that shall succeed to the rights of such Participant under this Participation Agreement; provided, however, that such Participant shall not be replaced hereunder until it has been paid in full such claim and all other amounts owed to it hereunder. Section 13.10 Funding Losses. The Representative agrees to indemnify each Indemnitee and to hold each Indemnitee harmless from any loss or expense which such Indemnitee may sustain or incur (other than through such Person's own gross negligence or willful misconduct) as a consequence of (a) default by any Lessee in making a borrowing of, conversion into or continuation of Loans or Lessor Amounts which are Eurodollar Loans/Lessor Amounts after such Lessee has given a notice 72 79 requesting the same in accordance with the provisions of this Participation Agreement, (b) default by such Lessee in making any prepayment of a Loan or Lessor Amounts which is a Eurodollar Loan/Lessor Amount after the Lessee has given a notice thereof in accordance with the provisions of this Participation Agreement, or (c) the making of a prepayment of Loans or Lessor Amounts which are Eurodollar Loans/Lessor Amounts on a day which is not the last day of an Interest Period with respect thereto. This covenant shall survive the termination of this Participation Agreement or any other Operative Document and the payment of the Loans, Lessor Amounts and all other amounts payable under the Operative Documents. Section 13.11 Capital Adequacy. (a) If the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Participant with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, in each case made subsequent to the Documentation Date has or will have the effect of reducing the rate of return on any Participant's or its parent company's capital by an amount such Participant deems to be material, as a consequence of its commitments or obligations hereunder to a level below that which such Participant or its parent company could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Participant's or its parent company's policies with respect to capital adequacy), then, upon notice from such Participant, the Representative shall pay to such Participant such additional amount or amounts as will compensate such Participant and its parent company for such reduction (it being understood that such parent company shall not be reimbursed to the extent its subsidiary Participant is reimbursed by the Representative in connection with the same or a similar law, rule, regulation, change, request or directive applicable to such Participant). All payments required by this Section 13.11 shall be made by the Representative within 10 Business Days after demand by the affected Participant. The Representative shall not be obligated to reimburse any Participant for any reduced return incurred more than 120 days after the date that such Participant receives actual notice of such reduced return unless such Participant gives notice thereof to the Representative in accordance with this Section 13.11 during such 120 day period. If any Participant becomes entitled to claim any additional amounts pursuant to this clause, it shall provide prompt notice thereof to the Representative, through the Administrative Agent and/or the Agent Lessor, certifying (x) that one of the events described in this clause (a) has occurred and describing in reasonable detail the nature of such event, (y) as to the increased cost or reduced amount resulting from such event and (z) as to the additional amount demanded by such Participant and a reasonably detailed explanation of the calculation thereof (including the method 73 80 by which such Participant allocated such amounts to the applicable Lessee or Lessees). Such a certificate as to any additional amounts payable pursuant to this clause submitted by such Participant, through the Administrative Agent and/or the Agent Lessor, to the Representative shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Participation Agreement and the other Operative Documents and the payment of the Loans, Lessor Amounts and all other amounts payable hereunder and thereunder. (b) Each Participant shall use its commercially reasonable efforts to reduce or eliminate any claim for compensation pursuant to this Section 13.11, including, without limitation, a change in the office of such Participant at which its obligations related to the Operative Documents are maintained if such change will avoid the need for, or reduce the amount of, such compensation and will not, in the reasonable judgment of such Participant, be otherwise disadvantageous to it. If any such claim for compensation shall not be eliminated or waived, the Representative shall have the right to replace the affected Participant with a new financial institution that shall succeed to the rights of such Participant under the Operative Documents; provided, however, that such Participant shall not be replaced hereunder until it has been paid in full such claim and all other amounts owed to it hereunder. ARTICLE XIV THE AGENT LESSOR Section 14.1 Appointment and Authorization. Each Lessor irrevocably appoints and authorizes Bank of Montreal Global Capital Solutions, Inc. as Agent Lessor (in such capacity as Agent Lessor hereunder and under the other Operative Documents, the "Agent Lessor") of such Lessor to enter into the Operative Documents (including, without limitation, the Master Lease and each Lease Supplement) on behalf of such Lessor and to act as specified herein and in the other Operative Documents, and each such Lessor hereby authorizes the Agent Lessor as agent for such Lessor, to take such action on its behalf under the provisions of this Participation Agreement and the other Operative Documents and to exercise such powers and perform such duties as are expressly delegated by the terms hereof and thereof, together with such other powers as are reasonably incidental thereto (including, without limitation, the execution and delivery from time to time with the Lenders' unanimous consent of Lease Supplements, Construction Agency Agreement Supplements, Assignment of Lease and Rent Supplements and the various other documents, conveyances, terminations, assignments and instruments contemplated herein to be delivered by the Agent Lessor on behalf of the Lessors). Each action taken by the Agent Lessor under any Operative Document shall be deemed to be on behalf of each the Lessors, unless otherwise indicated. Notwithstanding any provision 74 81 to the contrary elsewhere herein or in the other Operative Documents, the Agent Lessor shall not have any duties or responsibilities, except those expressly set forth herein and therein, or any fiduciary relationship with any Lessor, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Participation Agreement or any of the other Operative Documents, or shall otherwise exist against the Agent Lessor. Section 14.2 Delegation of Duties. The Agent Lessor may execute any of its duties hereunder or under the other Operative Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent Lessor shall not be responsible for the negligence or misconduct of any agents or attorneys in fact selected by it with reasonable care. Section 14.3 Agent Lessor and Affiliates. The Agent Lessor shall have the same rights and powers under this Participation Agreement and under the other Operative Documents as any other Lessor, and may exercise or refrain from exercising the same as though it were not the Agent Lessor. Section 14.4 Action by Agent Lessor. The obligations of the Agent Lessor hereunder and under the other Operative Documents are only those expressly set forth herein and therein. Without limiting the generality of the foregoing, the Agent Lessor shall not be required to take any action with respect to any Default or Event of Default, except as expressly provided herein and in the other Operative Documents. Section 14.5 Consultation with Experts. The Agent Lessor may consult with legal counsel (who may be counsel for a Beverly Entity, a Participant, the Administrative Agent, the Arranger or any Affiliate of any of them), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. Section 14.6 Exculpatory Provisions. Neither the Agent Lessor nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be responsible for or have any duty to ascertain, inquire into or verify (a) any statement, warranty or representation made in connection with the Operative Documents; (b) the performance or observance of any of the covenants or agreements of any Beverly Entity; (c) the satisfaction of any condition precedent specified herein or in any other Operative Document; (d) the validity, effectiveness or genuineness of any of the Operative Documents or any other instrument or writing furnished in connection herewith or therewith; (e) the use of the proceeds of the Advances; (f) the existence of any Default or Event of Default; or (g) the properties, books or records of any Beverly Entity. 75 82 Section 14.7 Reliance on Communications. The Agent Lessor shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, telecopy, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to any Beverly Entity, independent accountants and other experts selected by the Agent Lessor with reasonable care). The Agent Lessor may deem and treat the Participants as the owner of their respective interests hereunder and under the other Operative Documents for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Agent Lessor in accordance with Section 12.1 of the Participation Agreement. The Agent Lessor, acting in its capacity as Agent Lessor, shall be fully justified in failing or refusing to take any action under this Participation Agreement or under any of the other Operative Documents unless it shall first receive such advice or concurrence of the Lessors as it deems appropriate or it shall first be indemnified to its satisfaction by the Participants against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent Lessor shall in all cases be fully protected in acting, or in refraining from acting, hereunder or under any of the other Operative Documents in accordance with a request of the Lessors and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Participants (including their successors and assigns). Section 14.8 Notice of Default. The Agent Lessor shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Agent Lessor has received notice from a Participant or a Beverly Entity referring to the Operative Document, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Agent Lessor receives such a notice, the Agent Lessor shall give prompt notice thereof to the Participants. The Agent Lessor shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Lessors. Section 14.9 Non-Reliance on Agent Lessor and Other Participants. Each Participant expressly acknowledges that neither the Agent Lessor (other than in its role as Participant) nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent Lessor or any affiliate thereof hereafter taken, including any review of the affairs of any Beverly Entity, shall be deemed to constitute any representation or warranty by the Agent Lessor to any Participant. Each Participant represents to the Agent Lessor that it has, independently and without reliance upon the Agent Lessor or any other Participant, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other conditions, 76 83 prospects and creditworthiness of each Beverly Entity and made its own decision to make its proportionate share of all Advances hereunder and under the other Operative Documents and enter into this Participation Agreement and the other Operative Documents. Each Participant also represents that it will, independently and without reliance upon the Agent Lessor or any other Participant, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Participation Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other conditions, prospects and creditworthiness of each Beverly Entity. Except for notices, reports and other documents expressly required to be furnished to the Participants by the Agent Lessor hereunder, the Agent Lessor shall not have any duty or responsibility to provide any Participant with any credit or other information concerning the business, operations, assets, property, financial or other conditions, prospects or creditworthiness of any Beverly Entity which may come into the possession of the Agent Lessor or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. Section 14.10 Indemnification. The Lessors agree to indemnify the Agent Lessor in its capacity as such (to the extent not reimbursed by the Beverly Entities and without limiting the obligation of the Beverly Entities to do so), ratably according to their respective Commitments, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including without limitation at any time following the payment of the Obligations) be imposed on, incurred by or asserted against the Agent Lessor in its capacity as such in any way relating to or arising out of this Participation Agreement or the other Operative Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Agent Lessor under or in connection with any of the foregoing; provided that no Lessor shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of the Agent Lessor. If any indemnity furnished to the Agent Lessor for any purpose shall, in the opinion of the Agent Lessor, be insufficient or become impaired, the Agent Lessor may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section shall survive the payment in full of the Obligations and all other amounts payable hereunder and under the other Operative Documents. Section 14.11 Failure to Act. Except for action expressly required of the Agent Lessor hereunder, the Agent Lessor shall in all cases be fully justified in failing or refusing to act hereunder unless it shall be indemnified to its satisfaction by the 77 84 Lessors against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Section 14.12 Resignation and Removal. The Agent Lessor may resign at any time upon at least 30 days' prior notice to the Representative and the Participants, and may be removed as such at any time by vote of the Required Lessors and notice to the retiring Agent Lessor, the Administrative Agent and the Representative. In the Event of any such resignation or removal, the Required Lessors shall as promptly as practicable (but with five Business Days' prior written notice being given to the Representative) appoint a successor Agent Lessor, provided that such successor Agent Lessor shall be approved by the Administrative Agent, and, unless an Event of Default is continuing, be approved by the Representative (which approval shall not be unreasonably withheld or delayed) and, if the Representative has not responded within such five Business Day period, the Representative shall be deemed to have approved such new Agent Lessor. If no successor Agent Lessor shall have been so appointed and shall have accepted such appointment within 30 days after either the retiring Agent Lessor's giving of notice of resignation or the Required Lessors' vote to remove the retiring Agent Lessor, then the retiring Agent Lessor may, on behalf of the Lessors, appoint a successor Agent Lessor, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof or under the laws of another country that is doing business in the United States and having a combined capital, surplus and undivided profits of at least $100,000,000, or a wholly owned subsidiary of such bank. Upon its acceptance of its appointment, such successor Agent Lessor shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent Lessor, and the retiring Agent Lessor shall be discharged from all further duties and obligations as Agent Lessor under this Participation Agreement and under the other Operative Documents. After any retiring Agent Lessor's resignation or removal hereunder as Agent Lessor, the provisions of this Participation Agreement and of the other Operative Documents shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent Lessor under this Participation Agreement. No resignation or renewal of the Agent Lessor may become effective until a successor Agent Lessor has been appointed as provided above. Section 14.13 Distributions. The Agent Lessor shall, as promptly as practicable, distribute to each Participant its appropriate portion, if any, of payments received (in good, collected funds) by the Agent Lessor from the Beverly Entities for the account of the Participants or of any such payments so received for the account of such Participant. Section 14.14 Rights of Each Beverly Entity. Except where a Beverly Entity is expressly referenced in this Article XIV, (w) the Agent Lessor shall act solely as agent of the Lessors and does not assume and shall not be deemed to have assumed 78 85 any obligation or relationship of agency or trust with or for any Beverly Entity, (x) this Article XIV is for the benefit of the Agent Lessor and the Participants only, (y) each Beverly Entity shall have no right to enforce any part of this Article XIV and shall have no rights as third party beneficiary or otherwise therein, and (z) this Article XIV may be amended by the approval of Agent Lessor and the Required Participants, without any need to obtain the approval of any Beverly Entity, provided no such amendment shall be permitted without the consent of the Representative, which consent shall not be unreasonably withheld. The Agent Lessor shall send the Representative a copy of any such amendments. ARTICLE XV MISCELLANEOUS Section 15.1 Survival of Agreements. The representations, warranties, covenants, indemnities and agreements of the parties provided for in the Operative Documents, and the parties' obligations under any and all thereof, shall survive the execution and delivery of this Participation Agreement, the transfer of any and all Property to the Agent Lessor, the construction of any Improvements, any disposition of any interest of the Agent Lessor or any Participant in any Property or any Improvements and the payment of the Notes and any disposition thereof, and shall be and continue in effect notwithstanding any investigation made by any party and the fact that any party may waive compliance with any of the other terms, provisions or conditions of any of the Operative Documents. Except as otherwise expressly set forth herein or in the other Operative Documents, the indemnities of the parties provided for in the Operative Documents shall survive the expiration or termination of any thereof. Section 15.2 No Broker, etc. Each of the parties hereto represents to the others that it has not retained or employed any broker, finder or financial adviser (other than Capstar Partners, Inc.) to act on its behalf in connection with this Participation Agreement or the transactions contemplated herein or in the other Operative Documents nor has it authorized any broker, finder or financial adviser (other than Capstar Partners, Inc.) retained or employed by any other Person so to act. Any party which is in breach of this representation shall indemnify and hold the other parties harmless from and against any liability arising out of such breach of this representation. Section 15.3 Notices. Unless otherwise specifically provided herein, all notices, consents, directions, approvals, instructions, requests and other communications required or permitted by the terms hereof to be given to any Person shall be given in writing by United States mail, by nationally recognized courier service, by hand or by facsimile, and any such notice shall become effective (i) if 79 86 delivered by United States mail, five (5) Business days after being deposited in the mail, certified or registered with appropriate postage prepaid, (ii) if delivered by a nationally recognized courier service, two (2) Business Days after delivery to a nationally recognized courier service specifying overnight delivery, (iii) if delivered by hand, when received or (iv) if delivered by facsimile, when transmitted (upon electronic confirmation thereof), and shall be directed to the address or facsimile number of such Person as indicated on Schedule II. From time to time any party may designate a new address or facsimile number for purposes of notice hereunder by written notice to each of the other parties hereto in accordance with this Section. Section 15.4 Counterparts. This Participation Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 15.5 Amendments, etc. Neither any Operative Document nor any of the terms thereof may be terminated (except upon payment in full of the Lease Balance or effective exercise and consummation of the Remarketing Option in accordance with Article XX of the Master Lease and payment in full of all amounts due in accordance therewith), amended, supplemented, waived or modified without the written agreement or consent of each party thereto and, regardless of whether the Lenders and the Lessors are parties thereto, the Required Participants; provided, however, that: (a) no such termination, amendment, supplement, waiver or modification shall without written agreement or consent of each Participant: (i) modify any of the provisions of this Section 15.5, change the definition of "Required Participants" or modify or waive any provision of any Operative Document requiring action by the foregoing; (ii) amend, modify, waive or supplement any of the provisions of Section 2.5, 2.6 or 2.7 of the Loan Agreement; (iii) reduce, modify, amend or waive any fees or indemnities in favor of any Participant, including without limitation amounts payable pursuant to Article XIII (except that any Person may consent to any reduction, modification, amendment or waiver of any indemnity payable to it); (iv) modify, postpone, reduce or forgive, in whole or in part, any payment of Rent (other than pursuant to the terms of any 80 87 Operative Document), any Loan or Lessor Amount, the Lease Balance, the Loan Balance, Commitment Fees, amounts due pursuant to Section 20.2 of the Master Lease, interest or Yield (except that any Person may consent to any modification, postponement, reduction or forgiveness of any payment of any Commitment Fee payable to it) or, subject to subclause (iii) above, any other amount payable under the Lease or this Participation Agreement, or modify the definition or method of calculation of Rent (other than pursuant to the terms of any Operative Document), Loans or Lessor Amounts, Lease Balance, Loan Balance, Commitment Fees, Commitment Fee Shortfall Amounts, Shortfall Amount, Property Improvement Costs, Estimated Improvement Costs, Participant Balance, or any other definition which would affect the amounts to be advance or which are payable under the Operative Documents; (v) consent to any assignment of the Master Lease or any Lease Supplement by any Lessee, releasing such Lessee from its obligations in respect of the payments of Rent, Loan Balance or Lease Balance or changing the absolute and unconditional character of such obligations; or (vi) consent to any change in clause (i) of the definition of Unavailable Commitment Termination Date from August 1, 1997; and (b) no such termination, amendment, supplement, waiver or modification that would increase the obligations of any Beverly Party thereunder or deprive any Beverly Party of any of its rights thereunder shall be effective against such Beverly Party without its written agreement or consent. Section 15.6 Headings, etc. The Table of Contents and headings of the various Articles and Sections of this Participation Agreement are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. Section 15.7 Parties in Interest. Except as expressly provided herein, none of the provisions of this Participation Agreement is intended for the benefit of any Person except the parties hereto. No Beverly Entity shall assign or transfer any of its rights or obligations under the Operative Documents except in accordance with the terms and conditions thereof. Section 15.8 GOVERNING LAW. THIS AGREEMENT AND THE OTHER OPERATIVE DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE 81 88 CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Section 15.9 Severability. Any provision of this Participation Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 15.10 Liability Limited. (a) The parties hereto agree that except as specifically set forth herein or in any other Operative Document, no Lessor shall have any personal liability whatsoever to any Participant or their respective successors and assigns for any claim based on or in respect hereof or any of the other Operative Documents or arising in any way from the transactions contemplated hereby or thereby and recourse, if any, shall be solely had against such Lessor's interest in the Property; provided, however, that each Lessor shall be liable in its individual capacity (a) for its own willful misconduct or gross negligence, (b) breach of any of its representations, warranties or covenants under the Operative Documents, or (c) for any Tax based on or measured by any fees, commission or compensation received by it for acting as a Lessor as contemplated by the Operative Documents. It is understood and agreed that, except as provided in the preceding sentence: (i) no Lessor shall have any personal liability under any of the Operative Documents as a result of acting pursuant to and consistent with any of the Operative Documents; (ii) all obligations of each Lessor to any Lender are solely nonrecourse obligations except to the extent that such Lessor has received payment from others (including, without limitation, obligations with respect to the Loans); and (iii) all such personal liability of any Lessor is expressly waived and released as a condition of, and as consideration for, the execution and delivery of the Operative Documents by such Lessor. (b) No Participant shall have any obligation to any other Participant or to any Beverly Entity, the Lessors or the Lenders with respect to transactions contemplated by the Operative Documents, except those obligations of such Participant expressly set forth in the Operative Documents or except as set forth in the instruments delivered in connection therewith, and no Participant shall be liable for performance by any other party hereto of such other party's obligations under the Operative Documents except as otherwise so set forth. Section 15.11 Further Assurances. The parties hereto shall promptly cause to be taken, executed, acknowledged or delivered, at the sole expense of the Representative, all such further acts, conveyances, documents and assurances as the 82 89 other parties may from time to time reasonably request in order to carry out and preserve the security interests and liens (and the priority thereof) intended to be created pursuant to this Participation Agreement, the other Operative Documents, and the transactions thereunder (including, without limitation, the preparation, execution and filing of any and all Uniform Commercial Code financing statements and other filings or registrations which the parties hereto may from time to time request to be filed or effected). The Representative, at its own expense and without need of any prior request from any other party, shall take such action as may be necessary (including any action specified in the preceding sentence), or as so requested, in order to maintain and protect all security interests provided for hereunder or under any other Operative Document. Section 15.12 SUBMISSION TO JURISDICTION. EACH PARTY HERETO HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS PARTICIPATION AGREEMENT OR ANY OF THE OTHER OPERATIVE DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. Section 15.13 Setoff. The Lenders and the Lessors shall, upon the occurrence of any Lease Event of Default or Construction Agency Event of Default, have the right to appropriate and, subject to Section 4.7, apply to the payment of any Beverly Entity's obligations under the Lease, the Construction Agency Agreement and the other Operative Documents as security for the payment of such obligations, any and all balances, credits, deposits, accounts or moneys of such Beverly Entity then or thereafter maintained with any Lender or any Lessor. The rights of the Lenders and the Lessors under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Person may have. Section 15.14 WAIVER OF JURY TRIAL. THE PARTIES HERETO VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS PARTICIPATION AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY 83 90 OF THE PARTIES HERETO. THE PARTIES HERETO HEREBY AGREE THAT THEY WILL NOT SEEK TO CONSOLIDATE ANY SUCH LITIGATION WITH ANY OTHER LITIGATION IN WHICH A JURY TRIAL HAS NOT OR CANNOT BE WAIVED. THE PROVISIONS OF THIS SECTION 15.14 HAVE BEEN FULLY NEGOTIATED BY THE PARTIES HERETO AND SHALL BE SUBJECT TO NO EXCEPTIONS. EACH BEVERLY ENTITY PARTY HERETO ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH OF THE AGENT LESSOR, THE ADMINISTRATIVE AGENT, THE ARRANGER AND EACH OF THE PARTICIPANTS ENTERING INTO THIS PARTICIPATION AGREEMENT AND EACH SUCH OTHER OPERATIVE DOCUMENT. Section 15.15 No Participant Responsible for Other Participants. The obligations of each Participant under this Participation Agreement and the other Operative Documents are several and not joint; and, in the event of a failure by a Participant to perform any of its obligations hereunder or under any other Operative Document, neither the Agent Lessor nor the Administrative Agent nor any other Participant (other than the defaulting Participant) shall have any liability as a consequence thereof. Section 15.16 Each Lessor to Have an Undivided Interest. The Agent Lessor hereby confirms that it is holding each Property on behalf of the Lessors, each of which shall hold an undivided interest in the Property (and all proceeds thereof), in each case such interest to be equal to the Commitment of such Lessor relative to the aggregate amount of the Lessor Commitment of all Lessors. Section 15.17 Authority of Representative. Each of the Lessees hereby appoints and designates (which appointment and designation is irrevocable and coupled with an interest) Beverly Enterprises, Inc., as its attorney in fact and legal representative (the "Representative") for the purposes of the Operative Documents and all transactions contemplated thereby, and hereby authorizes each Participant to conclusively rely on such designation. Each Lessee hereby confirms that the Representative, acting alone, has sufficient power and authority to bind such Lessee in respect of all matters contemplated by the Operative Documents, and hereby agrees to indemnify and hold each Participant harmless from and against any Claims it may suffer in relying on the Representative as above indicated. 84 91 IN WITNESS WHEREOF, the parties hereto have caused this Participation Agreement to be duly executed by their respective officers thereunto duly authorized as of the day and year first above written. BEVERLY ENTERPRISES, INC., as Representative, Construction Agent and Parent Guarantor By ---------------------------------------------- Name: Title: THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, as Arranger and as a Lender By ---------------------------------------------- Name: Title: BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC. By ---------------------------------------------- Name: Title: BANK OF MONTREAL, as Co- Arranger, Administrative Agent and as a Lender By ---------------------------------------------- Name: Title: 85 92 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION as Documentation Agent and as a Lender By -------------------------------------------- Name: Title: VANTAGE HEALTHCARE CORPORATION, as Lessee and Structural Guarantor By -------------------------------------------- Name: Title: PETERSEN HEALTH CARE, INC., as Lessee and Structural Guarantor By -------------------------------------------- Name: Title: BEVERLY SAVANA CAY MANOR, INC., as Lessee and Structural Guarantor By -------------------------------------------- Name: Title: 86 93 BEVERLY ENTERPRISES - GEORGIA, INC., as Lessee and Structural Guarantor By -------------------------------------------- Name: Title: BEVERLY HEALTH AND REHABILITATION SERVICES, INC., as Lessee and Structural Guarantor By -------------------------------------------- Name: Title: BEVERLY ENTERPRISES - ARKANSAS, INC., as Lessee and Structural Guarantor By -------------------------------------------- Name: Title: BEVERLY ENTERPRISES - FLORIDA, INC., as Lessee and Structural Guarantor By -------------------------------------------- Name: Title: 87 94 BEVERLY ENTERPRISES - WASHINGTON, INC., as Lessee and Structural Guarantor By -------------------------------------------- Name: Title: BEVERLY ENTERPRISES - CALIFORNIA, INC., as Lessee and Structural Guarantor By -------------------------------------------- Name: Title: 88 95 SCHEDULE I TO PARTICIPATION AGREEMENT COMMITMENTS
COMMITMENT PARTICIPANT COMMITMENT PERCENTAGE - -------------------------------------------------------------------------------- LENDERS LTCB $ 50,000,000 40% Bank of Montreal $ 28,750,000 23% Bank of America $ 25,000,000 20% LESSORS Bank of Montreal Global $ 21,250,000 17% Capital Solutions, Inc. TOTAL $125,000,000 100%
I-1 96 SCHEDULE II TO PARTICIPATION AGREEMENT Notice Information, Wire Instructions and Funding Offices Representative, Construction Agent and Parent Guarantor BEVERLY ENTERPRISES, INC. 5111 Rogers Avenue Suite 40-A Fort Smith, Arkansas 72919 Attention: Jack MacKenzie Facsimile No.: (501) 452-2705 Wire Transfer Instructions: Bank: Chase Manhattan Bank ABA Number: 021-000-021 Account Name: Beverly Enterprises, Inc. Account Number: 323-213448 Ref: Synthetic Lease Draws Agent Lessor: BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC. 311 West Monroe Chicago, IL 60603 Attention: Amy Szeto Facsimile No.: (312) 461-2347 Wire Transfer Instructions: Bank: Citibank N.A. ABA Number: 021-000-089 Account Name: BMO Leasing Account Number: 3602-3029 Ref: Beverly Enterprises II-1 97 Administrative Agent: BANK OF MONTREAL 115 South LaSalle Chicago, IL 60603 Attention: Sonya Taitt Facsimile No.: (312) 750-4345 Wire Transfer Instructions: Bank: Harris Bank ABA Number: 071-000-288 Account Name: Bank of Montreal Account Number: 124-8566 Ref: Beverly Enterprises Lessors: BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC. 311 West Monroe Chicago, IL 60603 Attention: Amy Szeto Facsimile No.: (312) 461-2347 Wire Transfer Instructions: Bank: Citibank N.A. ABA Number: 021-000-089 Account Name: BMO Leasing Account Number: 3602-3029 Ref: Beverly Enterprises II-2 98 Lenders: THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY Credit issues office: The Long Term Credit Bank of Japan, Ltd. Los Angeles Agency 350 South Grand Ave., Suite 3000 Los Angeles, California 90071 Attention: Koji Toriumi, Vice President Facsimile No. (213) 687-3921 Funding office: The Long-Term Credit Bank of Japan, Ltd., New York Branch 165 Broadway 48th Floor New York, New York 10006 Attention: Bernadette McKenna, Assistant Manager Facsimile No.: (215) 335-4998 Wire Transfer Instructions: Bank: Chase Manhattan Bank, New York ABA Number: 021000021 Name of Account: The Long-Term Credit Bank of Japan, Ltd., New York Branch Account Number: 544-7-75066 Ref: Beverly Enterprises, Inc./BMO Leasing II-3 99 BANK OF MONTREAL 115 South LaSalle Chicago, IL 60603 Attention: Sonya Taitt Facsimile No.: (312) 750-4345 Wire Transfer Instructions: Bank: Harris Bank ABA Number: 071-000-288 Account Name: Bank of Montreal Account Number: 124-8566 Ref: Beverly Enterprises BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION Credit Contact: Exact Name of Signing Officer: J. Gregory Seibly Title of Signing Officer: Vice President Bank Address: 555 S. Flower Street 11th Floor Los Angeles, CA 90071 Back-up: Beth Filipponi (213) 228-6379 Operations Contact: Maria Borrayo 333 S. Beaudry Avenue Los Angeles, CA 90017 Tel: (213) 345-7022 Fax: (213) 345-6550 Administration Contact: Beth Filipponi 555 S. Flower Street, 11th Floor Los Angeles, CA 90071 Tel: (213) 228-6379 Fax: (213) 228-2756 II-4 100 Wire Instructions to your Bank: Bank of America NT&SA ABA # 1210-00358 Acct # 12331-83980 Re: Beverly/BMO Leasing Attn: Maria Borrayo Lessees and Structural Guarantors: c/o Beverly Enterprises, Inc. II-5 101 SCHEDULE III TO PARTICIPATION AGREEMENT Subsidiaries & Indebtedness III 102 SCHEDULE V TO PARTICIPATION AGREEMENT Existing Properties Tampa (Hillsborough Co.), FL. Marietta (Cobb Co.), GA. Fort Myers (Lee Co.), FL Lakeland (Polk Co.), FL. Arkadelphia (Clark Co.), AR. Larzo (Pinellas Co.), FL. Murrieta (Riverside Co.), CA. (Health & Rehab/Assisted Living) Federal Way (King Co.), WA El Dorado (Union Co.), AR. Corporate Headquarters, Forth Smith, AR Bradenton (Manatee Co.), FL. Crestview (Okaloosa Co.), FL. North Little Rock (Pulaski Co.), AR V-II 103 SCHEDULE IV TO PARTICIPATION AGREEMENT PRICING CATEGORY For purposes of the Pricing Categories used in the definitions of "Loan Margin" and "Lessor Margin", the following terms have the following meanings: "Pricing Ratio" means the ratio of Consolidated EBITDAR to the sum of Consolidated Interest Charges and Consolidated Rental Expense. "Category I Pricing" applies on any day after March 31, 1997 if, as of the last day of the fiscal quarter of the Representative most recently ended on or prior to such day and as to which the Representative shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 10.1(d)(iii), the Pricing Ratio is greater than 2.50 to 1.0. "Category II Pricing" applies on any day after March 31, 1997 if, as of the last day of the fiscal quarter of the Representative most recently ended on or prior to such day and as to which the Representative shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 10.1(d)(iii), (i) the Pricing Ratio is greater than 2.25 to 1.0 and (ii) Category I Pricing does not apply. "Category III Pricing" applies on any day if, as of the last day of the fiscal quarter of the Representative most recently ended on or prior to such day and as to which the Representative shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 10.1(d)(iii), (i) the Pricing Ratio is greater than 2.00 to 1.0 and (ii) neither Category I Pricing nor Category II Pricing applies. "Category IV Pricing" applies on any day if, as of the last day of the fiscal quarter of the Representative most recently ended on or prior to such day and as to which the Representative shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 10.1(d)(iii), (i) Pricing Ratio is greater than 1.75 to 1.0 and (ii) none of Category I Pricing, Category II Pricing or Category III Pricing applies. "Category V Pricing" applies on any day if, on such day, no other Pricing Category applies. "Pricing Category" means any one of the five pricing categories denominated Category I Pricing, Category II Pricing, Category III Pricing, Category IV Pricing or Category V Pricing. IV-I 104 SCHEDULE V Additional Properties New Beverly Headquarters North Little Rock (Pulaski Co.) AR Crestview (Okaloosa Co.) FL Bradenton (Manatee Co.) FL Callaway (Bay Co.) FL V-I 105 EXHIBIT A TO PARTICIPATION AGREEMENT FORM OF LEGAL OPINION OF REPRESENTATIVE, LESSEES AND GUARANTORS(1) SEE TABS 11 AND 12 - -------- (1)These opinions may be divided between Lessee's New York counsel with respect to opinions 3, 9 and 10 and Lessee's general counsel with respect to all other opinions. A-I 106 SCHEDULE A A-II 107 EXHIBIT B TO PARTICIPATION AGREEMENT FORM OF FUNDING REQUEST (Date) TO: Agent Lessor and the Administrative Agent, pursuant to the Amended and Restated Participation Agreement (the "Participation Agreement") dated as of August 28, 1998 among the Lessees, Representative, Construction Agent, Parent Guarantor, the Structural Guarantors, the Agent Lessor, the Lessors, the Lenders, the Administrative Agent, the Arranger and the Co-Arranger as the same may be amended, supplemented, amended and restated or otherwise modified from time to time (capitalized terms used herein shall have the meanings ascribed thereto in the Participation Agreement). FROM: Beverly Enterprises, Inc., as Construction Agent RE: [Funding Date][Acquisition Date] Closing 1. This irrevocable Funding Request is hereby delivered by Lessee pursuant to Section 3.4(a) of the Participation Agreement. 2. The [Funding Date][Acquisition Date] is scheduled for _______________, 199_ [, and such date will also be an Acquisition Date]. 3. The amount of the Advance is $__________________. 4. The Loans and Lessor Amounts comprising such Advance will be [Base Rate Loans/Lessor Amounts][Eurodollar Loans/Lessor Amounts]. The initial Interest Period for such Eurodollar Loans/Lessor Amounts will extend from the [Funding Date] [Acquisition Date] to the next Scheduled Payment Date. 5. The Advance will be allocated among each of the Properties listed in Schedule I attached hereto. With respect to each acquisition of Property, Schedule II specifies (i) a description of the Property, (ii) the seller or lessor of the Property, (iii) the related Land Acquisition Cost and (iv) the Estimated Improvement Costs. 6. After giving effect to the Advance requested hereby, the Property Cost for each Property in respect of which the Advance is being drawn is set forth on Schedule A hereto and such amount does not exceed the Fair Market Sales Value for such Property as set forth in (i) the Improved Property Appraisal, with respect to any Improved Property, therefor as delivered pursuant to Section 6.1(d) of the B-I 108 Participation Agreement, and (ii) the As-Built Appraisal, with respect to any other Property,". therefor as delivered pursuant to clause (i) or (ii) of Section 6.2(b) of the Participation Agreement. 7. Funds shall be sent by wire transfer as follows: a. Each Lessor and Lender shall transfer its Commitment Percentage of $______________ to the following account of Agent Lessor: Bank: ABA Number: Account Name: Account Number: Ref: Further Credit to: [amount to be provided by Lessee] b. Construction Agent hereby instructs Agent Lessor to distribute the funds as follows: [information to be provided by Construction Agent] 8. All of the costs being funded pursuant to this Funding Request relate to the acquisition of Land and all Improvements thereon and to the construction of such other Improvements subject to the Construction Agency Agreement and all moneys advanced to Construction Agent pursuant to this Funding Request relate to supplies purchaser for Construction work actually performed on such Construction and will be applied by the Construction Agent solely to the payment (or reimbursement) of such costs and for no other purposes. In connection with such requested Advance, the Construction Agent hereby represents and warrants to you as follows: a. On the proposed Funding Date or Acquisition Date, both immediately before and after giving effect to the making of the requested Advance and the application of the proceeds thereof, the statements made by each Beverly Entity in Section 8 of the Participation Agreement are true and correct in all material respects. b. After giving effect to the Advance requested hereby (i) the aggregate outstanding amounts of each of the Loans and the Lessor Amounts to all Lessees does not exceed the Commitments of the Lenders and the Lessors, respectively, (ii) in the case of an acquisition of a fee simple interest or B-II 109 leasehold interest in the applicable Land, the Land Acquisition Cost for such Property does not exceed the Fair Market Sales Value of such Property as set forth in the Appraisal of such Property delivered pursuant to Section 6.1(d) of the Participation Agreement and (iii) the total amount advanced with respect to each Construction Period Property is within the Construction Budget for such Property. c. All of the conditions precedent set forth in Article VI of the Participation Agreement applicable to the Advance requested hereby have been satisfied or waived. IN WITNESS WHEREOF, I have signed my name this ______ day of _______, 199_. BEVERLY ENTERPRISES, INC., as Construction Agent By: ---------------------------------- Name: -------------------------------- Title: ------------------------------- B-III 110 SCHEDULE A TO FUNDING REQUEST ALLOCATION OF ADVANCES
Property Land Acquisition Improvement Costs Description (City, Lease Supp. Costs (Current (Current Advance State) No. Advance Only) Only) 1._______ No. __ $________ $________ 2._______ No. __ $________ $________ 3._______ No. __ $________ $________ 4._______ No. __ $________ $________ 5._______ No. __ $________ $________ Aggregate Property As-Built Appraisal Land Acquisition Cost (all Advances for Property as of Costs and to date, including Completion Date Estimated Current Advance) Improvement Costs 1._______ $________ $________ 2._______ $________ $________ 3._______ $________ $________ 4._______ $________ $________ 5._______ $________ $________
B-IV 111 SCHEDULE B TO FUNDING REQUEST INFORMATION REQUIRED FOR FUNDING ACQUISITION OF LAND 1. Description of the subject Property:__________. 2. The subject Property consists of [Land only] [Land and Improvements]. 3. The Land comprising part of the subject Property is to be [ground leased by the Lessors] [acquired by the Lessors in fee simple]. 4. [name of Seller/Ground lessor] is the [Seller] [Ground lessor] of the Land comprising part of the subject Property. 5. */Land Acquisition Cost for the subject Property: Indicated on Schedule A. 6. Estimated Improvement Costs for the subject Property in the aggregate are $_____________. - -------- */ Insert in the case of an acquisition of a fee simple interest in the applicable Land. B-V 112 EXHIBIT C TO PARTICIPATION AGREEMENT FORM OF INTEREST PERIOD SELECTION/CONTINUATION/CONVERSION NOTICE*/ Re:(Beverly Enterprises, Inc.) TO: Agent Lessor and Administrative Agent This Interest Period Selection/Continuation/Conversion Notice is delivered to you pursuant to Section 3.6 of the Amended and Restated Participation Agreement dated as of August 28, 1998 (the "Participation Agreement"), among the Lessees, Representative, Construction Agent, Parent Guarantor, the Structural Guarantors, the Agent Lessor, the Lessors, the Lenders, the Administrative Agent, the Arranger and the Co-Arranger as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. Beverly Enterprises, Inc. (the "Representative") hereby requests that on _____ __, 19__, all or any portion of the presently outstanding principal amount of the Loans and Lessor Amounts: (1) which are presently [Base Rate Loans/Lessor Amounts] [Eurodollar Loans/Lessor Amounts with an Interest Period ending on ______ __, 19__], (2) be [continued as] [converted into], (3) [Eurodollar Loans/Lessor Amounts having an Interest Period of ____ months]. Any and all capitalized terms used in this Notice for Selection/Continuation/Conversion shall have the meaning ascribed thereto in the Participation Agreement, unless specifically defined herein. The Representative hereby certifies, represents and warrants that no Default or Event of Default exists or will (after giving effect to the selection, continuation or conversion requested hereby) exist. - -------- */ Subject to Section 3.6(b) of the Participation Agreement, this notice is only applicable with respect to Loan and Lessor Amounts outstanding during the Basic Lease Term. C-I 113 The Representative has caused this notice to be executed and delivered by its Responsible Officer this _____ day of ______ __, 19__. BEVERLY ENTERPRISES, INC., as Representative By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- C-II 114 EXHIBIT D-1 TO PARTICIPATION AGREEMENT FORM OF OFFICER'S CERTIFICATE Pursuant to the Amended and Restated Participation Agreement dated as of August 28, 1998 (the "Participation Agreement") among the Lessees, Representative, Construction Agent, Parent Guarantor, the Structural Guarantors, the Agent Lessor, the Lessors, the Lenders, the Administrative Agent, the Arranger and the Co- Arranger as the same may be amended, supplemented, amended and restated or otherwise modified from time to time. I, _______________, _______________ of [Representative/Lessee], do hereby certify as follows (capitalized terms used herein shall have the meanings ascribed thereto in the Participation Agreement): (1) The representations and warranties of [Representative/Lessee] contained in the Participation Agreement and other Operative Documents to which it is a party are true, correct and complete on and as of the date hereof with the same effect as if such representations and warranties had been made on and as of the date hereof. (2) [Representative/Lessee] has performed all agreements on its part required to be performed under the Participation Agreement and the other Operative Documents to which it is a party on or prior to the date hereof. (3) There exists on the date hereof no Default or Event of Default. IN WITNESS WHEREOF, I have signed my name this _____ day of _____________, 199__. [REPRESENTATIVE/LESSEE] By: ---------------------------------------- Name: -------------------------------------- Title: ------------------------------------- D-1-I 115 EXHIBIT D-2 TO PARTICIPATION AGREEMENT FORM OF SECRETARY'S CERTIFICATE The undersigned, _________________, [Assistant] Secretary of [Representative/Lessee], a ______ corporation [("Representative/Lessee"], pursuant to the Amended and Restated Participation Agreement dated as of August 28, 1998 (the "Participation Agreement") among the Representative, Construction Agent, Parent Guarantor, the Structural Guarantors, the Agent Lessor, the Lessors, the Lenders, the Administrative Agent, the Arranger and the Co-Arranger as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, does hereby certify as follows (capitalized terms used herein shall have the meanings ascribed thereto in the Participation Agreement): 1. Attached hereto as Exhibit C are true, correct and complete copies of all resolutions adopted by the [Board of Directors] (and shareholders) of [Representative/Lessee] relating to the [Participation Agreement/Master Lease] and the other Operative Documents to which [Representative/Lessee] is a party, which resolutions have not been amended or rescinded and are in full force and effect on the date hereof. 2. No proceeding for merger, consolidation, liquidation, reorganization or dissolution of [Representative/Lessee] or the sale of all or substantially all of its assets is pending or contemplated. 3. The following persons are on the date hereof duly qualified and acting officers of [Representative/ Lessee], duly elected or appointed to the offices set forth beside their respective names and signatures, and each such person who, as an officer of [Representative/Lessee], signed the [Participation Agreement/Master Lease], any of the other Operative Documents or any other document delivered before or on the date hereof in connection with such agreements and documents and the transactions contemplated therein was, at the respective times of such signing and delivery, and is now duly elected or appointed, qualified and acting as such officer, and the signatures of such persons appearing on such documents are their genuine signatures: D-2-I 116
NAME OFFICE SIGNATURE - ---- ------ --------- - ----------- ------------- ------------------------ - ----------- ------------- ------------------------ - ----------- ------------- ------------------------
IN WITNESS WHEREOF, I have signed my name this _____ day of _____________, 199__. [REPRESENTATIVE/LESSEE] By: --------------------------------------- Name: ------------------------------------- Title: [Assistant] Secretary I, ___________________, [Vice] President of [Representative/Lessee], hereby certify that ______________________ is on the date hereof the duly elected, qualified and acting [Assistant] Secretary of [Representative/Lessee], and that the signature set forth above is such person's true and correct signature. Dated: _________________, 199__ [REPRESENTATIVE/LESSEE] By: ---------------------------------------- Name: -------------------------------------- Title: [Vice] President D-2-II 117 EXHIBIT D-3 TO PARTICIPATION AGREEMENT FORM OF RESPONSIBLE OFFICER'S CERTIFICATE Pursuant to the Amended and Restated Participation Agreement dated as of August 28, 1998, among the Lessees, Representative, Construction Agent, Parent Guarantor, the Structural Guarantors, the Agent Lessor, the Lessors, the Lenders, the Administrative Agent, the Arranger and the Co-Arranger as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, I, [name of Responsible Officer], [position of Responsible Officer] of Beverly Enterprises, Inc. (the "Representative"), do hereby certify as follows (capitalized terms used herein shall have the meanings ascribed thereto in the Participation Agreement): 1. The representations and warranties of each Beverly Entity contained in the Participation Agreement and other Operative Documents to which it is a party are true, correct and complete on and as of the date hereof with the same effect as if such representations and warranties had been made on and as of the date hereof. 2. Each Beverly Entity has performed all agreements on its part required to be performed under the Participation Agreement and the other Operative Documents to which it is a party on or prior to the date hereof. 3. Each Operative Document to which any Beverly Entity is a party is in full force and effect with respect to it. 4. There exists on the date hereof no Default or Event of Default. D-3-I 118 IN WITNESS WHEREOF, I have signed my name this _____ day of _______________ 199_ and certify that I am the [position of Responsible Officer] of the Representative. BEVERLY ENTERPRISES, INC., as Representative By: --------------------------- Name: ------------------------- Title: ------------------------ D-3-II 119 EXHIBIT E TO PARTICIPATION AGREEMENT FORM OF COMPLIANCE CERTIFICATE TO: Agent Lessor, Administrative Agent, Lessors and Lenders 1. This Compliance Certificate is hereby delivered by the Representative pursuant to Section 10.1(d)(iii)(B) of the Amended and Restated Participation Agreement dated as of August 28, 1998, among the Lessees, Representative, Construction Agent, Parent Guarantor, the Structural Guarantors, the Agent Lessor, the Lessors, the Lenders, the Administrative Agent, the Arranger and the Co-Arranger as the same may be amended, supplemented, amended and restated or otherwise modified from time to time (the "Participation Agreement"). 2. As described below, the Representative and each Lessee has been in compliance during and at the end of such accounting periods covered by the financial statements delivered pursuant to Sections 10.1(d)(i) and 10.1(d)(ii) of the Participation Agreement with the restrictions contained in Section 10.2(a), Section 10.2(b), Section 10.2(c), clause v of Section 10.2(e), Section 10.2(f), Section 10.2(g), Section 10.2(i) and Section 10.2(1) of the Participation Agreement. [Representative to provide reasonable detail evidencing compliance with aforementioned section references] Any and all capitalized terms used in this Compliance Certificate shall have the meaning ascribed thereto in the Participation Agreement, unless specifically defined herein. E-I 120 IN WITNESS WHEREOF, I have signed my name this _____ day of _______________ 199_. BEVERLY ENTERPRISES, INC., as Representative By: --------------------------- Name: ------------------------- Title: ------------------------ E-II 121 EXHIBIT F TO PARTICIPATION AGREEMENT FORM OF ASSIGNMENT AGREEMENT To: Beverly Enterprises, Inc. Bank of Montreal Global Capital Solutions, Inc., as Agent Lessor Reference is made to Section 12.1 of the Amended and Restated Participation Agreement dated as of August 28, 1998, among the Lessees, Representative, Construction Agent, Parent Guarantor, the Structural Guarantors, the Agent Lessor, the Lessors, the Lenders, the Administrative Agent, the Arranger and the Co-Arranger as the same may be amended, supplemented, amended and restated or otherwise modified from time to time (the "Participation Agreement"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings given thereto in the Participation Agreement. [Name of assigning Participant] (the "Assignor") and [Name of Eligible Lender Assignee/Eligible Lessor Assignee] hereby agree as follows: 1. The Assignor hereby sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, a [__]% interest in and to all the Assignor's rights and obligations under the Operative Documents as of the Effective Date (as defined below) (including, without limitation, such percentage interest in the [Lender][Lessor] Commitment of the Assignor on the Effective Date and such percentage interest in each [Loan][Lessor Amounts] owing to the Assignor outstanding on the Effective Date together with such percentage interest in all unpaid [interest][Yield] and fees (including those fees under Section 4.4 of the Participation Agreement) accrued to the Effective Date). 2. The Assignor (a) represents and warrants that as of the date hereof its [Lender][Lessor] Commitment (without giving effect to assignments thereof which have not yet become effective) is $[_______], and the outstanding aggregate principal balance of its [Loans][Lessor Amounts] (without giving effect to assignments thereof which have not yet become effective) is $[_______] and (b) makes no representation or warranty and assumes no responsibility (i) with respect to any statements, warranties or representations made in or in connection with any Operative Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Operative Document or any other instrument or document furnished thereunder or pursuant thereto, except that it represents and warrants that it is the legal and beneficial owner of the interests being assigned by it hereunder and that such interests are free and clear of adverse claims, and (ii) with respect to the financial position of the Representative, Lessee or any Guarantor or the performance or observance by the Representative, any Lessee or any Guarantor of any of their F-I 122 respective obligations under any Operative Document or any other instrument or document furnished thereunder or pursuant thereto. 3. The Assignee (a) represents and warrants that it is legally authorized to enter into this Assignment Agreement; (b) confirms that it has received a copy of each of the Participation Agreement, Lease, Construction Agency Agreement and Loan Agreement, together with copies of the most recent financial statements delivered pursuant to Section 10.1(d) of the Participation Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement; (c) agrees that it will, independently and without reliance upon the Administrative Agent, the Agent Lessor, the Assignor or any other Participant and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under any Operative Document; (d) appoints and authorizes the Administrative Agent and the Agent Lessor, as applicable, to take such action on its behalf and to exercise such powers under the Operative Documents as are delegated to the Administrative Agent and the Agent Lessor, as applicable, by the terms thereof, together with such powers as are reasonably incidental thereto; and (e) agrees that it will perform in accordance with its terms all the obligations which by the terms of the Operative Documents are required to be performed by it as a Participant. 4. From and after the Effective Date (a) the Assignee shall be party to and be bound by the provisions of the Operative Documents as a [Lender][Lessor] and, to the extent of its interests assigned by this Assignment Agreement, have the rights and obligations of a ["Lender"] ["Lessor"] and as a "Participant" thereunder and (b) the Assignor shall, to the extent of its interests assigned by this Assignment Agreement, relinquish its rights and be released from its obligations under the Operative Documents. 5. This Assignment Agreement will be delivered to each of the Administrative Agent and the Agent Lessor together with a transfer fee of $2,500 payable by the Assignor or the Assignee to the Administrative Agent for its own account. [6. The Assignor shall surrender to the Administrative Agent its Note or Notes representing the Assignor's interest in and to all the Assignor's rights and obligations under the Operative Documents, and the Administrative Agent will (upon execution and delivery thereof by the Representative) promptly provide to the Assignor and the Assignee separate promissory notes in the amount of their respective interests substantially in the form of the original Note (each such note with F-II 123 a notation thereon that it is given in substitution for and replacement of the original Note or any replacement notes thereof).]* 7. THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 8. The effective date of this Assignment Agreement shall be ______ __, 19__ (the "Effective Date"). [THIS SPACE INTENTIONALLY LEFT BLANK] - -------- * This Section to apply only if the Assignor is a Lender. F-III 124 IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement to be executed and delivered by their respective duly authorized officers as of the date first written above. Adjusted Commitment [__________________], as Assignor Commitment to make Loans: $ --------- Commitment Percentage: ___% By: --------------------------- Name: ---------------------- Commitment to advance Title: Lessor Amounts: --------------------- $ --------- Commitment Percentage: ___% Commitment Commitment to make Loans: [__________________], $ --------- as Assignee Commitment Percentage: ___% Commitment to advance By: Lessor Amounts: --------------------------- $ Name: ------- ---------------------- Commitment Percentage: ___% Title: --------------------- F-IV 125 Agreed to and Accepted: BEVERLY ENTERPRISES, INC., as Representative By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- BANK OF MONTREAL as Administrative Agent By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- BANK OF MONTREAL GLOBAL CAPITAL SOLUTIONS, INC., as Agent Lessor By: ----------------------------------- Name: --------------------------------- Title: -------------------------------- F-V 126 EXHIBIT G TO PARTICIPATION AGREEMENT FORM OF LEGAL OPINION OF LOCAL COUNSEL TO LESSEE [Letterhead of Local Counsel] ___________________, 19___ TO: Bank of Montreal Global Capital Solutions, Inc. Bank of Montreal The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency Bank of America National Trust and Savings Association Re: Beverly Enterprises, Inc. Ladies and Gentlemen: We have acted as special ___________________ counsel to _______________, a ____________ corporation (together with its permitted successors and assigns, the "Company") in connection with the transactions contemplated by the Amended and Restated Participation Agreement dated as of August 28, 1998 (the "Participation Agreement"), entered into by and among the Lessees, Representative, Construction Agent, Parent Guarantor, the Structural Guarantors, the Agent Lessor, the Lessors, the Lenders, the Administrative Agent, the Arranger and the Co-Arranger. Capitalized terms used but not otherwise defined herein have the respective meanings specified in Appendix A to the Participation Agreement. This opinion is being furnished to you at the request of [Lessee] (the "Lessee") pursuant to Section 6.1(s) of the Participation Agreement. In connection with the opinions contained herein, we have examined and are familiar with originals of or copies identified to our satisfaction of the documents listed on Schedule I attached hereto (the "Subject Documents"). In addition, we have G-I 127 examined and are familiar with such legal matters as we have deemed necessary for the purpose of rendering this opinion. In rendering this opinion we have assumed: (a) the genuineness of the signatures on all documents and instruments and the authenticity of all documents submitted as originals, and the conformity to originals of all documents submitted as photostatic or certified copies; (b) that each of the parties to the Subject Documents has all the legal capacity, power and authority required for it to enter into the Subject Documents to which it is a party, and to perform its respective obligations thereunder; (c) that all such matters have received any corporate or other authorization required by any applicable charter, by-law, law or regulation; (d) the due execution and delivery of the Subject Documents by each of the parties thereto; and (e) that there are no agreements between any parties which would alter the agreements set forth in the Subject Documents. To the extent that the assumptions in clauses (b) and (c) relate to any laws or regulations, such assumptions relate only to those laws and regulations as to which we are not opining herein. Based upon the foregoing, we are of the opinion that: 1. Neither Bank of Montreal Global Capital Solutions, Inc. nor any Participant is required under the laws of the State of ____________ (the "State") to qualify as a foreign corporation or otherwise in the State solely as a result of its execution, delivery and performance of the Subject Documents to which it is a party. 2. Title to the Property situated in the State may be held in the name of the Agent Lessor as follows: Bank of Montreal Global Capital Solutions, Inc., as Agent Lessor under the Amended and Restated Master Lease and Open End Mortgage dated as of August 28, 1998, among Bank of Montreal Global Capital Solutions, Inc., as Agent Lessor, Beverly Enterprises, Inc., as Representative and the various Lessees identified therein. 3. To the extent local law is applicable to the Subject Documents, each of the Subject Documents delivered on the Acquisition Date for the related Property situated in the State or previously delivered constitutes the legal, valid and binding obligation of the parties thereto enforceable against each such party in accordance with the terms thereof, except as such enforceability may be limited by applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally and by general equitable principles. [4. The [Deed] [Ground Lease] delivered on the Acquisition Date for the related Property situated in the State is in form sufficient under the laws of the State to convey all interests in the property described therein intended to be conveyed thereby, and such instrument, when filed or recorded with _______________________ (the "Recording Office") will have been filed or recorded in the appropriate public offices in the State in which such filing or G-II 128 recording is necessary to convey valid title to the property described therein to the Agent Lessor. 5. The Subject Documents create rights in the Agent Lessor for the ratable benefit of all Participants, and the Agent Lessor has the power to exercise remedies granted to it by the Subject Documents without naming the other Participants. 6. No registration, filing or qualification is required to permit the Agent Lessor to exercise remedies in the State under the Lease, and the validity and enforceability of the Lease will not be affected by any failure of the Agent Lessor to qualify. 7. If the transactions contemplated by the Master Lease and Lease Supplement No. __ (the "Subject Lease Supplement") delivered on the Acquisition Date for the related Property situated in the State are characterized as a lease transaction, the Master Lease and the Subject Lease Supplement are in form sufficient under the laws of the State to demise to the Lessee a valid leasehold interest in such Property. The Subject Lease Supplement, when recorded with the Recording Office, will have been filed or recorded in all public offices in the State in which such filing or recording is necessary to provide constructive notice of the Subject Lease Supplement to third Persons and to establish of record the interest of the Agent Lessor thereunder. 8. If the transactions as provided for in the Master Lease and the Subject Lease Supplement are characterized as a loan transaction: a. Section 6 of the Subject Lease Supplement is effective to create a power of sale in favor of the Lessee. b. The Master Lease and the Subject Lease Supplement are in form sufficient under the laws of the State to create a valid lien or security interest, in favor of the Agent Lessor and to secure all the obligations of the Lessee under the Operative Documents, including future Advances, in the Property situated in the State described therein. The Subject Lease Supplement, when recorded with the Recording Office, will have been filed or recorded in all public offices in the State in which such filing or recording is necessary to perfect the lien of the Agent Lessor thereunder to the extent that such Property situated in the State constitutes real estate. The Master Lease and the Subject Lease Supplement each provide the Agent Lessor with all remedies customarily obtained by lenders in the State in connection with the type of loan and security provided thereby. [There is no "one form of action" or similar rule limiting G-III 129 the remedies available for the enforcement of the Lease. There is no limitation on remedies resulting from the exercise of remedies against any leased property located outside the State.]* 9. The Assignment of Lease and Rent and the Supplement to the Assignment of Lease and Rent delivered on the Acquisition Date for the related Property situated in the State are in form sufficient under the laws of the State to create valid liens or security interests in favor of the Lenders in the collateral described therein, and when recorded with the Recording Office, will have been filed or recorded in all public offices in the State in which such filing or recording is necessary to perfect the lien of the Lenders thereunder to the extent that such collateral constitutes real estate. The Assignment of Lease and Rent and the Supplement to the Assignment of Lease and Rent delivered on the Acquisition Date for the related Property situated in the State provide the Lenders with all remedies customarily obtained by lenders in the State in connection with the type of loan and security provided for by the Loan Agreement. 10. The law (statutory or otherwise) of the State does not require a lienholder to make an election of remedies where such lienholder holds security interests and liens on both the real and the personal property of a debtor or to take recourse first or solely against or otherwise exhaust its remedies against its collateral before otherwise proceeding to enforce against such debtor the obligations of such debtor. 11. The UCC Financing Statements which are to be recorded or filed within the State, the forms of which are attached as Schedule II hereto, are in form sufficient under the laws of the State for filing or recording, and when recorded with the Recording Office and the ____________ Secretary of State will have been filed or recorded in all public offices in the State in which such filing or recording is necessary to perfect the interest of the Agent Lessor in the collateral described therein to the extent the same can be perfected by filing or recording in the State. 12. Neither the execution and delivery of the Subject Documents, nor the fulfillment of or the compliance with the provisions thereof by the Agent Lessor results in a violation of, or contravenes any State statute, law, rule, code, ordinance or regulation to which the Agent Lessor is subject. 13. Except for the filings and recordings described above, no approval, consent, or withholding of objection on the part of, or filing or registration with, any governmental authority or regulatory body in the State is required to be made or taken in the State to establish, protect and preserve title to, interests in, liens on and security interests in the Property as contemplated by the Subject Documents, except for UCC continuation statements. - -------- * Bracketed language to be replaced in opinions from California. G-IV 130 14. Subject to the following sentence and except for federal, state and local franchise, withholding and income taxes, no taxes, fees or other charges imposed by the State, ___________ County or any other local governmental entity are payable by the Agent Lessor or the Lenders solely as a result of the execution, delivery, recordation or filing (where applicable) of the Subject Documents and all other instruments delivered in connection with the transactions contemplated thereby (except for nominal filing or recording fees payable at the time of filing or recording). 15. Under the laws of the State and local jurisdictions therein, there are no statutory or regulatory requirements relating to the transfer of ownership or operation, sale or foreclosure of the Property situated in the State which require notification of the State or the local jurisdiction of such transfer, sale or foreclosure, certification that there has been no discharge of Hazardous Materials or other substances. 16. The courts of the State would recognize the choice of New York law as to all matters of construction, validity and performance of the Operative Documents (excluding the lease documents which are governed by the internal laws of any other jurisdiction). The lease documents that are governed by the laws of the State are enforceable under the laws of the State. We are members of the Bar of the State. The opinions expressed herein are limited exclusively to the laws of the State and the rules and regulations, if any, under each of said laws. Certain of the Subject Documents purport to be governed by laws of states other than the State. With your permission, we have assumed for the purposes of this opinion (contrary to the express provisions thereof) that such agreements would be governed by and construed and interpreted in accordance with the laws of the State. Very truly yours, -------------------------- G-V 131 SCHEDULE I List of Subject Documents 1. Master Lease 2. Lease Supplement No. __ 3. [Deed] [Ground Lease] dated as of _______ __, 19___, from ____________, as [grantor] [landlord], to Bank of Montreal Global Capital Solutions, Inc., as Lessor Agent 4. Construction Agency Agreement 5. Supplement No. __ to Construction Agency Agreement 6. Assignment of Lease and Rent 7. Construction Agency Agreement Assignment 8. Supplement No. __ to Assignment of Lease and Rent 9. UCC financing statements described on Schedule II hereto 10. Construction Documents Assignment 11. Participation Agreement 12. Loan Agreement 13. Structural Guaranty 14. Guaranty 132 SCHEDULE II UCC Financing Statements [Attach Forms of UCC Financing Statements] 133 EXHIBIT H TO PARTICIPATION AGREEMENT FORM OF COMPLETION CERTIFICATE TO: Agent Lessor, Administrative Agent, Lessors and Lenders pursuant to the Amended and Restated Participation Agreement (the "Participation Agreement") dated as of August 28, 1998 among the Lessees, Representative, Construction Agent, Parent Guarantor, the Structural Guarantors, the Agent Lessor, the Lessors, the Lenders, the Administrative Agent, the Arranger and the Co-Arranger as the same may be amended, supplemented, amended and restated or otherwise modified from time to time (capitalized terms used herein shall have the meanings ascribed thereto in the Participation Agreement). With respect to the Property that is subject to Lease Supplement No. ___, the Construction Agent certifies to each of you, as of _____, 19__, as follows: 1. The construction of Improvements, the identification of and assistance with the acquisition of Land, and the construction of Improvements on such Land have been completed in all material respects in accordance with the applicable Plans and Specifications, the Construction Agency Agreement and the other Operative Documents, and in compliance in all material respects with all Requirements of Law and Insurance Requirements and in all material respects with all information, requirements and assumptions used in delivering the As-Built Appraisal with respect to such Property. 2. The Property is ready for occupancy and operation in accordance with the Plans and Specifications therefor, as evidenced by the issuance by the appropriate Governmental Authority of a permanent certificate of occupancy for all of the Improvements contemplated by the Plans and Specifications for such Property and all applicable Governmental Action has been taken; 3. The Property is subject to and governed by all of the provisions of the Master Lease and the other Operative Documents. 4. The representations and warranties set forth in Section 8.2 and 8.3 of the Participation Agreement (other than any representations and warranties made only as of a specific date, each of which was true and correct as of the date when made) are true and correct as of the date hereof as if such representations and warranties were set forth herein in full. 5. The aggregate Property Cost for the Property is $______. $______ of the Property Cost is allocable to Improvement Costs.* -------- * These amounts may be adjusted by a supplement to this certificate reflecting any adjustments required by the final amounts described in Item 6 hereof. H-I 134 6. Substantially all amounts owing to third parties for the Construction of the Improvements on the Property have been paid in full. We estimate that $__________ remain to be paid to subcontractors and that such amount has been included in Item 5. 7. No changes or modifications were made to the Plans and Specifications relating to the Property after the related Acquisition Date that have had a Material Adverse Effect on the value, use or useful life of the Property. H-II EX-10.38 3 AMENDED & RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.38 CONFORMED COPY $375,000,000 AMENDED AND RESTATED CREDIT AGREEMENT dated as of April 30, 1998 among BEVERLY ENTERPRISES, INC. The BANKS Listed Herein MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent 2 TABLE OF CONTENTS ----------------------
PAGE ----- ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions......................................................................2 SECTION 1.02. Accounting Terms and Determinations.............................................18 SECTION 1.03. Types of Loans and Borrowings...................................................18 ARTICLE 2 THE CREDITS SECTION 2.01. The Loans.......................................................................18 SECTION 2.02. Notice of Borrowing.............................................................19 SECTION 2.03. Notice to Banks; Funding of Loans...............................................19 SECTION 2.04. Notes...........................................................................20 SECTION 2.05. Maturity of Loans...............................................................21 SECTION 2.06. Interest Rates..................................................................21 SECTION 2.07. Letters of Credit...............................................................25 SECTION 2.08. Fees............................................................................30 SECTION 2.09. Optional Termination or Reduction of Commitments................................31 SECTION 2.10. Mandatory Termination of Commitments............................................31 SECTION 2.11. Method of Electing Interest Rates...............................................31 SECTION 2.12. Optional Prepayments............................................................33 SECTION 2.13. General Provisions as to Payments...............................................33 SECTION 2.14. Funding Losses..................................................................34 SECTION 2.15. Computation of Interest, Fees and Commissions...................................35 SECTION 2.16. Withholding Tax Exemption.......................................................35 SECTION 2.17. Maximum Interest Rate...........................................................35 ARTICLE 3 CONDITIONS SECTION 3.01. Effectiveness...................................................................36 SECTION 3.02. Borrowings and Letter of Credit Issuances.......................................37 ARTICLE 4 REPRESENTATIONS AND WARRANTIES SECTION 4.01. Corporate Existence and Power...................................................38 SECTION 4.02. Corporate and Governmental Authorization; No Contravention......................39 SECTION 4.03. Binding Effect..................................................................39 SECTION 4.04. Financial Information; Valuations...............................................39
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PAGE ----- SECTION 4.05. Litigation......................................................................39 SECTION 4.06. Compliance with ERISA...........................................................40 SECTION 4.07. Environmental Matters...........................................................40 SECTION 4.08. Taxes...........................................................................40 SECTION 4.09. Title to and Condition of Properties............................................41 SECTION 4.10. Not an Investment Company.......................................................41 SECTION 4.11. Full Disclosure.................................................................41 SECTION 4.12. Representations in Subsidiary Guaranty..........................................41 SECTION 4.13. Existing Letters of Credit......................................................41 ARTICLE 5 COVENANTS SECTION 5.01. Information.....................................................................42 SECTION 5.02. Maintenance of Property; Insurance..............................................44 SECTION 5.03. Compliance with Laws............................................................44 SECTION 5.04. Inspection of Property, Books and Records.......................................45 SECTION 5.05. Minimum Consolidated Net Worth..................................................45 SECTION 5.06. Fixed Charge Coverage Ratio.....................................................45 SECTION 5.07. Leverage Ratio..................................................................46 SECTION 5.08. Ownership of Stock of Wholly-Owned Subsidiaries.................................46 SECTION 5.09. Investments.....................................................................46 SECTION 5.10. Restricted Payments on Stock....................................................48 SECTION 5.11. Negative Pledge.................................................................49 SECTION 5.12. Consolidations, Mergers and Sales of Assets.....................................51 SECTION 5.13. Incurrence of Debt..............................................................52 SECTION 5.14. Use of Proceeds and Letters of Credit...........................................53 SECTION 5.15. Additional Subsidiary Guarantors................................................53 SECTION 5.16. Lease Conversions...............................................................54 SECTION 5.17. Transactions with Affiliates....................................................54 ARTICLE 6 DEFAULTS SECTION 6.01. Events of Defaults..............................................................54 SECTION 6.02. Notice of Default...............................................................58 ARTICLE 7 THE AGENT SECTION 7.01. Appointment and Authorizations..................................................58 SECTION 7.02. Agent and Affiliates............................................................58 SECTION 7.03. Action by Agent.................................................................58
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PAGE ----- SECTION 7.04. Consultation with Experts.......................................................59 SECTION 7.05. Liability of Agent..............................................................59 SECTION 7.06. Indemnification.................................................................59 SECTION 7.07. Credit Decision.................................................................59 SECTION 7.08. Successor Agent.................................................................59 SECTION 7.09. Agent's Fee.....................................................................60 ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair........................60 SECTION 8.02. Illegality......................................................................61 SECTION 8.03. Increased Cost and Reduced Return...............................................61 SECTION 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans.......................64 ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices.........................................................................64 SECTION 9.02. No Waivers......................................................................65 SECTION 9.03. Expenses; Documentary Taxes; Indemnification....................................65 SECTION 9.04. Sharing of Set-Offs.............................................................66 SECTION 9.05. Amendments and Waivers..........................................................66 SECTION 9.06. Successors and Assigns..........................................................67 SECTION 9.07. Margin Stock....................................................................68 SECTION 9.08. GOVERNING LAW; SUBMISSION TO JURISDICTION.......................................69 SECTION 9.09. Consent to Execution and Delivery of Certain Financing Documents; Release of Existing Collateral............................................................69 SECTION 9.10. Counterparts; Integration.......................................................69 SECTION 9.11. Confidentiality.................................................................69 SECTION 9.12. WAIVER OF JURY TRIAL............................................................70
iii 5 Schedule I - Pricing Schedule Schedule II - Commitment Schedule Schedule III - Existing Subsidiary Debt Schedule IV - Subsidiaries of the Borrower Exhibit A Note Exhibit B Form of Subsidiary Guaranty Exhibit C Form of Assignment and Assumption Agreement iv 6 AMENDED AND RESTATED CREDIT AGREEMENT AGREEMENT dated as of April 30, 1998 among BEVERLY ENTERPRISES, INC. (with its successors, the "BORROWER"), a Delaware corporation, the BANKS listed on the signature pages hereof, MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank (with its successors in such capacity, the "ISSUING BANK"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (with its successors in such capacity, the "AGENT"), amending and restating the Amended and Restated Credit Agreement dated as of August 20, 1997 (the "EXISTING CREDIT AGREEMENT") among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as issuing bank and as agent. WHEREAS, a Delaware corporation then known as Beverly Enterprises, Inc. (the "FORMER BORROWER") entered into an Amended and Restated Credit Agreement (the "ORIGINAL CREDIT AGREEMENT") dated as of December 20, 1996 among the Former Borrower, the banks listed on the signature pages thereof, the Issuing Bank and the Agent; WHEREAS, pursuant to an Amended and Restated Credit Agreement dated as of August 20, 1997 among the Former Borrower, the banks listed on the signature pages thereof, the Issuing Bank and the Agent, the Original Credit Agreement was amended and restated as set forth therein (the Original Credit Agreement, as so amended and restated, the "EXISTING CREDIT AGREEMENT"); WHEREAS, pursuant to the Existing Credit Agreement, an Assumption Agreement dated as of December 3, 1997 by the Borrower for the benefit of the Agent, the Issuing Bank and the banks under the Existing Credit Agreement and a New Pledge Agreement dated as of December 3, 1997 among the Borrower, Beverly Health & Rehabilitation Services, Inc. ("BH&RS") and the Agent, the Borrower assumed all of the obligations of the Former Borrower under the Existing Credit Agreement, the Former Borrower and certain of its Subsidiaries were released from all of their obligations under the Existing Credit Agreement and the related Financing Documents (as defined in the Existing Credit Agreement), the pledge by the Former Borrower and certain of its Subsidiaries of the capital stock of certain of their Subsidiaries was released and BH&RS pledged the capital stock of certain of its Subsidiaries to secure its obligations under the Financing Documents (as so defined); WHEREAS, the Borrower has requested that certain provisions of the Existing Credit Agreement be amended, and the Banks, the Issuing Bank and the Agent have agreed to such amendments, subject to the satisfaction of the terms 7 and conditions set forth herein, which amendments shall become effective only at such time as this Agreement becomes effective in accordance with Section 3.01; WHEREAS, the parties have agreed that, upon the effectiveness of this Agreement, any outstanding Loans made pursuant to the Existing Credit Agreement shall constitute outstanding Loans hereunder and shall be governed by the terms and conditions of this Agreement; WHEREAS, the parties have agreed that, upon the effectiveness of this Agreement, any outstanding "LETTERS OF CREDIT" issued or outstanding under the Existing Credit Agreement shall constitute "LETTERS OF CREDIT" hereunder and shall be governed by the terms and conditions of this Agreement; and WHEREAS, in order to set forth in one document, for the convenience of the parties, the text of the Existing Credit Agreement as amended by the amendments to be made upon the effectiveness hereof, the Existing Credit Agreement will upon satisfaction of the conditions set forth in Section 3.01 hereof, be amended and restated to read in full as set forth herein; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. The following terms, as used herein, have the following meanings: "ADJUSTED CD RATE" has the meaning set forth in Section 2.06(b). "ADJUSTED CONSOLIDATED DEBT" means at any date the sum, without duplication, of (i) all liabilities of the Borrower and its Subsidiaries at such date of the types classified as "current liabilities: short-term borrowings", "current liabilities: current portion of long-term obligations" and "long-term obligations" on the consolidated balance sheet included in the Base Financials, (ii) all guarantees at such date of obligations of other issuers (other than guarantees outstanding on the Effective Date of obligations outstanding on the Effective Date, in amounts not in excess of $79,375,000 and reported in the Base Financials) and (iii) an amount equal to the product of eight multiplied by the Consolidated Rental Expense for the four fiscal quarters of the Borrower most recently completed on or prior to such date. 2 8 "ADJUSTED LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.06(c). "ADMINISTRATIVE QUESTIONNAIRE" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent (with a copy to the Borrower) duly completed by such Bank. "AFFILIATE" means any Person (other than the Borrower, any Subsidiary of the Borrower or any Bank) (a) which directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Borrower or (b) which is the Beneficial Owner of 10% or more of any class of the Voting Stock of the Borrower. As used herein, the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting stock, by contract or otherwise. "AGENT" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Banks hereunder, and its successors in such capacity. "APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office and (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office. "APPRAISED VALUE" means, with respect to any asset subjected to or released from any Lien, the value of such asset as determined by an independent appraisal performed within 90 days of, and as of a date not less than 90 days prior to, the date upon which such asset is subjected to or released from such Lien. "ASSESSMENT RATE" has the meaning set forth in Section 2.06(b). "ASSIGNEE" has the meaning set forth in Section 9.06(c). "ASSUMPTION AGREEMENT" means the Assumption Agreement dated as of December 3, 1997 by the Borrower in favor of the banks, the issuing bank and the agent under the Existing Credit Agreement. "AUGUST 1997 AMENDMENT" means the Amended and Restated Credit Agreement dated as of August 20, 1997 among the Former Borrower, the banks listed therein and Morgan Guaranty Trust Company of New York, as issuing bank and as agent. "AUTHORIZED FINANCIAL OFFICER" of any Person means the Chief Financial Officer, Treasurer or Controller of such Person. 3 9 "BANK" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors. "BASE FINANCIALS" means the consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended, together with the notes thereto, included in the Borrower's 1997 Form 10-K and reported on without qualification by Ernst & Young LLP. "BASE RATE" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "BASE RATE LOAN" means (i) a Loan which bears interest at the Base Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or the provisions of Article 8 or (ii) an overdue amount that was a Base Rate Loan immediately before it became overdue. "BASE RATE MARGIN" has the meaning set forth in Section 2.06(a). "BENEFICIAL OWNER" means a Person who is deemed to be the "Beneficial Owner" of securities pursuant to Rule 13d-3 or 13d-5 of the Securities Exchange Act of 1934 (as in effect on the date hereof). "BORROWER" means Beverly Enterprises, Inc., a Delaware corporation. "BORROWER'S 1997 FORM 10-K" means the Borrower's annual report on Form 10-K for 1997, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended. "BORROWING" has the meaning set forth in Section 1.03. "CD BASE RATE" has the meaning set forth in Section 2.06(b). "CD LOAN" means (i) a Loan which bears interest at a CD Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or (ii) an overdue amount that was a CD Loan immediately before it became overdue. "CD MARGIN" has the meaning set forth in Section 2.06(b). "CD RATE" means a rate of interest determined pursuant to Section 2.06(b) on the basis of an Adjusted CD Rate. 4 10 "CD REFERENCE BANKS" means PNC Bank, National Association, NationsBank, N.A. and Morgan Guaranty Trust Company of New York. "COMMITMENT" means, with respect to any Bank, the amount set forth opposite the name of such Bank as such Bank's Commitment on the Commitment Schedule, as such amount may be reduced from time to time pursuant to Section 2.09. "COMMITMENT FEE RATE" has the meaning set forth in Section 2.08(a). "COMMITMENT SCHEDULE" means Schedule II attached hereto. "CONSOLIDATED EBITDA" means, for any period, Consolidated Net Income of the Borrower and its Consolidated Subsidiaries for such period plus, without duplication, any amounts deducted in determining such Consolidated Net Income in respect of (a) Consolidated Interest Charges for such period, (b) Consolidated Tax Charges for such period and (c) expenses for such period of the types classified as "depreciation and amortization" on the consolidated statement of operations included in the Base Financials; provided that, notwithstanding the foregoing, if during any period for which Consolidated EBITDA is being determined the Borrower or any of its Subsidiaries shall have consummated any acquisition then, for all purposes of this Agreement, Consolidated EBITDA shall be calculated (including, without limitation, as to any cost savings and the like resulting from any such acquisition), on a pro forma basis in accordance with Regulation S-X promulgated under the Securities Act of 1933, as amended, as if such acquisition had been made or consummated on the first day of such period. "CONSOLIDATED EBITDAR" means, for any period, the sum of Consolidated EBITDA and Consolidated Rental Expense for such period. "CONSOLIDATED GROSS CAPITAL EXPENDITURES" means, for any period the total amount of additions to property and equipment, other than software development costs, of the Borrower and its Consolidated Subsidiaries during such period of the types classified as "Capital expenditures" on the consolidated statement of cash flows included in the Base Financials. "CONSOLIDATED INTEREST CHARGES" means, for any period, all items for such period of the types classified as "interest" on the consolidated statement of operations included in the Base Financials. "CONSOLIDATED NET INCOME" means, for any period, the net income (loss) (calculated (a) before preferred and common stock dividends and (b) exclusive of the effect of any extraordinary or other material non-recurring gain or loss outside 5 11 the ordinary course of business) of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period. "CONSOLIDATED NET WORTH" means at any date the consolidated stockholders' equity of the Borrower and its Consolidated Subsidiaries at such date. "CONSOLIDATED RENTAL EXPENSE" means, for any period, the rental expense (net of sublease income) of the Borrower and its Consolidated Subsidiaries for such period. "CONSOLIDATED SUBSIDIARY" means, with respect to any Person and at any date, any of its Subsidiaries or any other entity the accounts of which would be consolidated with those of such Person in its consolidated financial statements if such statements were prepared as of such date. "CONSOLIDATED TAX CHARGES" means, for any period, all items for such period of the types classified as "provision for income taxes" on the consolidated statement of operations included in the Base Financials. "DEBT" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all obligations of such Person with respect to letters of credit and similar instruments, including, without limitation, obligations under reimbursement agreements, (vi) all mandatorily redeemable preferred stock of such Person, (vii) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (viii) all Debt of others Guaranteed by such Person. "DEFAULT" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DERIVATIVES OBLIGATIONS" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other 6 12 similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions. "DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent. "DOMESTIC LOANS" means CD Loans or Base Rate Loans or both. "DOMESTIC RESERVE PERCENTAGE" has the meaning set forth in Section 2.06(b). "EFFECTIVE DATE" means the date this Agreement becomes effective in accordance with Section 3.01. "ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment, including, without limitation, ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA GROUP" means the Borrower and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Internal Revenue Code. "EURO-DOLLAR BUSINESS DAY" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. 7 13 "EURO-DOLLAR LENDING OFFICE" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Borrower and the Agent. "EURO-DOLLAR LOAN" means (i) a Loan which bears interest at a Euro-Dollar Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or (ii) an overdue amount that was a Euro-Dollar Loan immediately before it became overdue. "EURO-DOLLAR MARGIN" has the meaning set forth in Section 2.06(c). "EURO-DOLLAR RATE" means a rate of interest determined pursuant to Section 2.06(c) on the basis of an Adjusted London Interbank Offered Rate. "EURO-DOLLAR REFERENCE BANKS" means the principal Nassau office of PNC Bank, National Association and the principal London offices of NationsBank, N.A. and Morgan Guaranty Trust Company of New York. "EURO-DOLLAR RESERVE PERCENTAGE" has the meaning set forth in Section 2.06(c). "EVENT OF DEFAULT" has the meaning set forth in Section 6.01. "EXISTING BANK" means a Bank (as defined in the Existing Credit Agreement). "EXISTING CREDIT AGREEMENT" means the Amended and Restated Credit Agreement dated as of December 20, 1996 among the Former Borrower, the banks listed on the signature pages thereof, and Morgan Guaranty Trust Company of New York, as issuing bank and as agent, as the same has been amended on or prior to the Effective Date, including without limitation, by the August 1997 Amendment and the Assumption Agreement. "EXISTING CREDIT AGREEMENT EFFECTIVE DATE" means August 20, 1997. "EXISTING FINANCING DOCUMENTS" means the Financing Documents (as defined in the Existing Credit Agreement). "EXISTING LETTER OF CREDIT" means a Letter of Credit (as defined in the Existing Credit Agreement). 8 14 "EXISTING LOAN" means a Loan (as defined in the Existing Credit Agreement). "EXPOSURE" means, for any day and with respect to any Bank, the sum on such day of the Letter of Credit Exposure of such Bank and the aggregate outstanding principal amount of the Loans of such Bank. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day; provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions, as determined by the Agent. "FINANCING DOCUMENTS" means this Agreement, the Notes and the Subsidiary Guaranty. "FIXED CHARGE COVERAGE RATIO" means, on any date, the ratio of (i) Consolidated EBITDAR minus Consolidated Gross Capital Expenditures for the four consecutive fiscal quarters most recently ended on or prior to such date to (ii) the sum of Consolidated Interest Charges and Consolidated Rental Expense for such four fiscal quarters. "FIXED RATE LOANS" means CD Loans or Euro-Dollar Loans or both. "FORMER BORROWER" means the Delaware corporation known, prior to December 3, 1997, as Beverly Enterprises, Inc.. "GROUP OF LOANS" means at any time a group of Loans consisting of (i) all Loans that are Base Rate Loans at such time or (ii) all Loans that are Fixed Rate Loans of the same type having the same Interest Period at such time; provided that, if a Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Section 8.02 or 8.04, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. 9 15 "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "HAZARDOUS SUBSTANCE" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "INTEREST PERIOD" means: (1) with respect to each Euro-Dollar Loan, a period commencing on the date of borrowing specified in the applicable Notice of Borrowing or the date specified in the applicable Notice of Interest Rate Election and ending one week or one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing or Notice of Interest Rate Election; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (c)(i) below) that would otherwise end on a day that is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day unless, in the case of any Interest Period other than a one-week Interest Period, such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period (other than an Interest Period of one week or an Interest Period determined pursuant to clause (c) below) that begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Euro-Dollar Business Day of a calendar month; and 10 16 (c) if any Interest Period includes a date on which a payment of principal of the Loans is required to be made under Section 2.05 but does not end on such date, then (i) the principal amount (if any) of each Euro-Dollar Loan required to be repaid on such date shall have an Interest Period ending on such date and (ii) the remainder (if any) of each such Euro-Dollar Loan shall have an Interest Period determined as set forth above; and (2) with respect to each CD Loan, a period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending 30, 60, 90 or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing or Notice of Interest Rate Election; provided that: (a) any Interest Period (other than an Interest Period determined pursuant to clause (b)(i) below) that would otherwise end on a day that is not a Euro-Dollar Business Day shall be extended to the next succeeding Euro-Dollar Business Day; and (b) if any Interest Period includes a date on which a payment of principal of the Loans is required to be made under Section 2.05 but does not end on such date, then (i) the principal amount (if any) of each CD Loan required to be repaid on such date shall have an Interest Period ending on such date and (ii) the remainder (if any) of each such CD Loan shall have an Interest Period determined as set forth above. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "INVESTMENT" means any investment in any Person, whether by means of share purchase, capital contribution, loan, time deposit or otherwise. "ISSUING BANK" means Morgan Guaranty Trust Company of New York in its capacity as issuer of the Letters of Credit, and its successors in such capacity. "LEASE CANCELLATION PAYMENT" means any payment made to cancel or terminate a lease of a facility and related property prior to the end of its term. "LEASE CONVERSION" means any acquisition by the Borrower or any of its Subsidiaries of a facility and related property that had theretofore been leased by the Borrower or any such Subsidiary and that the Borrower or any of its Subsidiaries continues to operate. 11 17 "LETTER OF CREDIT" means a letter of credit issued, or deemed to have been issued, by the Issuing Bank pursuant to Section 2.07(a). "LETTER OF CREDIT COMMISSION RATE" has the meaning set forth in Section 2.07(f). "LETTER OF CREDIT COMMITMENT" means, with respect to any Bank at any time, an amount equal to the lesser of (i) such Bank's Commitment at such time and (ii) the product of $100,000,000 multiplied by a fraction, the numerator of which is such Bank's Commitment at such time and the denominator of which is the aggregate Commitments of all Banks at such time. "LETTER OF CREDIT EXPOSURE" means, with respect to any Bank at any time, the sum of (i) its participation in the undrawn amount which is then, or may thereafter become, available for drawing under each outstanding Letter of Credit and (ii) its participation in the amount of each unpaid Reimbursement Obligation for drawings theretofore made under any Letter of Credit. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any of its Subsidiaries shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "LOAN" means a loan made by a Bank pursuant to Section 2.01; provided that if any such loan or loans (or portions thereof) are combined or subdivided pursuant to a Notice of Interest Rate Election, the term "Loan" shall refer to the combined principal amount resulting from such combination or to each of the separate principal amounts resulting from such subdivision, as the case may be. "LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.06(c). "MATERIAL COMMITMENT" means an outstanding commitment by a financial institution or a syndicate of financial institutions to provide financial accommodations to the Borrower and/or one or more of its Subsidiaries, arising in one or more related transactions, in an amount equal to or exceeding in the aggregate $50,000,000. 12 18 "MATERIAL FINANCIAL OBLIGATIONS" means a principal or face amount of Debt and/or (in the case of Section 6.01(f)) payment obligations in respect of, or (in the case of Section 6.01(g)) mark-to-market value of, Derivatives Obligations of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $20,000,000. "MATERIAL PLAN" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $1,000,000. "MATERIAL SUBSIDIARY" means, at any time, any Subsidiary of the Borrower that at such time constitutes a "significant subsidiary" of the Borrower within the meaning of Regulation S-X promulgated by the Securities and Exchange Commission; provided that for purposes of this definition of the term "Material Subsidiary" each reference to "10 percent" contained in the definition of "significant subsidiary" set forth in Regulation S-X shall be replaced by "5 percent". "MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions. "NOTES" means promissory notes of the Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "NOTICE OF BORROWING" has the meaning set forth in Section 2.02. "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section 2.11(a). "NOTICE OF ISSUANCE" has the meaning set forth in Section 2.07(b). "ORIGINAL EFFECTIVE DATE" means December 20, 1996. "OTHER PLAN" means an employee pension benefit plan (other than a Plan or a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code. "PARENT" means, with respect to any Bank, any Person controlling such Bank. "PARTICIPANT" has the meaning set forth in Section 9.06(b). 13 19 "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED RECEIVABLES FINANCING SECURITIES" means debt securities or preferred stock issued by a Special Purpose Receivables Financing Subsidiary pursuant to a Receivables Financing Program and borrowings by a Special Purpose Receivables Financing Subsidiary under a related Receivables Financing Backstop Facility. "PERMITTED PREFERRED STOCK" means preferred stock of the Borrower that has no mandatory redemption or redemption at the option of the holder thereof prior to the first anniversary of the Termination Date and no required increase in the rate of dividends payable thereon prior to such first anniversary other than increases arising from the resetting of the rate of dividends on the basis of a reasonable market or other similar index or a market interest rate. "PERSON" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PLAN" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group. "PRICING RATIO" has the meaning set forth in the Pricing Schedule attached hereto. "PRICING SCHEDULE" means Schedule I attached hereto. "PRIME RATE" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. "QUARTERLY DATE" means any March 31, June 30, September 30 or December 31 or, in the case of any such date that is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "RECEIVABLES FINANCING BACKSTOP FACILITY" means a credit facility entered into by a Special Purpose Receivables Financing Subsidiary for the purposes of providing liquidity with respect to securities issued by such Special 14 20 Purpose Receivables Financing Subsidiary and of financing transactions of the type intended to be financed with the proceeds of such securities. "RECEIVABLES FINANCING PROGRAM" means a program pursuant to which a Special Purpose Receivables Financing Subsidiary issues debt securities or preferred stock secured by (i) Medicaid, Medicare or other patient accounts receivable or Permitted Receivables Financing Securities purchased from the Borrower and its Subsidiaries or (ii) security interests in Medicaid, Medicare or other patient accounts receivable or Permitted Receivables Financing Securities granted by the Borrower and its Subsidiaries. "REFERENCE BANKS" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "REFINANCED DEBT" has the meaning set forth in clause (v) of Section 5.13(a). "REFINANCING DEBT" has the meaning set forth in clause (v) of Section 5.13(a). "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIMBURSEMENT OBLIGATION" means an obligation of the Borrower to reimburse the Issuing Bank pursuant to Section 2.07(d) for the amount of a drawing under a Letter of Credit. "RELEVANT DEBT" has the meaning set forth in Section 9.04. "REQUIRED BANKS" means at any time Banks having at least 66 2/3% of the aggregate Total Exposures of all Banks. "SENIOR NOTE AGREEMENT" means that certain Indenture, dated as of February 1, 1996, among the Borrower, the corporations listed on the signature pages thereto and The Chase Manhattan Bank, formerly known as Chemical Bank, as Trustee, as amended, modified or supplemented. "SPECIAL PURPOSE RECEIVABLES FINANCING SUBSIDIARY" means a Wholly- Owned Subsidiary of the Borrower the sole purpose of which is to issue debt securities and/or preferred stock and to purchase Medicare, Medicaid or other patient accounts receivable of the Borrower and its Subsidiaries and/or Permitted Receivables Financing Securities and make advances to the Borrower and its 15 21 Subsidiaries secured by security interests in such Medicare, Medicaid or other patient accounts receivable and/or Permitted Receivables Financing Securities, which accounts receivable, Permitted Receivables Financing Securities and/or security interests therein may be pledged to secure such debt securities and/or preferred stock and/or borrowings by such Special Purpose Receivables Financing Subsidiary under a Receivables Financing Backstop Facility. "SUBSIDIARY" means, with respect to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; provided that, with respect to the Borrower, Subsidiary shall not (except for financial reporting purposes and determination of compliance with financial covenants) include any corporations or other entities (i) which are inactive, (ii) each of which has neither assets nor liabilities, calculated on a consolidated basis for each such corporation or other entity, of $1,600,000 or more and (iii) which taken together have neither aggregate assets nor aggregate liabilities, calculated on a consolidated basis, of $3,000,000 or more. "SUBSIDIARY GUARANTOR" means, at any time, a Subsidiary of the Borrower party to the Subsidiary Guaranty at such time. "SUBSIDIARY GUARANTY" means the Amended and Restated Subsidiary Guaranty dated as of the date hereof by the Borrower and the Subsidiaries of the Borrower parties thereto in favor of the Banks, the Agent and the Issuing Bank, substantially in the form of Exhibit B hereto, as the same may be amended from time to time. "TEMPORARY CASH INVESTMENT" means any Investment in (i) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, (ii) commercial paper with maturities of not more than 180 days rated at least P-1 by Moody's Investors Service, Inc. or A-1 by Standard & Poor's Ratings Group, (iii) deposit accounts in, and certificates of deposit, repurchase agreements and bankers' acceptances of, United States branches of commercial banks whose unsecured senior long-term debt is rated A or better by Moody's Investors Service, Inc. or Standard & Poor's Ratings Group, in each case maturing within one year from the date of acquisition thereof or (iv) in addition to the accounts and instruments referred to in clause (iii), deposit accounts and certificates of deposit in United States branches of banks insured by the Federal Deposit Insurance Corporation which do not aggregate more than $100,000 in any one bank. 16 22 "TERMINATION DATE" means December 31, 2001. "TOTAL EXPOSURE" means, for any day and with respect to any Bank, the greater of (x) the Commitment of such Bank and (y) the Exposure of such Bank. "UNFUNDED LIABILITIES" means, with respect to any employee pension benefit plan which is covered by Title IV of ERISA, or subject to the minimum funding standards under Section 412 of the Internal Revenue Code, at any time, the amount (if any) by which (i) the present value of all benefit liabilities (within the meaning of Section 4001(a)(16) of ERISA) under such plan exceeds (ii) the fair market value of all plan assets allocable to such benefit liabilities (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such plan in accordance with the relevant provisions of Title IV of ERISA and regulations promulgated thereunder, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "VOTING STOCK" means capital stock of any class or classes (however designated) having ordinary voting power for the election of directors of the Borrower, other than stock having such power only by reason of the happening of a contingency. "WHOLLY-OWNED SUBSIDIARY" means, with respect to any Person, any Subsidiary of such Person all of the shares of Voting Stock or other ownership interests of which (except directors' qualifying shares) are at the time directly or indirectly owned by such Person. "WORKOUT TRANSACTION" means any adjustment, renegotiation, exchange, subordination, amendment, sale or other disposition of any note receivable, Investment or other similar asset of the Borrower or any of its Subsidiaries, any release, subordination, renegotiation or other adjustment or any Lien securing any Debt or other obligation of any Person held by or owed to the Borrower or any of its Subsidiaries, any acquisition of any asset by the Borrower or any of its Subsidiaries or the making of any Investment by the Borrower or any of its Subsidiaries, in each case in connection with (i) the foreclosure, enforcement or realization by the Borrower or any such Subsidiary on any Lien securing any Debt or other obligation of any Person held by or owed to the Borrower or any such Subsidiary or (ii) any renegotiation, composition, adjustment, amendment or restructuring of, or any other similar arrangement with respect to, any such Debt or obligation, in each case in connection with the bankruptcy, insolvency, financial distress or other similar condition of such Person; provided that any such adjustment, renegotiation, exchange, subordination, amendment, sale, disposition, release or acquisition or the making of any such Investment (A) will, in the 17 23 reasonable opinion of an Authorized Financial Officer of the Borrower, in light of the circumstances affecting the relevant obligor, be likely to maximize the amount to be realized by the Borrower and its Subsidiaries with respect to such Debt or other obligation or (B) is imposed on the Borrower or any of its Subsidiaries pursuant to voting arrangements mandated by any law or contract arrangements binding upon the Borrower or such Subsidiary. SECTION 1.02. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the Base Financials; provided that if any change in generally accepted accounting principles after December 31, 1997 in itself materially affects the calculation of any financial covenant in Article 5, the Borrower may by notice to the Agent, or the Agent (at the request of the Required Banks) may by notice to the Borrower, require that such covenant thereafter be calculated in accordance with generally accepted accounting principles as in effect, and applied by the Borrower, immediately before such change in generally accepted accounting principles occurs. If such notice is given, the compliance certificates delivered pursuant to Section 5.01(d) after such change occurs shall be accompanied by reconciliations of the difference between the calculation set forth therein and a calculation made in accordance with generally accepted accounting principles as in effect from time to time after such change occurs. SECTION 1.03. Types of Loans and Borrowings. The term "BORROWING" denotes the aggregation of Loans made to the Borrower pursuant to Article 2 on a single date and, in the case of a Borrowing consisting of Fixed Rate Loans, for a single Interest Period. Loans and Borrowings are distinguished by "type". The "TYPE" of a Loan (or a Borrowing consisting of such Loans) refers to the pricing of the Loans, whether such Loan is a Euro-Dollar Loan, a CD Loan or a Base Rate Loan, each of which constitutes a type. ARTICLE 2 THE CREDITS SECTION 2.01. The Loans. (a) Existing Loans. Prior to the Effective Date, each Existing Bank has made Existing Loans to, or that have been assumed by, the Borrower pursuant to the Existing Credit Agreement. On and after the Effective Date, all Existing Loans outstanding under the Existing Credit Agreement shall remain outstanding as Loans hereunder and be governed by the terms and conditions of this Agreement. 18 24 (b) Loans on and after the Effective Date. Each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower pursuant to this Section 2.01(b) from time to time from and including the Effective Date to but excluding the Termination Date in amounts such that such Bank's Exposure shall not exceed such Bank's Commitment. Each Borrowing under this Section 2.01(b) shall be in an aggregate principal amount of $1,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available under Section 3.02(b)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section 2.01(b), prepay loans to the extent permitted by Section 2.12, and reborrow pursuant to this Section 2.01(b). SECTION 2.02. Notice of Borrowing. The Borrower shall give the Agent notice (a "NOTICE OF BORROWING") not later than (x) 12:00 Noon (New York City time) on the date of each Base Rate Borrowing, (y) 12:00 Noon (New York City time) on the second Domestic Business Day before each CD Borrowing and (z) 12:00 Noon (New York City time) on the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to bear interest initially calculated on the basis of the Base Rate, a CD Rate or a Euro-Dollar Rate, (d) in the case of a Borrowing consisting of Fixed Rate Loans, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. Notice to Banks; Funding of Loans. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 3:00 P.M. (New York City time) on the date of each Borrowing, each Bank shall (except as provided in subsection (c) below) make available its ratable share of such Borrowing, in Federal or other funds immediately 19 25 available in New York City, to the Agent at its address specified in or pursuant to Section 9.01. Unless the Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Agent will promptly make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (c) If any Bank that makes any Loan on the Effective Date is the holder, on the Effective Date, of any Existing Loan that is to be repaid on the Effective Date, such Bank shall apply the proceeds of its Loan to make such repayment and only an amount equal to the difference (if any) between the amount of the Loan being borrowed and the amount of such Existing Loan to be so repaid shall be made available by the Bank to the Agent as provided in subsection (b) or remitted by the Borrower to such Bank as provided in the Existing Credit Agreement. (d) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (b) of this Section 2.03 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate then applicable to the Loans contained in such Borrowing pursuant to Section 2.06 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.04. Notes. (a) In connection with the effectiveness of the Assumption Agreement, the Borrower delivered to the Agent, for the account of each Existing Bank, duly executed "NOTES" substantially in the form of Exhibit A to the Existing Credit Agreement (collectively, the "EXISTING NOTES") to evidence the Existing Loans of each bank under the Existing Credit Agreement. On or prior to the Effective Date, the Borrower shall deliver to the Agent, for the account of each Bank, duly executed Notes, substantially in the form of Exhibit A hereto. On the Effective Date, each Bank's Existing Note shall be automatically canceled, and from and after the Effective Date, the Loans of each Bank shall be evidenced by a single 20 26 Note payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. On or promptly after the Effective Date, each Existing Bank shall deliver to the Agent for delivery to the Borrower its Existing Note (or in the case of loss thereof, a written agreement of indemnity by such Bank for such loss in customary form and executed by such Bank) marked "CANCELLED". (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of its Loans of such type. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(b), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount and type of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and prior to any transfer of its Note may endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or of the Borrower under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.05. Maturity of Loans. Each Loan shall mature, and the principal amount thereof shall be due and payable in full, on the Termination Date. SECTION 2.06. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from and including the date such Loan is made to but excluding the date it becomes due, at a rate per annum equal to the sum of the Base Rate Margin for such day plus the Base Rate for such day. Such interest shall be payable quarterly in arrears on each Quarterly Date and, with respect to the principal amount of any Base Rate Loan converted to a Fixed Rate Loan, on each day a Base Rate Loan is so converted. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day from and including the date upon which it becomes due to but excluding the date upon which it is paid, at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. 21 27 "BASE RATE MARGIN" means a rate per annum determined in accordance with the Pricing Schedule. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; provided that if any CD Loan or any portion thereof shall, as a result of clause (2)(b)(i) of the definition of Interest Period, have an Interest Period of less than 30 days, such portion shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus (i) for each day during such Interest Period, the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Loan, and (ii) for each day after the end of such Interest Period, the rate applicable to Base Rate Loans for such day. "CD MARGIN" means a rate per annum determined in accordance with the Pricing Schedule. The "ADJUSTED CD RATE" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: [ CDBR ]1 ACDR = [ ------------ ] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate The "CD BASE RATE" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of - ----------------- (1) The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% 22 28 recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "DOMESTIC RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "ASSESSMENT RATE" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. ss. 327.3(e) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. The "ADJUSTED LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means the rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve Percentage. "EURO-DOLLAR MARGIN" means a rate per annum determined in accordance with the Pricing Schedule. 23 29 The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. "EURO-DOLLAR RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "EUROCURRENCY LIABILITIES" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day from and including the date upon which it becomes due to but excluding the date upon which it is paid, at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Loan at the date such payment was due and (ii) the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day). (e) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the Banks by telex, cable or facsimile transmission of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. 24 30 (f) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Reference Banks, or if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.07. Letters of Credit. (a) Commitment to Issue Letters of Credit. (i) The Borrower may from time to time request that the Issuing Bank issue a letter of credit pursuant to which the Issuing Bank shall be obligated to the beneficiary to pay any drawings made thereunder and the Banks shall be obligated to the Issuing Bank to participate ratably in such drawings in proportion to their respective Commitments as hereinafter provided. (ii) Subject to Section 2.07(a)(iv) below, and in accordance with its customary procedures (to the extent such procedures are not inconsistent with the terms of this Agreement), the Issuing Bank agrees, on the terms and conditions set forth in this Agreement and at the request of the Borrower, to issue Letters of Credit for the account of the Borrower or any of its Subsidiaries from time to time prior to the Termination Date. Each Bank agrees to participate ratably in proportion to its Commitment in any drawings made under each Letter of Credit. (iii) Notwithstanding any reference in any Existing Letter of Credit to the Existing Credit Agreement, on and as of the Effective Date, each Existing Letter of Credit shall be deemed to be a Letter of Credit and to have been issued pursuant to clause (ii) above. (iv) In addition to the conditions precedent set forth in Article 3, the obligations of the Issuing Bank to issue Letters of Credit pursuant to clause (ii) above are subject to the additional conditions that: (A) no Letter of Credit shall have an expiry date later than one Domestic Business Day prior to the Termination Date; provided that with respect to a Letter of Credit issued for the purpose of providing credit support for obligations of the Borrower or any of its Subsidiaries in connection with self-insurance provided by or insurance procured on behalf of the Borrower and its Subsidiaries, it shall not be a violation of the condition set forth in 25 31 this clause (iv) if such Letter of Credit (1) is certified by an Authorized Officer of the Borrower to be required by applicable insurance law or regulation to provide, and does provide, that if there shall occur with respect to the Issuing Bank one of the events described in Article 17 of the 1993 revision of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication No. 500), as the same may be revised, amended, supplemented or superseded, the expiry date shall be extended until not later than a specified number of days (the "EXTENSION PERIOD") after the resumption of business of the Issuing Bank following such event and (2) provides for an expiry date prior to the Termination Date by at least 30 days more than the number of days included in the Extension Period; and (B) the fact that, immediately after the issuance of such Letter of Credit, no Bank's Letter of Credit Exposure will exceed such Bank's Letter of Credit Commitment. (b) Notice of Issuance. Except in the case of Letters of Credit deemed, pursuant to clause (iii) of Section 2.07(a) above, to be issued on the Effective Date, the Borrower shall give the Agent and the Issuing Bank notice (a "NOTICE OF ISSUANCE") at least three Domestic Business Days before each Letter of Credit is to be issued, specifying: (i) the date of issuance and expiry date of such Letter of Credit, (ii) the proposed terms of such Letter of Credit, including the face amount thereof and (iii) the transaction that is to be supported or financed by such Letter of Credit. Upon receipt of a Notice of Issuance, the Issuing Bank shall promptly notify each Bank and the Agent of the contents thereof and of the amount of such Bank's participation in such Letter of Credit and such Notice of Issuance shall not thereafter be revocable by the Borrower. (c) Drawings under Letters of Credit. (i) Upon receipt from the beneficiary of any Letter of Credit of demand for payment under such Letter of Credit, the Issuing Bank shall determine in accordance with the terms of such Letter of Credit whether such demand for payment should be honored. (ii) If the Issuing Bank determines that a demand for payment by the beneficiary of a Letter of Credit should be honored, the Issuing Bank shall make available to the beneficiary in accordance with the terms of such Letter of Credit the amount of the drawing under such Letter of Credit. The Issuing Bank shall thereupon notify the Borrower, the Agent and each 26 32 Bank of the amount of such drawing paid by it and the amount of each Bank's participation therein. (d) Reimbursement and Other Payments by the Borrower. (i) If any amount is drawn under any Letter of Credit, the Borrower irrevocably and unconditionally agrees to reimburse the Issuing Bank for all amounts paid by the Issuing Bank upon such drawing, together with any and all reasonable charges and expenses which any Bank or the Issuing Bank may pay or incur relative to such drawing and interest on the amount drawn at the average rate charged to the Issuing Bank on overnight Federal funds transactions for each day from and including the date such amount is drawn to but excluding the date such reimbursement payment is due and payable. Such reimbursement payment shall be due and payable (x) not later than 12:00 Noon (New York City time) on the date the Issuing Bank notifies the Borrower of such drawing, if such notice is given at or before 10:00 A.M. (New York City time) on such date, or (y) not later than 12:00 Noon (New York City time) on the first Domestic Business Day succeeding the date such notice is given, if such notice is given after 10:00 A.M. (New York City time); provided that no payment otherwise required by this sentence to be made by the Borrower not later than 12:00 Noon (New York City time) on any day shall be overdue hereunder if arrangements for such payment satisfactory to the Issuing Bank, in its sole discretion, shall have been made by the Borrower not later than 12:00 Noon (New York City time) on such day and such payment is actually made not later than 3:00 P.M. (New York City time) on such day. The Issuing Bank shall provide a copy of any such notice to the Agent. (ii) In addition, the Borrower agrees to pay to the Issuing Bank (A) interest on any and all amounts unpaid by the Borrower when due hereunder with respect to a Letter of Credit, for each day from and including the date when such amount becomes due to but excluding the date such amount is paid in full, whether before or after judgment, payable on demand, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day, and (B) upon each transfer of any Letter of Credit in accordance with its terms, a sum equal to such amount as shall be necessary to cover the reasonable costs and expenses of the Issuing Bank incurred in connection with such transfer. (iii) Each payment to be made by the Borrower pursuant to this Section 2.07(d) shall be made, in Federal or other funds immediately available in New York City, to the Issuing Bank at its address referred to in or pursuant to Section 9.01. 27 33 (e) Payments by Banks with Respect to Letters of Credit. (i) Each Bank shall make available an amount equal to its ratable share of any drawing under a Letter of Credit, in Federal or other funds immediately available in New York City, to the Issuing Bank by 3:00 P.M. (New York City time) on the Domestic Business Day following such drawing, together with interest on such amount at the average rate charged to the Issuing Bank on overnight Federal funds transactions on the date of such drawing as determined by the Issuing Bank, at the Issuing Bank's address specified in or pursuant to Section 9.01; provided that each Bank's obligation shall be reduced by its pro rata share of any reimbursement theretofore paid by the Borrower in respect of such drawing pursuant to Section 2.07(d)(i). The Issuing Bank shall notify each Bank and the Agent of the amount of such Bank's obligation in respect of any drawing under a Letter of Credit not later than 1:00 P.M. (New York City time) on the day such payment by such Bank is due. Each Bank shall be subrogated to the rights of the Issuing Bank against the Borrower to the extent of all amounts due from such Bank to the Issuing Bank, plus interest thereon, for each day from and including the day such amount is due from such Bank to the Issuing Bank to but excluding the day the Borrower makes payment to the Issuing Bank pursuant to Section 2.07(d) above, whether before or after judgment, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day. (ii) If any Bank fails to pay any amount required pursuant to clause (i) of this subsection on the date on which such payment is due, interest shall accrue on such Bank's obligation to make such payment, for each day from and including the date such payment becomes due to but excluding the date such Bank makes such payment, whether before or after judgment, at a rate per annum equal to (A) in the case of each day from and including the day such payment is due through and including the first succeeding Domestic Business Day (and any intervening days), the average rate charged to the Issuing Bank on overnight Federal funds transactions for each such day as determined by the Issuing Bank and (B) thereafter, the sum of 2% plus the rate applicable to Base Rate Loans for such day. Any payment made by any Bank after 3:00 P.M., New York City time, on any Domestic Business Day shall be deemed for purposes of the preceding sentence to have been made on the next succeeding Domestic Business Day. (iii) If the Borrower shall reimburse the Issuing Bank for any drawing under a Letter of Credit after the Banks shall have made funds 28 34 available to the Issuing Bank with respect to such drawing in accordance with clause (i) of this subsection, the Issuing Bank shall promptly upon receipt of such reimbursement distribute to each Bank its pro rata share thereof, including interest, to the extent received by the Issuing Bank. (f) Letter of Credit Commission; Fronting Fee. (i) The Borrower shall pay to the Agent for the account of the Banks, ratably in proportion to their Commitments or, if all Commitments have been terminated, in proportion to their Commitments immediately before such termination, a letter of credit commission at a rate per annum (the "LETTER OF CREDIT COMMISSION RATE") determined daily in accordance with the Pricing Schedule on the daily average amount available for drawing (whether or not any conditions to drawing can then be met) on all outstanding Letters of Credit. Such letter of credit commission shall accrue from and including the Effective Date to but excluding the Termination Date (or later date of expiration or termination of the last Letter of Credit to expire or be terminated) and shall be payable quarterly in arrears on each Quarterly Date, on the date of termination of the Commitments in their entirety and, if later, on the date of expiration or termination of the last Letter of Credit to expire or be terminated. (ii) The Borrower agrees to pay to the Agent for the account of the Issuing Bank a fronting fee in the amounts and at the times previously agreed between the Borrower and the Issuing Bank. (g) Payment upon Acceleration. If the Commitments shall be terminated or the principal of the Notes shall become immediately due and payable pursuant to Section 6.01, the Borrower shall pay to the Agent for deposit in a segregated collateral account an amount equal to the aggregate amount which is then, or may thereafter become, available for drawing under all outstanding Letters of Credit and pledge such amount to the Agent for the benefit of the Issuing Bank and the Banks to secure the Borrower's obligations in respect of such Letters of Credit. (h) Limited Liability of the Issuing Bank. The Borrower assumes all risks of the acts or omissions of any beneficiary and any transferee of any Letter of Credit with respect to its use of such Letter of Credit. The Banks, the Issuing Bank and their respective officers, directors, employees and agents shall not be liable or responsible for, and the obligations of each Bank to make payments (other than obligations of such Bank resulting solely from the gross negligence or willful misconduct of the Issuing Bank), and of the Borrower to reimburse the Issuing Bank for payments, pursuant to this Section shall not be excused by, any action or inaction of any Bank or the Issuing Bank related to (i) the use which may be made 29 35 of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (ii) the validity, sufficiency or genuineness of documents presented under any Letter of Credit, or of any endorsements thereon, even if such documents should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; or (iii) payment by the Issuing Bank against presentation of documents to the Issuing Bank which do not comply with the terms of any Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit. Notwithstanding the foregoing, the Borrower shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which were caused by (i) the Issuing Bank's willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit comply with the terms thereof or (ii) the Issuing Bank's willful failure to pay under any Letter of Credit after the presentation to the Issuing Bank by any beneficiary (or a successor beneficiary to whom such Letter of Credit has been transferred in accordance with its terms) of documents strictly complying with the terms and conditions of such Letter of Credit. Subject to the preceding sentence, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary unless any beneficiary (or a successor beneficiary to whom such Letter of Credit has been transferred in accordance with its terms) and the Borrower shall have notified the Issuing Bank that such documents do not comply with the terms and conditions of such Letter of Credit. Each Bank shall, ratably in accordance with its Commitment, indemnify the Issuing Bank (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Issuing Bank's gross negligence or willful misconduct) that the Issuing Bank may suffer or incur in connection with this Agreement or any action taken or omitted by the Issuing Bank hereunder. SECTION 2.08. Fees. (a) The Borrower shall pay to the Agent for the account of the Banks, ratably in proportion to their Commitments, a commitment fee at a rate per annum (the "COMMITMENT FEE RATE") determined daily in accordance with the Pricing Schedule, on the daily average amount by which the aggregate amount of the Commitments exceeds the aggregate Exposure. Such commitment fee shall accrue from and including the date of the last payment of such commitment fee under the Existing Credit Agreement to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety). 30 36 (b) On the Effective Date, the Borrower shall pay to J.P. Morgan Securities Inc., for its own account, an arrangement fee in the amount previously agreed between the Borrower and the Agent. (c) On the Effective Date, the Borrower shall pay to the Agent for the account of each Bank, a participation fee in an amount equal to 0.05% of the amount of such Bank's Commitment on the Effective Date. (d) Accrued fees under Section 2.08(a) above shall be payable quarterly in arrears on each Quarterly Date and upon the date of termination of the Commitments in their entirety. SECTION 2.09. Optional Termination or Reduction of Commitments. (a) The Borrower may, upon at least three Domestic Business Days' notice to the Agent, (i) terminate the Commitments at any time, if the aggregate Exposures of all Banks shall be zero at the time of such termination, or (ii) ratably reduce from time to time by an aggregate amount of $5,000,000 or any larger multiple of $1,000,000, the aggregate amount of the Commitments in excess of the aggregate Exposures of all Banks. (b) Each reduction of the Commitments pursuant to this Section 2.09 shall be applied ratably to the respective Commitments of all Banks. SECTION 2.10. Mandatory Termination of Commitments. All Commitments shall terminate in their entirety on the Termination Date. SECTION 2.11. Method of Electing Interest Rates. (a) The Loans included in each Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to CD Loans as of any Domestic Business Day or to Euro-Dollar Loans as of any Euro-Dollar Business Day; (ii) if such Loans are CD Loans, the Borrower may elect to convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to continue such Loans as CD Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans; and 31 37 (iii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or CD Loans or elect to continue such Loans as Euro-Dollar Loans for an additional Interest Period, in each case effective on the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "NOTICE OF INTEREST RATE ELECTION") to the Agent not later than 12:00 Noon (New York City time) (x) if the relevant Loans are to be converted to Domestic Loans or continued as Domestic Loans for an additional Interest Period, the second Domestic Business Day before such conversion or continuation is to be effective and (y) if the relevant Loans are to be converted to Euro-Dollar Loans or continued as Euro-Dollar Loans for an additional Interest Period, the third Euro-Dollar Business Day before such conversion or continuation is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group of Loans and (ii) the portion to which such Notice of Interest Rate Election applies, and the remaining portion to which it does not apply, are each at least $1,000,000 and not more than one of such portions is other than a multiple of $1,000,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of Section 2.11(a) above; (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if such new Loans are Fixed Rate Loans, the duration of the initial Interest Period applicable thereto; and (iv) if such Loans are to be continued as Fixed Rate Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to Section 2.11(a) above, the Agent shall promptly notify each Bank of 32 38 the contents thereof and such notice shall not thereafter be revocable by the Borrower. If the Borrower fails to deliver a timely Notice of Interest Rate Election to the Agent for any Group of Fixed Rate Loans, such Loans shall be converted into Base Rate Loans on the last day of the then current Interest Period applicable thereto. SECTION 2.12. Optional Prepayments. (a) The Borrower may, upon notice to the Agent not later than 11:00 A.M. (New York City time) on the date of such prepayment, prepay a Group of Base Rate Loans in whole at any time, or from time to time in part in amounts aggregating $1,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. (b) The Borrower may, upon at least three Domestic Business Days' notice to the Agent, in the case of a Group of CD Loans, or upon at least three Euro-Dollar Business Days' notice to the Agent, in the case of a Group of Euro-Dollar Loans, prepay the Loans comprising such Group in whole at any time, or from time to time in part in amounts aggregating $1,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment; provided that the Borrower shall reimburse each Bank for any loss or expense incurred by it as a result of any such prepayment in accordance with Section 2.14. (c) Each prepayment of all or part of a Group of Loans pursuant to this Section 2.12 shall be applied to prepay ratably the Loans of the several Banks included in such Group. (d) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.13. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of commissions and fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in or pursuant to Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of 33 39 commissions or fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from and including the date such amount is distributed to such Bank to but excluding the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.14. Funding Losses. If the Borrower makes any payment of principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a Base Rate Loan (whether such payment or conversion is pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.06(d), or if the Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.03(a) or 2.12(d), the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties or terminating, covering, reversing or closing out interest rate swap agreements with third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow or prepay; provided that such Bank shall have promptly delivered to the Borrower a certificate as to the amount of such loss or expense (setting forth in reasonable detail, if the Borrower so requests, the calculation thereof), which certificate shall be conclusive in the absence of manifest error. SECTION 2.15. Computation of Interest, Fees and Commissions. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 34 40 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest, fees and commissions shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.16. Withholding Tax Exemption. At least five Domestic Business Days prior to the first date on which interest, fees or commissions are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States of America or a state thereof agrees that it will deliver to each of the Borrower and the Agent (and, in the case of any Bank with any Letter of Credit Exposure, the Issuing Bank) two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Borrower and the Agent (and, in the case of any Bank with any Letter of Credit Exposure, the Issuing Bank) two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Borrower or the Agent (or, in the case of any Bank with any Letter of Credit Exposure, the Issuing Bank), in each case certifying that such Bank is entitled to receive payments under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including, without limitation, any change in any treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Borrower and the Agent (and, in the case of any Bank with any Letter of Credit Exposure, the Issuing Bank) that it is not capable of receiving payments without any deduction or withholding of United States federal income tax. SECTION 2.17. Maximum Interest Rate. (a) Nothing contained in this Agreement or the Notes shall require the Borrower to pay interest at a rate exceeding the maximum rate permitted by applicable law. Neither this Section nor Section 9.08 is intended to limit the rate of interest payable for the account of any Bank or the Issuing Bank, as the case may be, to the maximum rate permitted by the laws of the State of New York if a higher rate is permitted with respect to such Bank or the Issuing Bank, as the case may be, by supervening provisions of United States federal law. 35 41 (b) If the amount of interest payable for the account of any Bank or the Issuing Bank, as the case may be, on any date in respect of the immediately preceding interest computation period, computed pursuant to Section 2.06 or, in the case of interest on Reimbursement Obligations or other amounts payable in respect of Letters of Credit, Section 2.07, would exceed the maximum amount permitted by applicable law to be charged by such Bank or the Issuing Bank, as the case may be, the amount of interest payable for its account on such date shall be automatically reduced to such maximum permissible amount. (c) If the amount of interest payable for the account of any Bank or the Issuing Bank, as the case may be, in respect of any interest computation period is reduced pursuant to clause (b) of this Section and the amount of interest payable for its account in respect of any subsequent interest computation period, computed pursuant to Section 2.06 or, in the case of interest on Reimbursement Obligations or other amounts payable in respect of Letters of Credit, Section 2.07, would be less than the maximum permissible amount permitted by applicable law to be charged by such Bank or the Issuing Bank, as the case may be, then the amount of interest payable for its account in respect of such subsequent interest computation period shall be automatically increased to such maximum permissible amount; provided that at no time shall the aggregate amount by which interest paid for the account of any Bank or the Issuing Bank, as the case may be, has been increased pursuant to this clause (c) exceed the aggregate amount by which interest paid for its account has theretofore been reduced pursuant to clause (b) of this Section. ARTICLE 3 CONDITIONS SECTION 3.01. Effectiveness. This Agreement shall become effective on the date that each of the following conditions shall have been satisfied (or waived in accordance with Section 9.05): (a) receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any such party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex, facsimile transmission or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Agent for the account of each Bank of a duly executed Note dated on or before the Effective Date complying with the provisions of Section 2.04; 36 42 (c) receipt by the Agent of duly executed counterparts of the Subsidiary Guaranty duly executed by all Subsidiary Guarantors; (d) receipt by the Agent of evidence satisfactory to it of the fact that all amounts payable by the Borrower to the Agent or the Banks on or before such date shall have been paid or arrangements satisfactory to the Agent shall have been made for such payment; (e) receipt by the Agent and the Issuing Bank of evidence satisfactory to the Agent and the Issuing Bank that each Existing Letter of Credit shall have been amended to the extent, if any, necessary to reflect the fact that on and after the Effective Date such Letter of Credit shall be deemed to have been issued hereunder; and (f) upon the effectiveness of this Agreement, the aggregate amount of the Letter of Credit Exposures shall not exceed the aggregate amount of the Letter of Credit Commitments. Prior to the effectiveness of this Agreement in accordance with this Section 3.01, none of the terms and conditions of the Existing Credit Agreement or any Existing Financing Document shall be amended, waived or otherwise modified by this Agreement and all such terms and conditions shall remain in full force and effect and are hereby ratified and confirmed in all respects. The Agent shall promptly notify the Borrower, the Issuing Bank and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. SECTION 3.02. Borrowings and Letter of Credit Issuances. The obligation of any Bank to make a Loan on the occasion of any Borrowing, and the obligation of the Issuing Bank to issue any Letter of Credit, are subject to the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Borrowing or Notice of Issuance as required by Section 2.02 or 2.07(b), as the case may be; (b) in the case of any Borrowing or the issuance of a Letter of Credit, the fact that, immediately after such Borrowing or the issuance of such Letter of Credit, as the case may be, the aggregate Exposures of all Banks does not exceed the aggregate Commitments of all Banks; (c) the fact that, immediately before and after such Borrowing, or the issuance of such Letter of Credit, as the case may be, no Default shall have occurred and be continuing; and 37 43 (d) the fact that the representations and warranties of the Borrower or any of its Subsidiaries contained in the Financing Documents shall be true in all material respects on and as of the date of such Borrowing or issuance, as the case may be. Each Borrowing and each issuance of a Letter of Credit hereunder shall be deemed to be a representation and warranty by the Borrower to the Agent, each of the Banks and, in the case of an issuance of a Letter of Credit, the Issuing Bank on the date of such Borrowing or issuance, as the case may be, as to the facts specified in clauses (b), (c) and (d) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower hereby makes the following representations and warranties: SECTION 4.01. Corporate Existence and Power. Each of the Borrower and its Subsidiaries party to any Financing Document is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted except where the failure to obtain such governmental licenses, authorizations, consents and approvals would not materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries and would not in any manner draw into question the validity of any Financing Document. The Borrower has no Subsidiaries on the Effective Date other than those listed on Schedule IV hereto. SECTION 4.02. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each of the Borrower and its Subsidiaries of each Financing Document to which it is a party are within the Borrower's and each such Subsidiary's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or any such Subsidiary or of any agreement, judgment, injunction, order, decree or other instrument that is material, individually or in the aggregate, and that is binding upon the Borrower or any such Subsidiary or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. SECTION 4.03. Binding Effect. Each Financing Document other than the Notes constitutes a valid and binding agreement of the Borrower and each of the 38 44 Subsidiaries party thereto, enforceable against them in accordance with its terms, and the Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Borrower, enforceable against it in accordance with their terms. SECTION 4.04. Financial Information. (a) The Base Financials, copies of which have been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of December 31, 1997 and their consolidated results of operations and cash flows for the fiscal year of the Borrower then ended. (b) Since December 31, 1997, there has been no material adverse change in the business, financial position, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. SECTION 4.05. Litigation. Except as disclosed in the Borrower's 1997 Form 10-K, there is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries or which in any manner draws into question the validity of any Financing Document. SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group has complied with its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standards under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan, or made any amendment to any Plan, which has resulted or could reasonably be expected to result, prior to the first anniversary of the Termination Date, in the imposition of a Lien or the posting of a bond or other security under Section 302(f) of ERISA or Section 401(a)(29) or 412(n) of the Internal Revenue Code, (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA or (iv) within the preceding five plan years, with respect to any Other Plan, engaged in any transaction described in Section 4069 or Section 4212(c) of ERISA. 39 45 SECTION 4.07. Environmental Matters. (a) In the ordinary course of its business, the Borrower conducts an ongoing review of the effect of Environmental Laws on the business, operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs. On the basis of this review, the Borrower has reasonably concluded that Environmental Laws are unlikely to have a material adverse effect on the business, financial condition, results of operations or prospects of the Borrower and its Consolidated Subsidiaries, considered as a whole. (b) As of the Effective Date, to the knowledge of the Borrower and its Subsidiaries no material claim, investigation or written inquiry has been made, and the Borrower is not aware of any circumstance which would warrant or give rise to such a claim, investigation or inquiry, with regard to the Borrower or any of its Subsidiaries, in respect of any facility owned, or to the knowledge of the Borrower and its Subsidiaries, leased or operated, either now or in the past, by the Borrower or any of its Subsidiaries, under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended and in effect, or pursuant to any other Environmental Law, or by the Environmental Protection Agency or by any state, local, municipal or foreign enforcement agency having jurisdiction over the protection of the environment, or by any other Person in respect of or under any Environmental Law. SECTION 4.08. Taxes. United States federal income tax returns of the Borrower and its Subsidiaries have been closed through the fiscal year ended December 31, 1992. The Borrower and its Subsidiaries have filed all United States federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries other than any such taxes the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with generally accepted accounting principles have been established. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate. SECTION 4.09. Title to and Condition of Properties. As of the Effective Date (a) the Borrower and its Subsidiaries have good and marketable title to all of the properties and other assets (real or personal, tangible, intangible or mixed) they own or purport to own and (b) all leases to which the Borrower or any of its Subsidiaries is a party as lessee or sublessee are in full force and effect, except for such defects in title and such invalidity or unenforceability of leases as, in the aggregate, could not materially adversely affect the condition (financial 40 46 or otherwise), earnings, business affairs or business prospects of the Borrower and its Subsidiaries taken as a whole. SECTION 4.10. Not an Investment Company. Neither the Borrower nor any of its Subsidiaries is an "INVESTMENT COMPANY" or a company "CONTROLLED" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.11. Full Disclosure. All information heretofore furnished in writing by the Borrower to the Agent, the Issuing Bank or any Bank or otherwise to the Banks generally for purposes of or in connection with this Agreement or any transaction contemplated hereby was true and accurate in all material respects on the date as of which such information was stated or certified. The Borrower has disclosed to the Agent, the Issuing Bank and the Banks in writing any and all facts which materially and adversely affect, or may so affect (to the extent the Borrower can now reasonably foresee), the business, operations or financial condition of the Borrower and its Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower or any of its Subsidiaries party to any of the Financing Documents to perform its obligations under any Financing Document to which it is a party. SECTION 4.12. Representations in Subsidiary Guaranty. Each representation and warranty contained in the Subsidiary Guaranty is true and correct. ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment or Letter of Credit Exposure hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. Information. The Borrower will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations, stockholders' equity and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by Ernst & Young LLP or other independent public 41 47 accountants of nationally recognized standing and certified as to consistency in compliance with Section 1.02 by an Authorized Financial Officer of the Borrower; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Borrower, condensed consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as of the end of such quarter and the related condensed consolidated statements of income and cash flows for such quarter and for the portion of the Borrower's fiscal year ended at the end of such quarter, setting forth in each case in comparative form the figures for the corresponding quarter and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments and condensation pursuant to the rules of the Securities and Exchange Commission) as to fairness of presentation and consistency in compliance with Section 1.02 by an Authorized Financial Officer of the Borrower; (c) as soon as available and in any event within 30 days after the end of each calendar month, consolidated balance sheets of the Borrower and its Consolidated Subsidiaries as of the end of such month and the related consolidated statements of operations, stockholders' equity and cash flows for such month and for the portion of the Borrower's fiscal year ending at the end of such month, setting forth in each case in comparative form the figures for the corresponding month and the corresponding portion of the Borrower's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation and consistency in compliance with Section 1.02 by an Authorized Financial Officer of the Borrower; (d) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of an Authorized Financial Officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.05, 5.06, 5.07, 5.09, 5.10, 5.11 and 5.13 hereof on the date of such financial statements, (ii) setting forth in reasonable detail calculations of the Pricing Ratio as at the date of the balance sheet contained therein and for the period of four fiscal quarters ending on such date and (iii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; and if such compliance is being determined on a pro forma basis in accordance with the proviso to the definition in Consolidated EBITDA, setting forth in reasonable detail the nature and amount of each pro forma adjustment included in such calculations. 42 48 (e) promptly upon the occurrence of any Default, a certificate of an Authorized Financial Officer of the Borrower setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Borrower shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) provides or is required to provide notice to the PBGC of any "REPORTABLE EVENT" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has provided or is required to provide notice of any such reportable event, a copy of the notice of such reportable event provided or required to be provided to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standards under Section 412 of the Internal Revenue Code with respect to any Plan, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and such other information as is filed with the PBGC in connection therewith; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; (vii) receives notice from the PBGC or any plan administrator of an intent to impose liability on any member of the ERISA Group with respect to any Other Plan on account of a transaction described in Section 4069 or 4212(c) of ERISA, a copy of such notice; (viii) receives notice from the PBGC or any plan administrator of an intent to impose liability on any member of the ERISA Group with respect to any Other Plan on the basis that such member of the ERISA Group is a member of the "CONTROLLED GROUP" with respect to such Other Plan under Section 412(c)(11) of the Internal Revenue Code or Section 4001(a)(14) of ERISA, a copy of such notice; or (ix) fails to make any payment or contribution to any Plan or Multiemployer Plan or makes any amendment to any Plan which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under Section 302(f) of ERISA or Section 401(a)(29) or 412(n) of the Internal Revenue Code, a 43 49 certificate of an Authorized Financial Officer of the Borrower setting forth all material and relevant details as to such occurrence or event and the action, if any, which the Borrower, the Borrower or the applicable member of the ERISA Group proposes or, after consultation with counsel, believes that it is required to take; and (i) from time to time such additional information regarding the financial position or business of the Borrower or any of its Subsidiaries as any Bank may reasonably request. SECTION 5.02. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each of its Subsidiaries to keep, all property necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will, and will cause each of its Subsidiaries to, maintain (either in the name of the Borrower or in such Subsidiary's own name) with financially sound and responsible insurance companies, insurance on all their respective properties in at least such amounts and against at least such risks (and with such risk retention and self insurance) as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business at a substantial number of different facilities. The Borrower will furnish to the Banks, upon request from the Agent, information presented in reasonable detail as to the insurance so carried. SECTION 5.03. Compliance with Laws. The Borrower will comply, and will cause each of its Subsidiaries to comply, with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) (except (i) where the failure to so comply would not materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Subsidiaries and would not in any manner draw into question the validity of any Financing Document or (ii) where the necessity of compliance therewith is contested in good faith by appropriate proceedings and for which adequate reserves have been established in accordance with generally accepted accounting principles) and will maintain and cause each of its Subsidiaries to maintain all governmental licenses, approvals, authorizations and consents necessary for the conduct of the business of the Borrower and its Subsidiaries (except where the failure to maintain such governmental licenses, approvals, authorizations and consents would not materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Subsidiaries and would not in any manner draw into question the validity of any Financing Document). 44 50 SECTION 5.04. Inspection of Property, Books and Records. The Borrower will keep, and will cause each of its Subsidiaries to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities and will permit, and will cause each such Subsidiary to permit, representatives of any Bank to visit and inspect any of its properties, to examine and make abstracts from any of its books and records and to discuss its affairs, finances and accounts with its officers, employees and independent public accountants, all at such reasonable times and upon reasonable notice to the Borrower and as often as may reasonably be desired; provided that (i) subject to the provisions of Section 9.03(a), the Borrower shall not be obligated to pay the expenses of the Banks' respective representatives and (ii) the Borrower will have an opportunity to participate in any discussions that take place between representatives of any Bank and the Borrower's independent public accountants. SECTION 5.05. Minimum Consolidated Net Worth. Consolidated Net Worth shall be at least $690,000,000 plus 50% of the aggregate positive Consolidated Net Income (excluding any consolidated net loss) of the Borrower and its Consolidated Subsidiaries for each fiscal quarter ending after January 1, 1998. SECTION 5.06. Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio at any date shall not be less than the ratio set forth below opposite the period in which such date falls:
Period Ratio ------ ----- Effective Date through March 30, 1999............................. 1.25 to 1.0 March 31, 1999 through March 30, 2000 1.35 to 1.0 March 31, 2000 through March 30, 2001 1.45 to 1.0 March 31, 2001 and thereafter..................................... 1.50 to 1.0
SECTION 5.07. Leverage Ratio. The ratio at any date of (a) Adjusted Consolidated Debt to (b) EBITDAR shall not be more than the ratio set forth below opposite the period in which such date falls:
Period Ratio ------ ----- Effective Date through June 29, 1999....................................... 4.95 to 1.0 June 30, 1999 through December 30, 1999.................................... 4.85 to 1.0 December 31, 1999 through June 29, 2000.................................... 4.75 to 1.0 June 30, 2000 through December 30, 2000.................................... 4.60 to 1.0 December 31, 2000 through June 29, 2001.................................... 4.50 to 1.0 June 30, 2001 and thereafter............................................... 4.45 to 1.0
45 51 SECTION 5.08. Ownership of Stock of Wholly-Owned Subsidiaries. The Borrower will at all times maintain, or cause a Wholly-Owned Subsidiary of the Borrower to maintain, ownership of 100% of each class of voting securities of, and all other equity securities (except for directors' qualifying shares) in, each of its Subsidiaries that shall be a Wholly-Owned Subsidiary of the Borrower on the date hereof and each Person that shall become a Wholly-Owned Subsidiary of the Borrower after the date hereof, except in each case any such Wholly-Owned Subsidiary that shall hereafter be disposed of in its entirety, consolidated or merged with or into the Borrower or another such Wholly-Owned Subsidiary or liquidated. SECTION 5.09. Investments. Neither the Borrower nor any of its Subsidiaries will make or acquire after the date hereof any Investment in any Person other than: (a) Investments in the Borrower or in Persons that were Subsidiaries of the Borrower on the Original Effective Date; (b) Investments in Persons that are (i) primarily engaged in the health-care business and (ii) after the making of such Investment, are Subsidiaries of the Borrower; (c) Temporary Cash Investments; (d) extensions of credit or Guarantees of obligations of one or more other Persons (other than Encore Nursing Center Partners, Ltd.-85 and Encore Retirement Partners, Ltd.-85) as an integral part of the financing of the acquisition, construction, equipping or improving of facilities from which the Borrower or its Subsidiaries will provide medical or related services; (e) other miscellaneous Investments related to the acquisition and financing (in the ordinary course of the Borrower's business) of health-care facilities through industrial development revenue bonds issued for the benefit of the Borrower and its Subsidiaries; (f) capital contributions required to be made by the Borrower to Beverly Indemnity, Ltd. in accordance with applicable law and insurance regulations; (g) stock, obligations or securities received from nursing home patients in the ordinary course of business of the Borrower and its Subsidiaries; 46 52 (h) negotiable instruments endorsed for deposit or collection or similar instruments in the ordinary course of business; (i) promissory notes and other Investments received as consideration for facilities sold, provided that the aggregate net book value of all outstanding Investments permitted by this clause (i) shall not, at any time, exceed $25,000,000; (j) Guarantees permitted by Section 5.13; (k) any Investment made by the Borrower or any of its Subsidiaries in connection with and as part of a Workout Transaction; (l) Investments made by the Borrower or any of its Subsidiaries in one or more Special Purpose Receivables Financing Subsidiaries by means of the sale of, or the granting of security interests in, Medicare, Medicaid or other patient accounts receivable owing to the Borrower or such Subsidiary, in either case to such Special Purpose Receivables Financing Subsidiaries pursuant to a Receivables Financing Program, provided that the net amount of all uncollected accounts receivable owing to the Borrower or any of its Subsidiaries that have been so sold or in which a security interest has been so granted shall not exceed 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding; (m) Investments made in Beverly Japan Corporation in an aggregate amount outstanding at any time not to exceed $10,000,000; (n) Investments made in Persons that are primarily engaged in the health-care business, the consideration for which consists exclusively of common stock of the Borrower or Permitted Preferred Stock; and (o) any Investment not otherwise permitted by the foregoing clauses of this Section (other than promissory notes and other Investments received as consideration for facilities sold) in any Person engaged primarily in the health-care business if, immediately after such Investment is made or acquired, the aggregate net book value of all such Investments then held by the Borrower or its Subsidiaries and permitted by this clause (o) does not exceed $75,000,000. SECTION 5.10. Restricted Payments on Stock. Neither the Borrower nor any of its Subsidiaries shall (x) declare or make any dividend payment or other distribution on any capital stock of the Borrower (other than dividends payable solely in shares of the Borrower's capital stock) or (y) declare or make any payment on account of the purchase, redemption, retirement or acquisition of the Borrower's capital stock; provided that, so long as at the time of and after giving 47 53 effect to any such payment no Event of Default shall have occurred and be continuing, (i) the Borrower may make any such payment or distribution from the proceeds of the sale by the Borrower (other than a sale to a Subsidiary of the Borrower) after the Original Effective Date of its common stock, (ii) the Borrower may make dividend payments with respect to its preferred stock (A) from any source in an amount not to exceed $2,500,000 in any fiscal quarter and (B) from proceeds of the sale by the Borrower (other than a sale to a Subsidiary of the Borrower) after the Original Effective Date of Permitted Preferred Stock in any amount, (iii) the Borrower may make payments on account of the purchase, redemption, retirement or acquisition of its preferred stock from the proceeds of the sale by the Borrower (other than a sale to a Subsidiary of the Borrower) after the Original Effective Date of any Permitted Preferred Stock, (iv) the Borrower may make odd-lot repurchases of its common stock for an aggregate consideration not exceeding $10,000 in any calendar year, and (v) the Borrower may make any such payment or distribution if, after giving effect thereto, the aggregate amount of all such payments or distributions made after the Existing Credit Agreement Effective Date (including, without limitation, any such payments or distributions permitted under subclause (ii)(A) or clause (iv) above) does not exceed the sum of $75,000,000 plus 50% of Consolidated Net Income for the period after June 30, 1997 through the date of such declaration, payment or distribution. Nothing in this Section shall prohibit the payment of any dividend or distribution within 45 days after the declaration thereof if such declaration was not prohibited by this Section. SECTION 5.11. Negative Pledge. Neither the Borrower nor any of its Subsidiaries will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (i) Liens existing on the Effective Date securing Debt and other obligations outstanding on the Effective Date; 48 54 (ii) any Lien on any asset of any corporation that becomes a Consolidated Subsidiary of the Borrower after the Effective Date that exists at the time such corporation becomes such a Consolidated Subsidiary and (other than in a Workout Transaction) not created in contemplation thereof; (iii) any Lien existing on any asset prior to the acquisition thereof, acquired after the Effective Date by the Borrower or a Subsidiary of the Borrower and (other than in a Workout Transaction) not created in contemplation thereof; (iv) any Lien on any asset securing Debt or lease obligations incurred or assumed for the purpose of financing all or any part of the cost of acquiring or constructing such asset or reconstructing substantially all of such asset, provided that such Lien attaches to such asset concurrently with or within one year after such acquisition, construction or reconstruction; (v) any Lien on any asset securing Debt or lease obligations incurred or assumed for the purpose of improving or making any addition to such asset, provided that (A) such Lien attaches to such asset concurrently with or within one year after the completion of the improvement thereof or addition thereto and (B) the aggregate outstanding principal amount of all such Debt incurred after the Original Effective Date secured by such Liens shall not, at any time, exceed $30,000,000; (vi) Liens securing Debt incurred in connection with Lease Cancellation Payments, provided that the aggregate amount of all such Debt incurred after the Original Effective Date secured by such Liens shall not, at any time, exceed $20,000,000; (vii) Liens securing industrial development revenue bonds (or securing contingent obligations to issuers of letters of credit issued to support industrial development revenue bonds) arising in connection with the conversion of the interest rate on such bonds from floating to long-term fixed rates or from fixed rates to other long-term fixed rates; (viii) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that the principal amount of such Debt is not increased and such Debt is not secured by any additional assets other than assets that relate directly to the facility subject to the original financing; 49 55 (ix) Liens on Medicare, Medicaid or other patient accounts receivable of the Borrower or any of its Subsidiaries, or on Permitted Receivables Financing Securities, granted to secure Permitted Receivables Financing Securities, provided that the net amount of all uncollected accounts receivable owing to the Borrower or any of its Subsidiaries over which such a Lien is granted, together, without duplication, with the net amount of all uncollected accounts receivable owing to the Borrower or any of its Subsidiaries that are assigned to secure such Permitted Receivables Financing Securities, shall not exceed, at any time, 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding; (x) Liens incidental to the conduct of its business or the ownership of its assets which (A) do not secure Debt or Derivatives Obligations and (B) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (xi) Liens on cash and cash equivalents securing Derivatives Obligations, provided that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $10,000,000; (xii) Liens on nursing homes and related real estate improvements and equipment ("MORTGAGE ASSETS") given in substitution for Liens on Mortgage Assets existing on the Existing Credit Agreement Effective Date or for Liens on Mortgage Assets incurred pursuant to this clause (xii) or clause (xiii) below, provided that the sum of (A) the excess of the Appraised Value of all Mortgage Assets subjected to Liens pursuant to this clause (xiii) on or after the Existing Credit Agreement Effective Date over the Appraised Value of all such Mortgage Assets released from Liens on or after the Existing Credit Agreement Effective Date and (B) all Debt incurred after the Existing Credit Agreement Effective Date and secured by Liens permitted under clause (xiii) below shall not at any time exceed $50,000,000; and (xiii) Liens not otherwise permitted under clauses (i) through (xii) of this Section, provided that the sum of the amounts set forth in subclause (A) of clause (xii) above and the aggregate principal amount of all Debt incurred after the Existing Credit Agreement Effective Date and secured by Liens permitted under this clause (xiii) shall not at any time exceed $50,000,000. 50 56 SECTION 5.12. Consolidations, Mergers and Sales of Assets. (a) Neither the Borrower nor any of its Subsidiaries will (i) consolidate or merge with or into any other Person, unless the Borrower or, except in the case of a merger or consolidation to which the Borrower is a party, a Wholly-Owned Subsidiary of the Borrower is the surviving corporation or (ii) sell, lease or otherwise transfer all or any substantial part of the assets of the Borrower and its Subsidiaries, taken as a whole, to any other Person, provided that (A) this Section shall not apply to mergers, dissolutions, reorganizations or liquidations of Subsidiaries of the Borrower that have disposed of all or substantially all of their assets and (B) the Borrower and its Subsidiaries may assign or grant security interests in their Medicare, Medicaid or other patient accounts receivable to a Special Purpose Receivables Financing Subsidiary to secure Permitted Receivables Financing Securities (provided that the net amount at any time of all uncollected accounts receivable owing to the Borrower or any of its Subsidiaries that are so assigned or in which a security interest is so granted shall not exceed 200% of the aggregate principal or redemption amount of all Permitted Receivables Financing Securities then outstanding). SECTION 5.13. Incurrence of Debt. The Borrower will not permit any of its Subsidiaries to incur, assume or suffer to exist any Debt, except: (i) Debt outstanding on the Effective Date and included either in the Base Financials or listed in Schedule III hereto; (ii) Debt incurred after the Effective Date in connection with Lease Cancellation Payments, provided that the aggregate principal amount of all such Debt outstanding at any time shall not exceed $20,000,000; (iii) Debt secured by a Lien permitted pursuant to clause (iii) of Section 5.11(a); (iv) Debt of any corporation that becomes a Consolidated Subsidiary of the Borrower after the Effective Date that exists at the time such corporation becomes such a Consolidated Subsidiary and (other than in a Workout Transaction) not created in contemplation thereof; (v) Debt ("REFINANCING DEBT") incurred to refinance Debt ("REFINANCED DEBT") permitted under clauses (i) through (iv) above, provided that (A) the principal amount of such Refinancing Debt shall not exceed the principal amount of such Refinanced Debt and (B) such Refinancing Debt shall have a weighted average life of not less than the remaining weighted average life of such Refinanced Debt or such 51 57 Refinancing Debt shall not have any required payments of principal prior to the first anniversary of the Termination Date; (vi) Permitted Receivables Financing Securities, provided that the aggregate principal and redemption amount of all Permitted Receivables Financing Securities outstanding at any time shall not exceed $150,000,000; (vii) Debt incurred under the Financing Documents; (viii) Guarantees by any Subsidiary of the Borrower of any obligation of the Borrower or any of its other Subsidiaries that such guaranteeing Subsidiary would have been permitted to incur hereunder as a primary obligation; (ix) Debt consisting of advances from the Borrower or any of its Subsidiaries in connection with the normal operation of the business of the Borrower and its Subsidiaries; (x) Debt incurred in connection with and as part of a Workout Transaction; (xi) Debt incurred or assumed for the purpose of financing the cost of acquiring, constructing or improving an asset of the Borrower or any of its Subsidiaries; (xii) Permitted Preferred Stock; and (xiii) Debt not otherwise permitted under clauses (i) through (xii) of this Section, provided that the aggregate principal amount of all Debt permitted under this clause (xiii) that is incurred on or after the Existing Credit Agreement Effective Date shall not at any time exceed $75,000,000. SECTION 5.14. Use of Proceeds and Letters of Credit. The Letters of Credit issued (or deemed issued), and the proceeds of the Loans made, under this Agreement will be used for (i) the repayment or prepayment of loans made under the Existing Credit Agreement and (ii) general corporate purposes. None of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. SECTION 5.15. Additional Subsidiary Guarantors. The Borrower agrees to cause each Person, other than a Special Purpose Receivables Financing 52 58 Subsidiary, that shall, at any time after the date hereof, become a Wholly-Owned Subsidiary of the Borrower to enter into the Subsidiary Guaranty. SECTION 5.16. Lease Conversions. The Borrower will not, and will not permit any of its Subsidiaries to, make any Lease Conversion in any calendar year unless: (i) the aggregate consideration paid or to be paid by the Borrower and its Subsidiaries in connection with the termination of leases or the acquisition of facilities and related property pursuant to such Lease Conversion and all other Lease Conversions made during such calendar year would not exceed $100,000,000; and (ii) to the extent such Lease Conversion is financed or will be financed with Debt of the Borrower or any of its Subsidiaries, such Debt is incurred within one year of such Lease Conversion. SECTION 5.17. Transactions with Affiliates. The Borrower will not, after the date hereof, and will not permit any of its Subsidiaries to, after the date hereof, enter into any transaction or arrangement with any Affiliate (including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for, any Affiliate), except in the ordinary course of and pursuant to the reasonable requirements of the Borrower's or such Subsidiary's (as the case may be) business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would be obtained in a comparable arm's-length transaction with a Person other than an Affiliate. ARTICLE 6 DEFAULTS SECTION 6.01. Events of Defaults. If one or more of the following events ("EVENTS OF DEFAULT") shall have occurred and be continuing: (a) the Borrower shall fail to pay (i) on the date when due any principal of any Loan or any Reimbursement Obligation or (ii) within five Domestic Business Days after the date when due any interest on any Loan or Reimbursement Obligation or any fees, commissions or other amounts payable hereunder; (b) the Borrower shall fail to observe or perform any covenant contained in Sections 5.05, 5.06, 5.07, 5.10, 5.12, 5.13, 5.14 or 5.16; 53 59 (c) the Borrower shall fail to observe or perform any covenant contained in Sections 5.08, 5.09, 5.11 or 5.15 for 10 days after the Borrower shall have obtained actual knowledge of such failure or after written notice thereof has been given to the Borrower by the Agent at the request of any Bank; (d) the Borrower or any Subsidiary Guarantor shall fail to observe or perform any covenant or agreement contained herein or in the Subsidiary Guaranty (other than those covered by clause (a), (b) or (c) above) for 30 days after written notice thereof has been given to the Borrower by the Agent at the request of any Bank; (e) any representation, warranty, certification or statement made by the Borrower or any of its Subsidiaries in any Financing Document or in any certificate, financial statement or other document delivered pursuant to any Financing Document shall prove to have been incorrect in any material respect when made (or deemed made); (f) the Borrower or any of its Subsidiaries shall fail to make any payment in respect of any Material Financial Obligations when due or, if later, within any applicable grace period; (g) (i) any event or condition shall occur which results in the acceleration of the maturity, or requires the early redemption or prepayment, of any Material Financial Obligations or any event or condition shall occur and be continuing which enables (or, with the giving of notice or lapse of time or both, would enable) the holder of any Material Financial Obligations or any Person acting on such holder's behalf to accelerate the maturity, or require the early redemption or prepayment, of such Material Financial Obligations (unless such event or condition shall have been waived and any acceleration or required redemption or prepayment rescinded), provided that the fact that the interest paid on any industrial development revenue bonds ceases to be exempt from federal income taxation shall not constitute an Event of Default under this subsection (g) unless such industrial development revenue bonds are accelerated, redeemed or prepaid or the aggregate principal amount of industrial development revenue bonds subject to acceleration or early redemption or prepayment as a result of such event or condition shall be at least $20,000,000 or (ii) any event or condition constituting a default or event of default under the agreement, instrument or other document relating thereto shall occur which results in the termination of any Material Commitment or any such event or condition shall occur and be continuing which enables (or with the giving of notice or lapse of time or both, would enable) the provider of any Material Commitment or any Person acting on such provider's behalf to require the early termination of such Material Commitment (unless such event or condition shall have been waived and any termination rescinded); 54 60 (h) the Borrower or any Material Subsidiary (or any combination of Subsidiaries that, if treated as a single Subsidiary, would at such time constitute a Material Subsidiary) shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (i) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary (or any combination of Subsidiaries that, if treated as a single Subsidiary, would at such time constitute a Material Subsidiary) seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary (or any combination of Subsidiaries that, if treated as a single Subsidiary, would at such time constitute a Material Subsidiary) under the federal bankruptcy laws as now or hereafter in effect; (j) (i) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $1,000,000 which it shall have become liable to pay under Title IV of ERISA; or (ii) notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or (iii) any member of the ERISA Group has been notified in writing that the PBGC has instituted proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or (iv) a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or (v) any of the events described in clause (iii) above shall occur with respect to any Other Plan or Other Plans (other than a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA) (A) that have aggregate Unfunded Liabilities in excess of $1,000,000 and (B) with respect to which either (1) one or more members of the ERISA Group have engaged in a transaction or transactions described in Section 4069 of 55 61 ERISA or (2) one or more members of the ERISA Group is a member of the "CONTROLLED GROUP" under Section 412(c)(11) of the Internal Revenue Code or Section 4001(a)(14) of ERISA; or (vi) there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more (A) multiemployer plans, within the meaning of Section 4001(a)(3) of ERISA (which plans are not Multiemployer Plans), with respect to which a member of the ERISA Group shall have engaged, within the previous five plan years, in a transaction described in Section 4212(c) of ERISA, or (B) Multiemployer Plans, which could reasonably be expected to result in the incurrence by one or more members of the ERISA Group of a current payment obligation in excess of $1,000,000; provided that no Event of Default shall occur under clause (v) or (vi) if (A) the Unfunded Liabilities of the Other Plans in respect of which events described in clause (v) have occurred, together with the current payment obligations that could reasonably be expected to result from complete or partial withdrawals or defaults described in clause (vi), shall not exceed $2,500,000 and (B) each member of the ERISA Group that could reasonably be expected to be liable for such Unfunded Liabilities or current payment obligations is diligently contesting, in good faith, by appropriate proceedings, the imposition of such liabilities or obligations; (k) (i) one or more judgments or orders for the payment, in the aggregate, of money in excess of $20,000,000 shall be rendered against the Borrower or any of its Subsidiaries and such judgments or orders shall continue unsatisfied and unstayed for a period of 30 days or (ii) one or more judgments or orders shall be rendered against the Borrower or any of its Subsidiaries, which judgments or orders shall be stayed on condition that a bond or collateral equal to or greater than, in the aggregate, $250,000,000 be posted or provided, and such judgments or orders shall not be overturned or lifted within a period of 10 days; or (l) any person or group of persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) shall have acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of 25% or more of the outstanding shares of common stock of the Borrower; then, and in every such event, the Agent shall (i) if requested by Banks having more than 66 2/3% in aggregate amount of the Commitments, by notice to the Borrower terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding more than 66 2/3% of the sum of (A) the aggregate principal amount of the Loans and (B) the aggregate Letter of Credit Exposures, by notice to the Borrower declare the Notes and any Reimbursement Obligations (together with accrued interest thereon and all fees, commissions and other amounts payable by the Borrower hereunder) to be, and the same shall thereupon 56 62 become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause (h) or (i) above with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes and any Reimbursement Obligations (together with accrued interest thereon and all fees, commissions and other amounts payable by the Borrower hereunder) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.02. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(c) or 6.01(d) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks and the Issuing Bank thereof. ARTICLE 7 THE AGENT SECTION 7.01. Appointment and Authorizations. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Financing Documents as are delegated to the Agent by the terms thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of New York shall have the same rights and powers under the Financing Documents as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent or the Issuing Bank, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent or the Issuing Bank hereunder. SECTION 7.03. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. SECTION 7.04. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action 57 63 taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.05. Liability of Agent. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (a) with the consent or at the request of the Required Banks or (b) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with the Financing Documents or any borrowing or letter of credit hereunder, (ii) the performance or observance of any of the covenants or agreements of the Borrower or any of its Subsidiaries party to any Financing Document, (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Agent, or (iv) the validity, effectiveness or genuineness of any Financing Document or any other instrument or writing furnished in connection therewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.06. Indemnification. Each Bank shall, ratably in accordance with its Total Exposure, indemnify the Agent (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from the Agent's gross negligence or willful misconduct) that the Agent may suffer or incur in connection with any Financing Document or any action taken or omitted by the Agent hereunder or thereunder. SECTION 7.07. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent, the Issuing Bank or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent, the Issuing Bank or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. Successor Agent. The Agent may resign at any time, effective upon the appointment of a successor Agent and such successor Agent's acceptance of such appointment, by giving written notice thereof to the Banks, the Issuing Bank and the Borrower. Upon the giving of any such notice of resignation, the Required Banks (with, unless an Event of Default shall have 58 64 occurred and be continuing, the written consent of the Borrower (which shall not be unreasonably withheld)) shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After the effectiveness of any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. SECTION 7.09. Agent's Fee. The Borrower shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Agent. ARTICLE 8 CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any Fixed Rate Loan: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or (b) Banks having 50% or more of the aggregate principal amount of the affected Loans advise the Agent that the Adjusted CD Rate or the Adjusted London Interbank Offered Rate, as the case may be, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist, (i) the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, or to convert outstanding Loans into CD Loans or Euro-Dollar Loans shall be suspended and (ii) each outstanding CD Loan or Euro-Dollar Loan shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date 59 65 of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. SECTION 8.02. Illegality. If, on or after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans, or to convert outstanding Domestic Loans into Euro-Dollar Loans, shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan to such day. SECTION 8.03. Increased Cost and Reduced Return. (a) If on or after the date hereof the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Bank (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans, or shall change the basis of taxation of payments to any Bank (or its Applicable Lending Office) of the principal of or interest on its Fixed Rate Loans or any other amounts due 60 66 under this Agreement in respect of its Fixed Rate Loans or its obligation to make Fixed Rate Loans (except for changes in the rate of tax on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank's principal executive office or Applicable Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (A) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage or Assessment Rate and (B) with respect to any Euro-Dollar Loan any such requirement included in a Euro-Dollar Reserve Percentage) against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If, after the date hereof, the adoption of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by the Issuing Bank or any Bank with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall either (i) impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System) against letters of credit issued by the Issuing Bank or participations in letters of credit by any Bank or (ii) impose on the Issuing Bank or any Bank any other condition (including, without limitation, any assessment for federal deposit insurance) regarding any Letter of Credit, the Issuing Bank's obligation to issue any Letter of Credit or any Bank's obligation to pay the Issuing Bank its ratable share of any drawing under any Letter of Credit, and the result of any event referred to in clause (i) or (ii) of this 61 67 subsection is to increase the cost to the Issuing Bank or such Bank of issuing or maintaining any Letter of Credit or participating therein or making any payment under any Letter of Credit (which increase in cost shall be determined on the basis of the Issuing Bank's or such Bank's reasonable allocation of the aggregate of such cost increases resulting from such events), then, within 15 days after demand by the Issuing Bank or such Bank (with a copy to the Agent), the Borrower shall pay to the Issuing Bank or such Bank such additional amount or amounts as will compensate the Issuing Bank or such Bank for such increased cost. (c) If any Bank shall have determined that, after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder or under or with respect to the Letters of Credit (including any participation therein) to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (d) Each of the Issuing Bank and the Banks will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section. Each Bank will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in its judgment, be otherwise disadvantageous to it. A certificate of the Issuing Bank or any Bank claiming compensation under this Section and setting forth in reasonable detail an explanation of the basis for requesting such compensation and stating the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, the Issuing Bank or such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) with respect to its CD Loans or Euro-Dollar 62 68 Loans or its obligation to make CD Loans or Euro-Dollar Loans and the Borrower shall, by at least five Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer apply: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted to) CD Loans or Euro-Dollar Loans, as the case may be, shall instead be made as (or continued as or, effective (i) on the last day of the then current Interest Period applicable thereto unless clause (b) of the last sentence of Section 8.02 shall apply or (ii) immediately upon the giving of notice referred to in such sentence if such clause (b) shall apply, converted to) Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the principal amount of each such Base Rate Loan shall be converted into a CD Loan or a Euro-Dollar Loan, as the case may be, on the first day of the next succeeding Interest Period applicable to the related CD Loans or Euro-Dollar Loans of the other Banks. ARTICLE 9 MISCELLANEOUS SECTION 9.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of the Borrower, the Issuing Bank or the Agent, at its address or telex or facsimile transmission number set forth on the signature pages hereof, (y) in the case of any Bank, at its address or telex or facsimile transmission number set forth in its Administrative Questionnaire or (z) in the case of any party, at such other address or telex or facsimile transmission number as such party may hereafter specify for the purpose by notice to the Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in or pursuant to this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when such facsimile is transmitted to the facsimile transmission number specified in or 63 69 pursuant to this Section and telephonic confirmation of receipt thereof is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in or pursuant to this Section; provided that notices to the Agent or the Issuing Bank under Article 2 or Article 8 shall not be effective until received. SECTION 9.02. No Waivers. No failure or delay by the Agent, the Issuing Bank or any Bank in exercising any right, power or privilege under any Financing Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.03. Expenses; Documentary Taxes; Indemnification. (a) The Borrower shall pay (i) all out-of-pocket expenses of the Agent and the Issuing Bank, including reasonable fees and disbursements of any special counsel to the Agent, in connection with the preparation of the Financing Documents, any waiver or consent thereunder or any amendment thereof or any Default or alleged Default thereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent, the Issuing Bank or any Bank, including reasonable fees and disbursements of counsel, including in-house counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. The Borrower shall indemnify each Bank, the Agent and the Issuing Bank against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Financing Documents. (b) The Borrower agrees to indemnify the Agent, each Bank and the Issuing Bank and hold the Agent, each Bank and the Issuing Bank harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by the Agent, any Bank or the Issuing Bank in connection with any investigative, administrative or judicial proceeding (whether or not the Agent, such Bank or the Issuing Bank shall be designated a party thereto) relating to or arising out of the Financing Documents or any actual or proposed use of Letters of Credit or proceeds of Loans hereunder; provided that neither the Agent nor the Issuing Bank or any Bank shall have the right to be indemnified hereunder for its own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a 64 70 proportion of the aggregate amount of principal and interest due with respect to any Note held by it and its participation in any Reimbursement Obligation and interest (if any) thereon (collectively, its "RELEVANT DEBT") which is greater than the proportion received by any other Bank in respect of the Relevant Debt of such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Relevant Debt of the other Banks, and such other adjustments shall be made, as may be required so that all such payments with respect to the Relevant Debt of the Banks shall be shared by the Banks pro rata; provided that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its Relevant Debt. The Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note or Reimbursement Obligation, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation. SECTION 9.05. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Issuing Bank or the Agent are affected thereby, by the Agent or the Issuing Bank, as the case may be); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease any Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or the rate of interest on any Loan or Reimbursement Obligation or any commissions or fees hereunder, (iii) postpone the date fixed pursuant to Section 2.05, 2.06, 2.07, 2.08 or 2.10 for any payment of principal of or interest on any Loan or Reimbursement Obligation or any commissions or fees hereunder or for the termination of any Commitment, (iv) release any Material Subsidiary from its obligations under the Subsidiary Guaranty (other than pursuant to the terms thereof) or (v) change the percentage of the Commitments, the aggregate unpaid principal amount of the Notes or the Loans or of the aggregate Letter of Credit Exposures, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement. SECTION 9.06. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of all Banks. 65 71 (b) Any Bank may, without the consent of the Borrower, the Agent or the Issuing Bank, upon notice to the Borrower, the Agent and, if any participating interest in any Letter of Credit or Commitment is to be so granted, the Issuing Bank, grant to one or more banks or other institutions (each a "PARTICIPANT") participating interests in its Commitments or any or all of its Loans or its participations in Letters of Credit; provided that each participating interest shall represent an aggregate interest therein of at least $1,000,000. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower, the Agent and the Issuing Bank, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower, the Agent and the Issuing Bank shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 9.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by Section 9.06(c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "ASSIGNEE") all, or a proportionate part of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit C hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, the Agent and, if any participation in any Letter of Credit or Commitment is to be assigned, the Issuing Bank; provided that if an Assignee is, prior to such assignment, a Bank or an affiliate of a Bank, no such consent shall be required; and provided further that, (i) unless the Loans, Commitments and participations in Letters of Credit assigned shall constitute all Loans, Commitments and participations in Letters of Credit of such assignor Bank, the aggregate principal amount of the Loans, Commitments and participations in Letters of Credit assigned shall not be less than $10,000,000 and (ii) any such assignment shall include a pro rata portion of the assigning Bank's Commitment, Loans and participations in Letters of Credit. Upon the execution and delivery of such instrument, payment by such Assignee to such transferor Bank 66 72 of an amount equal to the purchase price agreed between such transferor Bank and such Assignee and delivery of notice to the Borrower, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with Commitments as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500; provided that no such fee shall be required if the Assignee is, prior to any such assignment, an affiliate of such Bank. If the Assignee is not incorporated under the laws of the United States of America or a state thereof, it shall, prior to the first date on which interest, fees or commissions are payable hereunder for its account, deliver to the Borrower and the Agent (and, in the case of any such Assignee to whom any Letter of Credit Exposure or Commitment has been assigned, the Issuing Bank) certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 2.16. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. SECTION 9.07. Margin Stock. Each of the Banks represents to the Agent, the Issuing Bank and each of the other Banks that it in good faith is not relying upon any "MARGIN STOCK" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.08. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT AND EACH NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. THE BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY 67 73 NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. THE BORROWER IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. SECTION 9.09. Consent to Execution and Delivery of Certain Financing Documents; Release of Existing Collateral. (a) The Issuing Bank, the Agent and the Banks each consents and agrees to the terms of the Subsidiary Guaranty. (b) On the Effective Date, the Pledge Agreement (as defined in the Existing Credit Agreement) (other than Sections 12, 15 and 17 thereof) shall be terminated, all Security Interests (as defined in such Pledge Agreement) shall be released and the Agent shall deliver to the Pledgor (as defined in such Pledge Agreement) all Collateral (as so defined) then held by it and execute and deliver to the Pledgor or the Borrower such documents as the Borrower shall reasonably request to evidence the release of such Security Interests. SECTION 9.10. Counterparts; Integration. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement, the Notes and the Subsidiary Guaranty constitute the entire agreement and understanding among the parties hereto and supersede any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. SECTION 9.11. Confidentiality. Each Bank agrees not to disclose to any Person other than the Agent or another Bank any information delivered or made available by the Borrower or any of its Subsidiaries to it and indicated in writing as confidential; provided that nothing herein shall prevent any Bank from disclosing such information (a) to any other Person who is a director, officer or employee of such Bank or any of its affiliates if reasonably incidental to the administration of the Loans, (b) upon the order of any court or administrative agency, (c) upon the request or demand of, or pursuant to any regulation of, any regulatory agency or authority, (d) which had been publicly disclosed other than as a result of a disclosure by the Agent or any Bank prohibited by this Agreement, (e) in 68 74 connection with any litigation related to the transactions contemplated by the Financing Documents to which the Agent, any Bank or its subsidiaries or parent may be a party, (f) to the extent reasonably required in connection with the exercise of any remedy hereunder, (g) to such Bank's or Agent's legal counsel or independent auditors, and (h) to any actual or proposed Assignee or Participant of all or part of its rights hereunder provided that such actual or proposed Assignee or Participant agrees in writing to be bound by the provisions of this Section. SECTION 9.12. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT, THE ISSUING BANK AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. 69 75 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE BORROWER BEVERLY ENTERPRISES, INC. By: /s/ Schuyler Hollingsworth ------------------------------------------ Title: Senior Vice President & Treasurer 5111 Rogers Avenue, Suite 40-A Fort Smith, Arkansas 72919-0155 Attention: Chief Financial Officer Telephone number: (501) 452-6712 Facsimile transmission number: (501) 484-8489 BANKS MORGAN GUARANTY TRUST COMPANY OF NEW YORK By: /s/ John M. Mikolay ------------------------------------------ Title: Vice President THE CHASE MANHATTAN BANK By: /s/ Dawn Lee Lum ------------------------------------------ Title: Vice President 70 76 BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION By: /s/ Edward S. Han ------------------------------------------ Title: Vice President THE BANK OF NEW YORK By: /s/ Rebecca Levine ------------------------------------------ Title: Vice President THE BANK OF NOVA SCOTIA By: /s/ W. J. Brown ------------------------------------------ Title: Vice President DEUTSCHE BANK AG NEW YORK BRANCH By: /s/ Susan L. Pearson ------------------------------------------ Title: Director By: /s/ Robert Wood ------------------------------------------ Title: Director 71 77 THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY By: /s/ Pieji Sakata ------------------------------------------ Title: Joint General Manager NATIONSBANK OF TEXAS, N.A. By: /s/ Scott Singhoff ------------------------------------------ Title: Senior Vice President PNC BANK, NATIONAL ASSOCIATION By: /s/ Connie R. Field ------------------------------------------ Title: Assistant Vice President BANK OF MONTREAL By: /s/ John T. Mead, Jr. ------------------------------------------ Title: Director 72 78 BANK OF HAWAII By: /s/ Donna Parker ------------------------------------------ Title: Vice President BHF - BANK AKTIENGESELLSCHAFT By: /s/ Dan Dobrjanskyj ------------------------------------------ Title: Assistant Vice President By: /s/ Ralph Della Rocca ------------------------------------------ Title: Assistant Treasurer AGENT MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By: /s/ John M. Mikolay ------------------------------------------ Title: Vice President 60 Wall Street New York, New York 10260 Attention: Cynthia Whaley Telephone number: (212) 648-6696 Telex number: 177615 Facsimile transmission number: (212) 648-5018 73 79 ISSUING BANK MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank By: /s/ John M. Mikolay ------------------------------------------ Title: Vice President c/o J.P. Morgan Services Inc. P.O. Box 6071 500 Stanton Christiana Road Newark, Delaware 19713 Attention: International Trade Services Standby Unit Telephone number: (302) 634-4234 Facsimile transmission number: (302) 634-4061 74 80 SCHEDULE I PRICING SCHEDULE The "EURO-DOLLAR MARGIN", "CD MARGIN", "BASE RATE MARGIN", "LETTER OF CREDIT COMMISSION RATE" and "COMMITMENT FEE RATE" for any day are the respective rates per annum set forth below in the applicable row in the column corresponding to the Pricing Level that applies on such day:
========================================================================================================= Level I Level II Level III Level IV Level V ========================================================================================================= Euro-Dollar Margin 0.500% 0.750% 0.875% 1.125% 1.500% - --------------------------------------------------------------------------------------------------------- CD Margin 0.625% 0.875% 1.000% 1.250% 1.625% - --------------------------------------------------------------------------------------------------------- Base Rate Margin 0.000% 0.000% 0.000% 0.500% 1.000% - --------------------------------------------------------------------------------------------------------- Letter of Credit Commission Rate 0.500% 0.750% 0.875% 1.125% 1.500% - --------------------------------------------------------------------------------------------------------- Commitment Fee 0.175% 0.200% 0.225% 0.275% 0.350% Rate =========================================================================================================
For purposes of this Pricing Schedule, the following terms have the following meanings: "PRICING RATIO" means the ratio of Consolidated EBITDAR to the sum of Consolidated Interest Charges and Consolidated Rental Expense. "LEVEL I PRICING" applies on any day if, as of the last day of the fiscal quarter of the Borrower most recently ended on or prior to such day and as to which the Borrower shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 5.01(d), the Pricing Ratio is greater than 2.50 to 1.0. "LEVEL II PRICING" applies on any day if, as of the last day of the fiscal quarter of the Borrower most recently ended on or prior to such day and as to which the Borrower shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 5.01(d), (i) the Pricing Ratio is greater than 2.25 to 1.0 and (ii) Level I Pricing does not apply. "LEVEL III PRICING" applies on any day if, as of the last day of the fiscal quarter of the Borrower most recently ended on or prior to such day and as to which the Borrower shall have delivered, or been required to deliver, on or prior to 81 such day a certificate pursuant to Section 5.01(d), (i) the Pricing Ratio is greater than 2.00 to 1.0 and (ii) neither Level I Pricing nor Level II Pricing applies. "LEVEL IV PRICING" applies on any day if, as of the last day of the fiscal quarter of the Borrower most recently ended on or prior to such day and as to which the Borrower shall have delivered, or been required to deliver, on or prior to such day a certificate pursuant to Section 5.01(d), (i) the Pricing Ratio is greater than 1.75 to 1.0 and (ii) none of Level I Pricing, Level II Pricing or Level III Pricing applies. "LEVEL V PRICING" applies on any day if, on such day, no other Pricing Level applies. "PRICING LEVEL" means any one of the five pricing levels denominated Level I Pricing, Level II Pricing, Level III Pricing, Level IV Pricing or Level V Pricing. 2 82 SCHEDULE II COMMITMENT SCHEDULE
Bank Commitments - ---- ------------- Morgan Guaranty Trust Company of New York $ 42,500,000 The Chase Manhattan Bank $ 37,500,000 Bank of America National Trust & Savings Association $ 35,000,000 The Bank of Nova Scotia, Atlanta Agency $ 35,000,000 Deutsche Morgan Grenfell Inc. $ 35,000,000 The Long-Term Credit Bank of Japan, Ltd., Los Angeles Agency $ 35,000,000 NationsBank of Texas, N.A. $ 35,000,000 The Bank of New York $ 35,000,000 PNC Bank, National Association $ 30,000,000 Bank of Montreal $ 25,000,000 Bank of Hawaii $ 15,000,000 BHF - BANK Aktiengesellschaft $ 15,000,000 ------------- Total $ 375,000,000 =============
3 83 SCHEDULE III EXISTING SUBSIDIARY DEBT(2)
- ------------------------------------------------------------------------------- TYPE BALANCE @ MARCH 31, 1998 - ------------------------------------------------------------------------------- NOTES & MORTGAGES $144,909,600 - ------------------------------------------------------------------------------- TAX EXEMPT BONDS $184,077,000 - ------------------------------------------------------------------------------- FIRST MORTGAGE REVENUE BONDS $46,945,000 - ------------------------------------------------------------------------------- MIFA TAXABLE BONDS $25,000,000 - ------------------------------------------------------------------------------- 9% SENIOR NOTES $180,000,000 - ------------------------------------------------------------------------------- REVOLVER OUTSTANDING $40,000,000 - ------------------------------------------------------------------------------- MEDIUM TERM NOTES $40,000,000 - ------------------------------------------------------------------------------- ATRS NOTES $21,076,000 - ------------------------------------------------------------------------------- BANK UNITED $14,601,000 - ------------------------------------------------------------------------------- DEPOSIT GUARANTY LOAN $9,993,400 - ------------------------------------------------------------------------------- GE CAPITAL CORPORATION LOAN $9,287,000 - ------------------------------------------------------------------------------- CAPITAL LEASES $18,460,000 - ------------------------------------------------------------------------------- TOTAL $734,349,000 - -------------------------------------------------------------------------------
- ------------------- (2) Including debt guaranteed by Subsidiaries 4 84 SCHEDULE IV SUBSIDIARIES OF THE BORROWER A-1 Home Health Services, Inc. AdviNet, Inc. AGI-Camelot, Inc. American Transitional Care Dallas - Ft. Worth, Inc. American Transitional Hospitals, Inc. American Transitional Hospitals of East Tennessee, Inc. American Transitional Hospitals of Indiana, Inc. American Transitional Hospitals of Oklahoma, Inc. American Transitional Hospitals of Tennessee, Inc. American Transitional Hospitals -- Texas Medical Center, Inc. Arborland Management Company, Inc. ATH Columbus, Inc. ATH -- Fort Smith, Inc. ATH Heights, Inc. ATH-Little Rock, Inc. ATH-Memphis, Inc. ATH Oklahoma City, Inc. ATH Tucson, Inc. Beverly - Bella Vista Holding, Inc. Beverly - Missouri Valley Holding, Inc. Beverly - Rapid City Holding, Inc. Beverly Assisted Living, Inc. Beverly Health and Rehabilitation Services, Inc. Beverly Enterprises - Alabama, Inc. Beverly Enterprises - Arizona, Inc. Beverly Enterprises - Arkansas, Inc. Beverly Enterprises - California, Inc. Beverly Enterprises - Colorado, Inc. Beverly Enterprises - Connecticut, Inc. Beverly Enterprises - Delaware, Inc. Beverly Enterprises - Distribution Services, Inc. Beverly Enterprises - District of Columbia, Inc. Beverly Enterprises - Florida, Inc. Beverly Enterprises - Garden Terrace, Inc. Beverly Enterprises - Georgia, Inc. Beverly Enterprises - Hawaii, Inc. Beverly Enterprises - Idaho, Inc. Beverly Enterprises - Illinois, Inc. Beverly Enterprises - Indiana, Inc. 5 85 Beverly Enterprises - Iowa, Inc. Beverly Enterprises - Kansas, Inc. Beverly Enterprises - Kentucky, Inc. Beverly Enterprises - Louisiana, Inc. Beverly Enterprises - Maine, Inc. Beverly Enterprises - Maryland, Inc. Beverly Enterprises - Massachusetts, Inc. Beverly Enterprises - Michigan, Inc. Beverly Enterprises - Minnesota, Inc. Beverly Enterprises - Mississippi, Inc. Beverly Enterprises - Missouri, Inc. Beverly Enterprises - Montana, Inc. Beverly Enterprises - Nebraska, Inc. Beverly Enterprises - Nevada, Inc. Beverly Enterprises - New Hampshire, Inc. Beverly Enterprises - New Jersey, Inc. Beverly Enterprises - New Mexico, Inc. Beverly Enterprises - North Carolina, Inc. Beverly Enterprises - North Dakota, Inc. Beverly Enterprises - Ohio, Inc. Beverly Enterprises - Oklahoma, Inc. Beverly Enterprises - Oregon, Inc. Beverly Enterprises - Pennsylvania, Inc. Beverly Enterprises - Rhode Island, Inc. Beverly Enterprises - South Carolina, Inc. Beverly Enterprises - Tennessee, Inc. Beverly Enterprises - Texas, Inc. Beverly Enterprises - Utah, Inc. Beverly Enterprises - Vermont, Inc. Beverly Enterprises - Virginia, Inc. Beverly Enterprises - Washington, Inc. Beverly Enterprises - West Virginia, Inc. Beverly Enterprises - Wisconsin, Inc. Beverly Enterprises - Wyoming, Inc. Beverly Enterprises International Limited Beverly Enterprises Medical Equipment Corporation Beverly Holdings I, Inc. Beverly Indemnity, Ltd. Beverly Manor Inc. of Hawaii Beverly Real Estate Holdings, Inc. Beverly Savana Cay Manor, Inc. Columbia-Valley Nursing Home, Inc. Commercial Management, Inc. 6 86 Community Care, Inc. Compassion and Personal Care Services, Inc. Continental Care Centers of Council Bluffs, Inc. Doctor's Urgent Care Centre, Inc. Eastern Carolina Home Health Agency, Inc. Eastern Home Health Supply & Equipment Co., Inc. ECT, Inc. Forest City Building Ltd. Hallmark Convalescent Homes, Inc. Health Services Management, Inc. Homecare Preferred Choice, Inc. Home Health Care of Carteret County, Inc. Home Technology Heathcare - Mid Cumberland, Inc. Home Technology Healthcare - Mid South, Inc. Home Technology Healthcare - Nursing, Inc. Home Technology Healthcare - St. Louis, Inc. Home Technology Healthcare - Tennessee, Inc. Hospice of Eastern Carolina, Inc. Hospice of Tennessee, Inc. Hospice Preferred Choice, Inc. Hospital Facilities Corporation HTHC Holdings, Inc. J. David Butler, I.P.T., Inc. Kenwood View Nursing Home, Inc. Liberty Nursing Home, Incorporated MATRIX Healthcare Network, Inc. MATRIX Occupational Health, Inc. MATRIX Rehabilitation, Inc. Medical Arts Health Facility of Lawrenceville, Inc. Moderncare of Lumberton, Inc. Nebraska City S-C-H, Inc. Nursing Home Operators, Inc. Petersen Health Care, Inc. Physician's Home Health Care, Incorporated South Alabama Nursing Home, Inc. South Dakota - Beverly Enterprises, Inc. Spectra Healthcare Alliance, Inc. Synergos, Inc. Synergos - Scottsdale, Inc. Tar Heel Health Care Services, Inc. Tar Heel Holdings, Inc. Tar Heel Home Health, Inc. Tar Hell Home Health of Cape Fear, Inc. 7 87 Tar Heel Home Health of Dare County, Inc. Tar Heel Home Health of North Central North Carolina, Inc. Tar Heel Infusion Company, Inc. TMD Disposition Company Vantage Healthcare Corporation Vaughn, Buchanan, Shelley & Associates, Physical Therapists, Inc. Vaughn Home Health Care & Services, Inc. 8 88 EXHIBIT A NOTE New York, New York ____________, 1998 For value received, BEVERLY ENTERPRISES, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the Termination Date provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the type thereof and all repayments of the principal thereof shall be recorded by the Bank and, prior to any transfer hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Amended and Restated Credit Agreement dated as of April 30, 1998 among the Borrower, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as Issuing Bank and Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the mandatory and optional repayment and prepayment hereof and the acceleration of the maturity hereof. 9 89 Payment of principal and interest on this Note is unconditionally guaranteed, subject to the limitations contained in the Subsidiary Guaranty, by the Subsidiary Guarantors pursuant to the Subsidiary Guaranty. BEVERLY ENTERPRISES, INC. By ----------------------------------------- Title: 10 90 NOTE (CONT'D) LOANS AND PAYMENTS OF PRINCIPAL
Type of Amount of Principal Notation Made Amount of Loan Loan Repaid By - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
11 91 EXHIBIT C ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of _________, 199_ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the "Assignee"), and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent") and Issuing Bank (the "Issuing Bank"). W I T N E S S E T H WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the Amended and Restated Credit Agreement dated as of April 30, 1997 among Beverly Enterprises, Inc., as borrower (the "Borrower"), the Assignor and the other banks party thereto, as banks (the "Banks"), and the Agent and the Issuing Bank (the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has Commitments to make Revolving Loans to the Borrower, and to participate in Letters of Credit issued for the benefit of the Borrower and its Subsidiaries, in an aggregate amount equal to $__________; WHEREAS, (i) Revolving Loans made to the Borrower by the Assignor under the Credit Agreement are outstanding on the date hereof in the aggregate amount of $__________ and (ii) participations by the Assignor in Letters of Credit issued by the Issuing Bank for the benefit of the Borrower and its Subsidiaries under the Credit Agreement are outstanding on the date hereof in the aggregate amount of $__________. WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of (i) a portion of its Revolving Commitment thereunder in an amount equal to $__________, together with a corresponding portion of its outstanding Revolving Loans, and its participations in outstanding Letters of Credit (the "Assigned Amounts"), and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follow 12 92 SECTION 1. Definitions. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amounts, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amounts. Upon the execution and delivery hereof by the Assignor, the Assignee, the Agent and, if any participation in a Letter of Credit or any Revolving Commitment is being assigned, the Issuing Bank and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with Commitments in amounts equal to, holding Loans in aggregate principal amounts and holding participations in Letters of Credit to the extent of, the Assigned Amounts, and (ii) the Commitments, Loans and Letter of Credit participations of the Assignor shall, as of the date hereof, be reduced by like amounts and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. Payments. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them. It is understood that commitment and other fees and Letter of Credit commissions accrued under the Credit Agreement to the date hereof are for the account of the Assignor and such fees and commissions accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if it receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. SECTION 4. Consent of the Agent and the Issuing Bank. This Agreement is conditioned upon the consent of the Agent and the Borrower and, if any participation in a Letter of Credit or any Revolving Commitment is being assigned, the Issuing Bank, pursuant to Section 9.06(c) of the Credit Agreement. The execution of this Agreement by the Agent, the Borrower and, if applicable, the Issuing Bank is evidence of such consent. SECTION 5. Non-Reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition or statements of the Borrower or any 13 93 Subsidiary Guarantor, or the validity and enforceability of the obligations of the Borrower or any Subsidiary Guarantor in respect of the Credit Agreement, the Subsidiary Guaranty, any Note or the Pledge Agreement. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower and the Subsidiary Guarantors. SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 14 94 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By -------------------------------------- Title: [ASSIGNEE] By ------------------------------------- Title: [BORROWER] By ------------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By ------------------------------------- Title: 15 95 [MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Issuing Bank] By ------------------------------------- Title: 16 EX-21.1 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE DECEMBER 31, 1998
STATE OF CORPORATION INCORPORATION - ----------- ------------- A-1 Home Health Services, Inc. Georgia A.B.C. Health Equipment Corp. New York AdviNet, Inc. Delaware AGI-Camelot, Inc. Missouri Arborland Management Company, Inc. South Carolina Associated Physical Therapy Practitioners, Inc. Pennsylvania Bercy International, Inc. California Beverly Assisted Living, Inc. Delaware Beverly Enterprises International Limited California Beverly Enterprises Medical Equipment Corporation California Beverly Enterprises - Alabama, Inc. California Beverly Enterprises - Arizona, Inc. California Beverly Enterprises - Arkansas, Inc. California Beverly Enterprises - California, Inc. California Beverly Enterprises - Colorado, Inc. California Beverly Enterprises - Connecticut, Inc. California Beverly Enterprises - Delaware, Inc. California Beverly Enterprises - Distribution Services, Inc. California Beverly Enterprises - District of Columbia, Inc. California Beverly Enterprises - Florida, Inc. California Beverly Enterprises - Garden Terrace, Inc. California Beverly Enterprises - Georgia, Inc. California Beverly Enterprises - Hawaii, Inc. California Beverly Enterprises - Idaho, Inc. California
1 2 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1998
STATE OF CORPORATION INCORPORATION - ----------- ------------- 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 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
2 3 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1998
STATE OF CORPORATION INCORPORATION - ----------- ------------- 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 Beverly Enterprises - Wisconsin, Inc. California Beverly Enterprises - Wyoming, Inc. California Beverly - Bella Vista Holding, Inc. Delaware Beverly - Branson Holdings, Inc. Delaware Beverly Clinical, Inc. Delaware Beverly Funding Corporation Delaware Beverly Health and Rehabilitation Services, Inc. California Beverly Healthcare, LLC Indiana 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 - Plant City Holdings, Inc. Delaware
3 4 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1998
STATE OF CORPORATION INCORPORATION - ----------- ------------- Beverly - Rapid City Holding, Inc. Delaware Beverly Real Estate Holdings, Inc. Delaware Beverly Rehabilitation, Inc. Delaware Beverly Savana Cay Manor, Inc. California Beverly - Tamarac Holdings, Inc. Delaware Beverly - Tampa Holdings, Inc. Delaware Carrollton Physical Therapy Clinic, Inc. Texas Columbia Valley Nursing Home, Inc. Ohio Commercial Management, Inc. Iowa Community Care, Inc. North Carolina Compassion and Personal Care Services, Inc. North Carolina Continental Care Centers of Council Bluffs, Inc. Iowa Doctor's Urgent Care Centre, Inc. Delaware Eastern Carolina Home Health Agency, Inc. North Carolina Eastern Home Health Supply & Equipment Co., Inc. North Carolina ECT, Inc. North Carolina Edgewood Convalescent Hospital California Forest City Building Ltd. Missouri Fort Smith Hospital, Inc. Delaware Greenville Rehabilitation Services, Inc. Texas Hallmark Convalescent Homes, Inc. Michigan HomeCare Preferred Choice, Inc. Delaware Home Health and Rehabilitation Services, Inc. Texas Home Health Care of Carteret County, Inc. North Carolina
4 5 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1998
STATE OF CORPORATION INCORPORATION - ----------- ------------- Home Medical Systems, Inc. Delaware Home Technology Healthcare - Mid Cumberland, Inc. Tennessee Home Technology Healthcare - Mid South, Inc. Delaware Home Technology Healthcare - Nursing, Inc. Delaware Home Technology Healthcare - St. Louis, Inc. Delaware Home Technology Healthcare - Tennessee, Inc. Tennessee Hospice of Eastern Carolina, Inc. North Carolina Hospice of Tennessee, Inc. Delaware Hospice Preferred Choice, Inc. Delaware Hospital Facilities Corporation California HTHC Holdings, Inc. Delaware J. David Butler, L.P.T., Inc. Texas Kenwood View Nursing Home, Inc. Kansas Las Colinas Physical Therapy, Inc. Texas Liberty Nursing Homes, Incorporated Virginia Long Beach Sports Medicine and Physical Therapy Center, Inc. California MATRIX HealthCare Network, Inc. Delaware MATRIX Occupational Health, 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 Network for Physical Therapy, Inc. Texas North Dallas Physical Therapy Associates, Inc. Texas
5 6 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1998
STATE OF CORPORATION INCORPORATION - ----------- ------------- Nursing Home Operators, Inc. Ohio Petersen Health Care, Inc. Florida Physician's Home Health Care, Incorporated Tennessee Piedmont No. 1, Inc. Missouri PPI, Inc. New Mexico PT Net, Inc. Tennessee PT Net (Colorado), Inc. Colorado Rehabilitation Associates of Lafayette, Inc. Louisiana Riverside Physical Therapy, Inc. California Shastina Properties Inc. California Shastina Realty Inc. California South Alabama Nursing Home, Inc. Alabama South Dakota - Beverly Enterprises, Inc. California Spectra Healthcare Alliance, Inc. Delaware Tar Heel Health Care Services, Inc. North Carolina Tar Heel Holdings, Inc. Delaware Tar Heel Home Health, Inc. North Carolina Tar Heel Home Health of Cape Fear, Inc. North Carolina Tar Heel Home Health of Dare County, Inc. North Carolina Tar Heel Home Health of North Central North Carolina, Inc. North Carolina Tar Heel Infusion Company, Inc. North Carolina The Parks Physical Therapy and Work Hardening Center, Inc. Texas Theraphysics Corp. Delaware Theraphysics Corp. of New York IPA, Inc. New York
6 7 EXHIBIT 21.1 BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES SUBSIDIARY SCHEDULE (CONTINUED) DECEMBER 31, 1998
STATE OF CORPORATION INCORPORATION - ----------- ------------- Theraphysics Partners of Colorado, Inc. Delaware Theraphysics Partners of Louisiana, Inc. Delaware Theraphysics Partners of Western Pennsylvania, Inc. Delaware Theraphysics Partners of Texas, Inc. Delaware TP Acquisition, Inc. Delaware TMD Disposition Company Florida Vantage Healthcare Corporation Delaware Vaughn, Buchanan, Shelley & Associates, Physical Therapists, Inc. South Carolina Vaughn Home Health Care & Services, Inc. Illinois
7 EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements and amendments thereto Form S-8 No. 33-21505 Employee Stock Purchase Plan Form S-8 No. 333-41671 Non-Employee Director Deferred Compensation Plan Form S-8 No. 333-41669 1997 Long-Term Incentive Plan Form S-8 No. 333-41673 Executive Deferred Compensation Plan Form S-8 No. 333-42131 Non-Employee Directors' Stock Option Plan
of Beverly Enterprises, Inc. of our report dated February 3, 1999 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, 1998. /s/ ERNST & YOUNG LLP Little Rock, Arkansas March 26, 1999 EX-27.1 6 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, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 DEC-31-1998 17,278 0 592,687 22,205 32,133 695,970 1,814,637 694,322 2,160,511 357,156 878,270 0 0 11,028 765,178 2,160,511 2,812,232 2,822,940 0 2,633,135 174,749 0 65,938 (50,882) (25,936) (24,946) 0 (1,660) (4,415) (31,021) (.30) (.30) EXCLUDES $24,184 OF LONG-TERM NOTES RECEIVABLE. EXCLUDES $2,921 OF ALLOWANCE FOR LONG-TERM NOTES RECEIVABLE. INCLUDED IN TOTAL COSTS AND EXPENSES LINE.
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