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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1997
REGISTRATION NO. 333-28521
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NEW BEVERLY HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 8051 62-1691861
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
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5111 ROGERS AVENUE, SUITE 40-A
FORT SMITH, ARKANSAS 72919-0155
(501) 452-6712
(Address, Including Zip Code, And Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
ROBERT W. POMMERVILLE, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
NEW BEVERLY HOLDINGS, INC.
5111 ROGERS AVENUE, SUITE 40-A
FORT SMITH, ARKANSAS 72919-0155
(501) 452-6712
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
---------------------
Copies to:
H. WATT GREGORY, III, ESQ.
MICHAEL E. KARNEY, ESQ.
GIROIR, GREGORY, HOLMES & HOOVER, PLC
111 CENTER STREET, SUITE 1900
LITTLE ROCK, ARKANSAS 72201
(501) 372-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions described herein have been satisfied or are waived.
If the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 22, 1997
NEW BEVERLY HOLDINGS, INC.
COMMON STOCK PAR VALUE $0.10 PER SHARE
This Prospectus covers up to 110,424,677 shares of common stock, par value
$.10 per share ("New Beverly Common Stock"), of New Beverly Holdings, Inc., a
Delaware corporation ("New Beverly"). This Prospectus is being furnished to the
stockholders of Beverly Enterprises, Inc., a Delaware corporation ("Beverly"),
the sole stockholder of New Beverly, in connection with the proposed
distribution (the "Distribution") to Beverly's stockholders of all the
outstanding shares of New Beverly Common Stock, pursuant to the terms of an
Agreement and Plan of Distribution, dated as of April 15, 1997, by and between
Beverly, New Beverly and Capstone Pharmacy Services, Inc., a Delaware
corporation ("Capstone") (the "Distribution Agreement"). A copy of the
Distribution Agreement is attached as Annex C to the Joint Proxy
Statement/Prospectus (the "Joint Proxy Statement/ Prospectus") of Beverly and
Capstone relating to the solicitation of proxies in order to obtain stockholder
approval of the Distribution and Merger (as defined below) which accompanies
this Prospectus. Beverly is proposing to make the Distribution in connection
with and as part of a proposed reorganization that also involves the merger of
Beverly with and into Capstone (the "Merger"), with Capstone remaining as the
surviving corporation ("Surviving Corporation"), the Merger to take place
immediately following the Distribution, pursuant to an Agreement and Plan of
Merger by and between Capstone and Beverly dated as of April 15, 1997 (the
"Merger Agreement"), a copy of which is attached as Annex B to the Joint Proxy
Statement/Prospectus. Immediately following the Merger, New Beverly will change
its name to "Beverly Enterprises, Inc." The consummation of the Merger is
conditioned upon the successful completion of the Distribution. The completion
of the Merger (and, in the case of Beverly, the Distribution) is subject to the
approval of the stockholders of both Beverly and Capstone.
One share of New Beverly Common Stock will be distributed for each share of
common stock of Beverly, par value $.10 per share (the "Beverly Common Stock"),
issued and outstanding on the date established by the Board of Directors of
Beverly for determining stockholders of record entitled to receive New Beverly
Common Stock in the Distribution (the "Distribution Record Date").
At the time of the Distribution, New Beverly will own all of Beverly's
businesses and assets other than Beverly's institutional pharmacy business (the
"Institutional Pharmacy Business"), currently operated through Beverly's
wholly-owned subsidiary Pharmacy Corporation of America, a California
corporation ("PCA"). The businesses to be owned and operated by New Beverly
include Beverly's nursing facilities, acute long-term transitional hospitals,
rehabilitation therapy services, outpatient therapy clinics, assisted living
centers, hospices, home healthcare centers and other healthcare and related
services and businesses, other than the Institutional Pharmacy Business
(collectively, the "Remaining Healthcare Business"), which will be transferred
to New Beverly or one or more direct or indirect subsidiaries of New Beverly.
No consideration will be paid by Beverly's stockholders for the shares of
New Beverly Common Stock to be received by them in the Distribution. There is
currently no public trading market for the shares of New Beverly Common Stock.
New Beverly intends to list the New Beverly Common Stock for trading on the New
York Stock Exchange ("NYSE") and the Pacific Stock Exchange ("PSE") under the
trading symbol "BEV," which is currently used by Beverly.
The consummation of the Distribution is a condition to, among other things,
Beverly's and Capstone's respective obligations to consummate the Merger.
STOCKHOLDERS OF BEVERLY SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER THE CAPTION "RISK FACTORS" ON PAGE 7 HEREOF WITH RESPECT TO THE SECURITIES
BEING OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
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NEW BEVERLY HOLDINGS, INC. PROSPECTUS
TABLE OF CONTENTS
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AVAILABLE INFORMATION....................................... iv
CAUTIONARY STATEMENTS....................................... v
PROSPECTUS SUMMARY.......................................... 1
Overview.................................................. 1
New Beverly............................................... 1
The Transactions.......................................... 2
The Distribution Agreement................................ 2
Certain Tax Considerations................................ 3
New Beverly Stock Option Plans............................ 3
Effect of the Transactions on Employees and Employee
Benefits............................................... 4
Expenses.................................................. 4
Risk Factors.............................................. 4
SUMMARY CONSOLIDATED FINANCIAL DATA......................... 5
RISK FACTORS................................................ 6
Substantial Indebtedness.................................. 6
Business to be Conducted by New Beverly................... 6
Uncertainty Associated with Healthcare Reform............. 6
Risks Involved with Reimbursement by Third Party Payors... 7
Government Regulation..................................... 7
Increased Labor Costs and Availability of Personnel....... 8
Dependence on Key Personnel............................... 8
Competition............................................... 8
Absence of Prior Trading Market........................... 9
Certain Indemnification Obligations....................... 9
Non-competition Agreement with Capstone................... 9
USE OF PROCEEDS............................................. 10
CAPITALIZATION.............................................. 11
UNAUDITED PRO FORMA NEW BEVERLY FINANCIAL STATEMENTS........ 13
NEW BEVERLY HOLDINGS, INC. PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE SIX MONTHS ENDED JUNE 30, 1997.................... 14
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME...................................... 15
NEW BEVERLY HOLDINGS, INC. PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET AS OF JUNE 30, 1997......................... 16
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE
SHEET..................................................... 17
THE DISTRIBUTION............................................ 18
Terms of the Distribution Agreement....................... 18
Restructuring and Contribution of Remaining Healthcare
Business to New Beverly................................ 18
Consummation of the Distribution; Treatment of Beverly
Stock Options, Phantom Shares, Performance Shares and
Shares of Restricted Stock............................. 19
Manner of Effecting the Distribution...................... 20
Listing of New Beverly Common Stock; Restrictions on
Resale................................................. 20
Treatment of Indebtedness................................. 21
Expenses.................................................. 21
Conditions................................................ 21
Settlement of Intercompany Accounts....................... 22
Indemnification and Insurance............................. 22
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i
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Terms of the Employee Benefit Agreement................... 23
Terms of the Non-competition Agreement.................... 25
Terms of the Interim Services Agreement................... 25
Terms of the Tax Allocation and Indemnification
Agreement.............................................. 25
Preferred Provider Agreement.............................. 27
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................... 27
The Distribution.......................................... 28
The Merger................................................ 29
Taxpayer Relief Act....................................... 30
Back-up Withholding Requirements.......................... 30
TREATMENT OF BEVERLY INDEBTEDNESS........................... 31
General................................................... 31
Existing Credit Facility.................................. 31
9% Senior Notes........................................... 32
Subordinated Debentures................................... 32
Industrial Revenue Bonds.................................. 33
First Mortgage Bonds...................................... 33
8.75% Notes............................................... 34
Medium Term Notes......................................... 34
REIT Promissory Notes..................................... 35
Bank Loans, Mortgages and Notes Payable................... 35
INFORMATION CONCERNING BEVERLY.............................. 36
Selected Historical Consolidated Financial Data........... 36
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 37
General................................................... 37
Operating Results......................................... 38
Liquidity and Capital Resources........................... 44
BUSINESS.................................................... 46
General................................................... 46
Operations................................................ 46
Governmental Regulation and Reimbursement................. 48
Competition............................................... 51
Employees................................................. 51
Properties................................................ 52
Legal Proceedings......................................... 53
Management................................................ 54
Dividend Policy........................................... 56
PRINCIPAL STOCKHOLDERS OF NEW BEVERLY....................... 57
Security Ownership of Certain Beneficial Owners........... 57
Security Ownership of Management.......................... 58
EXECUTIVE AND DIRECTOR COMPENSATION......................... 59
Executive Compensation.................................... 59
Option/SAR Grants in Last Fiscal Year..................... 62
Compensation of Directors and Other Information Concerning
the Board and its Committees........................... 63
The Beverly Non-Employee Director Deferred Compensation
Plan................................................... 64
Compensation Committee Report on Executive Compensation... 65
Compensation Philosophy................................... 65
Competitive Market Evaluation............................. 65
Base Salary............................................... 66
Annual Incentives......................................... 66
Long-term Incentives...................................... 66
Stock Ownership Guideline................................. 67
$1 Million Limit on Compensation.......................... 67
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Other Matters............................................. 67
Compensation Committee.................................... 67
Compensation Committee Interlocks and Insider
Participation.......................................... 68
Performance Graph......................................... 68
Other Plans............................................... 68
New Beverly 1997 Long-Term Incentive Plan................. 72
New Beverly Non-Employee Directors Stock Option Plan...... 72
Certain Transactions with Management and Others........... 73
DESCRIPTION OF NEW BEVERLY CAPITAL STOCK.................... 73
Authorized Capital Stock.................................. 73
New Beverly Preferred Stock............................... 73
New Beverly Common Stock.................................. 73
New Beverly Common Stock Purchase Rights.................. 73
The Charter and Bylaws of New Beverly..................... 75
SHARES ELIGIBLE FOR FUTURE SALE............................. 76
LEGAL MATTERS............................................... 76
EXPERTS..................................................... 76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES....................................... F-1
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iii
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AVAILABLE INFORMATION
New Beverly has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of New Beverly Common Stock described in this
Prospectus. This Prospectus, which is a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement or
the exhibits and schedules thereto, certain portions having been omitted
pursuant to the rules and regulations of the Commission. Statements made in this
Prospectus as to the contents of any contract or other document are not
necessarily complete with respect to each such contract or other document filed
with the Commission as an exhibit to the Registration Statement. Reference is
made to such exhibits for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference.
The Registration Statement and the exhibits and schedules thereto filed
with the Commission may be inspected and copied (at prescribed rates) at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at 7 World Trade Center, 13th Floor, New York, New York, 10048,
and The Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661-2511. Such reports and other information can be reviewed through the
Commission's Electronic Data Gathering Analysis and Retrieval System, which is
publicly available through the Commission's Web site (http://www.sec.gov).
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NEW BEVERLY, BEVERLY OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF THE SECURITIES MADE UNDER THIS PROSPECTUS
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF NEW BEVERLY OR BEVERLY SINCE THE DATE OF THIS
PROSPECTUS.
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CAUTIONARY STATEMENTS
This Prospectus contains statements relating to future results of New
Beverly and Beverly (including certain projections and business trends) that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995 (the "Litigation Reform Act"). Section 27A(b)(2)(D) of the
Securities Act and Section 21E(b)(2)(D) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as promulgated by the Litigation Reform Act,
expressly state that the safe harbor for forward-looking statements does not
apply to statements made in connection with an initial public offering. Actual
results may differ materially from those projected as a result of certain risks
and uncertainties, including, but not limited to, changes in political and
economic conditions, regulatory conditions, government healthcare spending,
integration of acquisitions and competitive pricing pressures, all as detailed
from time to time in the filings of New Beverly and Beverly made with the
Commission.
When used in this Prospectus with respect to New Beverly and Beverly the
words "estimate," "project," "intend," "expect" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those contemplated in such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Such risks and uncertainties include those
risks, uncertainties and risk factors identified in this Prospectus under the
headings "Risk Factors," "The Distribution," "Certain Federal Income Tax
Consequences," "Treatment of Beverly Indebtedness" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." New Beverly and
Beverly do not undertake any obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
v
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PROSPECTUS SUMMARY
This Prospectus is being furnished to stockholders of Beverly together with
the Joint Proxy Statement/ Prospectus. The following summary is qualified in its
entirety by the more detailed information and financial statements, including
the notes thereto, appearing elsewhere in this Prospectus and the Joint Proxy
Statement/ Prospectus. Beverly stockholders are urged to read this Prospectus,
the Joint Proxy Statement/Prospectus, and the Annexes thereto in their entirety.
Except where otherwise indicated, the description of New Beverly and its
businesses contained herein assumes the completion of the Distribution and the
Merger.
OVERVIEW
Prior to the Merger, Beverly's Remaining Healthcare Business will be
transferred or contributed to New Beverly, a wholly-owned subsidiary of Beverly,
and all of the New Beverly Common Stock will be distributed to the stockholders
of Beverly at the rate of one share of New Beverly Common Stock per share of
Beverly Common Stock held as of the Distribution Record Date. Beverly's only
remaining business then will be the Institutional Pharmacy Business operated
through PCA, which will be combined with Capstone's institutional pharmacy
business upon the Merger of Beverly with and into Capstone. All outstanding
shares of Beverly Common Stock and the associated Rights (as defined in the
Joint Proxy Statement/Prospectus under the caption "Comparative Rights of
Stockholders -- Anti-Takeover Measures," will be converted into a right to
receive an aggregate of 50 million shares of common stock, $.01 par value per
share, of Capstone (the "Capstone Common Stock"). Capstone will be the Surviving
Corporation in the Merger and will continue its corporate existence under the
laws of the State of Delaware. In connection with the Merger, Capstone will
assume approximately $275 million in debt incurred by PCA in connection with the
Transactions, the proceeds of which are to be paid to Beverly prior to the
Distribution Date (as defined below). Capstone will also assume options and
awards covering an aggregate of approximately 700,000 shares (subject to
adjustment) of Beverly Common Stock. As a result of the Distribution, New
Beverly will be an independent, publicly-traded company engaged in the Remaining
Healthcare Business and owned by the stockholders of Beverly as of the
Distribution Record Date. Immediately following the Merger, the name of New
Beverly will be changed to "Beverly Enterprises, Inc."
NEW BEVERLY
New Beverly is currently a wholly-owned subsidiary of Beverly incorporated
under the laws of the State of Delaware. By virtue of the restructuring of
Beverly as part of the Distribution, all of the Remaining Healthcare Business of
Beverly, other than the Institutional Pharmacy Business, will be contributed to
New Beverly prior to the Merger of Beverly with and into Capstone. The mailing
address of Beverly's principal executive offices is 5111 Rogers Avenue, Suite
40-A, Fort Smith, Arkansas 72919-0155, and the telephone number at such address
is (501) 452-6712. Following the Distribution, New Beverly's principal executive
offices and phone number will be the same as Beverly's present address and
number, indicated above. New Beverly will make application to list the New
Beverly Common Stock for trading on the NYSE and PSE under the symbol "BEV,"
currently used by Beverly.
New Beverly will be one of the largest operators of nursing facilities in
the United States, with its business consisting principally of providing
long-term healthcare, including the operation of nursing facilities, acute
long-term transitional hospitals, rehabilitation therapy services, outpatient
therapy clinics, assisted living centers, hospices and home healthcare centers.
At June 30, 1997, Beverly operated 574 nursing facilities with 64,206 licensed
beds. The facilities are located in 31 states and the District of Columbia, and
range in capacity from 20 to 355 beds. At June 30, 1997, Beverly also operated
74 pharmacies through PCA, 33 assisted living centers containing 897 units, 12
transitional hospitals containing 639 beds, 46 outpatient therapy clinics, 21
hospices and six home healthcare centers. Beverly's facilities had average
occupancy of 86.5%, 87.4%, 88.1% and 88.5% during the six months ended June 30,
1997 and the years ended December 31, 1996, 1995, and 1994, respectively.
New Beverly is treated for accounting purposes in the Transactions as the
continuing reporting entity with respect to the historical Beverly business in
light of, among other factors, (i) all of Beverly's business operations (other
than PCA) being continued by New Beverly after the Transactions, (ii) the
stockholders of Beverly before, and New Beverly after, the Transactions being
identical, (iii) the respective Boards of Directors of Beverly before, and New
Beverly after, the Transactions being identical in composition, number
1
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and tenure, (iv) the senior management of Beverly before, and New Beverly after,
the Transactions being substantially identical and (v) the vast majority
(approximately 95%) of the approximately 80,000 employees of Beverly before the
Transactions being continued as employees of New Beverly after the Transactions.
THE TRANSACTIONS
Restructuring. Prior to the Distribution Record Date, Beverly will complete
an internal restructuring pursuant to which all the assets and liabilities
relating to the Remaining Healthcare Business will be transferred or contributed
to New Beverly in one or more transactions expected to receive tax-free
treatment. Upon completion of the restructuring, the Remaining Healthcare
Business will be conducted by New Beverly and the Institutional Pharmacy
Business conducted by PCA will remain with Beverly. See "The
Distribution -- Restructuring and Contribution of Remaining Healthcare Business
to New Beverly."
Distribution. The Distribution will be effected immediately prior to the
Merger. On the Distribution Date, Beverly will distribute to Beverly
stockholders as of the Distribution Record Date, shares of New Beverly Common
Stock. Each stockholder of Beverly as of the Distribution Record Date will
receive one share of New Beverly Common Stock per share of Beverly Common Stock
held as of the Distribution Record Date. The Distribution will not take place
unless all of the conditions to effecting the Merger (other than the completion
of the Distribution) have been fulfilled. Beverly's transfer agent, The Bank of
New York, will act as the Distribution Agent for the Distribution and will
deliver certificates for New Beverly Common Stock as soon as practicable to
holders of record of Beverly Common Stock as of the close of business on the
Distribution Record Date. All shares of New Beverly Common Stock will be fully
paid and nonassessable and the holders thereof will not be entitled to
preemptive rights. Immediately following the completion of the Distribution, New
Beverly will be an independent, publicly-traded company, and it is contemplated
that the shares of New Beverly Common Stock will be listed on the NYSE and PSE.
See "The Distribution -- Consummation of the Distribution; Treatment of Beverly
Stock Options, Phantom Shares, Performance Shares and Shares of Restricted
Stock."
Merger. Following the approval and adoption of the Merger Agreement by the
requisite vote of the stockholders of Beverly and Capstone and the satisfaction
or waiver of the other conditions to the Merger, Beverly will be merged with and
into Capstone, with Capstone continuing as the Surviving Corporation. The Merger
will become effective upon filing with the Secretary of State of the State of
Delaware a duly executed Certificate of Merger, in the form required by and in
accordance with the Delaware General Corporation Law ("DGCL"), or at such time
thereafter as is provided in the Certificate of Merger.
Pursuant to the Merger Agreement, at the effective time of the Merger
("Effective Time") each share of Beverly Common Stock, and associated Rights (as
defined in "The Merger Agreement" in the Joint Proxy Statement/Prospectus),
issued and outstanding immediately prior to the Effective Time (other than
fractional shares) will be converted into the right to receive that number of
duly authorized, validly issued, fully paid and nonassessable shares of Capstone
Common Stock equal to the quotient, expressed to four decimal places, of (a)
50,000,000 divided by (b) the number of shares of Beverly Common Stock
outstanding immediately prior to the Effective Time (the "Conversion Number").
THE DISTRIBUTION AGREEMENT
The Distribution Agreement provides a general framework for allocating
Beverly's assets and liabilities pursuant to the Internal Beverly Restructuring
Plan (attached as Exhibit A to the Distribution Agreement which is attached as
Annex C to the Joint Proxy Statement/Prospectus). The Internal Beverly
Restructuring Plan will segregate the Remaining Healthcare Business from the
Institutional Pharmacy Business prior to the date, as determined by the Beverly
Board of Directors, on which the Distribution shall be effected (the
"Distribution Date"). The Distribution Agreement also sets forth the general
terms on which Beverly will conduct its business prior to the Distribution Date,
as well as the terms regarding certain relationships between Capstone and New
Beverly following the Distribution. The Distribution Agreement provides that the
Distribution will be effected by distributing to each holder of Beverly Common
Stock as of the close of business on the Distribution Record Date, one share of
New Beverly Common Stock per share of Beverly Common Stock held by such holder
as of such time.
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CERTAIN TAX CONSIDERATIONS
Beverly has requested a private letter ruling (the "Private Letter Ruling")
from the Internal Revenue Service ("IRS") substantially to the effect that,
among other things, the Distribution will qualify as a reorganization under
Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the
"Code"), and that neither Beverly, New Beverly nor their stockholders will
recognize any gain or loss (i) in connection with such reorganization (as more
fully described below), (ii) upon the receipt by New Beverly of the Remaining
Healthcare Business from Beverly in exchange for the New Beverly Common Stock,
or (iii) upon receipt by Beverly stockholders of the New Beverly Common Stock in
the Distribution. As an alternative to obtaining the Private Letter Ruling, at
Beverly's election, Beverly may request the opinion of Caplin & Drysdale,
Chartered or Ernst & Young LLP to the same effect. Tax opinions are not binding
on the IRS or any court. Receipt of either the Private Letter Ruling or a
favorable tax opinion is a condition to the respective obligations of Beverly
and Capstone to consummate the Merger. See "The Merger -- Conditions to Closing"
in the Joint Proxy Statement/Prospectus.
It is expected that the Distribution will qualify as a tax-free
reorganization under Section 368 of the Code. Assuming that the Distribution so
qualifies, (i) the holders of Beverly Common Stock will not recognize gain or
loss upon receipt of shares of New Beverly Common Stock, (ii) each holder of
Beverly Common Stock will allocate his, her or its aggregate tax basis in the
Beverly Common Stock immediately before the Distribution among the Beverly
Common Stock and New Beverly Common Stock in proportion to their respective fair
market values, (iii) the holding period of each holder of Beverly Common Stock
for the New Beverly Common Stock will include the holding period for his, her or
its Beverly Common Stock, provided that the Beverly Common Stock is held as a
capital asset at the time of the Distribution, and (iv) Beverly will not
recognize any gain or loss on its distribution of the New Beverly Common Stock
to its stockholders. See "Certain Federal Income Tax Consequences."
It is also expected that the Merger will qualify as a tax-free
reorganization within the meaning of Section 368(a) of the Code. Assuming the
Merger so qualifies, (i) the holders of Beverly Common Stock will not recognize
gain or loss upon the receipt of Capstone Common Stock in exchange for their
shares of Beverly Common Stock, (ii) each holder of Beverly Common Stock will
carry over his, her or its tax basis in the Beverly Common Stock (as determined
immediately following the Distribution) to the Capstone Common Stock, (iii) the
holding period for each holder of Beverly Common Stock will carry over to the
Capstone Common Stock, provided that the Beverly Common Stock is held as a
capital asset immediately prior to the Effective Time of the Merger, and (iv)
any holder of Beverly Common Stock receiving cash in lieu of fractional shares
will recognize capital gain or loss (provided the shares of Beverly Common Stock
surrendered are held as capital assets immediately prior to the Effective Time
of the Merger) equal to the difference between the amount of cash received and
the portion of such holder's basis in the shares of Beverly Common Stock
allocable to such fractional share interests, and such capital gain or loss will
be long-term capital gain or loss if the holding period for such shares is more
than one year. See "Certain Federal Income Tax Consequences."
Beverly and Capstone will also receive, prior to the Effective Time of the
Merger, the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP to the
effect that: (i) the Merger will qualify as a reorganization within the meaning
of Section 368(a) of the Code; (ii) no gain or loss will be recognized by
Capstone or Beverly as a result of the Merger; and (iii) no gain or loss will be
recognized by Beverly's stockholders upon the receipt of Capstone Common Stock
solely in exchange for Beverly Common Stock in connection with the Merger
(except with respect to cash received in lieu of a fractional interest in
Capstone Common Stock). Tax opinions are not binding on the IRS or any court.
Moreover, the tax opinions are based upon, among other things, certain
representations as to factual matters made by Beverly and Capstone, which
representations, if incorrect or incomplete in certain material respects, would
jeopardize the conclusions reached in the opinions. See "Certain Federal Income
Tax Consequences."
NEW BEVERLY STOCK OPTION PLANS
New Beverly will have one or more employee benefit plans pursuant to which
shares or options to purchase shares of New Beverly Common Stock or other stock
incentives will be issued or issuable to or for
3
<PAGE> 11
the benefit of employees, former employees and directors. See "The
Distribution -- Consummation of the Distribution; Treatment of Beverly Stock
Options, Phantom Shares, Performance Shares and Shares of Restricted Stock." On
May 29, 1997, the New Beverly Board of Directors adopted the New Beverly 1997
Long-Term Incentive Plan (the "New Beverly 1997 Incentive Plan"), pursuant to
which New Beverly will be able to make stock incentive awards to its directors,
officers, key employees and other persons on a going-forward basis. The New
Beverly 1997 Incentive Plan was adopted by the Board of Directors and
Compensation Committee of Beverly, and was approved by Beverly as the sole
stockholder of New Beverly prior to the Distribution. It is expected that a
total of approximately 5.5 million shares will be reserved for issuance by New
Beverly to current holders of options to purchase Beverly Common Stock ("the
Beverly Options") in connection with the Distribution. See "Executive and
Director Compensation -- Executive Compensation." New Beverly has reserved 10
million shares of New Beverly Common Stock for issuance under the New Beverly
1997 Incentive Plan. The New Beverly 1997 Incentive Plan will be submitted for
the approval of the stockholders of Beverly in connection with the Joint Proxy
Statement/Prospectus.
The New Beverly Board of Directors has also adopted the New Beverly
Non-Employee Directors Stock Option Plan (the "New Beverly Directors Option
Plan"), pursuant to which New Beverly will be able to make stock incentive
awards to its non-employee directors on a going-forward basis. The New Beverly
Directors Option Plan was adopted by the Board of Directors and Compensation
Committee of Beverly, and was approved by Beverly as the sole stockholder of New
Beverly prior to the Distribution. See "Executive and Director
Compensation -- Compensation of Directors and Other Information Concerning the
Board and its Committees." New Beverly has reserved 300,000 shares of New
Beverly Common Stock under the New Beverly Directors Option Plan. The New
Beverly Directors Option Plan will be submitted for the approval of stockholders
of Beverly in connection with the Joint Proxy Statement/Prospectus. See "Other
Beverly Proposals -- New Beverly Directors Option Plan" in the Joint Proxy
Statement/Prospectus.
EFFECT OF THE TRANSACTIONS ON EMPLOYEES AND EMPLOYEE BENEFITS
Beverly employees that provide services in connection with the
Institutional Pharmacy Business (together with current and former employees and
current and former independent contractors of the Institutional Pharmacy
Business, the "Retained Employees") are expected to become Capstone employees
following the Merger, while all other Beverly employees (together with current
and former employees and current and former independent contractors of the
Remaining Healthcare Business, the "Transferred Employees") are expected to
become New Beverly employees following the Distribution. Capstone will assume
liabilities and obligations regarding the Retained Employees and New Beverly
will assume liabilities and obligations regarding the Transferred Employees, in
accordance with an Employee Benefit Matters Agreement between Beverly, New
Beverly and Capstone (the "Employee Benefit Agreement"). Pursuant to the
Employee Benefit Agreement, certain adjustments will be made to shares of
Beverly Common Stock underlying options held by Retained Employees and
Transferred Employees. See "The Distribution -- Consummation of the
Distribution; Treatment of Beverly Stock Options, Phantom Shares, Performance
Shares and Shares of Restricted Stock" and "-- Terms of Employee Benefit
Agreement."
EXPENSES
Each of Capstone, on the one hand, and Beverly and New Beverly, on the
other hand, will incur significant expenses in connection with the Transactions.
The fees and expenses of Beverly and New Beverly are currently estimated to be
approximately $32 million with respect to the Distribution and approximately $8
million with respect to the Merger. A significant portion of the estimated
Beverly and New Beverly expenses with respect to the Distribution are expected
to arise in connection with restructuring, modifying or replacing Beverly's
existing indebtedness in connection with the Distribution. See "Treatment of
Beverly Indebtedness."
RISK FACTORS
New Beverly stockholders should carefully consider certain risks in
evaluating the New Beverly Common Stock to be received in the Distribution. See
"Risk Factors."
4
<PAGE> 12
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary historical consolidated financial data of Beverly has
been derived from the historical financial statements and should be read in
conjunction with such financial statements and notes thereto, which are included
elsewhere herein. Beverly data for the six months ended June 30, 1997 and 1996
have been derived from and should be read in conjunction with the unaudited
condensed consolidated financial statements which are also included elsewhere
herein. The pro forma condensed consolidated financial data gives retroactive
effect to (i) the Merger; (ii) the recapitalization/reorganization of Beverly,
into New Beverly; and (iii) the receipt by Beverly of $275,000,000 as a partial
repayment of its intercompany receivable from PCA and the contribution to PCA's
capital of Beverly's remaining receivable from PCA. The pro forma condensed
consolidated statement of operations data gives effect to the transactions as if
they occurred on January 1, 1996. The pro forma condensed consolidated balance
sheet data gives effect to the transactions as if they occurred on June 30,
1997. The pro forma data should be read in conjunction with the unaudited pro
forma condensed consolidated New Beverly financial statements, and notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
AT AND FOR THE
SIX MONTHS ENDED AT AND FOR THE
JUNE 30, YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Net operating revenues................ $1,634,219 $1,609,380 $3,267,189 $3,228,553 $2,969,239 $2,884,451 $2,607,756
Depreciation and amortization......... 54,806 51,023 105,468 103,581 88,734 82,938 80,226
Interest expense, net................. 37,961 39,193 77,272 70,017 50,214 50,927 56,441
Income (loss) from continuing
operations before income taxes...... 65,722 51,152 125,507 (6,154) 114,795 87,640 6,148
Income (loss) from continuing
operations.......................... 39,433 30,691 52,026 (8,123) 76,913 57,956 1,945
Earnings per share.................... 0.40 0.31 0.52 (0.16) 0.79 0.41 0.01
CONSOLIDATED BALANCE SHEET DATA:
Working capital....................... 330,196 249,795 318,215 243,047 242,712 154,419 137,026
Total assets.......................... 2,490,966 2,524,904 2,525,082 2,506,461 2,322,578 2,000,804 1,859,361
Current portion of long-term
obligations......................... 35,669 37,710 38,826 84,639 60,199 43,125 30,466
Long-term obligations, excluding
current portion..................... 1,018,551 1,076,462 1,106,256 1,066,909 918,018 706,917 712,896
Stockholders' equity.................. 890,717 843,217 861,095 820,333 827,244 742,862 593,505
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
---------------- -----------------
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
INCOME DATA:
Net operating revenues...................................... $1,383,195 $2,832,872
Depreciation and amortization............................... 44,898 89,076
Interest expense, net....................................... 25,599 51,808
Income from continuing operations before provision for
income taxes.............................................. 50,500 116,182
Income from continuing operations........................... 30,706 47,117
Earnings per share.......................................... 0.28 0.42
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DATA:
Working capital............................................. $ 250,524
Total assets................................................ 2,025,534
Current portion of long-term obligations.................... 24,124
Long-term obligations, excluding current portion............ 661,206
Stockholders' equity........................................ 835,680
</TABLE>
5
<PAGE> 13
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating New Beverly
before making any investment decisions with respect to the New Beverly Common
Stock to be received in the Distribution.
SUBSTANTIAL INDEBTEDNESS
New Beverly, as a result of the Distribution, will assume substantial
indebtedness from Beverly. Although the indebtedness of Beverly to be assumed by
New Beverly in connection with the Transactions will be reduced and
restructured, the amount of indebtedness ultimately assumed by New Beverly will
continue to be substantial. See "Treatment of Beverly Indebtedness." As of June
30, 1997, Beverly had total indebtedness of approximately $1,054,200,000. In
addition to such indebtedness, Beverly has substantial obligations under
operating leases which will be assumed by New Beverly. For the six months ended
June 30, 1997 and the year ended December 31, 1996, Beverly's rent expense was
approximately $58,200,000 and $116,700,000, respectively. The ability of New
Beverly to satisfy its debt and operating lease obligations will be dependent
upon its future operating performance, which will be subject to prevailing
economic conditions and to financial, business and other factors, including
factors beyond New Beverly's control such as federal and state healthcare
reform. New Beverly's level of debt, and the covenants contained in the debt
instruments governing such obligations might impair New Beverly's ability to
take certain actions (including the incurrence of additional debt and the
acquisition or the disposition of assets).
BUSINESS TO BE CONDUCTED BY NEW BEVERLY
At the Time of Distribution, the Remaining Healthcare Business will be
transferred to New Beverly or one or more direct or indirect subsidiaries of New
Beverly, and will constitute all of the businesses, assets and liabilities of
New Beverly. The businesses, assets and liabilities of New Beverly will not
include the Institutional Pharmacy Business represented by PCA. The
Institutional Pharmacy Business represented by PCA accounted for approximately
$251,000,000 and $434,300,000, or 15% and 13% of Beverly's net operating
revenues (after elimination of intercompany revenue between PCA and the
Remaining Healthcare Business) for the six months ended June 30, 1997 and the
year ended December 31, 1996, respectively. The Institutional Pharmacy Business
accounted for approximately $16,100,000 and $20,300,000, or 41% and 39% of
Beverly's net income for the six months ended June 30, 1997 and the year ended
December 31, 1996, respectively. Following the Distribution, New Beverly will
derive its revenues from a smaller group of businesses and assets. While New
Beverly intends to pursue strategies to expand its businesses, there can be no
assurance that New Beverly will be successful in implementing such strategies or
that, if implemented, such strategies will result in additional growth in New
Beverly's businesses.
UNCERTAINTY ASSOCIATED WITH HEALTHCARE REFORM
In addition to extensive government healthcare regulation, there are
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services. It is not
clear at this time what proposals, if any, will be adopted or, if adopted, what
effect such proposals may have on New Beverly's future business. Certain aspects
of these healthcare proposals, such as cutbacks in Medicare and Medicaid
programs, containment of healthcare costs on an interim basis by means that
could include a short-term freeze on rates paid to healthcare providers and
permitting greater flexibility to the states in the administration of Medicaid,
could adversely affect New Beverly. See "-- Risks Involved with Reimbursement by
Third-Party Payors." There can be no assurance that currently proposed or future
healthcare legislation or other changes in the administration or interpretation
of governmental healthcare programs will not have an adverse effect on New
Beverly. Concern about the potential effects of the proposed reform measures has
contributed to the volatility of stock prices of companies in healthcare and
related industries, including Beverly, and may similarly affect the price of the
New Beverly Common Stock in the future.
6
<PAGE> 14
RISKS INVOLVED WITH REIMBURSEMENT BY THIRD PARTY PAYORS
For the years ended December 31, 1996, 1995 and 1994 Beverly derived
approximately 75%, 77% and 80%, respectively, of its net operating revenues from
funds under federal and state medical assistance programs, and it is expected
that New Beverly will continue to derive a significant portion of its revenue
from such federal and state reimbursement programs. There can be no assurance
that New Beverly will improve or achieve a better payor mix. Both governmental
and private payor sources have instituted cost containment measures designed to
limit payments made to long-term care providers, and there can be no assurance
that future measures will not adversely affect both the timing and amount of
reimbursement to New Beverly. Furthermore, government reimbursement programs are
subject to statutory and regulatory changes, retroactive rate adjustments,
administrative rulings and government funding restrictions, all of which could
materially decrease the rates paid to New Beverly for its future services or the
services for which New Beverly is able to seek reimbursement. There have been,
and New Beverly expects that under the current and future presidential
administrations there will continue to be, a number of proposals to limit
Medicare and Medicaid reimbursement for long-term healthcare services. New
Beverly cannot predict at this time whether any of these proposals will be
adopted or, if adopted and implemented, what effect such proposals would have on
New Beverly. There can be no assurance that payments under state or federal
governmental programs will remain at levels comparable to present levels or will
be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs, particularly with respect to
individual, state-administered Medicaid programs, which generally provide lower
reimbursement rates than does the Medicare program. In addition, there can be no
assurance that the facilities to be operated by New Beverly and the services and
supplies to be provided by New Beverly will meet or continue to meet the
requirements for participation in such programs.
Federal law requires state Medicaid programs to reimburse long-term care
facilities for the costs that are incurred by efficiently and economically
operated providers in order to meet quality and safety standards. Long-term care
facilities may seek to enforce this requirement in the state or federal courts.
Nevertheless, there can be no assurance that budget constraints or other factors
will not cause states to reduce Medicaid reimbursement to long-term care
facilities or that litigation to prevent such reductions will be successful. As
a result, there can be no assurance that states in which New Beverly will
operate will continue to meet their Medicaid obligations on a timely basis. Any
failure by such states to meet their Medicaid obligations on a timely basis
could have a material adverse effect on New Beverly.
In addition, several states are considering various healthcare reforms,
including reforms through Medicaid managed care demonstration projects. Several
states in which Beverly operates and in which New Beverly will operate have
applied for, or received, approval from the U.S. Department of Health and Human
Services for waivers from certain Medicaid requirements which are generally
required for managed care projects. Although these demonstration projects
generally exempt institutional care, including long-term care facilities, no
assurance can be given that these waiver projects ultimately will not change the
reimbursement system for long-term care from fee-for-service to managed care
negotiated or capitated rates. It is not possible to predict which reforms of
the healthcare system will be adopted and the effect, if any, the reforms will
have on New Beverly's business.
GOVERNMENT REGULATION
The federal government and all states in which New Beverly will operate
regulate various aspects of the Remaining Healthcare Business to be operated by
New Beverly. In particular, the operation of long-term care facilities and the
provision of specialty medical services are subject to federal, state and local
laws relating to the adequacy of medical care, equipment, personnel, operating
policies, fire prevention, zoning, rate-setting and compliance with building
codes and environmental and other laws. The facilities to be operated by New
Beverly are subject to periodic inspection by governmental and other regulatory
authorities to assure continued compliance with various standards and to provide
for their continued licensing under state law and certification under the
Medicare and Medicaid programs. Should New Beverly receive notifications of
deficiency in the future, New Beverly expects to implement plans of correction
with respect to any such statement to address any alleged deficiencies. While
New Beverly will endeavor to comply with federal, state and local regulatory
7
<PAGE> 15
requirements for the maintenance and operation of its facilities, there can be
no assurance that all facilities will always be operated in full compliance. The
failure to obtain or renew any required regulatory approvals or licenses could
adversely affect New Beverly's operations.
New Beverly will also be subject to federal and state laws that govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between healthcare providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. Such laws include the anti-kickback provisions of
the federal Medicare and Medicaid Patients and Program Protection Act of 1987.
These provisions prohibit, among other things, the offer, payment, solicitation
or receipt of any form of remuneration in return for the referral of Medicare
and Medicaid patients. In addition, many states prohibit business corporations
from providing, or holding themselves out as a provider of, medical care. These
laws vary from state to state and have seldom been interpreted by the courts or
regulatory agencies. Additionally, federal enactments that expand the list of
healthcare services subject to existing federal referral prohibitions became
effective on January 1, 1995. See "Business -- Government Regulation and
Reimbursement."
INCREASED LABOR COSTS AND AVAILABILITY OF PERSONNEL
In recent years, Beverly has experienced increases in its labor costs
primarily due to higher wages and greater benefits required to attract and
retain qualified personnel, increased staffing levels in its nursing facilities
due to greater patient acuity and the hiring of therapists on staff. Although
New Beverly expects labor costs to continue to increase in the future, it is
anticipated that any increase in costs will generally result in higher patient
rates in subsequent periods, subject to the time lag in most states of up to 18
months between increases in reimbursable costs and the receipt of related
reimbursement rate increases. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
In the past, the healthcare industry, including Beverly's long-term care
facilities, has experienced a shortage of nurses to staff healthcare operations,
and, more recently, the healthcare industry in general has experienced a
shortage of therapists. While Beverly is not currently experiencing a nursing or
therapist shortage, it competes with other healthcare providers for nursing and
therapist personnel and may compete with other service industries for persons
serving Beverly in other capacities, such as nurses' aides. A shortage of
nursing therapists or nurse's aides could force New Beverly to pay even higher
salaries and make greater use of higher cost temporary personnel. A lack of
qualified personnel might also require New Beverly to reduce its census or admit
patients requiring a lower level of care, both of which could adversely affect
operating results.
DEPENDENCE ON KEY PERSONNEL
New Beverly's operations are dependent on the efforts, ability and
experience of its executive officers. New Beverly's continued growth and success
depends on its ability to attract and retain skilled employees and on the
ability of its officers and employees to successfully manage New Beverly's
expansion of service beyond the traditional long-term care services provided by
Beverly. The loss of some or all of these executive officers and skilled
employees could have a material adverse impact on New Beverly's future results
of operations.
COMPETITION
The long-term care industry is highly competitive. New Beverly will compete
with other providers on the basis of the breadth and quality of its services,
the quality of its facilities and, to a limited extent, price. New Beverly will
also compete with other providers in the acquisition and development of
additional facilities and healthcare services. New Beverly's long-term care
competitors will include national, regional and local operators of long-term
care facilities, acute care hospitals, rehabilitation hospitals, subacute
facilities, transitional hospitals, assisted living facilities, hospices, home
healthcare centers, healthcare therapy clinics, and similar institutions, many
of which have significantly greater financial and other resources than New
Beverly. In addition, New Beverly will compete with a number of tax-exempt
nonprofit organizations which can finance acquisitions and capital expenditures
on a tax-exempt basis or receive charitable contributions
8
<PAGE> 16
unavailable to New Beverly. There can be no assurance that New Beverly will not
encounter increased competition which could adversely affect its business,
results of operations or financial condition.
ABSENCE OF PRIOR TRADING MARKET
There is no existing trading market for the New Beverly Common Stock to be
received by Beverly's stockholders in the Distribution and there can be no
assurance as to the establishment of an active trading market. New Beverly
expects to list its common stock on the NYSE and the PSE. New Beverly's
management expects that approximately 110,424,677 shares of New Beverly Common
Stock will be outstanding after the Distribution. New Beverly Common Stock may
experience price volatility following the Distribution until trading values
become established. As a result, it could be difficult to make purchases or
sales of New Beverly Common Stock in the market at any particular time. There
can be no assurance as to either the price at which New Beverly Common Stock
will trade following the consummation of the Distribution and the Merger or
whether such price will be significantly below the book value per share of New
Beverly Common Stock.
CERTAIN INDEMNIFICATION OBLIGATIONS
Pursuant to the Distribution Agreement and the Tax Allocation and
Indemnification Agreement, New Beverly has agreed to indemnify Capstone with
respect to certain losses, damages, claims and liabilities which may arise from
the consummation of the Transactions described herein, the conduct of the
Remaining Healthcare Business prior to the Distribution Date and certain tax
liabilities. See "The Distribution -- Indemnification and Insurance" and
"-- Terms of the Tax Allocation and Indemnification Agreement."
NON-COMPETITION AGREEMENT WITH CAPSTONE
Following the Distribution and Merger, New Beverly will be prohibited from
competing with Capstone in the Institutional Pharmacy Business in certain
defined geographical areas for a period of five years. See "The
Distribution -- Terms of the Non-competition Agreement." In the past, a
significant portion of Beverly's net income has been derived from the
Institutional Pharmacy Business, and in 1996, Beverly derived approximately 39%
of its net income from the Institutional Pharmacy Business. The Non-competition
Agreement will therefore restrict New Beverly's ability to pursue a line of
business that historically has contributed a significant portion of Beverly's
net income.
9
<PAGE> 17
USE OF PROCEEDS
Pursuant to the Distribution, Beverly will transfer the Remaining
Healthcare Business to New Beverly or one or more of its subsidiaries and
receive from New Beverly shares of New Beverly Common Stock. Such shares of New
Beverly Common Stock will be distributed in a manner expected to receive
tax-free treatment to Beverly stockholders as of the Distribution Record Date,
and no consideration will be paid by such stockholders in the Distribution.
Therefore, there will be no proceeds from the issuance of the New Beverly Common
Stock.
In connection with the Distribution and the Merger, Beverly expects to
receive $275,000,000 as a partial repayment of PCA's intercompany balance owed
to Beverly. Beverly intends to use: (i) approximately $90,000,000 of such net
proceeds to repay Revolver borrowings under its Existing Credit Facility (as
defined); (ii) approximately $62,480,000 to repay the remaining outstanding
balance under the 7 5/8% Debentures (as defined); (iii) approximately
$24,805,000 to repay the 8.75% Notes (as defined); (iv) approximately
$38,822,000 to repay or defease certain other notes, mortgages and bonds; and
(v) the remaining net proceeds to pay the estimated Transaction costs of
$40,000,000, and for general corporate purposes, which may include: strategic
investments; repayment of other indebtedness; selective acquisitions, including
the purchase of previously leased facilities; construction of new facilities;
and to meet working capital requirements.
10
<PAGE> 18
CAPITALIZATION
Following the Distribution and the Merger, New Beverly will change its name
to Beverly Enterprises, Inc. and will be treated as the continuation of Beverly
for financial reporting purposes. See "Unaudited Pro Forma New Beverly Financial
Statements" and the consolidated financial statements of Beverly and notes
thereto included elsewhere herein. The following table sets forth Beverly's
historical capitalization at June 30, 1997, and pro forma to reflect the
Distribution and the Merger:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
ACTUAL PRO FORMA
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................. $ 71,756 $ 83,144(1)(2)(4)
========== ==========
Current portion of long-term debt......................... $ 35,669 $ 24,124(1)(2)
========== ==========
Long-term debt, net of current portion:
Revolver borrowings..................................... $ 90,000 $ --(2)
Industrial revenue bonds................................ 193,837 185,047(2)
Notes and mortgages..................................... 212,471 185,267(1)(2)
First Mortgage Bonds.................................... 46,864 46,864
8.75% Notes............................................. 24,805 --(2)
9% Senior Notes......................................... 180,000 180,000
7 5/8% Debentures....................................... 54,980 --(2)
5 1/2% Debentures....................................... 150,000 --(4)
Medium term notes....................................... 50,000 50,000
Capital lease obligations............................... 15,594 14,028(1)
---------- ----------
Total long-term debt............................ 1,018,551 661,206
Stockholders' equity:
Preferred stock, 25,000,000 shares authorized........... -- --
Common stock, $0.10 par value; 300,000,000 shares
authorized; 104,712,723 shares issued; 98,438,615
shares outstanding; pro forma 109,628,539 shares
issued and outstanding............................... 10,471 10,963(4)(5)(6)
Additional paid-in capital.............................. 777,172 855,527(4)(5)
Retained earnings (deficit)............................. 173,390 (30,810)(1)(3)
Treasury stock, at cost; 6,274,108 shares............... (70,316) --(5)
---------- ----------
Total stockholders' equity...................... 890,717 835,680
---------- ----------
Total capitalization............................ $1,909,268 $1,496,886
========== ==========
</TABLE>
- ---------------
(1) Reflects the following adjustments to eliminate PCA's historical amounts (in
thousands):
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 6,668
Current portion of long-term debt........................... 1,195
Other notes and mortgages................................... 22
Capital leases, net of current portion...................... 1,566
Retained earnings........................................... 103,853
</TABLE>
(2) Reflects repayment or defeasance of approximately $216,107,000 of debt with
the $275,000,000 of net proceeds to be received by Beverly as a partial
repayment of PCA's intercompany balance in conjunction with the
Transactions, with the remaining net proceeds of approximately $58,893,000
to be used to pay approximately $40,000,000 of Transaction costs, and for
general corporate purposes, including: strategic investments; repayment of
other indebtedness; selective acquisitions, including the purchase of
previously leased facilities; construction of new facilities; and to meet
working capital requirements.
(3) Reflects the contribution to PCA's capital (after the repayment of
$275,000,000 (See Note 2 above)) of the remaining $58,115,000 of PCA's
intercompany balance, which will not be repaid to Beverly.
11
<PAGE> 19
(4) Reflects conversion of $149,162,550 principal amount of 5 1/2% Debentures
(as defined) into 11,189,924 shares of Beverly Common Stock and repayment in
cash of the remaining principal amount of $837,450. A condition to closing
under the Merger Agreement is that Beverly amend, modify or replace
substantially all of its existing indebtedness so that upon closing the
Merger, Beverly will have been released from liability under all of its
existing indebtedness for borrowed money, except for the Institutional
Pharmacy Liabilities and certain other pharmacy-related obligations. In
conjunction therewith, on July 17, 1997, Beverly called its 5 1/2%
Debentures for redemption on August 18, 1997.
(5) Reflects cancellation and retirement of Beverly Common Stock held in
treasury at the Effective Time of the Merger, pursuant to the terms of the
Merger Agreement.
(6) Reflects a one-for-one distribution of New Beverly Common Stock for each
share of Beverly Common Stock held by a Beverly stockholder as of the
Distribution Record Date.
- ---------------
See "Unaudited Pro Forma New Beverly Financial Statements."
12
<PAGE> 20
UNAUDITED PRO FORMA NEW BEVERLY FINANCIAL STATEMENTS
Under the Distribution Agreement and the Merger Agreement: (1) Beverly's
Remaining Healthcare Business is to be reorganized into New Beverly with all of
the shares of New Beverly Common Stock to be distributed to Beverly's
stockholders in a tax-free reorganization; (2) Beverly (then consisting solely
of the Institutional Pharmacy Business operated by PCA and its subsidiaries) is
to be acquired by and merged with and into Capstone through a tax-free exchange
of shares of Capstone Common Stock for shares of Beverly Common Stock; and (3)
New Beverly will become an independent, publicly-traded company upon the
completion of the Distribution and the Merger. New Beverly will immediately
change its name to Beverly Enterprises, Inc., will be treated as the
continuation of Beverly for financial reporting purposes and will continue to
reflect Beverly's historical cost basis of assets and liabilities. Closing under
the Merger Agreement is subject to a number of conditions, including, among
other things, the approval of the Merger and the Distribution by Beverly's
stockholders, and approval of the Merger by Capstone's stockholders. The
accompanying unaudited pro forma condensed consolidated balance sheet reflects
the historical balance sheets of Beverly and PCA at June 30, 1997 and as
adjusted to give effect to the Distribution and the Merger, as if such events
occurred at June 30, 1997. The accompanying unaudited pro forma condensed
consolidated statements of income for the year ended December 31, 1996 and for
the six months ended June 30, 1997 give effect to such transactions as if they
occurred on January 1, 1996. Furthermore, in conjunction with the Distribution,
Beverly will be required to restructure, repay or otherwise renegotiate
substantially all of its outstanding indebtedness and to renegotiate or make
certain payments under various employment agreements with officers of Beverly.
An estimate of the effects of these items has been reflected in the accompanying
unaudited pro forma condensed consolidated balance sheet, but such items have
not been reflected in the accompanying unaudited pro forma condensed
consolidated statements of income due to their nonrecurring nature. The
unaudited pro forma condensed consolidated financial statements are not
necessarily indicative of the operating results that would have been achieved
had the Distribution and the Merger been consummated as of the indicated dates,
nor are they necessarily indicative of future operating results. The unaudited
pro forma condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of Beverly and PCA, and
the related notes thereto, included elsewhere in this Prospectus.
13
<PAGE> 21
NEW BEVERLY HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
PRO FORMA
TRANSACTION NEW
BEVERLY PCA(1) ADJUSTMENTS BEVERLY
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Net operating revenues............................ $3,267,189 $(516,400) $82,083(2) $2,832,872
Interest income................................... 13,839 (177) -- 13,662
---------- --------- ------- ----------
Total revenues........................... 3,281,028 (516,577) 82,083 2,846,534
Costs and expenses:
Operating and administrative:
Wages and related............................. 1,819,500 (118,888) -- 1,700,612
Other......................................... 1,139,442 (346,331) 82,083(2) 875,194
Interest........................................ 91,111 (11) (25,630)(3) 65,470
Depreciation and amortization................... 105,468 (16,392) -- 89,076
---------- --------- ------- ----------
Total costs and expenses................. 3,155,521 (481,622) 56,453 2,730,352
---------- --------- ------- ----------
Income (loss) from continuing operations before
provision for income taxes...................... 125,507 (34,955) 25,630 116,182
Provision for income taxes........................ 73,481 (14,668) 10,252(4) 69,065
---------- --------- ------- ----------
Income from continuing operations................. $ 52,026 $ (20,287) $15,378 $ 47,117
========== ========= ======= ==========
Per share data (primary):
Earnings per share from continuing operations... $ 0.52 $ 0.42
========== ==========
Weighted average shares outstanding............. 99,646 110,899
========== ==========
Per share data (fully diluted):
Earnings per share from continuing operations... $ 0.50 $ 0.42
========== ==========
Weighted average shares outstanding............. 111,002 111,002
========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------------------
PRO FORMA
TRANSACTION NEW
BEVERLY PCA(1) ADJUSTMENTS BEVERLY
---------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Net operating revenues............................ $1,634,219 $(301,328) $50,304(2) $1,383,195
Interest income................................... 6,726 (82) -- 6,644
---------- --------- ------- ----------
Total revenues........................... 1,640,945 (301,410) 50,304 1,389,839
Costs and expenses:
Operating and administrative:
Wages and related............................. 897,856 (65,476) -- 832,380
Other......................................... 577,874 (198,360) 50,304(2) 429,818
Interest........................................ 44,687 (130) (12,314)(3) 32,243
Depreciation and amortization................... 54,806 (9,908) -- 44,898
---------- --------- ------- ----------
Total costs and expenses................. 1,575,223 (273,874) 37,990 1,339,339
---------- --------- ------- ----------
Income (loss) from continuing operations before
provision for income taxes...................... 65,722 (27,536) 12,314 50,500
Provision for income taxes........................ 26,289 (11,421) 4,926(4) 19,794
---------- --------- ------- ----------
Income from continuing operations................. $ 39,433 $ (16,115) $ 7,388 $ 30,706
========== ========= ======= ==========
Per share data (primary):
Earnings per share from continuing
operations.................................. $ 0.40 $ 0.28
========== ==========
Weighted average shares outstanding........... 99,230 110,483
========== ==========
Per share data (fully diluted):
Earnings per share from continuing
operations.................................. $ 0.38 $ 0.28
========== ==========
Weighted average shares outstanding........... 110,865 110,865
========== ==========
</TABLE>
14
<PAGE> 22
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(1) Reflects the historical stand-alone amounts of PCA which are eliminated to
arrive at New Beverly.
(2) Reflects add-back of intercompany revenues and costs of sales of PCA which
are eliminated in Beverly historical amounts.
(3) Reduction of interest expense related to: (i) debt paydowns described in
Note 2 to the Unaudited Pro Forma Condensed Consolidated Balance Sheet; and
(ii) repayment/conversion of $150,000,000 principal amount of 5 1/2%
Debentures (as defined) into shares of Beverly Common Stock as described in
Note 4 to the Unaudited Pro Forma Condensed Consolidated Balance Sheet.
(4) Income tax effect of pro forma adjustments using a 40% statutory rate.
- ---------------
Note: Nonrecurring Transaction costs of approximately $37.2 million, net of tax,
will be charged to the operations of New Beverly but are not reflected in
the Pro Forma Condensed Consolidated Statements of Income.
15
<PAGE> 23
NEW BEVERLY HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
TRANSACTION NEW
BEVERLY PCA(1) ADJUSTMENTS BEVERLY
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 71,756 $ (6,668) $ 58,893(2) $ 83,144
(40,000)(3)
(837)(4)
Accounts receivable -- patient, less allowance for
doubtful accounts................................... 502,511 (109,798) -- 392,713
Accounts receivable -- nonpatient, less allowance for
doubtful accounts................................... 10,429 (101) -- 10,328
Notes receivable, less allowance for doubtful notes... 9,260 (772) -- 8,488
Operating supplies.................................... 55,713 (25,322) -- 30,391
Deferred income taxes................................. 23,547 -- -- 23,547
Prepaid expenses...................................... 43,738 (494) -- 43,244
---------- --------- --------- ----------
Total current assets........................... 716,954 (143,155) 18,056 591,855
Property and equipment, net............................. 1,188,197 (35,215) -- 1,152,982
Other assets:
Notes receivable, less allowance for doubtful notes... 28,958 (810) -- 28,148
Designated and restricted funds....................... 74,182 -- -- 74,182
Goodwill, net......................................... 375,221 (290,931) -- 84,290
Other, net............................................ 107,454 (11,435) (1,942)(2) 94,077
---------- --------- --------- ----------
Total other assets............................. 585,815 (303,176) (1,942) 280,697
---------- --------- --------- ----------
Total assets................................... $2,490,966 $(481,546) $ 16,114 $2,025,534
========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 96,854 (21,237) $ -- $ 75,617
Accrued wages and related liabilities................. 128,892 (6,006) -- 122,886
Accrued interest...................................... 17,683 -- -- 17,683
Other accrued liabilities............................. 107,660 (6,639) -- 101,021
Current portion of long-term debt..................... 35,669 (1,195) (10,350)(2) 24,124
---------- --------- --------- ----------
Total current liabilities...................... 386,758 (35,077) (10,350) 341,331
Long-term obligations................................... 1,018,551 (1,588) (205,757)(2) 661,206
(150,000)(4)
Deferred income taxes payable........................... 98,769 (4,046) (777)(2) 91,146
(2,800)(3)
Other liabilities and deferred items.................... 96,171 -- -- 96,171
Due to Parent........................................... -- (333,115) 333,115(2) --
Stockholders' equity:
Common stock.......................................... 10,471 (1) 1(5) 10,963(6)
(627)(7)
1,119(4)
Additional paid-in capital............................ 777,172 (3,866) 3,866(5) 855,527
(69,689)(7)
148,044(4)
Retained earnings..................................... 173,390 (103,853) (58,115)(2) (30,810)
(1,165)(2)
(3,867)(5)
(37,200)(3)
Treasury stock, at cost............................... (70,316) -- 70,316(7) --
---------- --------- --------- ----------
Total stockholders' equity..................... 890,717 (107,720) 52,683 835,680
---------- --------- --------- ----------
Total liabilities and stockholders'
equity....................................... $2,490,966 $(481,546) $ 16,114 $2,025,534
========== ========= ========= ==========
</TABLE>
16
<PAGE> 24
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(1) Reflects the historical stand-alone amounts of PCA which are eliminated to
arrive at New Beverly.
(2) Reflects (i) repayment or defeasance of approximately $216,107,000 of
long-term obligations with the $275,000,000 of net proceeds to be received
as partial repayment of PCA's intercompany balance owed to Beverly, with the
remaining net proceeds used for one or more of the following purposes:
strategic investments; repayment of indebtedness; selective acquisitions,
including the purchase of previously leased facilities; construction of new
facilities; and to meet working capital requirements; (ii) write-off of
deferred financing costs on such repaid long-term obligations and (iii)
reduction in equity for the remaining intercompany balance owed by PCA which
will not be repaid.
The repayments of approximately $216,107,000 of long-term obligations, as
noted above, are comprised of the following (in thousands):
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
------- --------- --------
<S> <C> <C> <C>
Revolver borrowings................................... $ -- $ 90,000 $ 90,000
Notes and mortgages................................... 2,450 27,182 29,632
8.75% Notes........................................... -- 24,805 24,805
7 5/8% Debentures..................................... 7,500 54,980 62,480
Industrial revenue bonds.............................. 400 8,790 9,190
------- -------- --------
$10,350 $205,757 $216,107
======= ======== ========
</TABLE>
(3) Reflects payment of estimated Merger and Distribution costs (which have not
been reflected in the Unaudited Pro Forma Condensed Consolidated Statements
of Income due to their nonrecurring nature) as follows (assuming $7,000,000
of such costs are deductible for income tax purposes) (in thousands):
<TABLE>
<S> <C>
Estimated Merger costs:
Investment banker fees.................................... $ 5,200
Professional fees and other Merger-related costs.......... 2,800
-------
Total estimated Merger costs...................... 8,000
Estimated Distribution costs:
Consent fees to debt and lease holders.................... $10,200
Employee incentives and other related costs............... 17,000
Professional fees and other Distribution-related costs.... 4,800
-------
Total estimated Distribution costs................ 32,000
-------
Total estimated Transaction costs................. 40,000
Less: Estimated tax effect at a 40% statutory
rate............................................ (2,800)
-------
$37,200
=======
</TABLE>
(4) Reflects conversion of $149,162,550 principal amount of 5 1/2% Debentures
(as defined) into 11,189,924 shares of Beverly Common Stock and repayment in
cash of the remaining principal amount of $837,450. A condition to closing
under the Merger Agreement is that Beverly amend, modify or replace
substantially all of its existing indebtedness so that upon closing the
Merger, Beverly will have been released from liability under all of its
existing indebtedness for borrowed money, except for the Institutional
Pharmacy Liabilities and certain other pharmacy-related obligations. In
conjunction therewith, on July 17, 1997, Beverly called its 5 1/2%
Debentures for redemption on August 18, 1997.
(5) Reflects add-back of common stock and additional paid-in capital of PCA
which are eliminated in Beverly historical amounts.
(6) Reflects a one-for-one distribution of New Beverly Common Stock for each
share of Beverly Common Stock held by a Beverly stockholder as of the
Distribution Record Date.
(7) Reflects cancellation and retirement of Beverly Common Stock held in
treasury at the Effective Time of the Merger, pursuant to the terms of the
Merger Agreement.
17
<PAGE> 25
THE DISTRIBUTION
The following information describes certain aspects of the proposed
restructuring of Beverly and the Distribution as well as certain contractual
arrangements that will exist between New Beverly and Capstone following the
completion of the Distribution and the Merger. For information describing
certain aspects of the Merger, see "Certain Conditions Related to the
Transactions" and "The Merger" in the Joint Proxy Statement/Prospectus. The
descriptions of the various agreements contained herein, including, without
limitation, the Distribution Agreement, the Employee Benefit Agreement, the
Non-competition Agreement, the Interim Services Agreement and the Tax Allocation
and Indemnification Agreement (each as defined below), do not purport to be
complete and are qualified in their entirety by reference to forms of such
agreements which are attached either as annexes to the Joint Proxy
Statement/Prospectus or filed as an exhibit to the registration statement of
which this Prospectus is a part, which such annexes and exhibits, as the case
may be, are incorporated herein by reference. All Beverly Stockholders are urged
to read such agreements in their entirety.
TERMS OF THE DISTRIBUTION AGREEMENT
Simultaneously with the execution of the Merger Agreement, Beverly, New
Beverly and Capstone executed the Distribution Agreement. Following the Merger,
Capstone will succeed to Beverly's obligations arising pursuant to the
Distribution Agreement by operation of law following the Merger. The
Distribution Agreement provides a general framework for allocating Beverly's
assets and liabilities pursuant to the Internal Beverly Restructuring Plan
(attached as Exhibit A to the Distribution Agreement which is attached as Annex
C to the Joint Proxy Statement/Prospectus), to segregate the Remaining
Healthcare Business from the Institutional Pharmacy Business prior to the
Distribution Date in preparation for the Distribution and the Merger. The
Distribution Agreement also sets forth the general terms on which Beverly will
conduct its business prior to the Distribution Date, as well as the terms
regarding certain relationships between Capstone and New Beverly following the
Distribution.
The Distribution Agreement provides that the Distribution will be effected
by distributing to each holder of Beverly Common Stock as of the close of
business on the Distribution Date certificates representing one share of New
Beverly Common Stock for each share of Beverly Common Stock held by such holder
as of such time. See "-- Manner of Effecting the Distribution."
RESTRUCTURING AND CONTRIBUTION OF REMAINING HEALTHCARE BUSINESS TO NEW BEVERLY
New Beverly, which is a wholly-owned subsidiary of Beverly, was recently
organized for purposes of the Transactions. Until shortly before the Merger, New
Beverly will own no material assets and will conduct no business activities
other than in preparation for the Transactions. Consummation of the Distribution
is a condition to the Merger.
Prior to the Distribution Record Date, Beverly will complete an internal
restructuring pursuant to which all the assets and liabilities relating to the
Remaining Healthcare Business will be transferred or contributed to New Beverly
in one or more tax-free transactions such that upon completion of such
restructuring, the Remaining Healthcare Business will be conducted by New
Beverly, a direct subsidiary of Beverly, and various direct and indirect
subsidiaries of New Beverly. At the same time, any assets and liabilities of
Beverly relating primarily to the Institutional Pharmacy Business which are not
already in the Pharmacy Subsidiaries (as defined in the Distribution Agreement)
will be transferred to such Pharmacy Subsidiaries so that upon completion of
such restructuring the Institutional Pharmacy Business will be conducted by PCA,
a direct subsidiary of Beverly, and various direct and indirect subsidiaries of
PCA.
In connection with the consummation of the transactions contemplated by the
Distribution Agreement and the Merger Agreement, Beverly, New Beverly, and
Capstone will enter into additional agreements and arrangements designed to
complete the separation of Beverly's Remaining Healthcare Business from its
Institutional Pharmacy Business and to define certain intercompany relationships
subsequent to the completion of the Merger. Among these agreements are: (i) the
Employee Benefit Matters Agreement (the "Employee Benefit Agreement") between
Beverly, New Beverly, and Capstone; (ii) the Tax Allocation and
18
<PAGE> 26
Indemnification Agreement (the "Tax Allocation and Indemnification Agreement")
between Beverly and New Beverly; (iii) the Non-competition Agreement (the
"Non-competition Agreement") between Capstone and New Beverly; (iv) the Interim
Services Agreement (the "Interim Services Agreement") between New Beverly and
Beverly; and (v) the Affiliate Agreement (the "Affiliate Agreement") between
Capstone and certain individuals who may be deemed affiliates of Beverly.
As provided in the Distribution Agreement, prior to the consummation of the
Distribution, Beverly will take certain actions as the sole stockholder of New
Beverly or will ratify action taken by officers and directors of New Beverly in
connection with establishing New Beverly as an independent company, including:
(i) incorporating New Beverly under the laws of the state of Delaware; (ii)
adopting the Certificate of Incorporation and Bylaws of New Beverly to be in
effect at the Time of Distribution (as defined in the Distribution Agreement);
(iii) electing directors of New Beverly and causing the appointment of officers
of New Beverly to serve in such capacities following the Distribution; and (iv)
adopting various incentive compensation plans for the benefit of directors,
officers, and employees of New Beverly to be in effect following the
Distribution. For information concerning the Certificate of Incorporation and
Bylaws of New Beverly, see "Description of New Beverly Capital Stock -- The
Charter and Bylaws of New Beverly." For information concerning the individuals
who may serve as directors and executive officers of New Beverly following the
Distribution and certain compensatory arrangements for their benefit, including
stock incentive plans, see "Executive and Director Compensation."
Pursuant to the Distribution Agreement, New Beverly will acquire the right
to use the name "Beverly" in connection with continuing the conduct of the
Remaining Healthcare Business. It is anticipated that immediately following the
Merger, New Beverly will change its name to "Beverly Enterprises, Inc."
CONSUMMATION OF THE DISTRIBUTION; TREATMENT OF BEVERLY STOCK OPTIONS, PHANTOM
SHARES, PERFORMANCE SHARES AND SHARES OF RESTRICTED STOCK
The Distribution will be effected immediately prior to the Merger. However,
the Distribution will not be effected unless both the proposal to approve the
Distribution and the proposal to merge Beverly with and into Capstone are
approved by Beverly's stockholders. Stockholder approval of the Distribution and
the Merger are being sought pursuant to the requirements of the Merger
Agreement. The Board of Directors of Beverly has not yet established the
Distribution Record Date, although it is anticipated that the Distribution
Record Date will be the date on which the Distribution occurs and will be
immediately prior to the Effective Time of the Merger.
On the Distribution Date Beverly's Board of Directors will cause Beverly to
distribute to Beverly Stockholders, as of the Distribution Record Date, shares
of New Beverly Common Stock. Each stockholder of Beverly as of the Distribution
Record Date will receive one share of New Beverly Common Stock for each share of
Beverly Common Stock held as of the Distribution Record Date. Immediately
following the completion of the Distribution, New Beverly will be an
independent, publicly-traded company and it is contemplated that the shares of
New Beverly Common Stock will be listed on the NYSE and the PSE under the
trading symbol "BEV". See "-- Listing of New Beverly Common Stock; Restrictions
on Resale."
Following the completion of the Distribution, Beverly will merge with and
into Capstone with Capstone being the Surviving Corporation in the Merger. At
such time, except insofar as fractional shares are concerned, each share of
Beverly Common Stock issued and outstanding immediately prior to the Effective
Time, (except for shares owned by Beverly as treasury stock, shares owned by
Capstone or any Subsidiary of Beverly) together with the associated Rights (as
defined in the Merger Agreement) shall be converted into the right to receive a
number of shares of Capstone Common Stock equal to the Conversion Number. In the
event of any change in Capstone Common Stock or Beverly Common Stock by reason
of any stock split, readjustment, stock dividend, exchange of shares,
reclassification, recapitalization or otherwise (other than the Distribution),
the Conversion Number shall be correspondingly adjusted. Each holder of shares
of Beverly Common Stock who, upon surrender of Beverly stock certificates (the
"Certificates"), would be entitled to receive a fraction of a share of Capstone
Common Stock shall receive, in lieu of such fractional share, cash in an amount
equal to such fraction multiplied by the Average Market Value. "Average Market
Value" means
19
<PAGE> 27
the arithmetic average of the last reported sale price per share of Capstone
Common Stock as reported on the National Association of Securities Dealers
Automated Quotation System ("Nasdaq") for the fifteen (15) consecutive trading
days ending with the last trading day prior to the scheduled date of the Beverly
Special Meeting specified in the Joint Proxy Statement/Prospectus.
As of the Time of Distribution (as defined in the Distribution Agreement),
by virtue of the Distribution and without any action on the part of the holders
thereof, options to purchase shares of Beverly Common Stock that are outstanding
under the applicable Beverly employee benefit plans immediately prior to the
Time of Distribution and which have been granted to each person employed or
formerly employed by Beverly or any subsidiary of Beverly other than an employee
or former employee of any of the Pharmacy Subsidiaries, and any other person who
becomes an employee of New Beverly immediately after the Time of Distribution
(the "Transferred Employees") will become exercisable, and if not exercised,
will be canceled and will be substituted with new options issued by New Beverly
in accordance with the Employee Benefit Agreement and such shares shall be
exercisable upon the same terms and conditions (except for 100% vesting as
described below) as under the applicable Beverly employee benefit plan and the
applicable option agreement issued thereunder, except that (i) the number of
shares of New Beverly Common Stock for which such options may be converted and
(ii) the option exercise price per share of such options, shall be adjusted in
accordance with the Employee Benefit Agreement to take into account the effect
of the Distribution. See "-- Terms of the Employee Benefit Agreement."
All Beverly options, restricted stock, phantom stock and performance shares
will be 100% vested as of the Time of Distribution, by virtue of the
Distribution and without any action on the part of the holders thereof.
MANNER OF EFFECTING THE DISTRIBUTION
The Beverly Board of Directors will determine the Distribution Date and it
is expected that the Distribution will be made on the Distribution Date to
stockholders of record of Beverly Common Stock as of the Distribution Record
Date. The Merger is expected to take place promptly following the satisfaction
of certain conditions set forth in the Merger Agreement and is expected to occur
immediately following the Time of Distribution. The Distribution will not take
place unless all of the conditions to effecting the Merger (other than the
completion of the Distribution) have been fulfilled, and there can be no
assurance as to the timing or consummation of the Distribution. Beverly's
transfer agent, The Bank of New York, will act as the Distribution Agent for the
Distribution and will deliver certificates for New Beverly Common Stock as soon
as practicable to holders of record of Beverly Common Stock as of the close of
business on the Distribution Record Date on the basis of one share of New
Beverly Common Stock for every one share of Beverly Common Stock held on the
Distribution Record Date. All shares of New Beverly Common Stock will be fully
paid and nonassessable and the holders thereof will not be entitled to
preemptive rights. See "Description of New Beverly Capital Stock." Following the
completion of the Distribution, New Beverly will operate as an independent,
publicly-traded company.
YOU WILL NOT BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE
SHARES OF NEW BEVERLY COMMON STOCK RECEIVED IN THE DISTRIBUTION NOR WILL YOU
NEED TO SURRENDER YOUR BEVERLY COMMON STOCK CERTIFICATES IN ORDER TO RECEIVE
SHARES OF NEW BEVERLY COMMON STOCK IN THE DISTRIBUTION. THE DISTRIBUTION AGENT
WILL SEND YOU YOUR NEW BEVERLY STOCK CERTIFICATES FOLLOWING THE CONSUMMATION OF
THE DISTRIBUTION.
LISTING OF NEW BEVERLY COMMON STOCK; RESTRICTIONS ON RESALE
New Beverly will apply for listing the New Beverly Common Stock on the NYSE
and PSE under the symbol "BEV," currently used by Beverly. The New Beverly
Common Stock received pursuant to the Distribution will be freely transferable
under the Securities Act, except for shares of New Beverly Common Stock received
by any person who may be deemed to be an "affiliate" of New Beverly within the
meaning of Rule 144 promulgated under the Securities Act. Persons who may be
deemed to be affiliates of New Beverly after the Distribution generally include
individuals or entities that control, are controlled by, or are under
20
<PAGE> 28
common control with New Beverly, and may include the directors and executive
officers of New Beverly. Persons who are affiliates of New Beverly will be
permitted to sell their New Beverly Common Stock received pursuant to the
Distribution only pursuant to an effective registration statement under the
Securities Act or pursuant to an exemption from the registration requirements of
the Securities Act. The Registration Statement of which this Prospectus is a
part will not cover resales of New Beverly Common Stock by affiliates of New
Beverly. See "Shares Eligible for Future Sale."
TREATMENT OF INDEBTEDNESS
The Distribution Agreement provides that Beverly and New Beverly will take
all commercially reasonable action to cause New Beverly or an appropriate
subsidiary of New Beverly, to assume all of the items of Beverly's consolidated
indebtedness other than (i) the Assumed Pharmacy Indebtedness and related
Accrued Interest Cost, (ii) the Closing Debt, (iii) other permitted indebtedness
constituting Institutional Pharmacy Liabilities (as defined in the Distribution
Agreement), and (iv) certain capital leases and other items relating to the
Institutional Pharmacy Business.
Prior to the Time of Distribution, Beverly, and after the Time of
Distribution, New Beverly is required to pay or cause to be paid, or otherwise
provide for by appropriate assurances (in each case satisfactory to Capstone),
to the extent Beverly or New Beverly is unable to effect releases of Beverly and
the Pharmacy Subsidiaries from liability thereunder, all Beverly or New Beverly
indebtedness or other non-contingent liabilities as to which Beverly or any of
the Pharmacy Subsidiaries is a direct obligor, other than the Assumed Pharmacy
Indebtedness and Institutional Pharmacy Liabilities.
Beverly has agreed to use its reasonable best efforts to cause its
outstanding indebtedness for borrowed money to be restructured, modified or
amended, as appropriate, to cause such indebtedness to be assumed by New Beverly
prior to the Effective Time, and to obtain all necessary consents, approvals,
waivers or other agreements by the holders of such indebtedness and other fixed
obligations of Beverly as may be required in order to effect the assignment to
and assumption by New Beverly of, and release of Beverly from, liability with
respect to, such obligations (collectively, the "Beverly Debt Restructuring").
Further, Beverly and Capstone have agreed to use all commercially reasonable
efforts to cause Beverly's Pharmacy Subsidiaries to borrow $275 million from
third party lenders on terms mutually agreeable to Beverly and Capstone for the
purpose of repaying such amount to Beverly prior to the Distribution in
settlement of the Assumed Pharmacy Indebtedness (as defined in the Distribution
Agreement), which borrowing shall continue after the Effective Time as an
obligation of the Surviving Corporation as part of its new credit facility. See
"Treatment of Beverly Indebtedness."
EXPENSES
In accordance with the terms of the Merger Agreement, Capstone, on the one
hand, and Beverly (before the Distribution) and New Beverly (after the
Distribution), on the other hand, shall bear their own respective expenses
incurred in connection with the Merger and the Distribution, including, without
limitation, the preparation, execution and the performance of the Merger
Agreement, the Distribution Agreement and the transactions contemplated thereby,
and all fees and expenses of investment bankers, finders, brokers, agents,
representatives, counsel and accountants. Expenses incurred in printing, mailing
and filing (including without limitation, SEC filing fees, fees related to any
state securities or "blue sky" laws and stock exchange listing application
fees), (i) as to the Joint Proxy Statement/Prospectus and related Registration
Statement, shall be paid by Capstone and (ii) as to the New Beverly Prospectus
and related Registration Statement shall be paid by New Beverly. Beverly
estimates that its (or New Beverly's, as the case may be) transaction expenses
will approximate $40 million, including approximately $10.2 million expected to
be incurred in connection with the Beverly Debt Restructuring.
CONDITIONS
The Merger Agreement requires, as a condition to the consummation of the
Merger, Beverly stockholders' approval of the Distribution. The completion of
the Distribution is also a condition to the consummation
21
<PAGE> 29
of the Merger, and Beverly does not presently intend to consummate the
Distribution unless and until all of the conditions to the consummation of the
Merger (other than the completion of the Distribution) have been satisfied. The
consummation of the Merger is subject to a number of conditions set forth in the
Merger Agreement. See "The Merger -- Conditions to Closing" in the Joint Proxy
Statement/Prospectus.
SETTLEMENT OF INTERCOMPANY ACCOUNTS
The Distribution Agreement provides that prior to the Distribution Date and
after settlement of the Assumed Pharmacy Indebtedness and the related Accrued
Interest Cost all intercompany accounts existing between Beverly and any of its
subsidiaries (other than the Pharmacy Subsidiaries), on the one hand, and the
Pharmacy Subsidiaries, on the other hand, will be netted out, in each case in
such manner and amount as may be agreed to in writing by duly authorized
representatives of Beverly, Capstone and New Beverly; and (i) the resulting net
balance due, if any, from the Pharmacy Subsidiaries to Beverly and any of its
subsidiaries (other than the Pharmacy Subsidiaries) shall be contributed to the
appropriate Pharmacy Subsidiaries as additional capital; and (ii) the resulting
net balance due, if any, from Beverly and any of its subsidiaries (other than
the Pharmacy Subsidiaries) to the Pharmacy Subsidiaries will be distributed to
Beverly as a dividend.
Further, New Beverly shall provide an accounting to Capstone of the
settlement of the intercompany accounts described above as soon as reasonably
practicable following the Effective Time of the Merger. To the extent that the
aggregate cash collected by Beverly from the Pharmacy Subsidiaries during the
period from the date of the Distribution Agreement to the Distribution Date, is
greater than the sum of (i) the Assumed Pharmacy Indebtedness and the related
Accrued Interest Cost, (ii) Beverly's normal management fees collected from the
Pharmacy Subsidiaries during such period in amounts consistent with past
practices in the ordinary course of business, and (iii) the Closing Debt (as
defined below, and collectively, the "Beverly Interim Period Cash
Entitlements"), then New Beverly shall reimburse Capstone for the amount in
excess of the Beverly Interim Period Cash Entitlements. To the extent that the
amount of Beverly Interim Period Cash Entitlements is in excess of the aggregate
cash collected by Beverly from the Pharmacy Subsidiaries during the period from
the date of the Distribution Agreement to the Distribution Date, Capstone shall
reimburse New Beverly for the amount of such difference. "Closing Debt" is
defined as the amount of Beverly's indebtedness incurred in connection with the
acquisition of institutional pharmacy businesses approved by Capstone during the
period commencing at the time of execution of the Distribution Agreement and
ending at the Distribution Date, which amount shall be in addition to the
Assumed Pharmacy Indebtedness. New Beverly shall be reimbursed for the Closing
Debt pursuant and subject to the provisions described above.
INDEMNIFICATION AND INSURANCE
The Distribution Agreement provides that from and after the Distribution
Date, Capstone will indemnify, defend and hold harmless New Beverly and its
subsidiaries, as well as the directors and officers of New Beverly and the
various New Beverly subsidiaries (collectively, the "New Beverly Indemnitees")
from and against all losses arising out of or relating to (i) the Institutional
Pharmacy Liabilities, (ii) any breach, whether before or after the Distribution
Date, by Beverly or the Pharmacy Subsidiaries of any provision of the
Distribution Agreement or any Ancillary Agreement and (iii) liabilities related
to the operation of Capstone.
New Beverly will, following the Distribution Date, indemnify, defend and
hold harmless, Beverly (and Capstone as its successor), each Pharmacy
Subsidiary, and the directors and officers of Beverly and the Pharmacy
Subsidiaries from and against losses arising out of or resulting from (i) the
Remaining Healthcare Liabilities (as defined in the Distribution Agreement),
(ii) the breach, whether before or after the Distribution Date, by New Beverly
or any New Beverly subsidiary, of any provision of the Distribution Agreement or
any Ancillary Agreement, (iii) any claims arising out of this Prospectus or the
Registration Statement pertaining hereto and (iv) the failure to qualify as a
tax-free reorganization. See "-- Terms of the Tax Allocation and Indemnification
Agreement" and "The Merger -- Indemnification and Insurance" in the Joint Proxy
Statement/Prospectus for information regarding Capstone's indemnification
obligations arising pursuant to the Merger Agreement.
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For a period of six years following the anniversary of the Distribution
Date, Capstone will maintain in effect in such manner as is contemplated by the
Merger Agreement policies of directors' and officers' liability insurance with
respect to claims against present or former officers or directors of Beverly and
its subsidiaries arising from facts or events occurring prior to the Effective
Time of the Merger. The cost of maintaining such coverage in effect shall be
shared as follows: (i) for the first three years after the Distribution Date,
New Beverly and Capstone shall each bear 50% of the premium cost of maintaining
said insurance policies or any applicable runoff policy in substitution or
replacement thereof; and (ii) for the following three years after the
Distribution Date, New Beverly shall bear 70% of such premium cost, and Capstone
shall bear 30% of such premium cost.
Following the Distribution Date, Capstone shall be responsible for
providing such insurance coverage as it may deem appropriate with respect to the
assets and business of the Institutional Pharmacy Business. Similarly, New
Beverly shall be responsible for maintaining such insurance coverage as it deems
appropriate with respect to the assets and business of the Remaining Healthcare
Business. Notwithstanding the above, Capstone and Beverly, pursuant to the terms
of the Merger Agreement, have agreed to use their joint best efforts to
expeditiously obtain a commitment for retroactive insurance coverage, which
shall be reasonably acceptable to Beverly, with respect to both known
liabilities and unreported losses which are related to the Institutional
Pharmacy Business which may have occurred or may occur at any time prior to the
Effective Time. Capstone has agreed that at the Effective Time, it will, at its
expense, cause such retroactive insurance coverage to be in effect.
TERMS OF THE EMPLOYEE BENEFIT AGREEMENT
Beverly, New Beverly and Capstone will execute the Employee Benefit
Agreement on or prior to the Distribution Date to allocate responsibilities and
obligations between Beverly and the Surviving Corporation for various employee
and employee benefit matters, including the rights and claims of Retained
Employees and Transferred Employees. The Employee Benefit Agreement allocates
such responsibilities and obligations with respect to salary, wages and related
benefits, as well as benefits under the current Beverly stock plans, non-tax
qualified benefit plans, employee welfare benefit plans and tax-qualified
defined contribution plans.
Beverly and New Beverly intend to transfer the Transferred Employees to the
employ of New Beverly or one of its subsidiaries, as appropriate, immediately
prior to the Distribution. With respect to the Transferred Employees, New
Beverly will assume the liabilities and obligations regarding, and will continue
to be responsible for, all claims made by or on behalf of Transferred Employees
concerning salary, wages, benefits, stock-based compensation, non-qualified
plans, qualified plans, welfare plans, severance pay, salary continuation and
post-employment obligations. With respect to Retained Employees, Beverly will
retain and Capstone shall assume all such liabilities and obligations with
respect to and concerning Retained Employees except for certain benefits of
Retained Employees provided under certain non-tax qualified benefit plans that
are to be maintained for such Retained Employees by New Beverly. Beverly and
Capstone will, however, retain liability for such benefits of Retained
Employees, and will indemnify New Beverly to the extent of the net cost to New
Beverly of providing such benefits.
All of the employee welfare benefit plans maintained by Beverly will be
assumed, along with any underlying assets held for such plans, by New Beverly.
New Beverly's assumption of liability for the provision of benefits under these
plans will cover all liabilities with respect to Transferred Employees and will
cover all liabilities for Retained Employees arising with respect to claims
incurred up to the Distribution. However, Beverly will retain and Capstone will
assume all coverage and benefit liabilities for Retained Employees as of the
Distribution. Beverly's and Capstone's obligations with respect to Retained
Employees as of the Distribution under COBRA will be administered and paid for
by New Beverly, with Beverly and Capstone providing reimbursement to New Beverly
for all costs incurred.
Effective as of the Distribution, New Beverly will assume the Beverly
Enterprises 401(k) Savings Plus Plan, taking on all of its assets and
liabilities. New Beverly will continue to maintain that plan for the benefit of
the Transferred Employees. The Retained Employees will cease to participate in
that plan. New Beverly will cause the assets held in that plan for the benefit
of the Retained Employees to be transferred in a trustee-to-
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trustee transfer to another tax-qualified plan of which the Surviving
Corporation is sponsor. The transferee plan will be designated by the Surviving
Corporation. The Pharmacy Corporation of America Retirement Savings Plan will be
amended to provide for its assumption by Capstone. The Beverly Enterprises, Inc.
1988 Stock Purchase Plan will be amended and assumed by New Beverly and Retained
Employees will cease to participate in that plan. Retained Employees will
receive a cash distribution of any remaining balance held in that plan to the
extent it has not been used to purchase stock.
Beverly, New Beverly and Capstone shall cooperate to amend the existing
Beverly stock plans prior to the Distribution to provide for the assumption of
such plans and certain options granted thereunder. In addition, prior to the
Distribution, New Beverly shall adopt one or more stock option plans, the
participants in which initially shall be all Transferred Employees who hold
Beverly options, restricted shares, performance shares and/or phantom shares,
which benefits shall be subject to accelerated vesting and other adjustments as
described below.
For all Transferred Employees and Retained Employees, immediately prior to
the Distribution, (i) each option to purchase Beverly Common Stock then
outstanding will become fully vested and exercisable, (ii) all restrictions on
outstanding restricted shares will lapse and each such share shall become fully
vested, (iii) each outstanding award of phantom shares shall become fully
vested, and (iv) each outstanding performance share of Beverly Common Stock
shall become fully vested.
Beverly has requested that those Transferred Employees with existing
employment or change in control severance agreements with Beverly enter into new
employment, severance, or change of control agreements with New Beverly to be
effective at the Time of Distribution (the "New Beverly Agreements"). The New
Beverly Agreements provide, in exchange for the benefits provided therein, that
the Transferred Employee agrees to, among other things, (i) waive any rights
currently in existence under any change in control, severance or employment
agreement or other compensation or employee benefit plan with or previously
assumed by Beverly; and (ii) the cancellation of existing Beverly stock options
and the substitution of new stock options to be issued by New Beverly (as
described below).
Effective immediately after the Distribution, New Beverly will substitute
for each outstanding Beverly option held by a Transferred Employee, a New
Beverly option to acquire shares of New Beverly Common Stock, which option shall
be of the same character and subject to substantially the same terms and
conditions, as the Beverly option for which it is substituted, provided,
however, that (i) the exercise price per share of New Beverly Common Stock for
which the option may be exercised shall be an amount equal to the product of (x)
the per share exercise price under the Beverly option immediately prior to the
Distribution, and (y) the fraction representing the Fair Market Value (defined
as the last reported sales price per share of the Beverly Common Stock as
reported on the New York Stock Exchange composite tape for the valuation date in
question) of a share of New Beverly Common Stock immediately after the
Distribution divided by the Fair Market Value of a share of Beverly Common Stock
immediately before the Distribution (the "Distributed Stock Fraction"), and (ii)
the number of New Beverly shares for which the option may be exercised shall be
an amount equal to the quotient of (x) the number of shares of Beverly stock for
which the Beverly option could have been exercised, immediately prior to the
Distribution, divided by (y) the Distributed Stock Fraction.
Capstone has agreed to assume the Beverly stock plans and each Beverly
option granted thereunder that is held by a Retained Employee, and each such
option so assumed shall be exercisable upon the same terms and conditions as
under the applicable Beverly stock plan and the applicable option agreement
issued thereunder. For each Retained Employee, the old Beverly stock options
will be canceled and Capstone shall issue new Capstone options in substitution,
with the number of shares and exchange price adjusted by two (2) different
adjustments so as to preserve the terms and conditions of the Beverly option.
See "The Merger Agreement" in the Joint Proxy Statement/Prospectus.
Prior to the Distribution, Beverly, New Beverly and Capstone shall
cooperate to amend all of Beverly's existing non-tax qualified benefit plans,
employee welfare benefit plans and tax-qualified defined contribution plans,
consistent with the transactions described above, and to provide generally for
(i) the assumption of such plans by New Beverly, (ii) the ongoing participation
in such plans by all Transferred Employees, (iii) the
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cessation of participation in such plans as of the Distribution by all Retained
Employees and (iv) taking such other steps as may be necessary to prevent the
consummation of the Merger, the Distribution and the transactions contemplated
thereby from causing, resulting in, or being treated as a termination of
employment, cessation of service or a change of control with respect to such
plans.
TERMS OF THE NON-COMPETITION AGREEMENT
In connection with the Distribution and the Merger, Beverly, Capstone and
New Beverly will enter into a Non-competition Agreement whereby New Beverly will
agree not to engage in the institutional pharmacy business (as defined in the
Non-competition Agreement) within a 120-mile radius of any pharmacy included in
the Institutional Pharmacy Business or operated by Capstone during the five-year
term of such agreement, except that the Non-competition Agreement shall not
restrict or impair any activities of New Beverly or any of its subsidiaries as
currently provided in connection with the provision of any healthcare services
or products in certain defined settings and in other settings where long-term
healthcare is not the primary service furnished.
If New Beverly, during the term of the Non-competition Agreement, acquires
a pharmacy dispensing services business as part of the acquisition of a larger
business where the pharmacy dispensing services business does not constitute the
principal part of the larger business, New Beverly has agreed to offer to sell
such pharmacy dispensing services business to Capstone within six months of the
purchase of such business. The purchase price of any such pharmacy dispensing
services business which Capstone elects to acquire under the Non-competition
Agreement will be determined based upon an appraisal of an independent business
appraisal firm.
TERMS OF THE INTERIM SERVICES AGREEMENT
Prior to the Distribution Date, New Beverly and Beverly will execute the
Interim Services Agreement which establishes a framework for New Beverly to
provide to Capstone, as the successor to Beverly following the Effective Time of
the Merger, certain services as may be requested by Capstone to ensure an
orderly transition of the Institutional Pharmacy Business. The contemplated
services may include those services that have been historically provided by
Beverly on a centralized basis to the Institutional Pharmacy Business such as
cash management, compensation and benefits administrative assistance, management
information systems and legal services. The term of the Interim Services
Agreement extends through April 30, 1998, or as otherwise mutually agreed by the
parties. New Beverly shall be reimbursed for all direct and indirect costs and
expenses incurred in connection with providing any services, as well as the
allocated portion of the base salaries of the New Beverly employees actually
providing services; provided that in no event shall the amount to be reimbursed
to New Beverly for such services be less than the fair market value for such
services.
TERMS OF THE TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
Prior to the Distribution, Beverly and New Beverly shall enter into a Tax
Allocation and Indemnification Agreement (the "Tax Allocation and
Indemnification Agreement"). This agreement sets forth each party's rights and
obligations with respect to the allocation and payment of tax liabilities and
entitlements to refunds, if any, for any federal, state or local taxes for
periods before and after the Effective Time of the Merger. The Tax Allocation
and Indemnification Agreement also addresses related matters such as the
allocation of responsibility in connection with the preparation and filing of
any tax returns, the conduct of proceedings related to taxes, cooperation of the
parties with respect to certain tax matters and the indemnification of the
parties against certain liabilities allocated under the Tax Allocation and
Indemnification Agreement.
In general, under the Tax Allocation and Indemnification Agreement, New
Beverly will be responsible for (i) all tax liabilities of Beverly not allocable
to the Pharmacy Subsidiaries (ii) any tax liability of New Beverly for periods
beginning after the date of the Merger, and (iii) except as otherwise described
in this section, any tax liability of Beverly resulting from the failure of the
restructuring and the Distribution to qualify as transactions described in
Sections 351 and 355 of the Code, and/or as a "reorganization" under Section
368(a)(1)(D) of the Code, or the Merger to qualify as a "reorganization" under
Section 368(a)(1)(A) of the Code. New Beverly will also be entitled to any
refunds that relate to those liabilities.
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Under the Tax Allocation and Indemnification Agreement, the Surviving
Corporation will generally be responsible for (i) all tax liabilities allocable
to the Pharmacy Subsidiaries, and (ii) any tax liability of Capstone.
If the tax return for the Beverly consolidated group (the "Group Tax
Return") for taxable year 1996 is filed before the Distribution, Beverly shall
be responsible for preparing and filing such Group Tax Return in a manner which
fairly reflects the interests of Beverly and New Beverly. If the Group Tax
Return for taxable year 1996 is filed after the Distribution, New Beverly shall
be responsible for preparing such Group Tax Return in a manner which fairly
reflects the interests of Beverly and for furnishing the completed Group Tax
Return to Beverly in time to permit the timely signing and filing of such Group
Tax Return by Beverly. Beverly will be responsible for preparing and filing the
Group Tax Return for taxable year 1997 in a manner which fairly reflects the
interests of New Beverly. New Beverly will be responsible for providing to
Beverly for taxable year 1997 the information relating to New Beverly which is
needed for the preparation of the taxable year 1997 Group Tax Return. All Group
Tax Returns filed after the date of the Merger shall be prepared on a basis
consistent with the elections, accounting methods, conventions and principles of
taxation used for the most recent taxable periods for which Group Tax Returns
have been filed.
If the consolidated federal income tax liability reported on the Group Tax
Return (the "Group Tax Liability"), if any, for any relevant tax period includes
alternative minimum tax imposed by section 55 of the Code, the total amount of
such alternative minimum tax shall be allocated to New Beverly. The remaining
portion of the Group Tax Liability (after reduction for alternative minimum tax)
will be apportioned between Beverly and New Beverly. The amount apportioned to
Beverly will be based upon a determination of the tax liability of the
Institutional Pharmacy Business had such business filed a federal income tax
return on a stand-alone basis, and the amount apportioned to New Beverly will be
the remaining portion of the Group Tax Liability, excluding any portion
attributable to Capstone.
For any tax period for which a Group Tax Return is filed after April 15,
1997, New Beverly shall be liable for the amount of taxes allocated to New
Beverly reduced by the excess of (a) the total amount of estimated federal
income taxes paid by Beverly with respect to any portion of such tax period
which occurs on or before the Distribution, over (b) the amount included as a
payable to Beverly for current federal income taxes with respect to such tax
period on the audited financial statements of PCA determined as of April 15,
1997. If the amount allocated to New Beverly for any tax period with a reduction
as provided above is a positive number, such net amount shall be a joint and
several liability of New Beverly and its subsidiaries enforceable by Beverly and
its subsidiaries under the terms of the Tax Allocation and Indemnification
Agreement. If the amount allocated to New Beverly for any tax period reduced as
provided above is a negative number, Beverly and its subsidiaries shall be
jointly and severally liable for the payment of an amount equal to such negative
number to New Beverly.
If, as a result of any filing of an amended return or claim for refund,
final determination or settlement with the IRS, or court decision, relating to a
Group Tax Return for any tax period, there is an increase in the Group Tax
Liability, then each of Beverly and New Beverly will be allocated the portion of
the increase in the Group Tax Liability that is attributable to it under the
apportionment method described above, plus any allocable interest and penalties.
If there is a reduction in the Group Tax Liability, then each of Beverly and New
Beverly will be allocated the portion of the refund from such reduction in the
Group Tax Liability that is attributable to it under the apportionment method
described above, plus any allocable interest.
Each party to the agreement agrees to pay and be responsible for, and will
indemnify, defend and hold harmless all other parties from and against all
liabilities allocated to it under the Tax Allocation and Indemnification
Agreement. If any party pays or has paid any Group Tax Liability or state or
local income or franchise tax liability for which another party is or becomes
liable pursuant to the terms of the Tax Allocation and Indemnification
Agreement, appropriate reimbursement shall be made no later than ten days after
demand for such reimbursement is made. The portion of any refund, rebate or
reimbursement received by any party to which another party is entitled pursuant
to the Tax Allocation and Indemnification Agreement will be paid over within ten
days. Any payments required to be made between the parties that are not made in
a
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timely fashion will bear interest calculated at the rate specified under Section
6621(a)(2) of the Code from the date such payment is due to the date the payment
is made.
Beverly agrees to (i) retain all Group Tax Returns, related schedules and
workpapers, and all material records and other documents as required under
Section 6001 of the Code and the regulations promulgated thereunder existing on
the date of the Tax Allocation and Indemnification Agreement or relating to tax
periods ending with the Distribution, for seven years following the
Distribution, or such longer period as a tax deficiency may be assessed or a
refund claim filed under applicable periods of limitation, and (ii) allow New
Beverly and its representatives (and representatives of any of its affiliates),
at times and dates reasonably acceptable to Beverly, to inspect, review and make
copies of such records, and have access to such employees, as New Beverly may
reasonably deem necessary or appropriate from time to time.
PREFERRED PROVIDER AGREEMENT
Beverly and Capstone have agreed that effective upon the closing of the
Merger, New Beverly and the Surviving Corporation will enter into a Preferred
Provider Agreement for Pharmaceutical and Related Services (the "Preferred
Provider Agreement") under which the Surviving Corporation will enter into one
or more provider agreements, for a five year term, with a five year renewal
right upon meeting certain competitive pricing criteria, to provide certain
pharmacy and related products and services (collectively, the "Services") in New
Beverly long-term care facilities where PCA has previously provided such
Services, and New Beverly will under certain conditions cause additional
long-term care facilities now or hereafter operated by Beverly to enter into
similar provider agreements for such Services for up to a five year term, with
similar renewal rights.
Under the Preferred Provider Agreement, if New Beverly sells or otherwise
disposes of any long-term care facility under contract with the Surviving
Corporation to a third party, New Beverly will be obligated to cause the third
party to assume New Beverly's obligation to obtain the Services at that facility
from the Surviving Corporation. A default by either party with respect to its
obligations under provider agreements covering 10% of the total number of
long-term facilities at the time under contract with the Surviving Corporation
will constitute a default under the Preferred Provider Agreement, entitling the
non-defaulting party to, among other remedies, terminate the entire
relationship.
Under the Preferred Provider Agreement, pricing for the Services is
expected to be determined and negotiated at the time of commencement of Services
by the Surviving Corporation at a specific facility, and will continue at such
amount for the duration of the term of the provider agreements, subject to such
modifications as may be required by changes in governmental reimbursement
regulations and rules.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material federal income tax
consequences of the Distribution and the Merger. This summary is for general
informational purposes only and is not intended as a complete description of all
of the tax consequences of the Distribution and the Merger and does not discuss
tax consequences under the laws of state or local governments or of any other
jurisdiction. Moreover, the tax treatment of a stockholder may vary depending
upon his, her or its particular situation. In this regard, certain stockholders
(including (i) insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, and persons who are not citizens or residents of
the United States or who are foreign corporations, foreign partnerships or
foreign trusts or estates as defined for United States federal income tax
purposes, and (ii) stockholders that hold shares as part of a position in a
"straddle" or as part of a "hedging" or "conversion" transaction for United
States federal income tax purposes and stockholders with a "functional currency"
other than the United States dollar) may be subject to special rules not
discussed below. In addition, this summary applies only to shares which are held
as capital assets. The following discussion may not be applicable to a
stockholder who acquired his or her shares pursuant to the exercise of stock
options or otherwise as compensation.
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THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
CODE, TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE WHICH MAY OR MAY NOT
BE RETROACTIVE, AND ANY SUCH CHANGES COULD AFFECT THE TAX CONSEQUENCES DESCRIBED
HEREIN. SEE "POSSIBLE FUTURE LEGISLATION" BELOW.
EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTION DESCRIBED
HEREIN, INCLUDING, THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
THE DISTRIBUTION
On May 17, 1997, Beverly requested the Private Letter Ruling from the IRS
substantially to the effect that, among other things, the Distribution will
qualify as a reorganization within Section 368(a)(1)(D), and that neither
Beverly, New Beverly nor their stockholders will recognize any gain or loss (i)
in connection with such reorganization transaction (as more fully described
below), (ii) upon the receipt by New Beverly of the Remaining Health Care Assets
from Beverly in exchange for the New Beverly Common Stock, or (iii) upon receipt
by Beverly stockholders of the New Beverly Common Stock in the Distribution.
Receipt of the Private Letter Ruling, or an opinion to the effect as set forth
below, at the election of Beverly, is a condition to the respective obligations
of Beverly and Capstone to consummate the Merger. Beverly does not expect to
have the Private Letter Ruling request acted upon prior to the fourth quarter of
1997. See "The Merger -- Conditions to Closing" in the Joint Proxy
Statement/Prospectus.
As an alternative to obtaining the Private Letter Ruling, at Beverly's
option, Beverly and Capstone have the right to receive the opinion of Caplin &
Drysdale, Chartered or Ernst & Young LLP to the effect that:
(1) the transfer by Beverly to New Beverly of the Remaining Healthcare
Assets, solely in exchange for New Beverly Common Stock, and the
assumption by New Beverly of the Remaining Healthcare Liabilities of
Beverly, followed by Beverly's distribution of the New Beverly Common
Stock to Beverly's stockholders, will constitute a reorganization
within the meaning of Section 368(a)(1)(D) of the Code;
(2) Beverly will recognize no gain or loss in connection with the
transactions described in (1) above, except to the extent that gain or
loss is required to be recognized on intercompany transactions;
(3) New Beverly will recognize no gain or loss upon the receipt of the
Remaining Healthcare Assets from Beverly in exchange for the New
Beverly Common Stock; and
(4) Beverly's stockholders will recognize no gain or loss (and no amount
will be included in the income of Beverly's stockholders) upon the
receipt of the New Beverly Common Stock in the Distribution.
Tax opinions are not binding on the IRS or any court. Moreover, the tax
opinions are based upon, among other things, certain representations as to
factual matters made by Beverly and Capstone, which representations if incorrect
or incomplete in certain material respects, would jeopardize the conclusions
reached in the opinions.
It is expected that the Distribution will qualify as a tax-free
reorganization under Section 368 of the Code. Assuming that the Distribution so
qualifies, (i) the holders of Beverly Common Stock will not recognize gain or
loss upon receipt of shares of New Beverly Common Stock, (ii) each holder of
Beverly Common Stock will allocate his, her or its aggregate tax basis in the
Beverly Common Stock immediately before the Distribution among the Beverly
Common Stock and New Beverly Common Stock in proportion to their respective fair
market values, (iii) the holding period of each holder of Beverly Common Stock
for the New Beverly Common Stock will include the holding period for his, her or
its Beverly Common Stock, provided that the Beverly Common Stock is held as a
capital asset at the time of the Distribution, and (iv)
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Beverly will not recognize any gain or loss on its distribution of the New
Beverly Common Stock to its stockholders, except to the extent that gain or loss
is required to be recognized on intercompany transactions.
No fractional shares of New Beverly Common Stock will be distributed in the
Distribution. A holder of Beverly Common Stock who, pursuant to the
Distribution, receives cash in lieu of fractional shares of New Beverly Common
Stock will be treated as having received such fractional shares of New Beverly
Common Stock pursuant to the Distribution and then as having received such cash
in a sale of such fractional shares of New Beverly Common Stock. Such holder
will generally recognize capital gain or loss pursuant to such demand sale equal
to the difference between the amount of cash received and such holder's adjusted
tax basis in the fractional share of New Beverly Common Stock received. Such
gain or loss will be capital (provided the Beverly Common Stock is held as a
capital asset at the time of the Distribution) and will be treated as a long-
term capital gain or loss if the holding period for the fractional shares of New
Beverly Common Stock deemed to be received and then sold is more than one year.
If the Distribution does not qualify as a tax-free reorganization under
Section 368 of the Code, then each holder of Beverly Common Stock who received
shares of New Beverly Common Stock in the Distribution will be treated as if
such holder received a taxable distribution in an amount equal to the fair
market value of the New Beverly Common Stock received. Such distribution will be
treated as (i) a dividend to the extent paid out of Beverly's current and
accumulated earnings and profits, then (ii) a reduction in such holder's basis
in Beverly Common Stock to the extent the amount received exceeds the amount
referenced in clause (i), and then (iii) a gain from the sale or exchange of
Beverly Common Stock to the extent the amount received exceeds the sum of the
amounts referenced in clauses (i) and (ii). Each holder's basis in the New
Beverly Common Stock would be equal to the fair market value of such stock at
the time of the Distribution. In addition, if the Distribution were not to
qualify as a tax-free reorganization under Section 368 of the Code, then, in
general, a corporate level federal income tax would be payable by the
consolidated group of which Beverly is the common parent, which tax would be
based upon the gain (computed as the difference between the fair market value of
the stock distributed and the distributing corporation's adjusted basis in such
stock) realized by Beverly upon its distribution of the stock of New Beverly to
its stockholders in the Distribution, and New Beverly would be liable for the
payment of such tax pursuant to the terms of the Tax Allocation and
Indemnification Agreement.
THE MERGER
In addition to the tax treatment with respect to the Distribution, as set
forth above, Beverly and Capstone shall receive, prior to the Effective Time of
the Merger, the opinion of Caplin & Drysdale, Chartered or Ernst & Young LLP
with respect to the Merger, to the effect that:
(1) the Merger will qualify as a reorganization within the meaning of
Section (368)(a) of the Code;
(2) no gain or loss will be recognized by Capstone or Beverly as a result
of the Merger; and
(3) no gain or loss will be recognized by Beverly's stockholders upon the
receipt of Capstone Common Stock solely in exchange for Beverly Common
Stock in connection with the Merger (except with respect to cash
received in lieu of a fractional interest in Capstone Common Stock).
Tax opinions are not binding on the IRS or any court. Moreover, the tax
opinions are based upon, among other things, certain representations as to
factual matters made by Beverly and Capstone, which representations if incorrect
or incomplete in certain material respects, would jeopardize the conclusions
reached in the opinions.
It is expected that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code. If the Merger so qualifies, (i) the
holders of Beverly Common Stock will not recognize gain or loss upon the receipt
of Capstone Common Stock in exchange for their shares of Beverly Common Stock,
(ii) each holder of Beverly Common Stock will carry over his, her or its tax
basis in the Beverly Common Stock (as determined immediately following the
Distribution) to the Capstone Common Stock, (iii) the holding period for each
holder of Beverly Common Stock will carry over to the Capstone Common Stock,
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provided that the Beverly Common Stock is held as a capital asset immediately
prior to the Effective Time of the Merger, and (iv) any holder of Beverly Common
Stock receiving cash in lieu of fractional shares will recognize capital gain or
loss (provided the shares of Beverly Common Stock surrendered are held as
capital assets immediately prior to the Effective Time of the Merger) equal to
the difference between the amount of cash received and the portion of such
holder's basis in the shares of Beverly Common Stock allocable to such
fractional share interests, and such capital gain or loss will be long-term
capital gain or loss if the holding period for such shares is more than one
year.
If the Merger does not qualify as a reorganization within the meaning of
Section 368(a) of the Code, then each holder of Beverly Common Stock will
recognize gain or loss upon the receipt of the Capstone Common Stock in exchange
for such Beverly Common Stock equal to the difference between the fair market
value of the Capstone Common Stock received and such holder's basis in Beverly
Common Stock. In this regard, the failure of the Merger to qualify as a
reorganization within the meaning of Code Section 368(a) of the Code may also
cause the Distribution to not qualify as a tax-free reorganization under Section
368 of the Code, in which case (as described in "-- The Distribution" above)
each holder of Beverly Common Stock who receives shares of New Beverly Common
Stock in the Distribution, will be treated as if such holder received a taxable
distribution in an amount equal to the fair market value of the New Beverly
Common Stock received. Such distribution would be treated as (i) a dividend to
the extent paid out of Beverly's current and accumulated earnings and profits,
then (ii) a reduction in such holder's basis in Beverly Common Stock to the
extent the amount received exceeds the amount referenced in clause (i), and then
(iii) gain from the sale or exchange of Beverly Common Stock to the extent the
amount received exceeds the sum of the amounts referenced in clauses (i) and
(ii). Each holder's basis in the New Beverly Common Stock would be equal to the
fair market value of such stock at the time of the Distribution.
In addition, if the Merger were not to qualify as a tax-free reorganization
under Section 368 of the Code, then, in general, a corporate level federal
income tax would be payable by the consolidated group of which Beverly is the
common parent, which tax would be based upon the gain (computed as the
difference between the fair market value of the PCA stock exchanged in the
Merger and Beverly's adjusted basis in such stock) realized by Beverly upon the
consummation of the Merger.
TAXPAYER RELIEF ACT
The Taxpayer Relief Act of 1997 ("TRA 1997") was signed into law on August
5, 1997. TRA 1997 contains certain restrictions involving a distribution or
"spin off" to stockholders of portions of a business enterprise, accompanied by
a merger or acquisition of a specific unit of the business enterprise involving
a third party acquiror. The Distribution and the Merger are not affected by the
restrictions imposed by TRA 1997.
BACK-UP WITHHOLDING REQUIREMENTS
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of Beverly Common Stock, unless
the stockholder (i) is a corporation or comes with certain other exempt
categories, and, when required, demonstrates these facts, or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. A stockholder who does not supply Beverly with
his, her or its correct taxpayer identification number may be subject to
penalties imposed by the IRS. Any amount withheld under these rules will be
refunded or credited against the stockholder's federal income tax liability.
Stockholders should consult their tax advisers as to their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption. If information reporting requirements apply to a stockholder, the
amount of dividends paid with respect to such shares will be reported annually
to the IRS and to such stockholder.
These back-up withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules may be changed.
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<PAGE> 38
TREATMENT OF BEVERLY INDEBTEDNESS
GENERAL
The Merger Agreement provides, among other things, that it is a condition
to Capstone's obligations to consummate the Merger, and Beverly has agreed that
prior to the Distribution and the Merger it will amend, modify or replace
substantially all of its existing indebtedness so that upon closing the Merger,
Beverly will have been released from liability under all its existing
indebtedness for borrowed money, except for the Institutional Pharmacy
Liabilities and certain other pharmacy-related obligations. Accordingly, Beverly
will be obligated to seek modifications or amendments to numerous credit or
lending agreements, leases and other instruments with third parties for the
purpose of causing New Beverly to be substituted as the obligor in Beverly's
place, and obtaining the release of Beverly from liability thereunder. To the
extent that Beverly is not able to obtain releases from such liabilities or able
to refinance the same, Capstone may not be obligated to consummate the Merger,
or if it elects to consummate the Merger, to reduce the amount of Assumed
Pharmacy Indebtedness which PCA is obligated to repay Beverly, by the amount of
any such indebtedness as to which Beverly has not obtained a release for itself.
Set forth below is a summary of the principal obligations of Beverly
whereunder it is either the primary obligor or guarantor, and Beverly's present
plans with respect to satisfaction of its covenant and the condition in the
Merger Agreement with respect to obtaining a release from liability. In one or
more cases Beverly may not be able to effect appropriate modifications to the
debt instruments and release of Beverly from liability thereunder, and
accordingly Beverly may be required to refinance or pay off such indebtedness or
terminate such leases, under terms and conditions which may be less favorable
than presently exist, and there is no assurance that Beverly will be able to
successfully refinance any such indebtedness. For information with respect to
anticipated one-time transactional costs associated with Beverly's effecting
debt amendments, modifications or replacements, see "Unaudited Pro Forma New
Beverly Financial Statements."
EXISTING CREDIT FACILITY
As of June 30, 1997, Beverly had approximately $125,759,000 outstanding
under a letter of credit/revolving credit facility which permitted borrowings of
up to $375 million (the "Existing Credit Facility"), including approximately
$90,000,000 under the revolving portion of the Existing Credit Facility and
approximately $35,759,000 of letters of credit issued pursuant thereto. The
Existing Credit Facility was established pursuant to an Amended and Restated
Credit Agreement dated as of December 20, 1996 (as heretofore amended, the
"Existing Credit Agreement") by and among Beverly, as borrower, and Morgan
Guaranty Bank of New York, as Issuing Bank, and as Agent for a lending bank
group ("Morgan"). The Existing Credit Agreement terminates on December 31, 2001.
The obligations of Beverly under the Existing Credit Facility are
guaranteed by Beverly's active, direct and indirect subsidiaries other than
Beverly Funding Corporation and Beverly Indemnity, Ltd. (including Beverly's
Pharmacy Subsidiaries) and are secured by a pledge of all of the capital stock
of PCA and certain of Beverly's other Pharmacy Subsidiaries (the "Pledged
Stock").
The Existing Credit Agreement contains representations and warranties,
affirmative covenants, reporting covenants, negative covenants and events of
default customary for similar financing transactions. Covenants include but are
not limited to certain restrictions on investments, debt incurrence, contingent
obligations, liens, consolidations, mergers and asset sales, payment of
dividends and the purchase or redemption of capital stock. In addition, Beverly
is required to comply with certain financial covenants governing, among other
things, minimum consolidated net worth, fixed charge coverage ratio, and the
ratio of adjusted consolidated debt to consolidated net worth.
Effective August 20, 1997, Beverly, Morgan and the other members of a group
of lending banks amended the Existing Credit Agreement and the Existing Credit
Facility by entering into an amended and restated credit facility (the "Amended
Credit Agreement"). The Amended Credit Agreement provides that, upon the
occurrence of the Transactions and the delivery of certain certificates,
opinions by Beverly, a new pledge agreement and an assumption agreement by New
Beverly, New Beverly will be substituted as the borrower; Beverly will be
released from its obligations thereunder; the Pledged Stock will be released and
the capital stock of certain direct or indirect subsidiaries of Beverly engaged
in the Remaining Healthcare Business and
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<PAGE> 39
having a fair value substantially equivalent to the fair market value of the
Pledged Stock will be substituted; and all Pharmacy Subsidiaries (as defined in
the Distribution Agreement) will be released as guarantors.
9% SENIOR NOTES
As of June 30, 1997, there was outstanding $180 million principal amount of
9% senior notes due 2006 (the "9% Senior Notes") that were issued pursuant to an
indenture dated as of February 1, 1996 (the "9% Indenture") between Beverly and
The Chase Manhattan Bank, as trustee (the "9% Senior Note Trustee") for the
holders of the 9% Senior Notes. The 9% Senior Notes are senior in right of
payment to all subordinated indebtedness of Beverly (including the convertible
subordinated debentures, discussed below). The 9% Senior Notes are redeemable
commencing February 1, 2001 at an initial redemption price of 104.5% of the
principal amount thereof, plus accrued and unpaid interest. The 9% Indenture
contains affirmative covenants, reporting covenants, negative covenants and
events of default customary for similar public debt financing transactions.
Covenants include but are not limited to certain restrictions on: investments;
liens; debt incurrence; issuance of preferred stock; consolidations, mergers and
asset sales; payment of dividends and the purchase or redemption of capital
stock and subordinated indebtedness. Many of these limitations relate to certain
financial tests or ratios which include but are not limited to minimum
consolidated net worth, debt to consolidated cash flow and fixed charge
coverage.
In order that the 9% Senior Notes be assigned to and assumed by New
Beverly, and Beverly be released from liability thereunder, Beverly intends to
solicit the consent of holders of a majority of the principal amount outstanding
of the 9% Senior Notes (the "Consent Solicitation") to amend the 9% Senior Notes
(as amended, the "Amended Notes") and the 9% Indenture to address the following
matters: (i) waiver of the consolidated net worth test in connection with the
Distribution; (ii) substitution of New Beverly as the "Company" for all purposes
of the 9% Indenture and the release of Beverly and the Pharmacy Subsidiaries
from all liability and obligations thereunder and (iii) waiver of the limitation
on redemption of subordinated debentures to permit Beverly to redeem the
subordinated debentures, as discussed below. If the consent of the required
holders is obtained, Beverly, New Beverly and certain other subsidiaries of
Beverly, as guarantors, and the 9% Senior Note Trustee will enter into a
supplemental indenture to substitute New Beverly as primary obligor thereunder,
release Beverly and the Pharmacy Subsidiaries from further liability under the
9% Senior Notes and permit the redemption of the 7 5/8% convertible subordinated
debentures described below.
There can be no assurance given that Beverly will be successful in
obtaining the consent of the required majority 9% Senior Note holders. If it is
not successful in the Consent Solicitation, Beverly anticipates it or New
Beverly will make an exchange offer whereby holders of the 9% Senior Notes would
be offered in exchange for the 9% Senior Notes a New Beverly debt security
without the limitation on redemption of subordinated debentures and without a
guarantee from the Pharmacy Subsidiaries (the "New Beverly Notes"). It is
expected that the New Beverly Notes will, except as noted above, contain
covenants similar to the 9% Senior Notes but there can be no assurance that any
New Beverly Notes issued pursuant to an exchange offer will not have higher
coupon rates, be issued at a discount or contain covenants more onerous or
restrictive than those in the 9% Indenture or 9% Senior Notes.
SUBORDINATED DEBENTURES
5 1/2% Debentures
As of June 30, 1997, there was outstanding $150 million aggregate principal
amount of 5 1/2% convertible subordinated debentures ("5 1/2% Debentures"). The
5 1/2% Debentures bore interest at a rate of 5 1/2% per annum with a scheduled
maturity date of August 1, 2018 and were redeemable after August 1, 1997 at a
redemption price of 103.30% of principal plus accrued and unpaid interest. The
5 1/2% Debentures were convertible into Beverly Common Stock at a conversion
price of $13.33 per share. On July 17, 1997, Beverly called the 5 1/2%
Debentures for redemption on August 18, 1997. A total of $149,162,550 of the
$150 million aggregate principal amount outstanding was converted to 11,189,924
shares of Beverly Common Stock, increasing the outstanding shares of Beverly
Common Stock by that amount. The payment of the redemption
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<PAGE> 40
price of 103.30% of the remaining principal amount plus the cash in lieu of
fractional shares was within the amount permitted under the restrictive payment
provisions of the 9% Indenture.
7 5/8% Debentures
As of June 30, 1997, there was outstanding approximately $62.5 million
aggregate principal amount of 7 5/8% convertible subordinated debentures
("7 5/8% Debentures"). The 7 5/8% Debentures bear interest at a rate of 7 5/8%
per annum, mature March 15, 2003, are presently redeemable at a redemption price
of 100% of principal amount plus accrued and unpaid interest thereon and are
subject to an annual sinking fund redemption of $7.5 million. The 7 5/8% Bonds
are convertible into Beverly Common Stock at the option of the holder at any
time prior to the close of business on March 14, 2003 but if the 7 5/8% Bonds
are called for redemption, holders must convert them prior to the close of
business on the business day immediately preceding the redemption date. The
conversion price currently in effect is $20.47 per share.
The 9% Indenture contains a covenant that restricts Beverly's ability to
redeem or repurchase subordinated debt such as the 7 5/8% Debentures unless the
redemption is accomplished with the net cash proceeds from an incurrence of
subordinated indebtedness of a longer term and no more than the principal amount
of the subordinated indebtedness being redeemed.
Because redemption of the 7 5/8% Debentures is restricted under the terms
of the 9% Indenture, Beverly is seeking, as part of the Consent Solicitation,
consent from the holders of the 9% Senior Notes to permit the redemption of the
7 5/8% Debentures. Once the Consent Solicitation is successfully completed,
Beverly intends to call the 7 5/8% Debentures for redemption, and anticipates
that all of the 7 5/8% Debentures will be redeemed.
INDUSTRIAL REVENUE BONDS
As of June 30, 1997, Beverly has guaranteed the obligations of various
subsidiaries and others on 104 issues of industrial revenue bonds in various
states and local jurisdictions, totalling an aggregate principal amount of
approximately $292.6 million (individually an "IRB" and collectively the
"IRBs"). A total of 89 issues with an aggregate principal amount of
approximately $204.5 million involve Beverly guarantees of the obligations of
Beverly subsidiaries operating the Remaining Healthcare Business, while 15
issues with an aggregate principal amount of approximately $88.1 million
involved guarantees of the obligations of third parties that have acquired
facilities from subsidiaries of Beverly subject to IRBs. The IRBs bear interest
at rates ranging from 4.0% to 11.5% per annum, mature from May 1, 1998 to
December 1, 2019, and are not redeemable until from June 1, 1997 to June 1,
2013. Beverly's obligations are set forth in a guaranty agreement for each issue
(individually a "Guaranty Agreement" and collectively the "Guaranty
Agreements"). The Guaranty Agreements have been entered into by Beverly and 21
respective trustees (individually an "IRB Trustee" and collectively the "IRB
Trustees"). In order to effect the Distribution, Beverly intends to request each
IRB Trustee to enter into appropriate assumption, substitution and release
agreements to, among other things: (i) substitute New Beverly as the guarantor,
assuming all of Beverly's obligations under the relevant Guaranty Agreement and
(ii) release Beverly from all obligations under the Guaranty Agreement. As of
September 8, 1997, IRB Trustees with respect to 51 IRB issues totalling
approximately $123.7 million have agreed, subject to the occurrence of the
Transactions and delivery of certain certificates and opinions, to enter into
such agreements. While Beverly will seek the assumption, substitution and
release from all IRB Trustees, there can be no assurance given that one or more
of the remaining IRB Trustees will not require that the holders of the IRBs
consent to the proposed changes. If consents from such IRB holders are required,
Beverly anticipates promptly seeking such consents. There remains the
possibility that one or more IRB holders may not enter into a consent agreement
and if such consent is not obtained from all IRB holders Beverly proposes to
refinance or pay off that portion of the IRBs with respect to which consents
have not been obtained.
FIRST MORTGAGE BONDS
As of June 30, 1997, there was outstanding approximately $48.4 million
aggregate principal amount of first mortgage bonds (the "First Mortgage Bonds")
in two series: Series A ("Series A Bonds") and Series B ("Series B Bonds"). The
Series A Bonds bear interest at a rate of 8 3/4% per annum, mature July 1, 2008
and
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<PAGE> 41
are redeemable after July 1, 1997 at a redemption price of 105% of the principal
amount plus accrued and unpaid interest thereon. The Series B Bonds bear
interest at a rate of 8 5/8% per annum, mature October 1, 2008 and are not
redeemable prior to October 1, 1997. After October 1, 1997, the Series B Bonds
are redeemable at a redemption price of 105% of the principal amount plus
accrued and unpaid interest thereon.
The First Mortgage Bonds were issued pursuant to an indenture dated as of
April 1, 1993 (as supplemented the "First Mortgage Bond Indenture") between
Beverly and First Union Bank of Connecticut, as trustee (the "First Mortgage
Bond Trustee") for the holders of such bonds. The First Mortgage Bond Indenture
permits the substitution of New Beverly for Beverly, the assumption by New
Beverly of the obligations of Beverly under the First Mortgage Bond Indenture
and the First Mortgage Bonds and the release of Beverly from such obligations,
upon the condition that (a) New Beverly executes documents necessary to evidence
the assumption; (b) such transaction will not disturb the continuance of the
lien of the First Mortgage Bond Indenture on the property mortgaged and pledged
as collateral and (c) immediately after giving effect to the transaction, no
default or event of default will occur.
In order to effect the Distribution, Beverly, New Beverly and the First
Mortgage Bond Trustee will execute and enter into a supplemental indenture and
other documents necessary to provide for the (i) substitution of New Beverly for
Beverly, (ii) assumption by New Beverly of the obligations of Beverly and (iii)
release of Beverly from its obligations under the First Mortgage Bond Indenture
and the First Mortgage Bonds.
8.75% NOTES
As of June 30, 1997, there was outstanding approximately $24.8 million
aggregate principal amount of 8.75% Notes ("8.75% Notes"), which were issued
pursuant to an indenture dated as of December 30, 1993 (as supplemented, the
"8.75% Note Indenture"), between Beverly and Boatman's Trust Company as trustee
for the holders of such notes. The 8.75% Notes bear interest at a rate of 8.75%
per annum, mature December 31, 2003, and are redeemable at a redemption price of
100% of the principal amount plus accrued and unpaid interest thereon. At
Beverly's request, the trustee has called the 8.75% Notes for redemption on
October 1, 1997.
MEDIUM TERM NOTES
As of June 30, 1997, there was outstanding $50.0 million aggregate
principal amount of medium term notes (the "Medium Term Notes"), which were
issued by Beverly Funding Corporation ("BFC"), a wholly-owned subsidiary of
Beverly, pursuant to an indenture dated as of December 1, 1994 (the "Medium Term
Note Indenture") between BFC and The Chase Manhattan Bank, as trustee (the
"Medium Term Note Trustee") for the holders of such notes. The Medium Term Notes
bear interest at LIBOR (as defined in the Medium Term Note Indenture) plus 0.35%
and mature on June 15, 2000. The Medium Term Notes are secured by a security
interest in patient accounts receivable generated by subsidiaries of Beverly and
sold to BFC.
The Medium Term Notes were issued in a private placement to The Long Term
Credit Bank of Japan, Los Angeles Agency ("LTCB") as holder of the entire amount
of notes issued.
Beverly has agreed to certain covenants pursuant to the First Amendment and
Restatement to Master Sales and Servicing Agreement (the "Servicing Agreement")
dated as of December 1, 1994. In order to effect the Distribution, Beverly will
seek the consent of LTCB as the sole holder of the Medium Term Notes to permit
the following under the Servicing Agreement and the Medium Term Note Indenture:
(i) substitution of New Beverly for Beverly for all purposes of such
instruments; (ii) assumption by New Beverly of the obligations of Beverly and
(iii) release of Beverly from its obligations under the Servicing Agreement and
the Medium Term Note Indenture. Although no binding commitments have yet been
requested or obtained, based upon informal discussions between the parties,
Beverly anticipates that prior to the Distribution Beverly, New Beverly, the
Medium Term Note Trustee, and LTCB will enter into appropriate documents to
reflect these consents and agreements.
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REIT PROMISSORY NOTES
As of June 30, 1997, there was outstanding approximately $41.8 million
aggregate principal amount of promissory notes due to real estate investment
trusts ("REIT Promissory Notes"). The REIT Promissory Notes, which were executed
by subsidiaries of Beverly that are part of the Remaining Healthcare Business
that will transfer to New Beverly as part of the Distribution bear interest at
rates ranging from 10.15% to 10.60% and mature from July 1, 2003 to May 1, 2010.
Health Care Property Investors ("HCPI") holds approximately $34.2 million of the
REIT Promissory Notes, which may not be prepaid until 2005. Nationwide Health
Properties ("NHP") holds approximately $7.6 million of the REIT Promissory
Notes, which have no prepayment rights. Beverly guarantees the performance under
the REIT Promissory Notes by the obligors, pursuant to one or more guaranty
agreements (individually a "Guaranty Agreement" and collectively the "Guaranty
Agreements").
Prior to the Distribution, Beverly intends to seek the consent of both HCPI
and NHP to permit the following under the Guaranty Agreements and the REIT
Promissory Notes: (i) substitution of New Beverly for Beverly; (ii) assumption
by New Beverly of the obligations of Beverly and (iii) release of Beverly from
its obligations. Although there have been preliminary discussions between
Beverly and representatives of the holders of the REIT Promissory Notes, the
terms on which a consent may be granted by the holders of the REIT Promissory
Notes remain uncertain.
BANK LOANS, MORTGAGES AND NOTES PAYABLE
As of June 30, 1997, there was outstanding approximately $125.7 million
aggregate principal amount of certain bank loans, mortgages and notes payable
representing financings by various subsidiaries of Beverly engaged in the
Remaining Healthcare Business that will be transferred to New Beverly as part of
the Distribution (the "Miscellaneous Debt Obligations"). The Miscellaneous Debt
Obligations represent obligations ranging from $10.3 million to $25 million in
outstanding principal amount, bear interest at rates ranging from 5.75% to 9.08%
per annum, mature at various dates from December 31, 1997 to September 30, 2006
and are prepayable at various dates from September 1, 1997 to June 1, 2000. The
Miscellaneous Debt Obligations are guaranteed by Beverly, and certain of them
contain financial and other covenants related to Beverly.
Prior to the Distribution, Beverly intends to seek amendments of the
Miscellaneous Debt Obligations to provide, among other things: (i) substitution
of New Beverly as guarantor in place of Beverly; (ii) assumption by New Beverly
of the obligations of Beverly; (iii) release of Beverly from its obligations and
(iv) adjustment of certain covenants to reflect the effects of the Distribution
and the Merger (the "Miscellaneous Debt Amendments"). To the extent Beverly is
unable to obtain Miscellaneous Debt Amendments to effect the foregoing, Beverly
expects the Miscellaneous Debt Obligations will be paid off or refinanced with
other lenders. As of September 15, 1997 Beverly has entered into Miscellaneous
Debt Amendments with lenders representing approximately $37.7 million out of the
$125.7 million aggregate principal amount of Miscellaneous Debt Obligations
outstanding as of June 30, 1997.
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INFORMATION CONCERNING BEVERLY
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected consolidated statement of operations data and
selected consolidated balance sheet data for the periods ended and as of
December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the
consolidated financial statements of Beverly and should be read in conjunction
with the financial statements and notes thereto included herein. The
consolidated statements of operations data and selected balance sheet data for
the six months ended and as of June 30, 1997 and 1996 have been derived from the
unaudited condensed consolidated financial statements and should be read in
conjunction with those financial statements and related notes included herein.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of results that may be expected for the full calendar year ending
December 31, 1997.
<TABLE>
<CAPTION>
AT OR FOR THE SIX
MONTHS ENDED
JUNE 30, AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net operating revenues.......... $ 1,634,219 $ 1,609,380 $ 3,267,189 $ 3,228,553 $ 2,969,239 $ 2,884,451 $ 2,607,756
Interest income................. 6,726 6,935 13,839 14,228 14,578 15,269 14,502
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.......... 1,640,945 1,616,315 3,281,028 3,242,781 2,983,817 2,899,720 2,622,258
Costs and expenses:
Operating and administrative:
Wages and related........... 897,856 894,522 1,819,500 1,736,151 1,600,580 1,593,410 1,486,191
Other....................... 577,874 573,490 1,139,442 1,224,681 1,114,916 1,069,536 921,750
Interest...................... 44,687 46,128 91,111 84,245 64,792 66,196 70,943
Depreciation and
amortization................ 54,806 51,023 105,468 103,581 88,734 82,938 80,226
Impairment of long-lived
assets:
Adoption of SFAS No. 121.... -- -- -- 68,130 -- -- --
Development and other
costs..................... -- -- -- 32,147 -- -- --
Restructuring costs........... -- -- -- -- -- -- 57,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total costs and
expenses.............. 1,575,223 1,565,163 3,155,521 3,248,935 2,869,022 2,812,080 2,616,110
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes,
extraordinary charge and
cumulative effect of change in
accounting for income taxes... 65,722 51,152 125,507 (6,154) 114,795 87,640 6,148
Provision for income taxes...... 26,289 20,461 73,481 1,969 37,882 29,684 4,203
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary charge and
cumulative effect of change in
accounting for income taxes... 39,433 30,691 52,026 (8,123) 76,913 57,956 1,945
Extraordinary charge, net of
income taxes of $1,099 in
1996, $1,188 in 1994, $1,155
in 1993 and $5,415 in 1992.... -- -- (1,726) -- (2,412) (2,345) (8,835)
Cumulative effect of change in
accounting for income taxes... -- -- -- -- -- -- (5,454)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............... $ 39,433 $ 30,691 $ 50,300 $ (8,123) $ 74,501 $ 55,611 $ (12,344)
=========== =========== =========== =========== =========== =========== ===========
Net income (loss) applicable to
common shares................. $ 39,433 $ 30,691 $ 50,300 $ (14,998) $ 66,251 $ 31,173 $ (13,344)
=========== =========== =========== =========== =========== =========== ===========
Income (loss) per share of
common stock:
Before redemption premium on
preferred stock,
extraordinary charge and
cumulative effect of change
in accounting for income
taxes....................... $ .40 $ .31 $ .52 $ (.16) $ .79 $ .66 $ .01
Redemption premium on
preferred stock............. -- -- -- -- -- (.25) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Before extraordinary charge
and cumulative effect of
change in accounting for
income taxes................ .40 .31 .52 (.16) .79 .41 .01
Extraordinary charge.......... -- -- (.02) -- (.03) (.03) (.11)
Cumulative effect of change in
accounting for income
taxes....................... -- -- -- -- -- -- (.07)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............. $ .40 $ .31 $ .50 $ (.16) $ .76 $ .38 $ (.17)
=========== =========== =========== =========== =========== =========== ===========
Shares used to compute per share
amounts....................... 99,230,000 100,028,000 99,646,000 92,233,000 87,087,000 81,207,000 77,685,000
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................... $ 2,490,966 $ 2,524,904 $ 2,525,082 $ 2,506,461 $ 2,322,578 $ 2,000,804 $ 1,859,361
Current portion of long-term
obligations................... $ 35,669 $ 37,710 $ 38,826 $ 84,639 $ 60,199 $ 43,125 $ 30,466
Long-term obligations, excluding
current
portion....................... $ 1,018,551 $ 1,076,462 $ 1,106,256 $ 1,066,909 $ 918,018 $ 706,917 $ 712,896
Stockholders' equity............ $ 890,717 $ 843,217 $ 861,095 $ 820,333 $ 827,244 $ 742,862 $ 593,505
OTHER DATA:
Patient days.................... 11,173,000 11,902,000 23,670,000 25,297,000 26,766,000 29,041,000 29,341,000
Average occupancy percentage
(based on licensed beds)...... 86.5% 87.3% 87.4% 88.1% 88.5% 88.5% 88.4%
Number of nursing home beds..... 64,206 72,022 71,204 75,669 78,058 85,001 89,298
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of financial condition and results of operations
for Beverly includes both the Remaining Healthcare Business and the
Institutional Pharmacy Business. After the Distribution and the Merger, the
financial condition and results of operations of New Beverly will not include
those of the Institutional Pharmacy Business. The following discussion is based
upon and should be read in conjunction with the Selected Historical Consolidated
Financial Data, the Unaudited Pro Forma Condensed Consolidated Financial
Statements and the historical consolidated financial statements of Beverly and
the notes thereto, included elsewhere herein.
GENERAL
Healthcare system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for both federal and state governments.
Although no comprehensive healthcare, Medicare or Medicaid reform legislation
has yet been implemented, pressures to contain costs and the active discussions
between the Clinton Administration, Congress and various other groups have
impacted the healthcare delivery system. Many states are experimenting with
alternatives to traditional Medicaid delivery systems through federal waiver
programs, and efforts to provide these services more efficiently will continue
to be a priority. In August 1996, Congress passed the Health Insurance
Portability and Accountability Act of 1996 which, among other things, provides
favorable changes in the tax treatment of long-term care insurance and allows
inclusion of long-term care insurance in medical savings accounts. Although
Beverly believes this legislation will have a favorable impact on the long-term
care industry, the full effect is not readily determinable. There can be no
assurances made as to the ultimate impact of this, or future healthcare reform
legislation, on New Beverly's financial position, results of operations or cash
flows. However, future federal budget legislation and regulatory changes may
negatively impact New Beverly.
During the first quarter of 1997, proposed rules were issued by the Health
Care Financing Administration of the Department of Health and Human Services
which, if implemented in their proposed form, would establish guidelines for
maximum reimbursement to skilled nursing facilities for contracted speech and
occupational therapy services, based on equivalent salary amounts for on-staff
therapists. In addition, these proposed rules would revise the salary
equivalency rules already in effect for physical therapy services. The full
effect of the new rules is not readily determinable as the details of the
proposal have not yet been finalized; however, New Beverly does not expect this
will have a material adverse effect on its consolidated results of operations or
cash flows.
The federal government recently increased the minimum wage in two phases,
beginning October 1, 1996 and September 1, 1997, respectively. This new
legislation did not result in a material increase in Beverly's wage rates in
1996, and Beverly does not anticipate a material impact on its wage rates in
1997, because a substantial portion of Beverly's associates earn in excess of
the new minimum wage levels; however, Beverly believes there may continue to be
competitive pressures to increase the wage levels of associates earning above
the new minimum wage. The effect of the new minimum wage on New Beverly's future
operations is not expected to be material as New Beverly believes that a
significant portion of such increase will be reimbursed through Medicare and
Medicaid rate increases.
New Beverly's future operating performance will be affected by the issues
facing the long-term healthcare industry as a whole, including the maintenance
of occupancy, its ability to continue to expand higher margin businesses, the
availability of nursing, therapy and other personnel, the adequacy of funding of
governmental reimbursement programs, the demand for nursing home care and the
nature of any healthcare reform measures that may be taken by the federal
government, as discussed above, as well as by any state governments. New
Beverly's ability to control costs, including its wages and related expenses
which continue to rise and will represent the largest component of New Beverly's
operating and administrative expenses, will also significantly impact its future
operating results.
As a general matter, increases in operating costs of New Beverly will
result in higher patient rates under Medicaid programs in subsequent periods.
However, New Beverly's results of operations will continue to be affected by the
time lag in most states between increases in reimbursable costs and the receipt
of related
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reimbursement rate increases. Medicaid rate increases, adjusted for inflation,
are generally based upon changes in costs for a full calendar year period. The
time lag before such costs are reflected in permitted rates varies from state to
state, with a substantial portion of the increases taking effect up to 18 months
after the related cost increases.
OPERATING RESULTS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Beverly's net income was $39,433,000 for the six months ended June 30,
1997, as compared to $30,691,000 for the same period in 1996. Beverly's income
before provision for income taxes was $65,722,000 for the six months ended June
30, 1997, as compared to $51,152,000 for the same period in 1996. Beverly's
estimated annual effective tax rate of 40% for 1997 and 1996 was different than
the federal statutory rate primarily due to the impact of state income taxes and
amortization of nondeductible goodwill.
Excluding the Institutional Pharmacy Business, net income for the six
months ended June 30, 1997 would have been $23,318,000 as compared to
$18,960,000 for the same period in 1996. Income before provision for income
taxes for the six months ended June 30, 1997, excluding the Institutional
Pharmacy Business, would have been $38,186,000, as compared to $30,940,000 for
the same period in 1996. Excluding the Institutional Pharmacy Business,
Beverly's estimated annual effective tax rate for the six months ended June 30,
1997 and 1996 would have been 38.9% and 38.7%, respectively.
Beverly's net operating revenues and operating and administrative costs
increased approximately $24,800,000 and $7,700,000, respectively, for the six
months ended June 30, 1997, as compared to the same period in 1996. These
increases consist of the following: increases in net operating revenues and
operating and administrative costs of approximately $72,800,000 and $51,900,000,
respectively, for facilities which Beverly operated during each of the six-month
periods ended June 30, 1997 and 1996 ("same facility operations"); increases in
net operating revenues and operating and administrative costs of approximately
$42,200,000 and $37,300,000, respectively, related to the acquisitions of eight
nursing facilities in 1996, as well as certain pharmacy, hospice and outpatient
therapy businesses acquired in 1996 and 1997; partially offset by decreases in
net operating revenues and operating and administrative costs of approximately
$90,200,000 and $81,500,000, respectively, due to the disposition of, or lease
terminations on, 59 nursing facilities in 1997 and 83 nursing facilities and
Beverly's MedView Services unit ("MedView") in 1996.
Excluding the Institutional Pharmacy Business, net operating revenues would
have decreased approximately $16,000,000 for the six months ended June 30, 1997,
as compared to the same period in 1996. This decrease consisted of the
following: a decrease of approximately $90,200,000 due to certain dispositions,
as noted above; partially offset by increases of approximately $49,500,000 for
same facility operations and increases of approximately $24,700,000 related to
acquisitions of nursing facilities, hospices and outpatient therapy clinics.
Excluding the Institutional Pharmacy Business, operating and administrative
costs would have decreased approximately $23,500,000 for the six months ended
June 30, 1997, as compared to the same period in 1996. This decrease consisted
of the following: decreases of approximately $81,500,000 due to certain
dispositions, as noted above; partially offset by increases of approximately
$35,400,000 for same facility operations and increases of approximately
$22,600,000 related to acquisitions of nursing facilities, hospices and
outpatient therapy clinics.
The increase in Beverly's net operating revenues for same facility
operations for the six months ended June 30, 1997, as compared to the same
period in 1996, was due to the following: approximately $56,800,000 due
primarily to increases in room and board rates; approximately $23,400,000 due to
increases in pharmacy-related revenues and approximately $4,500,000 due
primarily to increases in ancillary revenues and various other items. These
increases in Beverly's net operating revenues were partially offset by
approximately $6,600,000 due to a decrease in same facility occupancy to 89.4%
for the six months ended June 30, 1997, as compared to 90.0% for the same period
in 1996 based on operational beds; and approximately $5,300,000 due to one less
calendar day for the six months ended June 30, 1997, as compared to the same
period in 1996.
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Excluding the Institutional Pharmacy Business, the increase in net
operating revenues for same facility operations for the six months ended June
30, 1997, as compared to the same period in 1996, was due to the following:
approximately $56,800,000 due primarily to increases in room and board rates and
approximately $4,600,000 due primarily to increases in ancillary revenues and
various other items; partially offset by approximately $6,600,000 due to a
decrease in same facility occupancy, and approximately $5,300,000 due to one
less calendar day for the six months ended June 30, 1997, as compared to the
same period in 1996.
The increase in Beverly's operating and administrative costs for same
facility operations for the six months ended June 30, 1997, as compared to the
same period in 1996, was due to the following: approximately $31,900,000 due to
increased wages and related expenses (excluding pharmacy) principally due to
higher wages and greater benefits required to attract and retain qualified
personnel, the hiring of therapists on staff as opposed to contracting for their
services and increased staffing levels in Beverly's nursing facilities to cover
increased patient acuity; approximately $17,000,000 due to increases in
pharmacy-related costs; approximately $3,200,000 due to increases in nursing
supplies and other variable costs; and approximately $15,500,000 due to various
other items. These increases in Beverly's operating and administrative costs
were partially offset by approximately $15,700,000 due to a decrease in
contracted therapy expenses as a result of hiring therapists on staff as opposed
to contracting for their services.
Excluding the Institutional Pharmacy Business, the increase in operating
and administrative costs for same facility operations for the six months ended
June 30, 1997, as compared to the same period in 1996, was due to the following:
approximately $31,900,000 due to increased wages and related expenses;
approximately $3,200,000 due to increases in nursing supplies and other variable
costs; and approximately $16,000,000 due to various other items; partially
offset by approximately $15,700,000 due to a decrease in contracted therapy
expenses.
Beverly's interest expense decreased approximately $1,400,000 as compared
to the same period in 1996 primarily due to repayments of the term loan and
revolver borrowings under Beverly's 1994 Credit Agreement, the term loan under
Beverly's 1992 Credit Facility and the Nippon Term Loan during late 1996 with
the proceeds from a new credit facility. The increase in Beverly's depreciation
and amortization expense of approximately $3,800,000 as compared to the same
period in 1996, was affected by the following: approximately $6,300,000 increase
primarily due to capital additions and improvements, as well as, acquisitions;
partially offset by a decrease of approximately $2,500,000 related to the
disposition of, or lease terminations on, certain nursing facilities and
MedView.
The Institutional Pharmacy Business had an immaterial effect on the change
in interest expense for the six months ended June 30, 1997, as compared to the
same period in 1996. Excluding the Institutional Pharmacy Business, depreciation
and amortization expense increased approximately $1,700,000 for the six months
ended June 30, 1997, as compared to the same period in 1996. Such increase was
due to the following: approximately $4,200,000 increase primarily due to capital
additions and improvements, as well as, acquisitions; partially offset by a
decrease of approximately $2,500,000 related to the disposition of, or lease
terminations on, certain nursing facilities and MedView.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which is
required to be adopted in financial statements for periods ending after December
15, 1997. At that time, New Beverly will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements, primary earnings per share will be renamed basic
earnings per share and will exclude the dilutive effect of stock options. The
impact is not expected to result in a change in New Beverly's primary earnings
per share or fully diluted earnings per share (which will be renamed dilutive
earnings per share) for the six-month periods ended June 30, 1997 and 1996.
1996 Compared to 1995
Beverly's net income was $50,300,000 for the year ended December 31, 1996,
as compared to a net loss of $8,123,000 for the same period in 1995. Beverly's
net income for 1996 included a $1,726,000 extraordinary charge, net of income
taxes, related to the write-off of unamortized deferred financing costs related
to certain
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refinanced debt. Beverly's net loss for 1995 included a pre-tax charge of
$100,277,000 for impaired long-lived assets related primarily to the adoption of
SFAS No. 121 (as defined below) and the write-off of software and business
development costs, as well as a charge of $4,000,000 related to an overhead and
staff reduction program implemented during the fourth quarter of 1995.
Excluding the Institutional Pharmacy Business, net income for the year
ended December 31, 1996 would have been $31,739,000 as compared to a net loss of
$12,709,000 for the same period in 1995. Excluding the Institutional Pharmacy
Business, the net loss for 1995 would have included a pre-tax charge of
$90,734,000 for impaired long-lived assets related primarily to the adoption of
SFAS No. 121 and the write-off of software costs as well as the $4,000,000
overhead and staff reduction charge, as mentioned above.
Beverly had an annual effective tax rate of 59% for the year ended December
31, 1996, compared to a negative annual effective tax rate of 32% for the same
period in 1995. Beverly's annual effective tax rate in 1996 was different than
the federal statutory rate primarily due to the impact of nondeductible goodwill
associated with the sale of MedView. In addition, Beverly's annual effective tax
rate in 1995 was different than the federal statutory rate primarily due to the
impact of nondeductible goodwill included in the adjustments resulting from the
adoption of SFAS No. 121. At December 31, 1996, Beverly had general business tax
credit carryforwards of $12,236,000 for income tax purposes which expire in
years 2005 through 2011. For financial reporting purposes, the general business
tax credit carryforwards have been utilized to offset existing net taxable
temporary differences reversing during the carryforward periods.
Excluding the Institutional Pharmacy Business, Beverly would have had an
annual effective tax rate of 64.9% for the year ended December 31, 1996, as
compared to an annual effective tax rate of 24% for the same period in 1995.
Beverly's net operating revenues increased approximately $38,600,000 for
the year ended December 31, 1996, as compared to the same period in 1995. This
increase consisted of the following: increases of approximately $62,300,000 for
facilities which Beverly operated during each of the years ended December 31,
1996 and 1995 ("same facility operations"); increases of approximately
$91,700,000 related to the acquisition of Pharmacy Management Services, Inc.
("PMSI") in mid-1995, acquisitions of eight nursing facilities, and certain
pharmacy, hospice and outpatient therapy businesses during 1996 and the expanded
operations of American Transitional Hospitals, Inc. ("ATH"); partially offset by
decreases of approximately $115,400,000 due to the disposition of, or lease
terminations on, 83 nursing facilities and MedView in 1996 and 29 nursing
facilities in 1995. Beverly's operating and administrative costs decreased
approximately $1,900,000 for the year ended December 31, 1996, as compared to
the same period in 1995. This decrease consisted of the following: decreases of
approximately $114,200,000 due to the disposition of, or lease terminations on,
83 nursing facilities and MedView in 1996 and 29 nursing facilities in 1995;
offset by increases of approximately $39,000,000 for same facility operations
and increases of approximately $73,300,000 related to the acquisition of PMSI in
mid-1995, acquisitions of eight nursing facilities, and certain pharmacy,
hospice and outpatient therapy businesses during 1996 and the expanded
operations of ATH.
Excluding the Institutional Pharmacy Business, net operating revenues would
have decreased approximately $18,000,000 for the year ended December 31, 1996,
as compared to the same period in 1995. This decrease consisted of the
following: a decrease of approximately $115,400,000 due to certain dispositions,
as noted above; partially offset by increases of approximately $57,800,000 for
same facility operations; and increases of approximately $39,600,000 related to
acquisitions of nursing facilities, hospices and outpatient therapy clinics, the
acquisition of MedView in mid-1995 and the expanded operations of ATH. Excluding
the Institutional Pharmacy Business, operating and administrative costs would
have decreased approximately $40,500,000 for the year ended December 31, 1996,
as compared to the same period in 1995. This decrease consisted of the
following: decreases of approximately $114,200,000 due to certain dispositions,
as noted above; partially offset by increases of approximately $39,500,000 for
same facility operations and increases of approximately $34,200,000 related to
acquisitions of nursing facilities, hospices and outpatient therapy clinics, the
acquisition of MedView in mid-1995 and the expanded operations of ATH.
The increase in Beverly's net operating revenues for same facility
operations for the year ended December 31, 1996, as compared to the same period
in 1995, was due to the following: approximately
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$110,500,000 due primarily to increases in room and board rates; and
approximately $5,600,000 due to one additional calendar day for the year ended
December 31, 1996, as compared to the same period in 1995. These increases in
Beverly's net operating revenues were partially offset by approximately
$28,500,000 due to a decrease in same facility occupancy to 87.7% for the year
ended December 31, 1996, as compared to 88.9% for the same period in 1995;
approximately $19,700,000 due to decreases in ancillary revenues primarily due
to Beverly's continuing efforts to bring therapists on staff as opposed to
contracting for their services; and approximately $5,600,000 due to various
other items.
Excluding the Institutional Pharmacy Business, the increase in net
operating revenues for same facility operations for the year ended December 31,
1996, as compared to the same period in 1995, was due to the following:
approximately $110,500,000 due primarily to increases in room and board rates;
and approximately $5,600,000 due to one additional calendar day for the year
ended December 31, 1996, as compared to the same period in 1995. These increases
in net operating revenues were partially offset by approximately $28,500,000 due
to a decrease in same facility occupancy; approximately $19,700,000 due to a
decrease in ancillary revenues primarily due to bringing therapists on staff;
and approximately $10,100,000 due to various other items.
The increase in Beverly's operating and administrative costs for same
facility operations for the year ended December 31, 1996, as compared to the
same period in 1995, was due to the following: approximately $109,000,000 due to
increased wages and related expenses (excluding pharmacy) principally due to
higher wages and greater benefits required to attract and retain qualified
personnel, the hiring of therapists on staff as opposed to contracting for their
services and increased staffing levels in Beverly's nursing facilities to cover
increased patient acuity; approximately $8,300,000 due to increases in nursing
supplies and other variable costs; and approximately $19,100,000 due to various
other items. These increases in Beverly's operating and administrative costs
were partially offset by approximately $93,400,000 due to a decrease in
contracted therapy expenses as a result of hiring therapists on staff as opposed
to contracting for their services; and approximately $4,000,000 due to an
overhead and staff reduction program implemented during the fourth quarter of
1995.
Excluding the Institutional Pharmacy Business, the increase in operating
and administrative costs for same facility operations for the year ended
December 31, 1996, as compared to the same period in 1995, was due to the
following: approximately $109,000,000 due to increased wages and related
expenses; approximately $8,300,000 due to increases in nursing supplies and
other variable costs; and approximately $15,600,000 due to various other items.
These increases in operating and administrative costs were partially offset by
approximately $93,400,000 due to a decrease in contracted therapy expenses.
Beverly's interest expense increased approximately $6,900,000 as compared
to the same period in 1995 primarily due to the exchange of Preferred Stock into
5 1/2% Debentures in November 1995, the issuance and assumption of approximately
$40,000,000 of long-term obligations in conjunction with certain acquisitions
and the issuance of $25,000,000 of taxable revenue bonds during 1995, partially
offset by a reduction of approximately $52,800,000 of long-term obligations in
conjunction with the disposition of certain facilities. Although Beverly's
depreciation and amortization expense increased only $1,900,000 as compared to
the same period in 1995, it was affected by the following: approximately
$5,800,000 increase primarily due to capital additions and improvements and, to
a lesser extent, acquisitions; partially offset by a decrease of approximately
$3,900,000 related to the disposition of, or lease terminations on, certain
nursing facilities.
The Institutional Pharmacy Business had an immaterial effect on the change
in interest expense for the year ended December 31, 1996, as compared to the
same period in 1995. Excluding the Institutional Pharmacy Business, depreciation
and amortization expense decreased approximately $1,300,000 for the year ended
December 31, 1996, as compared to the same period in 1995, primarily due to the
disposition of, or lease terminations on certain nursing facilities, partially
offset by an increase due to capital additions and improvements.
1995 Compared to 1994
Beverly's net loss was $8,123,000 for the year ended December 31, 1995, as
compared to net income of $74,501,000 for the same period in 1994. Net loss for
1995 included a pre-tax charge of $100,277,000 for
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impaired long-lived assets related primarily to the adoption of SFAS No. 121 (as
defined below) and the write-off of software and business development costs, as
well as a charge of $4,000,000 related to an overhead and staff reduction
program implemented during the fourth quarter of 1995. Net income for 1994
included a $2,412,000 extraordinary charge, net of income taxes, related to the
write-off of unamortized deferred financing costs related to certain refinanced
debt.
Excluding the Institutional Pharmacy Business, net loss for the year ended
December 31, 1995 would have been $12,709,000 as compared to a net income of
$61,855,000 for the same period in 1994. Excluding the Institutional Pharmacy
Business, the net loss for 1995 would have included a pre-tax charge of
$90,734,000 for impaired long-lived assets related primarily to the adoption of
SFAS No. 121 and the write-off of software costs, as well as the $4,000,000
overhead and staff reduction charge, as mentioned above.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amounts. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount.
In the fourth quarter of 1995, Beverly recorded an impairment loss of
approximately $68,130,000 upon adoption of SFAS No. 121. Such loss primarily
related to certain nursing facilities, transitional hospitals, institutional
pharmacies and assisted living centers with current period operating losses.
Such current period operating losses, combined with a history of operating
losses and anticipated future operating losses, led management to believe that
impairment existed at such facilities. In addition, there were certain nursing
facilities for which management expected an adverse impact on future earnings
and cash flows as a result of recent changes in state Medicaid reimbursement
programs. Accordingly, management estimated the undiscounted future cash flows
to be generated by each facility. If the undiscounted future cash flow estimates
were less than the carrying value of the corresponding facility, management
estimated the fair value of such facility and wrote the carrying value down to
their estimate of fair value. Management calculated the fair value of the
impaired facilities by using the present value of estimated future cash flows,
or its best estimate of what such facility, or similar facilities in that state,
would sell for in the open market. Management believes it has the knowledge to
make such estimates of open market sales prices based on the volume of
facilities Beverly has purchased and sold in previous years.
In addition to the SFAS No. 121 charge, Beverly recorded a fourth quarter
impairment loss for other long-lived assets of approximately $32,147,000
primarily related to the write-off of software and business development costs.
During the fourth quarter of 1995, Beverly hired a new Senior Vice President of
Information Technology, who redirected Beverly's systems development
initiatives, causing a write-down, or a write-off, of certain software and
software development projects. In addition, Beverly wrote off certain business
development and other costs where Beverly believed the carrying amount was
unrecoverable.
The impairment loss recorded upon adoption of SFAS No. 121, excluding the
Institutional Pharmacy Business, would have been approximately $62,738,000 and
the impairment loss for other long-lived assets would have been approximately
$27,996,000, excluding the Institutional Pharmacy Business.
Beverly had a negative annual effective tax rate of 32% for the year ended
December 31, 1995, compared to an annual effective tax rate of 33% for the same
period in 1994. Beverly's annual effective tax rate in 1995 was different than
the federal statutory rate primarily due to the impact of nondeductible goodwill
included in the adjustments resulting from the adoption of SFAS No. 121. In
addition, Beverly's 1994 annual effective tax rate was lower than the federal
statutory rate primarily due to the utilization of certain tax credit
carryforwards, partially offset by the impact of state income taxes. At December
31, 1995, Beverly had general business tax credit carryforwards of $20,784,000
for income tax purposes which expire in years 2005 through 2009. For financial
reporting purposes, the general business tax credit carryforwards have been
utilized to offset existing net taxable temporary differences reversing during
the carryforward periods. Due to taxable losses in prior years, future taxable
income was not assumed and a valuation allowance of $198,000 for the year ended
December 31, 1994 was recognized to offset the deferred tax assets related to
those carryforwards. Beverly's valuation allowance was eliminated in 1995 due to
the utilization of general business tax credits.
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Excluding the Institutional Pharmacy Business, Beverly would have had an
annual effective tax rate of 24% for the year ended December 31, 1995, as
compared to an annual effective tax rate of 30.8% for the same period in 1994.
Beverly's net operating revenues and operating and administrative costs
increased approximately $259,300,000 and $245,300,000, respectively, for the
year ended December 31, 1995, as compared to the same period in 1994. These
increases consist of the following: increases in net operating revenues and
operating and administrative costs for facilities which Beverly operated during
each of the years ended December 31, 1995 and 1994 ("same facility operations")
of approximately $157,600,000 and $148,900,000, respectively; increases in net
operating revenues and operating and administrative costs of approximately
$239,500,000 and $222,400,000, respectively, related to the expanded operations
of ATH and the acquisitions of Insta-Care Holdings, Inc. ("Insta-Care") and
Synetic, Inc. ("Synetic") in late 1994 as well as PMSI in mid-1995; and
decreases in net operating revenues and operating and administrative costs of
approximately $137,800,000 and $126,000,000, respectively, due to the
disposition of, or lease terminations on, 29 facilities in 1995 and 77
facilities in 1994.
Excluding the Institutional Pharmacy Business, net operating revenues and
operating and administrative costs would have increased approximately
$51,900,000 and $39,900,000, respectively, for the year ended December 31, 1995,
as compared to the same period in 1994. These increases consist of the
following: increases in net operating revenues and operating and administrative
costs of $139,900,000 and $127,600,000 for same facility operations,
respectively; increases in net operating revenues and operating and
administrative costs of approximately $49,800,000 and $38,300,000, respectively,
related to the acquisition of MedView in mid-1995 and the expanded operations of
ATH; and decreases in net operating revenues and operating and administrative
costs of approximately $137,800,000 and $126,000,000, respectively, due to
certain dispositions, as noted above.
The increase in Beverly's net operating revenues for same facility
operations for the year ended December 31, 1995, as compared to the same period
in 1994, was due to the following: approximately $111,800,000 due primarily to
increases in Medicaid room and board rates, and to a lesser extent, private and
Medicare room and board rates; approximately $37,500,000 due primarily to
increases in pharmacy-related revenues; approximately $23,000,000 due to
increased ancillary revenues as a result of providing additional ancillary
services to Beverly's Medicare and private-pay patients; and approximately
$8,300,000 due to various other items. These increases in Beverly's net
operating revenues were partially offset by approximately $23,000,000 due to a
decrease in same facility occupancy to 88.5% for the year ended December 31,
1995, as compared to 89.5% for the same period in 1994.
Excluding the Institutional Pharmacy Business, the increase in net
operating revenues for same facility operations for the year ended December 31,
1995, as compared to the same period in 1994, was due to the following:
approximately $111,800,000 due primarily to increases in room and board rates;
approximately $23,000,000 due to increased ancillary revenues; and approximately
$28,100,000 due to various other items. These increases in net operating
revenues were partially offset by approximately $23,000,000 due to a decrease in
same facility occupancy.
The increase in Beverly's operating and administrative costs for same
facility operations for the year ended December 31, 1995, as compared to the
same period in 1994, was due to the following: approximately $125,700,000 due to
increased wages and related expenses (excluding pharmacy) principally due to
higher wages and greater benefits required to attract and retain qualified
personnel, the hiring of therapists on staff as opposed to contracting for their
services and increased staffing levels in Beverly's nursing facilities to cover
increased patient acuity; approximately $4,000,000 due to an overhead and staff
reduction program implemented during the fourth quarter of 1995; approximately
$38,100,000 due to increases in nursing supplies and other variable costs; and
approximately $38,800,000 due primarily to increases in pharmacy-related costs
and various other items. These increases in Beverly's operating and
administrative costs were partially offset by approximately $57,700,000 due to a
decrease in contracted therapy expenses as a result of hiring therapists on
staff as opposed to contracting for their services.
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Excluding the Institutional Pharmacy Business, the increase in operating
and administrative costs for same facility operations for the year ended
December 31, 1995, as compared to the same period in 1994, was due to the
following: approximately $125,700,000 due to increased wages and related
expenses; approximately $4,000,000 due to the overhead and staff reduction
program discussed above; approximately $38,100,000 due to increases in nursing
supplies and other variable costs; and approximately $17,500,000 due to various
other items. These increases in operating and administrative costs were
partially offset by approximately $57,700,000 due to a decrease in contracted
therapy expenses.
Beverly's interest expense increased approximately $19,500,000 as compared
to the same period in 1994 primarily due to additional interest related to the
issuance of approximately $308,000,000 of long-term obligations during late 1994
and in 1995 primarily in conjunction with certain acquisitions. Beverly's
depreciation and amortization expense increased approximately $14,800,000 as
compared to the same period in 1994 primarily due to acquisitions, capital
additions and improvements and the opening of newly constructed facilities,
partially offset by a decrease due to the dispositions of, or lease terminations
on, certain facilities.
The Institutional Pharmacy Business had no effect on the increase in
interest expense for the year ended December 31, 1995, as compared to the same
period in 1994. Excluding the Institutional Pharmacy Business, depreciation and
amortization expense increased approximately $7,400,000 for the year ended
December 31,1995, as compared to the same period in 1994 primarily due to
capital additions and improvements and the opening of newly constructed
facilities, partially offset by a decrease due to the dispositions of, or lease
terminations on, certain facilities.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, Beverly had approximately $71,800,000 in cash and cash
equivalents and net working capital of approximately $330,200,000. Beverly
anticipates that approximately $42,700,000 of its existing cash at June 30,
1997, while not legally restricted, will be utilized to fund certain workers'
compensation and general liability claims, and Beverly does not expect to use
such cash for other purposes. Beverly had approximately $249,200,000 of unused
commitments under its Existing Credit Facility as of June 30, 1997.
Excluding the Institutional Pharmacy Business, cash and cash equivalents
were approximately $65,100,000 and net working capital was approximately
$222,100,000 as of June 30, 1997.
Beverly's net cash provided by operating activities for the six months
ended June 30, 1997 was approximately $61,500,000, an increase of approximately
$4,500,000 from the prior year. Beverly's net cash provided by investing
activities and net cash used for financing activities were approximately
$42,900,000 and $102,400,000, respectively, for the six months ended June 30,
1997. Beverly primarily used cash generated from operations to fund capital
expenditures totaling approximately $70,300,000. Beverly received net cash
proceeds of approximately $143,400,000 from the dispositions of facilities and
other assets and approximately $18,400,000 from collections on notes receivable
and Beverly's REMIC investment. Such net cash proceeds were used to fund
acquisitions of approximately $45,400,000, to repay approximately $28,200,000 of
long-term obligations, to repurchase shares of Beverly Common Stock, and to
repay borrowings under its Existing Credit Facility.
Excluding the Institutional Pharmacy Business, net cash provided by
operating activities for the six months ended June 30, 1997 was approximately
$49,200,000, an increase of approximately $8,600,000 from the prior year. Net
cash provided by investing activities and net cash used for financing
activities, excluding the Institutional Pharmacy Business, were approximately
$76,100,000 and $101,900,000, respectively, for the six months ended June 30,
1997. Excluding the Institutional Pharmacy Business, cash from operations were
used to fund capital expenditures totalling approximately $64,700,000. Excluding
the Institutional Pharmacy Business, net cash proceeds of approximately
$143,400,000 from the dispositions of facilities and other assets and
approximately $17,800,000 from collections on notes receivable and Beverly's
REMIC investment were used to fund acquisitions of approximately $17,800,000, to
repay approximately $27,700,000 of long-term obligations, to repurchase shares
of Beverly Common Stock, and to repay borrowings under its Existing Credit
Facility.
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In April 1997, Beverly entered into a definitive agreement with Capstone to
combine PCA with Capstone to create one of the nation's largest independent
institutional pharmacy companies. Beverly will receive approximately
$275,000,000 of cash as partial repayment for PCA's intercompany debt, with any
remaining intercompany balance contributed to PCA's capital. Beverly intends to
use the $275,000,000 to repay Revolver borrowings, to pay off the 7 5/8%
Debentures, to pay off the 8.75% Notes, to repay certain other notes and
mortgages and for general corporate purposes. Pursuant to the Merger Agreement,
at the Effective Time, each share of Beverly Common Stock issued and outstanding
immediately prior to the Effective Time (other than fractional shares) will be
converted into the right to receive that number of newly issued shares of
Capstone Common Stock equal to the quotient, expressed to four decimal places,
of (a) 50,000,000 divided by (b) the number of shares of Beverly Common Stock
outstanding immediately prior to the Effective Time. The Merger, which is
subject to approvals by the stockholders of both Beverly and Capstone,
completion of the Distribution (as discussed below), and approvals by various
government agencies, is expected to close by year-end.
In connection with the restructuring, Beverly will transfer all of its
non-PCA assets and liabilities to New Beverly, in exchange for the issuance of
New Beverly Common Stock. Beverly will then distribute such New Beverly Common
Stock to the holders of Beverly's Common Stock on a one-for-one basis. In
connection with the Distribution, Beverly will be required to restructure, repay
or otherwise renegotiate substantially all of its outstanding debt instruments
and renegotiate or make certain payments under various employment agreements
with officers of Beverly. Beverly estimates that the costs of such undertakings
will approximate $10,200,000 as it relates to restructuring, repaying or
renegotiating debt instruments and approximately $17,000,000 as it relates to
renegotiating or paying certain amounts under various employment agreements. It
is expected that such amounts, along with other transaction costs, will be
funded with a portion of the $275,000,000 proceeds to be received as a partial
repayment of PCA's intercompany debt, as discussed above. For additional
information with respect to material debt instruments of Beverly which affect
the liquidity and capital resources of both Beverly and New Beverly, and
Beverly's current intentions with respect thereto in order to satisfy its
covenants under the Merger Agreement, see "Treatment of Beverly Indebtedness."
On July 17, 1997, Beverly called its 5 1/2% Debentures for redemption on
August 18, 1997. A total of $149,162,550 of the $150 million aggregate principal
amount outstanding was converted to 11,189,924 shares of Beverly Common Stock,
increasing the outstanding shares of Beverly Common Stock by that amount. The
payment of the redemption price of 103.3% of the remaining principal amount plus
the cash in lieu of fractional shares was within the amount permitted under the
restrictive payment provisions of the 9% Indenture.
Beverly believes that its existing cash and cash equivalents, working
capital from operations, borrowings under its banking arrangements, issuance of
certain debt securities and refinancings of certain existing indebtedness will
be adequate to repay its debts due within one year of approximately $35,700,000
(including scheduled sinking fund redemption requirements with respect to
Beverly's 7 5/8% Debentures, which may be funded in whole or in part from time
to time through open market purchases of such debentures), to make normal
recurring capital additions and improvements of approximately $138,000,000, to
make selective acquisitions, including the purchase of previously leased
facilities, to construct new facilities, and to meet working capital
requirements for the twelve months ending June 30, 1998.
As of June 30, 1997, Beverly had total indebtedness of approximately
$1,054,200,000 and total stockholders' equity of approximately $890,700,000. On
a pro forma basis, as of June 30, 1997, after giving effect to the Merger, the
Distribution and all transactions contemplated thereby, as described in the
section captioned "Capitalization," above, New Beverly would have total
indebtedness of approximately $685,300,000 and stockholders' equity of
approximately $835,700,000. The ability of Beverly, or New Beverly, to satisfy
its long-term obligations will be dependent upon its future performance, which
will be subject to prevailing economic conditions and to financial, business and
other factors beyond Beverly's, or New Beverly's, control, such as federal and
state healthcare reform. In addition, healthcare service providers operate in an
industry that is currently subject to significant changes from business
combinations, new strategic alliances, legislative reform, increased regulatory
oversight, aggressive marketing practices by competitors and market pressures.
In this environment, Beverly is, and it is expected that New Beverly will be,
frequently contacted by, and
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otherwise engage in discussions with, other healthcare companies and financial
advisors regarding possible strategic alliances, joint ventures, business
combinations and other financial alternatives. The terms of substantially all of
New Beverly's debt instruments will require New Beverly to repay or refinance
indebtedness under such debt instruments in the event of a change of control.
There can be no assurance that New Beverly will have the financial resources to
repay such indebtedness upon a change of control. See " -- General."
Following the Distribution and Merger, New Beverly believes that its cash
and cash equivalents, working capital from operations, borrowings under its
banking arrangements, issuance of certain debt securities and refinancings of
certain existing indebtedness will be adequate to repay its debts due within one
year, to make normal recurring capital additions and improvements, to make
selective acquisitions, including the purchase of previously leased facilities,
to construct new facilities and to meet working capital requirements. On a pro
forma basis, as of June 30, 1997, New Beverly would have debts due within one
year of approximately $24,100,000 and normal recurring capital additions and
improvements for the twelve months ending June 30, 1998 of approximately
$118,000,000.
BUSINESS
GENERAL
References herein to Beverly include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries. References herein to New Beverly are to the Remaining
Healthcare Business after the consummation of the Transactions. Immediately
following the completion of the Transactions, New Beverly will change its name
to Beverly Enterprises, Inc.
The business of Beverly consists principally of providing long-term
healthcare, including the operation of nursing facilities, acute long-term
transitional hospitals, institutional and mail service pharmacies,
rehabilitation therapy services, outpatient therapy clinics, assisted living
centers, hospices and home healthcare centers. The business of New Beverly will
consist of all of the operations of Beverly except the institutional and mail
service pharmacies.
Beverly is, and New Beverly is expected to be one of the largest operators
of nursing facilities in the United States. At June 30, 1997, Beverly operated
574 nursing facilities with 64,206 licensed beds. The facilities are located in
31 states and the District of Columbia, and range in capacity from 20 to 355
beds. At June 30, 1997, Beverly also operated 74 pharmacies, 33 assisted living
centers containing 897 units, 12 transitional hospitals containing 639 beds, 46
outpatient therapy clinics, 21 hospices and six home healthcare centers. It is
expected that New Beverly will operate all of such businesses after the
Transactions, except for the 74 pharmacies. Beverly's facilities had average
occupancy of 86.5% for the six months ended June 30, 1997 and 87.4%, 88.1% and
88.5% during the years ended December 31, 1996, 1995 and 1994, respectively. See
"Properties" below.
Healthcare service providers, such as Beverly, and after the Transactions
New Beverly, operate in an industry that is subject to significant changes from
business combinations, new strategic alliances, legislative reform, aggressive
marketing practices by competitors and market pressures. In this environment,
Beverly is, and it is expected that New Beverly will be frequently contacted by,
and otherwise engage in discussions with, other healthcare companies and
financial advisors regarding possible strategic alliances, joint ventures,
business combinations and other financial alternatives.
OPERATIONS
New Beverly will be organized into three operating units, which will
support New Beverly's delivery of vertically integrated services to the
long-term healthcare market. These operating units include: (i) Beverly Health
and Rehabilitation Services, Inc. ("BHRS") and its subsidiaries provide
long-term and subacute care through the operation of nursing facilities and
assisted living centers; (ii) Spectra Rehab Alliance, Inc. ("Spectra") and its
subsidiaries operate outpatient therapy clinics, and hospices and manage
Beverly's rehabilitation services business; and (iii) ATH and its subsidiaries
operate Beverly's transitional hospitals.
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Each operating unit will be headed by a President who will be a senior officer
of New Beverly and will report directly to the President of New Beverly. Each of
the three operating units will also have a separate Board of Directors
consisting of four senior executives of New Beverly and the President of the
unit.
Long-Term Care. BHRS's nursing facilities provide, and BHRS will continue
to provide residents with routine long-term care services, including daily
dietary, social and recreational services and a full range of pharmacy services
and medical supplies. BHRS's highly skilled staff also offers complex and
intensive medical services to patients with higher acuity disorders outside the
traditional acute care hospital setting.
Rehabilitation Therapies. Spectra has developed, and will continue to
develop and expand New Beverly's healthcare expertise in rehabilitation and
provide skilled rehabilitation (occupational, physical, speech and respiratory)
therapies in substantially all of BHRS's nursing facilities. Through Spectra,
Beverly offers, and New Beverly will offer, industrial rehabilitation,
outpatient therapy clinics, acute hospital therapy contracts,
management/consulting rehabilitation programs and hospice programs within
Beverly's, and after the Transactions New Beverly's, network of facilities, and
to other healthcare providers.
Transitional Care. ATH operates, and will continue to operate, transitional
hospitals which address the needs of patients requiring intense therapy
regimens, but not necessarily the breadth of services provided within
traditional acute care hospitals. The typical ATH patient requires an average of
six hours of nursing care per day for 30 to 45 days.
Other Services. Beverly offers, and New Beverly will offer, other
healthcare related services to payors and patients, including assisted living
and home healthcare services, and information and referral systems that link
payors and employees to long-term care providers.
Pharmacy Services. PCA is one of the nation's largest institutional
pharmacies delivering drugs and related products and services, infusion therapy
and other healthcare products (enteral and urological) to nursing facilities,
acute care and transitional care hospitals, home care providers, psychiatric
facilities, correctional facilities, assisted living centers, retirement homes
and their patients. PCA also provides consultant pharmacist services, which
include evaluations of patient drug therapy, and drug handling, distribution and
administration within a nursing facility as well as assistance with state and
federal regulatory compliance. PCA's mail service pharmacy delivers drugs and
medical equipment to workers' compensation payors, claimants and employers.
Pursuant to the Merger Agreement and the Distribution Agreement, the Remaining
Healthcare Business of Beverly will be transferred to New Beverly and the
Institutional Pharmacy Business, operated by PCA, which will be the sole
remaining business of Beverly, will be merged with and into Capstone. See "The
Distribution" herein and "The Merger Agreement" in the Joint Proxy
Statement/Prospectus.
Beverly has, and New Beverly will have, a Quality Management ("QM") program
to help ensure that high quality care is provided in each of its nursing,
transitional and outpatient facilities. Beverly's QM program has been a key
factor in helping Beverly to exceed the industry's nationwide average compliance
statistics, as determined by the Health Care Financing Administration of the
Department of Health and Human Services ("HCFA"). Beverly's nationwide QM
network of healthcare professionals includes physician Medical Directors,
registered nurses, dieticians, social workers and other specialists who work in
conjunction with regional and facility based QM professionals. Facility based QM
is structured through Beverly's Quality Assessment and Assurance committee. With
a philosophy of quality improvement, Beverly-wide clinical indicators are
utilized as a database to set goals and monitor thresholds in critical areas
directly related to the delivery of healthcare related services. These internal
evaluations are used by local quality improvement teams, which include QM
advisors, to identify and correct possible problems. The Senior Vice President
of QM reports directly to the President of Beverly and the QM Committee of
Beverly's Board of Directors, and will report directly to the President of New
Beverly and the QM Committee of New Beverly's Board of Directors.
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GOVERNMENTAL REGULATION AND REIMBURSEMENT
Beverly's nursing facilities are, and New Beverly's nursing facilities will
be, subject to compliance with various federal, state and local healthcare
statutes and regulations. Compliance with state licensing requirements imposed
upon all healthcare facilities is a prerequisite for the operation of the
facilities and for participation in government-sponsored healthcare funding
programs, such as Medicaid and Medicare. Medicaid is a medical assistance
program for the indigent, operated by individual states with the financial
participation of the federal government. Medicare is a health insurance program
for the aged and certain other chronically disabled individuals, operated by the
federal government. Changes in the reimbursement policies of such funding
programs as a result of budget cuts by federal and state governments or other
legislative and regulatory actions could have a material adverse effect on
Beverly's and New Beverly's financial position, results of operations and cash
flows.
Beverly receives, and New Beverly will receive, payments for services
rendered to patients from (a) each of the states in which its nursing facilities
are located under the Medicaid program; (b) the federal government under the
Medicare program; and (c)private payors, including commercial insurers and
managed care payors, and Veterans Administration ("VA"). The following table
sets forth: (i) patient days derived from the indicated sources of payment as a
percentage of total patient days, (ii) room and board revenues derived from the
indicated sources of payment as a percentage of net operating revenues, and
(iii) ancillary and other revenues derived from all sources of payment as a
percentage of net operating revenues, for the periods indicated:
<TABLE>
<CAPTION>
MEDICAID MEDICARE PRIVATE AND VA
------------------ ------------------ ------------------ ANCILLARY
ROOM AND ROOM AND ROOM AND AND
PATIENT BOARD PATIENT BOARD PATIENT BOARD OTHER
DAYS REVENUES DAYS REVENUES DAYS REVENUES REVENUES
------- -------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Six months ended:
June 30, 1997................ 68% 40% 13% 13% 19% 15% 32%
Year ended:
December 31, 1996............ 69% 42% 12% 12% 19% 14% 32%
December 31, 1995............ 68% 43% 12% 11% 20% 15% 31%
December 31, 1994............ 68% 47% 12% 11% 20% 16% 26%
</TABLE>
Excluding revenues from the Institutional Pharmacy Business, Medicaid,
Medicare, Private and VA, and Ancillary and Other Revenues would have been 47%,
15%, 18% and 20%, respectively, as a percentage of net operating revenues for
the six months ended June 30, 1997.
Consistent with the long-term care industry in general, changes in the mix
of Beverly's, or New Beverly's, patient population among the Medicaid, Medicare
and private categories can significantly affect revenues and profitability.
Although the level of cost reimbursement for Medicare patients typically
generates the highest revenue per patient day, profitability is not
proportionally increased due to the additional costs associated with the
required higher level of nursing care and other services for such patients. In
most states, private patients are the most profitable, and Medicaid patients are
the least profitable.
Beverly has experienced significant growth in ancillary revenues over the
past several years. Ancillary revenues are derived from providing services to
residents beyond room, board and custodial care and include occupational,
physical, speech, respiratory and intravenous ("IV") therapy, as well as sales
of pharmaceuticals and other services. Such services are currently provided
primarily to Medicare and private pay patients, consistent with the trend in
healthcare of providing a broader range of services in a lower cost setting,
such as Beverly's nursing facilities. Beverly is pursuing, and New Beverly will
continue to pursue, further growth of ancillary revenues, through acquisitions
as well as internal expansion of specialty services such as rehabilitation. Due
to Beverly's continuing efforts to bring therapists on staff as opposed to
contracting for their services, and the corresponding reduction in costs, the
overall rate of growth in ancillary revenues has been adversely impacted.
Medicaid programs are currently in existence in all of the states in which
Beverly currently, and New Beverly will, operate nursing facilities. While these
programs differ in certain respects from state to state, they
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are all subject to federally-imposed requirements, and at least 50% of the funds
available under these programs are provided by the federal government under a
matching program.
Medicare and most state Medicaid programs utilize a cost-based
reimbursement system for nursing facilities which reimburses facilities for the
reasonable direct and indirect allowable costs incurred in providing routine
patient care services (as defined by the programs) plus, in certain states,
efficiency incentives or a return on equity, subject to certain cost ceilings.
These costs normally include allowances for administrative and general costs as
well as the costs of property and equipment (e.g. depreciation and interest,
fair rental allowance or rental expense). In some states, cost-based
reimbursement is subject to retrospective adjustment through cost report
settlement. In other states, payments made to a facility on an interim basis
that are subsequently determined to be less than or in excess of allowable costs
may be adjusted through future payments to the affected facility and to other
facilities owned by the same owner. State Medicaid reimbursement programs vary
as to methodology used to determine the level of allowable costs which are
reimbursed to operators.
Arkansas, California, Louisiana and Texas provide for reimbursement at a
flat daily rate, as determined by the responsible state agency. In all other
states with a Medicaid program in which Beverly currently operates, and in which
New Beverly will operate, payments are based upon facility-specific cost
reimbursement formulas established by the applicable state. The Medicaid and
Medicare programs each contain specific requirements which must be adhered to by
healthcare facilities in order to qualify under the programs.
Governmental funding for healthcare programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease program reimbursement to healthcare
facilities. Healthcare system reform and concerns over rising Medicare and
Medicaid costs continue to be high priorities for both federal and state
governments. Although no comprehensive healthcare, Medicare or Medicaid reform
legislation has yet been implemented, pressures to contain costs and the active
discussions between the Clinton Administration, Congress and various other
groups have impacted the healthcare delivery system. Many states are
experimenting with alternatives to traditional Medicaid delivery systems through
federal waiver programs, and efforts to provide these services more efficiently
will continue to be a priority. In August 1996, Congress passed the Health
Insurance Portability and Accountability Act of 1996 which, among other things,
provides favorable changes in the tax treatment of long-term care insurance and
allows inclusion of long-term care insurance in medical savings accounts.
Although Beverly believes this legislation will have a favorable impact on the
long-term care industry, the full effect is not readily determinable. There can
be no assurances made as to the ultimate impact of this, or future healthcare
reform legislation, on Beverly's and New Beverly's financial position, results
of operations or cash flows. However, future federal budget legislation and
regulatory changes may negatively impact New Beverly.
During the first quarter of 1997, proposed rules were issued by HCFA which,
if implemented in their proposed form, would establish guidelines for maximum
reimbursement to skilled nursing facilities for contracted speech and
occupational therapy services based on equivalent salary amounts for on-staff
therapists. In addition, these proposed rules would revise the salary
equivalency rules currently in effect for physical therapy services. The full
effect of the new rules is not readily determinable as the details of the
proposal have not yet been finalized; however, New Beverly does not expect the
new rules to have a material adverse effect on its consolidated results of
operations or cash flows due to the fact that Beverly provides, and New Beverly
will provide, the majority of its therapy services through on-staff therapists.
In addition to the requirements to be met by nursing facilities for annual
licensure renewal, healthcare facilities are subject to annual surveys and
inspections in order to be certified for participation in the Medicare and
Medicaid programs. In order to maintain their operator's licenses and their
certification for participation in Medicare and Medicaid programs, the nursing
facilities must meet certain statutory and administrative requirements. These
requirements relate to the condition of the facilities and the adequacy and
condition of the equipment used therein, the quality and adequacy of personnel,
and the quality of medical care. Such requirements are subject to change. There
can be no assurance that, in the future, New Beverly will be able to
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maintain such licenses for its facilities or that New Beverly will not be
required to expend significant sums in order to do so.
HCFA adopted survey, certification and enforcement procedures by
regulations effective July 1, 1995 to implement the Medicare and Medicaid
provisions of the Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987")
governing survey, certification and enforcement of the requirements for contract
participation by skilled nursing facilities under Medicare and nursing
facilities under Medicaid. Among the provisions that HCFA has adopted are
requirements that (i) surveys focus on residents' outcomes; (ii) all deviations
from the participation requirements will be considered deficiencies, but that
all deficiencies will not constitute noncompliance; and (iii) certain types of
deficiencies must result in the imposition of a sanction. The regulations also
identify alternative remedies and specify the categories of deficiencies for
which they will be applied. These remedies include: temporary management; denial
of payment for new admissions; denial of payment for all residents; civil money
penalties of $50 to $10,000 per day of violation; closure of facility and/or
transfer of residents in emergencies; directed plans of correction; and directed
in service training. The regulations also specify under what circumstances
alternative enforcement remedies or termination, or both, will be imposed on
facilities which are not in compliance with the participation requirements.
Beverly has undertaken an analysis of the procedures in respect of its programs
and facilities covered by the final HCFA regulations. While Beverly is unable to
predict with total accuracy the degree to which its programs and facilities will
be determined to be in compliance with regulations, compliance data for the past
year is available. Results of HCFA surveys for the past year determined that
approximately 96% of Beverly's facilities were in compliance with the HCFA
criteria. HCFA reports have determined that of the non-Beverly facilities
surveyed nationally, approximately 95% of such facilities were determined to be
in compliance with such HCFA criteria. Although New Beverly could be adversely
affected if a substantial portion of its programs or facilities were eventually
determined not to be in compliance with the HCFA regulations, New Beverly
believes its programs and facilities generally exceed industry standards.
Beverly believes that its facilities are in substantial compliance with the
various Medicaid and Medicare regulatory requirements currently applicable to
them. In the ordinary course of its business, however, Beverly receives notices
of deficiencies for failure to comply with various regulatory requirements.
Beverly reviews such notices and takes appropriate corrective action. In most
cases, Beverly and the reviewing agency will agree upon the steps to be taken to
bring the facility into compliance with regulatory requirements. In some cases
or upon repeat violations, the reviewing agency may take a number of adverse
actions against a facility. These adverse actions can include the imposition of
fines, temporary suspension of admission of new patients to the facility,
decertification from participation in the Medicaid or Medicare programs and, in
extreme circumstances, revocation of a facility's license.
The Medicaid and Medicare programs provide criminal penalties for entities
that knowingly and willfully offer, pay, solicit or receive remuneration in
order to induce business that is reimbursed under these programs. The illegal
remuneration provisions of the Social Security Act, also known as the
"anti-kickback" statute, prohibit the payment or receipt of remuneration
intended to induce the purchasing, leasing, ordering or arranging for any good,
facility, service or item paid by Medicaid or Medicare programs. The violation
of the illegal remuneration provisions is a felony and can result in the
imposition of fines of up to $25,000 per occurrence. In addition, certain states
in which Beverly's facilities are located, and in which New Beverly facilities
will be located, have enacted statutes which prohibit the payment of kickbacks,
bribes and rebates for the referral of patients. The Medicare program has
published certain "Safe Harbor" regulations which describe various criteria and
guidelines for transactions which are deemed to be in compliance with the anti-
remuneration provisions. Although Beverly has, and New Beverly will have,
contractual arrangements with some healthcare providers, management believes it
is in compliance with the anti-kickback statute and other provisions of the
Social Security Act and with the applicable state statutes. However, there can
be no assurance that government officials responsible for enforcing these
statutes will not assert that New Beverly or certain transactions in which it is
involved are in violation of these statutes. The Social Security Act also
imposes criminal and civil penalties for making false claims to the Medicaid and
Medicare programs for services not rendered or for misrepresenting actual
services rendered in order to obtain higher reimbursement.
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The Medicare and Medicaid programs also provide for the mandatory and/or
permissive exclusion of providers of services who are convicted of certain
offenses or who have been found to have violated certain laws or regulations. In
certain circumstances, conviction of abusive or fraudulent behavior with respect
to one facility may subject other facilities under common control or ownership
to disqualification from participation in Medicaid and Medicare programs. In
addition, some federal and state regulations provide that all facilities under
common control or ownership licensed to do business within a state are subject
to delicensure if any one or more of such facilities is delicensed.
While federal regulations do not provide states with grounds to curtail
funding of their Medicaid cost reimbursement programs due to state budget
deficiencies, states have nevertheless curtailed funding in such circumstances
in the past. No assurance can be given that states will not do so in the future
or that the future funding of Medicaid programs will remain at levels comparable
to the present levels. The United States Supreme Court ruled in 1990 that
healthcare providers may bring suit in federal court to enforce the Medicaid Act
requirement that the states reimburse nursing facilities at rates which are
reasonable and adequate. Nursing facility operators, such as Beverly, and New
Beverly after the Transactions, have utilized and should continue to be able to
utilize the federal courts to require states to comply with their legal
obligation to adequately fund Medicaid programs. However, certain of the
legislative proposals discussed above contain provisions which would repeal the
provisions of the Medicaid Acts which require states to pay reasonable and
adequate rates and which would also eliminate the right to judicial review of
certain aspects of the reimbursement systems of state Medicaid programs;
therefore, there can be no assurance that nursing facility operators will be
able to utilize federal courts for such purposes in the future.
COMPETITION
The long-term care industry is highly competitive. Beverly's competitive
position has varied, and New Beverly's competitive position will vary, from
facility to facility, from community to community and from state to state. Some
of the significant competitive factors for the placing of patients in a nursing
facility include quality of care, reputation, physical appearance of facilities,
services offered, family preferences, location, physician services and price.
New Beverly's operations will compete with services provided by nursing
facilities, acute care hospitals, subacute facilities, transitional hospitals,
rehabilitation facilities, therapy clinics, hospices and home healthcare
centers. Beverly does, and New Beverly will, compete with a number of tax-exempt
nonprofit organizations which can finance acquisitions and capital expenditures
on a tax-exempt basis or receive charitable contributions unavailable to
Beverly, and New Beverly. There can be no assurance that New Beverly will not
encounter increased competition which could adversely affect its business,
results of operations or financial condition.
EMPLOYEES
At June 30, 1997, Beverly had approximately 80,000 employees (approximately
76,000 employees excluding those of the Institutional Pharmacy Business).
Beverly is, and New Beverly will be, subject to both federal minimum wage and
applicable federal and state wage and hour laws and maintains various employee
benefit plans.
The federal government recently increased the minimum wage in two phases,
beginning October 1, 1996 and September 1, 1997, respectively. This new
legislation did not result in a material increase in Beverly's wage rates in
1996, and Beverly does not anticipate a material impact on its wage rates in
1997, because a substantial portion of Beverly's associates earn in excess of
the new minimum wage levels; however, Beverly believes there may continue to be
competitive pressures to increase the wage levels of associates earning above
the new minimum wage. The effect of the new minimum wage on New Beverly's future
operations is not expected to be material as New Beverly believes that a
significant portion of such increase will be reimbursed through Medicare and
Medicaid rate increases.
In recent years, Beverly has experienced increases in its labor costs
primarily due to higher wages and greater benefits required to attract and
retain qualified personnel, increased staffing levels in its nursing facilities
due to greater patient acuity and the hiring of therapists on staff. Although
New Beverly expects
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<PAGE> 59
labor costs to increase in the future, it is anticipated that any increase in
costs will generally result in higher patient rates in subsequent periods,
subject to the time lag in most states, of up to 18 months, between increases in
reimbursable costs and the receipt of related reimbursement rate increases. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Operating Results."
In the past, the healthcare industry, including Beverly's long-term care
facilities, has experienced a shortage of nurses to staff healthcare operations,
and, more recently, the healthcare industry has experienced a shortage of
therapists. Beverly is not currently experiencing a nursing or therapist
shortage, but it competes with other healthcare providers for nursing and
therapist personnel and may compete with other service industries for persons
serving Beverly in other capacities, such as nurses' aides. A nursing, therapist
or nurse's aide shortage could force New Beverly to pay even higher salaries and
make greater use of higher cost temporary personnel. A lack of qualified
personnel might also require New Beverly to reduce its census or admit patients
requiring a lower level of care, both of which could adversely affect operating
results.
Approximately 100 of Beverly's facilities, and after the Transactions New
Beverly's facilities, are represented by various labor unions. Certain labor
unions have publicly stated that they are concentrating their organizing efforts
within the long-term healthcare industry. Beverly, being one of the largest
employers within the long-term healthcare industry, has been the target of a
"corporate campaign" by two AFL-CIO affiliated unions attempting to organize
certain of Beverly's facilities. Although Beverly has never experienced any
material work stoppages and believes that its relations with its employees (and
the existing unions that represent certain of them) are generally good, Beverly
cannot predict the effect continued union representation or organizational
activities will have on its, or New Beverly's, future activities. There can be
no assurance that continued union representation and organizational activities
will not result in material work stoppages, which could have a material adverse
effect on New Beverly's operations.
Excessive litigation is a tactic common to "corporate campaigns" and one
that is being employed against Beverly and is expected to continue against New
Beverly. There have been several proceedings against facilities to be operated
by New Beverly before the National Labor Relations Board ("NLRB"). These
proceedings consolidate individual cases from separate facilities, and certain
of these proceedings are currently pending before the NLRB. Beverly has, and New
Beverly will continue to, vigorously defend these proceedings. Beverly believes,
based on advice of its general counsel, that many of these cases are without
merit, and further, it is Beverly's belief that the NLRB-related proceedings,
individually and in the aggregate, are not material to Beverly's financial
position or results of operations or cash flows.
PROPERTIES
At June 30, 1997, Beverly operated 574 nursing facilities, 33 assisted
living centers, 12 transitional hospitals, 74 pharmacies, 46 outpatient therapy
clinics, 21 hospices and six home healthcare centers in 36 states and the
District of Columbia. It is expected that New Beverly will operate all of such
businesses after the Transactions, except for the 74 pharmacies. Most of the 195
leased nursing facilities are subject to "net" leases which require the payment
of all taxes, insurance and maintenance costs. Most of these leases have
original terms from ten to fifteen years and contain at least one renewal
option, which could extend the original term of the leases by five to fifteen
years. Many of these leases also contain purchase options. New Beverly believes
that all of its physical properties are in good operating condition and suitable
for the purposes for which they are being used. Certain of the nursing
facilities and assisted living centers to be owned by New Beverly will be
included in the collateral securing the obligations under various debt
agreements to be assumed by New Beverly.
52
<PAGE> 60
The following is a summary of Beverly's and, after the Transactions,
subject to adjustments for acquisitions, dispositions and construction after
June 30, 1997, New Beverly's nationwide network of nursing facilities, assisted
living centers, transitional hospitals, outpatient therapy clinics and hospices
at June 30, 1997:
<TABLE>
<CAPTION>
OUTPATIENT
ASSISTED LIVING TRANSITIONAL THERAPY
NURSING FACILITIES CENTERS HOSPITALS CLINICS HOSPICES
------------------- ---------------- ----------------- ---------- --------
TOTAL TOTAL
LICENSED TOTAL LICENSED
NUMBER BEDS NUMBER UNITS NUMBER BEDS NUMBER NUMBER
------- --------- ------- ------ ------ -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOCATION:
Alabama.................... 21 2,701 -- -- -- -- -- --
Arizona.................... 3 480 -- -- 2 78 -- --
Arkansas................... 31 3,803 3 48 -- -- -- 2
California................. 69 7,323 2 113 -- -- -- 5
Connecticut................ 1 120 -- -- -- -- -- --
District of Columbia....... 1 355 -- -- -- -- -- --
Florida.................... 64 8,049 5 290 -- -- -- --
Georgia.................... 17 2,100 4 72 -- -- 18 1
Hawaii..................... 2 396 -- -- -- -- -- --
Illinois................... 3 275 -- -- -- -- -- --
Indiana.................... 26 3,817 1 16 1 40 -- 1
Kansas..................... 33 2,146 3 39 -- -- -- --
Kentucky................... 8 1,041 -- -- -- -- -- --
Louisiana.................. 1 200 -- -- -- -- -- --
Maryland................... 4 585 1 16 -- -- -- --
Massachusetts.............. 24 2,402 -- -- -- -- -- --
Michigan................... 2 206 -- -- -- -- -- --
Minnesota.................. 35 3,152 2 28 -- -- -- 1
Mississippi................ 21 2,466 -- -- -- -- -- --
Missouri................... 29 3,038 3 101 -- -- -- 1
Nebraska................... 24 2,205 1 16 -- -- -- 3
New Jersey................. 1 120 -- -- -- -- -- --
North Carolina............. 11 1,398 1 16 -- -- -- --
Ohio....................... 12 1,435 -- -- 1 44 3 --
Oklahoma................... -- -- -- -- 2 64 -- --
Pennsylvania............... 42 4,895 3 53 -- -- -- 3
South Carolina............. 3 302 -- -- -- -- 1 --
South Dakota............... 17 1,232 -- -- -- -- -- --
Tennessee.................. 7 948 2 57 2 70 -- --
Texas...................... -- -- -- -- 4 343 24 3
Virginia................... 16 2,113 2 32 -- -- -- --
Washington................. 11 1,080 -- -- -- -- -- --
West Virginia.............. 3 310 -- -- -- -- -- --
Wisconsin.................. 32 3,513 -- -- -- -- -- 1
--- ------ -- --- -- --- -- --
574 64,206 33 897 12 639 46 21
=== ====== == === == === == ==
CLASSIFICATION:
Owned...................... 378 41,656 29 705 1 198 -- --
Leased..................... 195 22,475 4 192 11 441 46 21
Managed.................... 1 75 -- -- -- -- -- --
--- ------ -- --- -- --- -- --
574 64,206 33 897 12 639 46 21
=== ====== == === == === == ==
</TABLE>
LEGAL PROCEEDINGS
There are various lawsuits and regulatory actions pending against Beverly
arising in the normal course of business, some of which seek punitive damages.
To the extent those actions relate to the Remaining
53
<PAGE> 61
Healthcare Business, they will be assumed by New Beverly after the Disposition
and the Merger. Management does not believe that the ultimate resolution of
these matters will have a material adverse effect on Beverly's or New Beverly's
financial position or results of operations.
MANAGEMENT
The table below sets forth, as to each executive officer and director of
Beverly, such person's name, positions with Beverly and age. Each executive
officer and director of Beverly holds office until a successor is elected, or
until the earliest of death, resignation or removal. Each executive officer is
elected or appointed by the Beverly Board of Directors. It is expected that
most, if not all, of the executive officers listed below (other than Dr.
Renschler who will become the Chief Executive Officer and a director of Capstone
following the Distribution and Merger) will be asked to continue their
employment with New Beverly in substantially the same capacity as such
individuals have served Beverly. It is also expected that the directors of
Beverly, listed below, will continue as directors of New Beverly.
The executive officers listed below have employment or severance agreements
that provide for certain payments in the event of a "change of control" (as
defined in the relevant employment or severance agreements). Executive officers
entitled to payments in the event of a change of control under current
employment agreements with Beverly will be asked to waive their right to such
payments as a condition to entering into a new employment or severance agreement
with New Beverly. It is anticipated that the employment or severance agreements
to be entered into between such executive officers and New Beverly will provide
certain payments in the event of a "change of control" (as such term will be
defined in such employment agreements) of New Beverly. The current directors of
New Beverly are Messrs. Banks, Hendrickson, Pommerville, Stephens and Tabakin.
Immediately following the Distribution, Messrs. Pommerville, Stephens and
Tabakin will resign from the Board of Directors of New Beverly and will be
replaced by the then current non-employee directors of Beverly. No assurance can
be given that any of the executive officers or directors listed below will
accept any offered positions with New Beverly or that the management team of New
Beverly will remain substantially the same as Beverly's management team. The
information below is given as of August 31, 1997.
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
David R. Banks(1)......................... Chairman of the Board, Chief Executive 60
Officer and Director
Boyd W. Hendrickson(1).................... President, Chief Operating Officer and 52
Director
William A. Mathies........................ Executive Vice President and President of 37
BHRS
T. Jerald Moore........................... Executive Vice President and President of 56
ATH
Robert W. Pommerville..................... Executive Vice President, General Counsel 56
and Secretary
C. Arnold Renschler, M.D. ................ Executive Vice President and President of 55
PCA
Bobby W. Stephens......................... Executive Vice President -- Asset Management 52
Scott M. Tabakin.......................... Executive Vice President and Chief Financial 38
Officer
Mark D. Wortley........................... Executive Vice President and President of 42
Spectra
Pamela H. Daniels......................... Vice President, Controller and Chief 33
Accounting Officer
Beryl F. Anthony, Jr.(1)(3)(5)............ Director 59
James R. Greene(2)(3)(4).................. Director 75
Edith E. Holiday(2)(4)(5)................. Director 45
Jon E. M. Jacoby(1)(2).................... Director 59
Risa J. Lavizzo-Mourey, M.D.(3)(4)........ Director 42
Marilyn R. Seymann(2)(4)(5)............... Director 54
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
(4) Member of Quality Management Committee.
(5) Member of Nominating Committee.
54
<PAGE> 62
Mr. Banks has been a director of Beverly since 1979 and has served as Chief
Executive Officer since May 1989 and Chairman of the Board since March 1990. Mr.
Banks was President of Beverly from 1979 to September 1995. Mr. Banks is a
director of Nationwide Health Properties, Inc., Ralston Purina Company,
Wellpoint Health Networks, Inc., and trustee for Occidental College.
Mr. Hendrickson joined Beverly in 1988 as a Division President. He was
elected Vice President of Marketing in May 1989, Executive Vice President of
Operations and Marketing in February 1990, President of BHRS in January 1995 and
President, Chief Operating Officer and a director of Beverly in September 1995.
Mr. Mathies joined Beverly in 1981 as an Administrator in training. He was
an Administrator until 1986 at which time he became a Regional Manager. In 1988,
Mr. Mathies was elected Vice President of Operations for the California region
and was elected Executive Vice President of Beverly and President of BHRS in
September 1995.
Mr. Moore joined Beverly as Executive Vice President in December 1992 and
was elected President of ATH in June 1996. Mr. Moore was employed at Aetna Life
and Casualty from 1963 to 1992 and was elected Senior Vice President in 1990.
Mr. Pommerville first joined Beverly in 1970 and left in 1976. He rejoined
Beverly as Vice President and General Counsel in 1984 and was elected Secretary
in February 1990, Senior Vice President in March 1990 and Executive Vice
President and Acting Compliance Officer in February 1995.
Dr. Renschler joined Beverly in 1996 as Executive Vice President and
President of PCA. In connection with the Merger, it is expected that Dr.
Renschler will resign as an officer of Beverly and become Chief Executive
Officer and a director of Capstone. From 1990 to 1996, Dr. Renschler was Senior
Vice President and Chief Clinical Officer, as well as President of three
operating divisions of NovaCare, Inc. and a member of its board of directors.
Prior to that time, he held a series of key executive positions at Manor
Healthcare Corp., including President and Chief Operating Officer.
Mr. Stephens joined Beverly as a staff accountant in 1969. He was elected
Assistant Vice President in 1978, Vice President of Beverly and President of
Beverly's Central Division in 1980, and Executive Vice President in February
1990. Mr. Stephens is a director of City National Bank in Fort Smith, Arkansas,
Beverly Japan Corporation, and Harbortown Properties, Inc.
Mr. Tabakin joined Beverly in October 1992 as Vice President, Controller
and Chief Accounting Officer. He was elected Senior Vice President in May 1995,
Acting Chief Financial Officer in September 1995, and Executive Vice President
and Chief Financial Officer in October 1996. From 1980 to 1992, Mr. Tabakin was
with Ernst & Young LLP.
Mr. Wortley joined Beverly as Senior Vice President and President of
Spectra in September 1994 and was elected Executive Vice President in February
1996. From 1988 to 1994, Mr. Wortley was an officer of Therapy Management
Innovations.
Ms. Daniels joined Beverly in May 1988 as Audit Coordinator. She was
promoted to Financial Reporting Senior Manager in 1991 and Director of Financial
Reporting in 1992. She was elected Vice President, Controller and Chief
Accounting Officer in October 1996. From 1985 to 1988, Ms. Daniels was with
Price Waterhouse LLP.
Mr. Anthony served as a member of the United States Congress and was
Chairman of the Democratic Congressional Campaign Committee from 1987 through
1990. In 1993, he became a partner in the Winston & Strawn law firm. He has been
a director of Beverly since January 1993.
Mr. Greene's principal occupation has been that of a director and
consultant to various U.S. and international businesses since 1986. He is a
director of a number of mutual funds of Alliance Capital Management Corporation,
Buck Engineering Company and Bank Leumi. He has been a director of Beverly since
January 1991.
Ms. Holiday is an attorney. She served as White House Liaison for the
Cabinet and all federal agencies
55
<PAGE> 63
during the Bush administration. Prior to that, Ms. Holiday served as General
Counsel of the U.S. Treasury Department, as well as its Assistant Secretary of
Treasury for Public Affairs and Public Liaison. She is a director of Amerada
Hess Corporation, Hercules Incorporated and H. J. Heinz Company and a director
or trustee of various investment companies in the Franklin Templeton Group of
Funds. She has been a director of Beverly since March 1995.
Mr. Jacoby is Executive Vice President, Chief Financial Officer and a
director of Stephens Group, Inc. Mr. Jacoby has held the indicated positions
with Stephens Group, Inc. since 1986, and prior to that time, served as Manager
of the Corporate Finance Department and Assistant to the President of Stephens
Inc. Mr. Jacoby is a director of the American Classic Voyages Company, Delta and
Pine Land Company, Inc. and Medicus Systems, Inc. He has been a director of
Beverly since February 1987.
Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the
Division of Geriatric Medicine and Associate Executive Vice President for health
policy at the University of Pennsylvania, Ralston-Penn Center. From 1992 to
1994, Dr. Lavizzo-Mourey was in the Senior Executive Service in the Agency for
Health Care Policy and Research, U.S. Public Health Service of the Department of
Health and Human Services. She is a director of Medicus Systems, Inc. and
Nellcor Puritan Bennett. She has been a director of Beverly since March 1995.
Ms. Seymann is President and Chief Executive Officer of M One, Inc., a
management and information systems consulting firm specializing in the financial
services industry. From 1990 to 1993, Ms. Seymann was Director and Vice Chairman
of the Federal Housing Finance Board. Prior to that, she served as Managing
Director of Andersen Asset Based Services, a unit of Arthur Andersen LLP. From
1986 to 1990, Ms. Seymann was Executive Vice President of Chase Bank of Arizona
and served as President, Private Banking of Chase Trust Company from 1987 to
1990. She has been a director of Beverly since March 1995.
During 1996, there were nine meetings of Beverly's Board of Directors. Each
director attended 75% or more of the meetings of the Board and committees on
which he or she served.
DIVIDEND POLICY
Beverly currently does not pay dividends on any of its issued and
outstanding securities. New Beverly does not expect to pay any dividends for the
foreseeable future. Rather, New Beverly expects that it will reinvest any
earnings into funding future acquisitions and growth. Any future payments of
dividends and the amount thereof will be dependent upon New Beverly's results of
operations, financial condition, cash requirements, future prospects and other
factors deemed relevant by the Board of Directors of New Beverly from time to
time.
56
<PAGE> 64
PRINCIPAL STOCKHOLDERS OF NEW BEVERLY
New Beverly will be a wholly-owned subsidiary of Beverly until the
consummation of the Distribution. Because all of the shares of New Beverly
Common Stock now held by Beverly will be distributed to shareholders of Beverly
in connection with the Distribution, the number of shares of New Beverly Common
Stock shown below to be owned beneficially by certain beneficial owners holding
more than five percent of the issued and outstanding Beverly Common Stock, as
well as by each director and by all directors and officers as a group will
depend upon the number of shares held by such persons at the time of the
Distribution. This table assumes that each of the executive officers set forth
below will (i) be offered a position with New Beverly and (ii) accept such
position if offered. In order to present estimated beneficial ownership of the
persons and entities set forth below immediately following the Distribution, the
following table shows: (i) the number of shares of Beverly Common Stock
beneficially owned by such person or entities as of August 31, 1997 (including,
if applicable, shares underlying Company Options exercisable within 60 days of
such date) and (ii) the number of shares of New Beverly Common Stock that such
persons or entities would own immediately following the Distribution (including,
if applicable, shares underlying New Beverly Options exercisable within 60 days
of such date), assuming none of such persons or entities disposes of any shares
of Beverly Common Stock prior to the Distribution and Merger.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth as of August 31, 1997, those persons who
beneficially own more than five percent of the issued and outstanding Beverly
Common Stock based on information filed in reports by such persons with the SEC.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES OF TOTAL
NAME COMMON STOCK COMMON STOCK
---- ------------ ------------
<S> <C> <C>
FMR Corp............................................... 7,894,799(1) 7.2%
("FMR")
82 Devonshire Street
Boston, MA 02109
Franklin Resources, Inc................................ 8,417,800(2) 7.7%
("Franklin")
777 Mariners Island Blvd.
San Mateo, CA 94404
Loomis, Sayles & Company, L.P.......................... 6,213,650(3) 5.7%
("Loomis")
One Financial Center
Boston, MA 02111
Wellington Management Company.......................... 6,463,419(4) 5.9%
("WMC")
75 State Street
Boston, MA 02109
</TABLE>
- ---------------
(1) Based on the latest schedule 13G, dated February 14, 1997, provided to
Beverly by FMR; FMR had sole voting power with regard to 746,928 shares and
sole dispositive power with respect to 7,894,799 shares.
(2) Based on the latest schedule 13G, dated February 12, 1997, provided to
Beverly by Franklin; Franklin had sole voting and dispositive power with
respect to 8,417,800 shares.
(3) Based on the latest schedule 13G, dated February 13, 1997, provided to
Beverly by Loomis; Loomis had sole voting power with respect to 2,176,125
shares and shared dispositive power with respect to 6,213,650 shares.
(4) Based on the latest schedule 13G, dated January 24, 1997, provided to
Beverly by WMC; WMC had shared voting power with respect to 1,663,574 shares
and shared dispositive power with respect to 6,463,419 shares.
57
<PAGE> 65
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of August 31, 1997, the amount of Beverly
Common Stock beneficially owned by each of Beverly's directors, each executive
officer named in the Summary Compensation Table included in Beverly's Proxy
Statement for the Annual Meeting of Stockholders held on May 29, 1997, and all
directors and executive officers as a group based on information obtained from
such persons.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
----------------------------------------------------------------
SOLE VOTING OPTIONS PERCENTAGE
AND EXERCISABLE OTHER OF
INVESTMENT WITHIN BENEFICIAL DEFERRED COMMON
POWER 60 DAYS OWNERSHIP COMPENSATION TOTAL STOCK
----------- ----------- ---------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Beryl F. Anthony, Jr............ 0 22,500 0 4,317(1) 26,817 *
David R. Banks.................. 216,864(3) 377,223 8,774(4) 1,578(2) 604,439 *
James R. Greene................. 500 22,500 0 9,396(1) 32,396 *
Boyd W. Hendrickson............. 190,218(3) 128,643 0 1,192(2) 320,053 *
Edith E. Holiday................ 800 7,500 200(4) 1,819(1) 10,319 *
Jon E. M. Jacoby................ 0 22,500 0 7,467(1) 29,967 *
Risa J. Lavizzo-Mourey, M.D..... 1,000 7,500 0 1,971(1) 10,471 *
William A. Mathies.............. 76,693(3) 71,250 2,879(4) 728(2) 151,550 *
C. Arnold Renschler, M.D.(5).... 65,000(3) 58,750 0 990(2) 124,740 *
Marilyn R. Seymann.............. 1,000 7,500 0 2,400(1) 10,900 *
Mark D. Wortley................. 66,738(3) 41,250 0 700(2) 108,688 *
All Directors and Executive
Officers as a Group (16
Persons)(5)................... 1,142,915 1,097,172 16,268 35,120 2,291,475 2.1%
</TABLE>
- ---------------
* Percentage of Common Stock owned does not exceed 1%.
(1) Participant in the Beverly Non-Employee Director Deferred Compensation Plan.
(2) Participant in the Beverly Executive Deferred Compensation Plan.
(3) Includes shares allocated to the employee through participation in Beverly's
Employee Stock Purchase Plan.
(4) Includes shares owned by family members.
(5) C. Arnold Renschler, M.D., currently an Executive Vice President of Beverly
and President of PCA, is expected to resign his position with Beverly
effective as of the Effective Time of the Merger, when he will assume the
position of Chief Executive Officer and will become a director of Capstone.
58
<PAGE> 66
EXECUTIVE AND DIRECTOR COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief
Executive Officer and the other four most highly compensated individuals of
Beverly as to whom the total annual salary and bonus for the year ended December
31, 1996, exceeded $100,000. All of these individuals were executive officers of
Beverly at December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
----------------------
AWARDS PAYOUTS
ANNUAL ----------------------
COMPENSATION RESTRICTED SECURITIES
----------------- OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
FISCAL SALARY BONUS COMPENSATION AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($)(7)(8) (#) ($) ($)(9)
--------------------------- ------ ------- ------- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David R. Banks.................. 1996 597,542 324,973 None 697,500 90,000 None 20,230
Chairman of the Board and 1995 622,096 None None None None None 51,973
Chief Executive Officer 1994 539,170 173,384 None 151,711 60,000 None 51,469
Boyd W. Hendrickson............. 1996 437,971 245,314 None 581,250 65,000 None 17,973
President and Chief 1995 392,862 None None 412,500 70,000 None 38,100
Operating Officer(1) 1994 323,502 80,912 None 70,798 30,000 None 40,646
William A. Mathies.............. 1996 275,000 185,000 216,198(5) 465,000 40,000 None 8,858
Executive Vice President 1995 203,481 44,334 48,465(5) 206,250 35,000 None 19,526
and President-Beverly 1994 159,260 29,958 None 26,223 12,000 None 18,630
Health & Rehabilitation
Services, Inc.(BHRS)(2)
C. Arnold Renschler, MD......... 1996 200,481 187,500 46,995(6) 673,750 285,000 None 1,226
Executive Vice President 1995
and President-Pharmacy 1994
Corporation of America(3)
Mark D. Wortley................. 1996 258,704 171,316 None 465,000 75,000 None 8,693
Executive Vice President 1995 230,481 None None None None None 12,793
and President-Spectra 1994 65,769 24,000 None 20,996 50,000 None 3,779
Rehab Alliance, Inc.(4)
</TABLE>
- ---------------
(1) Mr. Hendrickson was elected to his current position on September 29, 1995.
Prior to that he was Executive Vice President and President-BHRS.
(2) Mr. Mathies was elected to his current position on September 29, 1995. Prior
to that he was a Vice President-Operations of BHRS.
(3) Dr. Renschler assumed his current position on June 3, 1996.
(4) Mr. Wortley was elected to his current position on February 9, 1996. Prior
to that he was a Senior Vice President and President of Spectra Rehab
Alliance, Inc.
(5) Relocation costs and expenses paid to Mr. Mathies in connection with his
relocation from California to Arkansas.
(6) Relocation costs and expenses paid to Dr. Renschler in connection with his
relocation from Pennsylvania to Florida.
59
<PAGE> 67
(7) Amounts shown as Restricted Stock Awards consist of the following (shown in
dollars) (Beverly does not currently pay dividends on its Common Stock).
<TABLE>
<CAPTION>
YEAR MR. BANKS MR. HENDRICKSON MR. MATHIES DR. RENSCHLER MR. WORTLEY
---- --------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Restricted Stock Grants.......... 1996 None None None 183,750(a) None
1995 None 412,500(b) 206,250(b) None
1994 None None None None
Performance Shares(c)............ 1996 697,500 581,250 465,000 490,000 465,000
1995
1994
Award Pursuant to the............ 1996
Annual Incentive Plan(d) 1995
1994 43,346 20,228 7,494 5,995
Award Pursuant to the............ 1996
Equity Incentive Plan(e) 1995
1994 108,365 50,570 18,729 15,001
Total........................ 1996 697,500 581,250 465,000 673,750 465,000
1995 None 412,500 206,250 None
1994 151,711 70,798 26,223 20,996
</TABLE>
- ---------------
(a) The total $183,750 restricted stock award to Dr. Renschler in 1996
consists of, on June 3, 1996, at which time the closing price of the
Common Stock was $12.25, a grant of 15,000 shares which vest twenty-five
percent per year beginning one year from the date of the grant.
(b) The total $412,500 restricted stock award to Mr. Hendrickson and the
total $206,250 restricted stock award to Mr. Mathies in 1995 consists
of, on October 2, 1995, at which time the closing price of the Common
Stock was $13.75, grants of 30,000 and 15,000 shares respectively, which
vest twenty-five percent per year beginning one year from the date of
grant.
(c) The total $697,500, $581,250, $465,000 and $465,000 Performance Share
awards to Mr. Banks, Mr. Hendrickson, Mr. Mathies and Mr. Wortley
consist of, on February 9, 1996, at which time the closing price of the
Common Stock was $11.625, a grant of performance-based restricted stock
in the following number of shares: 60,000; 50,000; 40,000; and 40,000
respectively. Performance is measured by appreciation in the price of
Common Stock from December 31, 1995. To satisfy the performance
restriction, the Common Stock must close at or above the performance
target for at least five consecutive trading days on the New York Stock
Exchange. Achievement of the performance target for any performance
period is deemed to be achievement of the performance target for all
prior performance periods. The percentage of shares that vest, if the
performance target is met, and the performance target, are: 10% and
$14.00; 20% and $16.125; 20% and $18.50; 25% and $21.375; 25% and $24.50
for 1996, 1997, 1998, 1999 and 2000 respectively. The total $490,000
Performance Share award to Dr. Renschler consists of, on June 3, 1996,
at which time the closing price of the Common Stock was $12.25, a grant
of 40,000 shares with the same performance targets and vesting schedule
as set forth above.
(d) For 1994 performance, the Annual Incentive Plan provided for the payment
of 20% of the annual incentive award earned to be paid by a grant of
other stock units, vesting one year from the grant date. The following
number of other stock units were granted to the named Executive
Officers: Mr. Banks -- 3,152; Mr. Hendrickson -- 1,471; Mr.
Mathies -- 545; and Mr. Wortley -- 436.
(e) The Equity Incentive Plan provided, for 1994 performance, the granting
of phantom units, with cliff vesting four years from the grant date. The
phantom units are payable, upon vesting, at an amount per unit equal to
the fair market value of the Common Stock on that date, in cash, shares
of Common Stock or a combination thereof at the discretion of the
Compensation Committee. The following number of phantom units were
granted to the named executive officers, to vest on February 14, 2000:
Mr. Banks -- 7,881; Mr. Hendrickson -- 3,678; Mr. Mathies -- 1,362; and
Mr. Wortley -- 1,091.
(8) Based on the closing price for the Common Stock of $12.75, at December 31,
1996, the number and value of aggregate restricted stock, performance shares
and phantom unit holdings for the named executive officers are as follows:
<TABLE>
<CAPTION>
MR. BANKS MR. HENDRICKSON MR. MATHIES DR. RENSCHLER MR. WORTLEY
--------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Restricted Stock............ (Shares) None 22,500 11,250 15,000 None
(Value $) None 286,875 143,437 191,250 None
Performance Shares.......... (Shares) 60,000 50,000 40,000 40,000 40,000
(Value $) 765,000 637,500 510,000 510,000 510,000
Phantom Units............... (Shares) 16,274 7,571 2,436 None 1,091
(Value $) 207,493 96,530 31,059 None 13,910
</TABLE>
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<PAGE> 68
(9) All other compensation consists of the following:
<TABLE>
<CAPTION>
YEAR MR. BANKS MR. HENDRICKSON MR. MATHIES DR. RENSCHLER MR. WORTLEY
---- --------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Car Allowance(a)................. 1996 None None None None None
1995 2,019 2,019 2,019 2,019
1994 7,500 7,500 7,500 2,192
Matching Contribution to......... 1996 2,340 2,340 2,340 None 2,340
Employee Stock Purchase 1995 2,340 2,340 2,340 2,340
Plan(b) 1994 2,340 2,340 2,250 None
Executive Medical Plan........... 1996 3,834 6,659 1,347 62 887
1995 6,168 9,660 4,098 2,530
1994 7,661 11,479 3,570 1,379
Premiums Under Executive......... 1996 1,350 1,080 177 None 216
Life Insurance Plan(c) 1995 4,753 2,607 420 294
1994 4,410 2,392 407 None
Regular Life Insurance........... 1996 5,648 2,187 297 626 464
Plan(d) 1995 3,410 1,483 167 282
1994 1,125 720 99 33
Matching Contribution to......... 1996 3,341 1,990 980 None 1,069
Executive Retirement 1995 30,541 17,249 7,938 2,586
Plan(e) 1994 28,258 16,040 4,629 None
Financial Planning............... 1996 None None None None None
1995 None None None None
1994 175 175 175 175
Benefit Allowance(f)............. 1996 3,717 3,717 3,717 538 3,717
1995 2,742 2,742 2,544 2,742
Total........................ 1996 20,230 17,973 8,858 1,226 8,693
1995 51,973 38,100 19,526 12,793
1994 51,469 40,646 18,630 3,779
</TABLE>
- ---------------
(a) Car allowances were discontinued in 1995. Amounts previously paid were
added to base salary.
(b) The Employee Stock Purchase Plan enables all full-time employees which
have completed one year of continuous service to purchase shares of
Common Stock through payroll deductions of up to $300 per pay period.
Beverly contributes 30% of the amount of payroll deductions for the
participating employee.
(c) Effective January 1, 1996, the amount shown represents the dollar value
benefit of premium payments under split dollar life insurance policies
for which Beverly will be reimbursed for premiums paid. In prior years,
the amounts shown represented premiums on individual term life insurance
policies.
(d) Imputed income for life insurance provided under Beverly's regular life
insurance plan for amounts in excess of $50,000.
(e) The Beverly Enterprises, Inc. Executive Retirement Plan, (the "Executive
Retirement Plan") provides that, depending on the Beverly's profits,
Beverly will match each participant's annual contribution, based on a
sliding scale relating to years of service with the Beverly, up to a
maximum of six percent of a participant's compensation. The Executive
Retirement Plan also provides that Beverly will pay each participant
additional compensation approximately equivalent to the tax liability
such participant shall accrue as a result of the Beverly's contribution.
During 1995 and 1994, Beverly contributed 50 percent and during 1996,
five percent of the maximum match permitted under the Executive
Retirement Plan for each participant. These figures include both the
employer match and the additional compensation for reimbursement of
taxes.
(f) Reimbursement for premiums paid under regular medical and dental
insurance.
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<PAGE> 69
The following tables set forth certain information at December 31, 1996 and
for the fiscal year then ended with respect to stock options granted to and
exercised by the individuals named in the Summary Compensation Table above. No
stock appreciation rights have been granted and no options have been granted at
an option price below fair market value on the date of the grant.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS GRANT DATE
------------------------------------------------------ VALUE
NUMBER OF % OF TOTAL ----------
SECURITIES OPTIONS/SARS GRANT DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE
NAME GRANTED(#) FISCAL YEAR ($/SH) DATE ($)(2)
---- ------------ ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
David R. Banks................... 90,000(1) 5.26% 12.75 12/11/06 684,900(6)
Boyd W. Hendrickson.............. 65,000(1) 3.80% 12.75 12/11/06 494,650(6)
William B. Mathies............... 40,000(1) 2.34% 12.75 12/11/06 304,400(6)
C. Arnold Renschler, M.D. ....... 35,000(2) 2.04% 12.25 06/03/01 172,900(7)
160,000(2) 9.35% 12.625 06/13/01 819,200(8)
40,000(1) 2.34% 12.75 12/11/06 304,400(6)
50,000(3) 2.92% 12.625 06/12/02 256,000(8)
Mark Wortley..................... 22,400(4) 1.31% 11.625 02/09/01 97,216(9)
40,000(1) 2.34% 12.75 12/11/06 304,400(6)
12,600(5) 0.74% 11.625 02/09/01 54,684(9)
</TABLE>
- ---------------
(1) Nonqualified stock options granted on December 12, 1996. 25% of these
options become fully exercisable one year from the grant date and 25% per
year thereafter on a cumulative basis.
(2) Nonqualified stock options for 35,000 shares were granted on June 3, 1996
and nonqualified stock options for 160,000 shares were granted on June 13,
1996. 25% of these options become fully exercisable one year from the grant
date and 25% per year thereafter on a cumulative basis.
(3) Nonqualified stock options granted on June 13, 1996. 10,000 shares vested on
December 31, 1996. 40,000 shares are subject to performance conditions
contained in the stock option agreement. 20,000 shares will vest on December
31, 1997 if the 1997 performance conditions are met and 20,000 shares will
vest on December 31, 1998 if the 1998 performance conditions are met.
Certain of the 1997 and all of the 1998 performance conditions will be set
by the Compensation Committee at a later date.
(4) Nonqualified stock options granted on February 9, 1996. 25% of these options
become fully exercisable one year from the grant date and 25% per year
thereafter on a cumulative basis.
(5) Incentive stock options granted on February 9, 1996. 25% of these options
become fully exercisable one year from the grant date and 25% per year
thereafter on a cumulative basis.
(6) Based upon the Black-Scholes Option Valuation Model, which estimates the
present dollar value of options to purchase shares of Common Stock to be
$7.61 per option share. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance the value
realized will be at or near the value estimated by the Black-Scholes Model.
The assumptions underlying the Black-Scholes Model include: (a) an expected
volatility of .3440 based on the thirty-six months prior to the grant date,
(b) a risk-free rate of return of 6.54%, which approximates the ten year
U.S. Treasury Strip Rate on the grant date, (c) no dividend on the Common
Stock, and (d) a ten year period from the grant until expiration.
(7) Based upon the Black-Scholes Option Valuation Model, which estimates the
present dollar value of options to purchase shares of Common Stock to be
$4.94 per option share. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance the value
realized will be at or near the value estimated by the Black-Scholes Model.
The assumptions underlying the Black-Scholes Model include: (a) an expected
volatility of .3226 based on the thirty-six months prior to the grant date,
(b) a risk-free rate of
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<PAGE> 70
return of 6.64%, which approximates the five year U.S. Treasury Strip Rate
on the grant date, (c) no dividend on the Common Stock, and (d) a five year
period from the grant until expiration.
(8) Based upon the Black-Scholes Option Valuation Model, which estimates the
present dollar value of options to purchase shares of Common Stock to be
$5.12 per option share. This analysis assumed that all performance
conditions would be met for vesting. The actual value, if any, an executive
may realize will depend on the excess of the stock price over the exercise
price on the date the option is exercised, so that there is no assurance the
value realized will be at or near the value estimated by the Black-Scholes
Model. The assumptions underlying the Black-Scholes Model include: (a) an
expected volatility of .3326 based on the thirty-six months prior to the
grant date, (b) a risk-free rate of return of 6.79%, which approximates the
five year U.S. Treasury Strip Rate on the grant date, (c) no dividend on the
Common Stock, and (d) a five year period from the grant until expiration.
(9) Based upon the Black-Scholes Option Valuation Model, which estimates the
present dollar value of options to purchase shares of Common Stock to be
$4.34 per option share. The actual value, if any, an executive may realize
will depend on the excess of the stock price over the exercise price on the
date the option is exercised, so that there is no assurance the value
realized will be at or near the value estimated by the Black-Scholes Model.
The assumptions underlying the Black-Scholes Model include: (a) an expected
volatility of .3167 based on the thirty-six months prior to the grant date,
(b) a risk-free rate of return of 5.23%, which approximates the five year
U.S. Treasury Strip Rate on the grant date, (c) no dividend on the Common
Stock, and (d) a five year period from the grant until expiration.
COMPENSATION OF DIRECTORS AND OTHER INFORMATION CONCERNING THE BOARD AND ITS
COMMITTEES
Effective June 1, 1996, compensation to Beverly directors other than Mr.
Banks and Mr. Hendrickson was changed to an annual retainer of $25,000 for
serving as a director plus an additional fee of $1,000 for each Board or
committee meeting attended. In addition, committee chairpersons receive $1,000
for each committee meeting chaired. Mr. Banks, the current Chairman of the Board
and Chief Executive Officer of Beverly, and Mr. Hendrickson, the current
President and Chief Operating Officer of Beverly, received no additional cash
compensation for serving on the Board or its committees.
Pursuant to the Beverly Enterprises, Inc. Non-Employee Directors' Stock
Option Plan, each non-employee director is automatically granted an option to
purchase 2,500 shares of Beverly Common Stock on June 1 of each year, at an
exercise price of 100 percent of the fair market value of such Common Stock on
the respective grant dates. The options become fully exercisable one year from
the grant date.
During 1996, there were nine meetings of the Beverly Board. Each director
attended 75% or more in the aggregate of the meetings of the Beverly Board and
committees on which the director served.
The Executive Committee, which met nine times during 1996, is delegated
authority to exercise all of the authority of the Beverly Board during the
intervals between meetings except that authority delegated to other committees
or extraordinary actions.
The Audit Committee, which met three times during 1996, reviews and acts,
or reports to the Beverly Board, with respect to various auditing and accounting
matters, including the selection of Beverly's independent auditors, the scope of
audit procedures, the nature of services to be performed for Beverly by and the
fees to be paid to the independent auditors, oversight of Beverly's internal
audit function, the performance of Beverly's independent auditors and the
accounting practices of Beverly.
The Nominating Committee, which met two times during 1996, is delegated the
following responsibilities: (i) identification and recommendation for nomination
of candidates to stand for election to the Beverly Board; and (ii) establishment
of procedures for the nomination process and criteria for the selection of
nominees, including stockholders' suggestions of nominees for director that are
submitted in writing in compliance with Beverly's Bylaws. The Nominating
Committee is also responsible for administering the Beverly Board's
self-evaluation.
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<PAGE> 71
The Quality Management Committee, which met six times during 1996, monitors
the quality of service provided by Beverly and reports to the Beverly Board of
Directors progress made toward reaching quality goals.
The Compensation Committee met seven times during 1996. See the
Compensation Committee Report on Executive Compensation below for a discussion
of the Compensation Committee functions.
THE BEVERLY NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN
The following is a description of the Beverly Enterprises, Inc.
Non-Employee Director Deferred Compensation Plan (the "Non-Employee Director
Plan") that was approved by the Beverly stockholders and became effective May
29, 1997. The purpose of the Non-Employee Director Plan is to provide outside
directors with the opportunity to receive awards equivalent to shares of Beverly
Common Stock (referred to as "deferred share units") and to defer receipt of
compensation for services rendered to Beverly. It is expected that New Beverly
will assume the Non-Employee Director Plan immediately following the
Transactions. It is intended that the Non-Employee Director Plan shall aid
Beverly (and after the Transactions, New Beverly) in retaining and attracting
non-employee directors whose abilities, experience and judgment can contribute
to the continued progress of Beverly (and after the Transactions, New Beverly).
Further, the Non-Employee Director Plan is intended to more closely align
directors with stockholders through compensation awards equivalent to shares of
Beverly Common Stock (and after the Transactions, New Beverly Common Stock).
There are three types of contributions available under the Non-Employee
Director Plan. First, directors will be able to defer all or part of retainer
and meeting fees to a pre-tax deferred compensation account with two investment
options. The first investment option will be a cash account which is credited
with interest (at a variable interest rate equal to the prime interest rate as
established by a major New York bank), and the second investment option will be
a deferred share unit account, with each unit having a value equivalent to one
share of Beverly Common Stock (and after the Transactions, New Beverly Common
Stock). A director's deferred share unit account will fluctuate in value as if
it had been invested in Beverly Common Stock (and after the Transactions, New
Beverly Common Stock), however the Non-Employee Director Plan is not actually
funded and amounts deferred will not necessarily be invested in the Beverly
Common Stock (and after the Transactions, New Beverly Common Stock). It is
possible for the value of a director's account to decrease in value as a result
of this deemed investment if the value of the Beverly Common Stock (and after
the Transactions, New Beverly Common Stock) decreases.
The second type of contribution is a Beverly matching contribution. Beverly
(and after the Transactions, New Beverly) will match 25% of the amount that is
deferred, but only to the extent the director elects to credit his deferral into
the deferred share unit account.
Third, in connection with the termination of Beverly's previous retirement
plan for non-employee directors, in order to replace lost benefits under such
plan, directors will receive a grant of 500 deferred share units each year under
the Non-Employee Director Plan. Both Beverly (and after the Transactions, New
Beverly) matching contributions and the annual 500 deferred share unit grant
will be automatically credited to the deferred share unit account.
Directors are at all times 100% vested in their accounts. Distributions
will commence upon retirement, termination, death, or disability. Earlier
payments are available only if approved by the full Board of Directors (which
administers the Non-Employee Director Plan), in the event of an unforeseeable
emergency resulting in an extreme financial hardship. Payment will be in the
form of a single lump sum or installment of up to ten years, as elected by each
director. Distributions will be made in shares of Beverly Common Stock (and
after the Transactions, New Beverly Common Stock). However, with prior Board of
Directors approval, a director may elect to be paid out of cash instead.
The right of a Director or his or her beneficiary to receive a distribution
under the Non-Employee Directors Plan is an unsecured claim against the general
assets of Beverly (and after the Transactions, New Beverly) . Beverly (and after
the Transactions, New Beverly) may (but is not required to) informally "fund"
some or all of the Non-Employee Director Plan liabilities through a so-called
"rabbi trust" or grantor trust,
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<PAGE> 72
but neither a director nor any beneficiary shall have any rights in or against
any specific assets of Beverly (and after the Transactions, New Beverly). The
Non-Employee Directors Plan became effective May 29, 1997, upon approval by the
stockholders of Beverly. New Beverly, at the Time of Distribution, will assume
the obligations and responsibilities of the Non-Employee Director Plan from
Beverly.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following is the Compensation Committee Report of the Beverly Board of
Directors, provided in connection with the Beverly Annual Meeting of
Stockholders held on May 29, 1997. This report reviews executive compensation
for Beverly for the fiscal year ended December 31, 1996. It is anticipated that,
prior to the consummation of the Transactions, the Compensation Committee of
Beverly will become the Compensation Committee of New Beverly and will continue
the same compensation philosophies currently in place at Beverly.
The Compensation Committee of Beverly's Board of Directors (the Committee)
is currently composed of three independent, non-employee Directors. There were
four members until June 1996, when new Committee assignments were made. Mr.
Louis W. Menk, former Chairman of the Compensation Committee, retired from the
Beverly Board of Directors in May 1997. Three Committee members remained and
one, Marilyn R. Seymann, left for another committee assignment. The Committee's
overall responsibility is to ensure executive compensation policies are directly
aligned with the strategic goals of Beverly. The Committee approves the design
of compensation programs, evaluates their effectiveness, and authorizes the
adoption of new plans and strategies as warranted.
COMPENSATION PHILOSOPHY
The Committee's compensation philosophy and the underlying compensation
programs are designed to directly support Beverly's business objectives by:
- Allowing Beverly to recruit, retain and develop highly qualified
executive employee talent
- Linking individual compensation with Beverly and individual performance
- Maintaining compensation levels that are competitive (targeted at the
median (50th percentile) of the Competitive Market discussed below)
- Emphasizing the variable and at-risk portion of compensation through
incentive plans which properly reflect and reward both short and
long-term performance
- Promoting executive stock ownership and encouraging stock retention by
executives
The Committee evaluates each element of compensation as well as total
executive compensation. The Chief Executive Officer provides input to the
Committee in this regard. In addition, the Committee receives consulting advice
and assistance from an independent executive compensation firm on an ongoing
basis.
COMPETITIVE MARKET EVALUATION
Beverly and its Compensation Committee evaluate competitive compensation
practices and levels in the marketplace by considering data from publicly
available surveys published by recognized, major compensation consulting firms,
as well as special studies and surveys of industry comparisons. In addition, the
compensation consulting firm engaged by the Committee and Beverly provided a
comprehensive assessment of compensation from its executive database. This
analysis included reference to companies of comparable revenues to Beverly in
the healthcare services industry as well as general industry. In addition, the
compensation consultant conducted several private surveys of executive pay in
companies that compete with Beverly for management talent. All of these sources
of data have been combined and median and averages calculated to establish
targets for each element of compensation for Company executives for 1997 and the
immediate future. The Competitive Market is the combination of all the survey
data in general industry of similar revenues, healthcare industry with similar
lines of business and companies from the proxy analysis peer group
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<PAGE> 73
with similar revenues. In establishing competitive levels, Beverly has used the
50th percentile as its target level for each element of compensation. The
Committee believes that actual compensation levels for the five executive
officers named in the Summary Compensation Table were at or below the 50th
percentile of the Competitive Market during 1996.
BASE SALARY
The Committee regularly reviews the base salary of corporate officers. In
addition to targeting the median of the Competitive Market, the Committee also
considers the level and scope of responsibility, experience, performance and
internal equity. No specific weighting is assigned to each of these criteria.
The Committee's annual salary review for corporate officers was moved from
December 1996 to March 1997 in order to provide the Committee the opportunity to
review 1996 performance prior to making compensation decisions.
The base salary for Mr. Banks, Chairman of the Board and Chief Executive
Officer of Beverly, and other corporate officers was reviewed at the March 27,
1997 meeting of the Committee. The Compensation Committee reviewed the
performance criteria it had established on April 11, 1996 to evaluate Mr. Banks'
performance for 1996. The performance criteria included financial and operating
objectives as well as succession planning, strategic planning and stockholder
relations. Effective January 1, 1997, Mr. Banks' base salary was reinstated to
$627,500, where it had been prior to the 5% salary reduction in 1996. In
addition, based on the results of Mr. Banks' performance in meeting these
objectives, and the comparison to the Competitive Market, his base salary was
also adjusted, effective January 1, 1997, to $700,000, which represents an 11.5%
increase over the reinstated level and places Mr. Banks at approximately the
50th percentile level of the Competitive Market for total compensation.
ANNUAL INCENTIVES
The annual incentive plans are designed to provide a direct link between
Beverly performance and individual performance over the annual performance
period (calendar year). During 1996, Beverly maintained two annual incentive
plans; one for corporate management and one for operations management. Each plan
has an initial performance threshold which must be met before potential awards
become available. This initial threshold is an internal standard of the quality
of service being provided by Beverly to its residents. The internal standard of
quality is set and approved by the Quality Management Committee of the Board.
Once the quality threshold has been reached or exceeded, the financial
criteria are then assessed for each executive based upon appropriate corporate
or individual areas of responsibility. The incentive plans measure financial
performance by evaluating Beverly earnings per share and operating margin and,
in the case of individuals responsible for business units, other key operating
financial measures related to the business unit.
Each executive participating in the annual incentive plan, including all of
the executive officers listed in the Summary Compensation Table, has a target
and maximum annual incentive opportunity expressed as a percentage of base
salary. Opportunities for participants under this plan for 1996 ranged from 25%
to 100% of base salary.
In calculating the 1996 annual incentive for the Chief Executive Officer,
the Committee first ascertained that the quality performance threshold had been
achieved. The Committee then determined that the Chief Executive Officer
exceeded the specific performance goals established by the Committee. As a
result, Mr. Banks received a bonus of $324,973, which amounted to 54.5% of base
salary.
LONG-TERM INCENTIVES
Long-term incentives are delivered through the Beverly Enterprises, Inc.
1996 Long-Term Incentive Stock Plan (the "1996 Plan"), which was approved by
stockholders at the 1996 annual meeting. The Committee believes that annual
grants of stock options provide a long-term incentive for key personnel to
remain with Beverly and improve future Beverly performance. In addition, stock
option grants confirm the mutuality of interests shared by Beverly's management
and its other stockholders with this compensation
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<PAGE> 74
dependent upon the appreciation of Beverly's Common Stock. The compensation
consulting firm provides the Committee with data on granting practices of other
healthcare companies to determine if Beverly's grants are competitive in size
and terms. Stock options are always granted at 100% of fair market value on the
date of grant. During 1996, a stock option grant for 90,000 shares was provided
to Mr. Banks. Option grants for the following number of shares were granted in
1996 to the following executive officers: Mr. Hendrickson -- 65,000; Mr.
Mathies -- 40,000; Dr. Renschler -- 285,000; and Mr. Wortley -- 75,000.
STOCK OWNERSHIP GUIDELINE
In 1994, Beverly introduced a stock ownership initiative for key executives
and officers of Beverly. The purpose of this initiative is to align executive
interests with stockholders' interests and to encourage executives to retain
Beverly shares over an extended period. Participants are required to own Beverly
securities with a value based on a multiple of the officer's base salary.
Failure to comply with this guideline may result in reduction in or suspension
from participation in Beverly's incentive plans. The Chief Executive Officer is
required to own securities with a market value of three times his base salary.
Other executives and officers are required to own Beverly securities with a
market value ranging from one to two and a half times base salary.
$1 MILLION LIMIT ON COMPENSATION
Section 162(m) of the Internal Revenue Code generally limits the corporate
deduction for compensation paid to executive officers named in the Summary
Compensation Table to $1 million, unless certain requirements are met which
allows for an exemption of certain compensation as performance-based. The Board
of Directors and the Committee desire that all incentive compensation plans for
executive officers be qualified as performance-based, thereby ensuring Beverly
will retain full tax deductibility. In 1994, the Committee approved a change in
the design and operation of both the annual and long-term incentive plans, which
change was then approved by the stockholders in May 1994. In 1996, stockholders
approved the 1996 Long-Term Incentive Stock Plan which provides certain features
designed to ensure tax deductibility of awards granted under the Plan.
OTHER MATTERS
The Committee has worked with a compensation consulting firm in revamping
Beverly's compensation plans for 1996 and future years. The focus of this work
was to develop pay for performance and included revised base salary ranges,
annual incentive compensation opportunities, long-term incentives and the
streamlining of certain employee benefits. All of this work has been
accomplished with the goal of motivating management behaviors which will enhance
Beverly's financial and operating results, thereby leading to the potential for
increased stockholder value. The work is ongoing and the Committee anticipates
working with top management and the consulting firm throughout 1997 to meet this
end.
COMPENSATION COMMITTEE
Louis W. Menk, Chairman
Beryl F. Anthony, Jr.
Edith E. Holiday
Marilyn R. Seymann
The Compensation Committee Report on Executive Compensation shall not be
deemed incorporated by reference by any general statement incorporating by
reference this registration statement into any filing under the Securities Act
of 1933 or the Securities and Exchange Act of 1934, except to the extent that
Beverly specifically incorporates this information by reference, and shall not
otherwise be deemed filed under such acts.
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<PAGE> 75
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No Committee member had any relationship requiring disclosure under any
paragraph of Item 404 of Regulation S-K.
PERFORMANCE GRAPH
The following graph shows a five-year comparison of cumulative total
returns for Beverly, the S&P 500 Composite Index and the S&P Health Care
Composite Index. The stock price performance shown on the graph below is not
necessarily indicative of future price performance.
<TABLE>
<CAPTION>
MEASUREMENT PERIOD S&P HEALTHCARE
(FISCAL YEAR COVERED) BEVERLY S&P 500 COMPOSITE
<S> <C> <C> <C>
1991 100 100 100
1992 146 108 84
1993 149 118 77
1994 162 120 87
1995 120 165 137
1996 144 203 165
</TABLE>
The total cumulative return on investment (change during the year in stock
price plus reinvested dividends) for each of the periods for Beverly, the S&P
500 Composite Index and the S & P Healthcare Composite Index is based on the
stock price or the composite index on December 31, 1991.
The performance graph and its description above shall not be deemed
incorporated by reference by any general statement incorporating by reference
this registration statement into any filing under the Securities Act of 1933 or
the Securities and Exchange Act of 1934, except to the extent that Beverly
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such acts.
OTHER PLANS
Executive Stock Purchase Program
On October 10, 1996 the Board of Directors established the Executive Stock
Purchase Program whereby those officers subject to the Stock Ownership
Guideline, described on page 69, could borrow, under three year loans made by
City National Bank of Fort Smith and guaranteed by Beverly, for the purpose of
buying Common Stock in order to meet the Stock Ownership Guideline. Executives
participating in the program were required to pledge the stock purchased to
Beverly pursuant to an Indemnification and Pledge Agreement. Messrs.
Hendrickson, Mathies, Renschler, and Wortley borrowed the following amounts
under the program: $182,125; $100,000; $135,620 and $203,481 respectively.
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Deferred Compensation Plan
As of July 18, 1991, Beverly amended and restated the Deferred Compensation
Plan: to allow no future grants; to close and pay out accounts with balances of
$10,000 or less; and to fix accounts with balances in excess of $10,000 using
the closing price of Beverly's Common Stock on the New York Stock Exchange on
July 18, 1991, of $11.00, which was credited to participants' Special Ledger
Accounts. Messrs. Banks and Hendrickson maintain accounts in the Deferred
Compensation Plan which are credited with interest at a rate of 9% per annum.
Employment Contracts and Termination of Employment and Change in Control
Arrangements
Beverly adopted a severance policy, as of December 1, 1989, which provides
assistance in the form of a lump sum severance payment to active, full-time,
corporate or regional office employees who are permanently, involuntarily and
without cause separated from all employment with Beverly or its successor.
Severance pay is calculated based upon an employee's base weekly pay, position
and continuous past service with Beverly as of the last day of the employee's
active employment. David R. Banks, Boyd W. Hendrickson, William A. Mathies, C.
Arnold Renschler, M.D. and Mark D. Wortley would have received $323,077,
$192,308, $150,000, $59,385 and $105,192, respectively, if they were entitled to
a severance payment as of January 1, 1997.
Effective December 8, 1995, Beverly entered into Change in Control
Severance Agreements that provide for payments to be made to the Executive Vice
Presidents of Beverly (including Messrs. Mathies and Wortley) (the "Severance
Agreements"). The Severance Agreements have an initial term of three years, with
an automatic extension of one additional day for each day beyond December 8,
1995 that the Executive Vice President (the "Executive") remains employed by
Beverly until such time as Beverly elects to cease such extension by written
notice, thereby setting the term to end three years from the written notice. The
Severance Agreements provide for specified severance benefits in the event of a
change in control and (i) termination of employment of the Executive by Beverly
without cause or by the Executive for good reason (which includes material
reduction in duties or authority, reduction in compensation or benefits, or a
relocation of employment from Fort Smith) during a period of two years following
the change in control or (ii) termination of employment initiated by the
Executive without good cause during the 31 day period commencing on the first
day of the 13th month following the change in control.
For purposes of the Severance Agreements, a change in control shall be
deemed to have taken place if: (i) any person, corporation, or other entity or
group, including any "group" as defined in Section 13(d)(3) of the Securities
Exchange Act of 1934, other than any employee benefit plan then maintained by
Beverly, becomes the beneficial owner of shares of Beverly's Common Stock having
30 percent or more of the total number of votes that may be cast for the
election of directors of Beverly; (ii) as the result of, or in connection with,
any contested election for the Board of Directors of Beverly, or any tender or
exchange offer, merger or other business combination or sale of assets, or any
combination of the foregoing (a "Transaction"), the persons who were directors
before the Transaction shall cease to constitute a majority of the Board of
Directors of Beverly or any successor to Beverly or its assets, or (iii) at any
time (a) Beverly shall consolidate with, or merge with, any other Person and
Beverly shall not be the continuing or surviving corporation, (b) any Person
shall consolidate with, or merge with, Beverly, and Beverly shall be the
continuing or surviving corporation and in connection therewith, all or part of
the outstanding Common Stock shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other property, (c) Beverly
shall be a party to a statutory share exchange with any other Person after which
Beverly is a subsidiary of any other Person, or (d) Beverly shall sell or
otherwise transfer 50% or more of the assets or earning power of Beverly and its
subsidiaries (taken as a whole) to any Person or Persons.
The severance benefit under the Severance Agreements includes (i) a lump
sum payment equal to three times the sum of (a) the Executive's base salary and
(b) the Executive's target bonus under Beverly's Annual Incentive Plan, with (a)
and (b) to be determined at either the termination of employment or the change
in control so as to produce the greater payment; (ii) vesting of all options,
restricted stock, phantom units, and other awards granted to Executive which
have not otherwise vested; (iii) continuation, for a period of three years
following termination of employment, of participation in Beverly's Medical Plan,
Executive Medical
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Reimbursement Plan, and Dental Plan; (iv) relocation to the next base of
full-time employment, if commenced within three years of termination of
employment, in accordance with Beverly's general relocation policy for
executives; (v) a matching contribution to Beverly's Executive Retirement Plan
for the plan year in which the termination of employment occurs; and (vi) for
two years following termination of employment, disability insurance benefits
equivalent to the benefits the Executive would have received had he or she
remained employed by Beverly.
The Severance Agreements include a provision for a gross-up payment if, in
the opinion of a Big 6 accounting firm or if so alleged by the Internal Revenue
Service, the aggregate severance benefit described above would cause the payment
of any part of such benefit to constitute an "excess parachute payment" as
defined in Section 280G(b) of the Internal Revenue Code. The amount of the
gross-up payment will be equal to the amount necessary to cause the net amount
retained by the Executive, after deduction of any (a) excise tax on the
severance benefit, (b) income tax on the gross-up payment, and (c) excise tax on
the gross-up payment, to be equal to the aggregate remuneration the Executive
would have received, as if Sections 280G and 4999 of the Internal Revenue Code
had not been enacted into law.
Effective December 8, 1995, Beverly entered into employment contracts (each
an "Employment Contract" and collectively the "Employment Contracts") with Mr.
Banks and Mr. Hendrickson (collectively the "Senior Executives"). The Employment
Contracts have an initial term of three years, with an automatic extension of
one additional day for each day beyond December 8, 1995 that each of the
respective Senior Executives remains employed by Beverly until such time as
Beverly elects to cease such extension by giving written notice thereby setting
the term to end three years from the written notice. The Employment Contracts
provide the Senior Executives with: (i) a stated minimum base salary per annum
through a specified date, and thereafter at any such greater rate as is
determined by the Committee (the stated minimum base salary per annum for
Messrs. Banks and Hendrickson is $627,500 and $450,000 respectively; (ii)
participation in all benefit plans; and (iii) an annual cash bonus pursuant to
Beverly's Annual Incentive Plan.
The Employment Contracts provide severance benefits in the event of a
change in control (including gross-up payments) on substantially the same terms
and conditions as set forth above with respect to the Severance Agreements
except that the Senior Executives may claim the relocation benefit without
commencing full-time employment. In addition Mr. Banks' Employment Contract
provides that Beverly will provide office space to Mr. Banks for a period of the
lesser of three years or the date he commences full-time employment.
In addition to severance benefits in the event of a change in control, the
Employment Contracts provide for severance benefits to the Senior Executives
during their term if there is a termination of employment initiated by (i)
Beverly without cause or (ii) by the Senior Executive for good reason. In this
event, the severance benefit includes: (a) a lump sum payment equal to one times
the sum of the Senior Executive's (1) base salary and (2) target bonus or actual
bonus for the previous year, if higher; (b) vesting of all unvested equity-based
compensation; (c) continuation, for at least two years from termination of
employment, of participation in Beverly's Medical Plan, Executive Medical
Reimbursement Plan, and Dental Plan; (d) relocation benefits as described above;
and (e) a matching contribution to Beverly's Executive Retirement Plan for the
plan year in which the termination of employment occurs.
Effective June 3, 1996 Beverly entered into an employment contract with Dr.
Renschler (as amended by the Employment Contract Addendum and Amendment to
Employment Contract, the "Renschler Agreement"). The Renschler Agreement
contains the same terms as the Employment Contract with Mr. Hendrickson with the
following exceptions: (i) the minimum base salary is $375,000; (ii) a guaranteed
bonus for 1996 performance of no less than 50% of base salary; (iii) a payment
of $400,000 in quarterly installments of $100,000 each beginning in June 1996 to
reimburse Dr. Renschler for lost benefits; (iv) Beverly agreed to be a co-signer
on a note for $1,200,000 to enable Dr. Renschler to exercise options from his
former employer (which note has since been repaid in full and Beverly's
obligations terminated and released); (v) the definition of "Change of Control"
was amended to include the sale by Beverly of at least 80 % of the capital stock
of Pharmacy Corporation of America to a person other than Beverly or any direct
or
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indirect affiliate and (vi) various provisions relating to Dr. Renschler's
participation in various Company stock-based compensation and other benefit
plans.
A trust has been established with Chemical Bank to fund certain benefits
payable pursuant to certain employee benefit plans, including the Severance
Agreements, the Employment Contracts and the Renschler Agreement in the event of
termination of employment after a change in control of Beverly. Immediately
prior to a change in control of Beverly, Beverly is required to make a deposit
to the trust in an amount equal to the excess of the maximum amount potentially
payable under the plans to all participants over the current value of the trust
assets. The trust is revocable by Beverly until a change in control. The trust
assets are subject to the claims of general creditors of Beverly in the event of
Beverly's insolvency.
The Beverly Board of Directors believes that the Severance Agreements, the
Employment Contracts and the Renschler Agreement will encourage the commitment
and availability of its key management employees in the face of potentially
disruptive and distracting circumstances that may arise in the event of an
attempted or actual change in control or an unsolicited takeover of Beverly. In
any such event, such key management employees will be able to analyze and
evaluate proposals objectively with a view to the best interest of Beverly and
its stockholders. The Severance Agreements, the Employment Contracts and the
Renschler Agreement, however, may have the incidental effect of discouraging
takeovers and protecting employees from removal, since the agreements increase
the cost that would be incurred by an acquiror seeking to replace current
management.
Beverly currently has employment and change of control agreements
(including certain severance agreements and employment contracts) (the "Existing
Agreements") with 87 employees, 84 of which are expected to become Transferred
Employees and will be transferred to New Beverly or one of its subsidiaries, as
appropriate, immediately prior to the Distribution. It is anticipated that 3
employees that currently have Existing Agreements will not become Transferred
Employees and will terminate their employment with Beverly. In addition, Beverly
currently has Existing Agreements with 13 employees of PCA (including the
Renschler Agreement), all of whom will become Retained Employees and be employed
by Capstone or one of its subsidiaries as of the Effective Time of the Merger.
If the Transactions were deemed to constitute a change in control within the
meaning of such Existing Agreements, all employees with such agreements could be
entitled to receive, upon termination of employment, up to $42 million in
aggregate payments.
Beverly has requested that the 84 employees who will become Transferred
Employees enter into new employment, severance, or change of control severance
agreements with New Beverly to be effective on the effective date of the
Distribution (the "New Beverly Agreements"). The New Beverly Agreements provide,
in exchange for the benefits provided therein (as described below), that the
employee agrees to: (i) waive any rights currently in existence under any change
in control, severance or employment agreement or other compensation or employee
benefit plan with or previously assumed by Beverly; (ii) waive any claim that
either the Distribution or the Merger constitutes a Change in Control; (iii)
non-disclosure and non-solicitation provisions not contained in the Existing
Agreements; (iv) a more narrow definition of "change in control" for future
transactions; and (v) cancellation of existing Beverly stock options and the
substitution of new stock options to be issued by New Beverly with similar terms
and conditions (including 100% vesting) as the prior options, other than an
increase in the number of shares for which the option may be exercised and a
decrease in the exercise price thereof in order to take into account the effect
of the Distribution.
The New Beverly Agreements provide the following benefits: (i) change in
control severance benefits substantially the same as those set forth in Existing
Agreements plus the addition of vesting of life insurance benefits for certain
officers; and (ii) additional severance benefits for officers upon termination
not in connection with a change in control. Four employees have failed to
execute and deliver a New Beverly Agreement. New Beverly will assume the
obligations of Beverly under the Existing Agreements. New Beverly will also
assume any Beverly stock options by cancellation of the Beverly grants and the
substitution of new grants by New Beverly with similar terms and conditions
(including 100% vesting) as the prior grants other than appropriate adjustments
to the number of shares and exercise price in order to take into account the
effect of the Distribution. In addition, the Existing Agreements (unlike many of
the New Beverly Agreements), generally provide no severance benefits outside of
a change in control.
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Capstone will assume the Existing Agreements with the 13 PCA employees,
effective on the Effective Date of the merger (the "Assumed Agreements").
Beverly will accelerate vesting of currently unvested Beverly options, phantom
shares, performance shares and restricted stock held by PCA employees on the
Effective Date of the Merger. On that date, Beverly will cancel all unexercised
Beverly stock options and Capstone will issue new Capstone stock options in
substitution, with similar terms and conditions (including 100% vesting) as the
prior options, other than an increase in the number of shares for which the
option may be exercised and a decrease in the exercise price to take into
account the effect of the Distribution and Merger. It is anticipated that 3 of
the 13 PCA employees will terminate employment with Capstone after a transition
period and be eligible for severance benefits under the Assumed Agreements.
NEW BEVERLY 1997 LONG-TERM INCENTIVE PLAN
On May 29, 1997, the Board of Directors of New Beverly adopted the New
Beverly 1997 Long-Term Incentive Plan (the "New Beverly 1997 Incentive Plan").
The Board of Directors, its Compensation Committee and Beverly, as sole
stockholder of New Beverly prior to the Distribution, has approved the New
Beverly 1997 Incentive Plan and recommended its approval by Beverly stockholders
at a meeting called to vote thereon. The Compensation Committee and Board of
Directors of Beverly have determined that it is in the best interest of Beverly
and its stockholders to seek stockholder approval from the Beverly stockholders
of the New Beverly 1997 Incentive Plan in view of the federal tax provisions
contained in Section 162(m) of the Code. Under Code Section 162(m), New Beverly
may be prohibited from deducting the expense of compensation accrued or paid to
its chief executive officer and its four other most highly-compensated officers
("Covered Participants") to the extent such compensation to any Covered
Participant exceeds $1 million for any taxable year of New Beverly. An exception
exists to this deduction limit for performance-based compensation such as an
award granted under the New Beverly 1997 Incentive Plan, if, among other
conditions, the specific terms of the performance-based compensation to such
Covered Participants are disclosed to and approved by the stockholders.
Stockholder approval of the New Beverly 1997 Incentive Plan is being sought in
order that awards granted under the New Beverly 1997 Incentive Plan will not
count toward the $1 million deductible compensation limit under Code Section
162(m).
The purpose of the New Beverly 1997 Incentive Plan is to allow New Beverly
to attract and retain qualified officers, key employees and consultants and to
provide these individuals with an additional incentive to devote themselves to
the future success of New Beverly. Additionally, New Beverly believes that
awards under the 1997 Incentive Plan will more closely align the interests of
its personnel with those of its stockholders. New Beverly will also use the New
Beverly 1997 Incentive Plan to fulfill its obligations under the Employee
Benefit Agreement with regards to Transferred Employees. For a discussion of the
material terms of the New Beverly 1997 Incentive Plan, see "Other Beverly
Proposals -- New Beverly 1997 Long-Term Incentive Plan" in the Joint Proxy
Statement/Prospectus. The New Beverly 1997 Incentive Plan is attached as Annex I
to the Joint Proxy Statement/Prospectus.
NEW BEVERLY NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
On May 29, 1997, the Board of Directors of New Beverly adopted the New
Beverly Non-Employee Directors Stock Option Plan ("New Beverly Directors Option
Plan"). The New Beverly Directors Option Plan has been adopted by the Board of
Directors and Compensation Committee of Beverly, and has been approved by
Beverly as sole stockholder of New Beverly prior to the Distribution.
Non-Employee Directors are not eligible to participate under the New Beverly
1997 Incentive Plan.
The purpose of the New Beverly Directors Option Plan is to build a
proprietary interest among the Non-Employee Directors on the New Beverly Board
of Directors, and thereby secure for New Beverly stockholders the benefits
associated with stock ownership by those who will oversee New Beverly's future
growth and success. For a discussion of the material terms of the New Beverly
Directors Option Plan, see "Other Beverly Proposals -- New Beverly Non-Employee
Directors Stock Option Plan" in the Joint Proxy Statement/Prospectus. The New
Beverly Directors Option Plan is attached as Annex J to the Joint Proxy
Statement/Prospectus.
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CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS
Jon E.M. Jacoby, a director of Beverly, serves as Executive Vice President,
Chief Financial Officer and director of Stephens Group, Inc. For the year ended
December 31, 1996, Beverly paid to Stephens Group, Inc. or its affiliates,
approximately $880,113 for investment banking and brokerage services. It is
anticipated that prior to the consummation of the Transactions, Mr. Jacoby will
be appointed as a director of New Beverly. See "Business -- Management."
DESCRIPTION OF NEW BEVERLY CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Prior to the Distribution, New Beverly shall cause to be filed an amendment
to its Certificate of Incorporation which shall grant to New Beverly the
authority to issue shares of capital stock, of which will be
common stock, par value $.10 per share, and will be preferred stock,
par value $1.00 per share ("New Beverly Preferred Stock"). At August 31, 1997,
New Beverly had outstanding 1,000 shares of New Beverly Common Stock, all of
which are currently held by Beverly.
NEW BEVERLY PREFERRED STOCK
Under New Beverly's Certificate of Incorporation, New Beverly's Board of
Directors may from time to time establish and issue one or more series of
preferred stock and fix the designations, powers, preferences and rights of the
shares of such series and the qualification, limitations or restrictions
thereon, including, but not limited to, the fixing of the dividend rights,
dividend rate or rates, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices,
and the liquidation preferences, in each case, if any, of any wholly unissued
series of New Beverly Preferred Stock.
NEW BEVERLY COMMON STOCK
Holders of New Beverly Common Stock are entitled to receive such dividends
as are declared by the Board of Directors, subject to the preference of any
outstanding New Beverly Preferred Stock, and are entitled to cast one vote per
share on all matters voted upon by stockholders. There is no cumulative voting
for the election of directors and New Beverly Common Stock does not have any
preemptive rights. Upon liquidation of New Beverly, holders of New Beverly
Common Stock are entitled to share equally and ratably in any assets available
for distribution to them, after payment or provision for liabilities and amounts
owing with respect to any outstanding New Beverly Preferred Stock. Payment and
declaration of dividends on New Beverly Common Stock and purchases of shares
thereof by New Beverly will be subject to restrictions if New Beverly fails to
pay dividends on any series of New Beverly Preferred Stock ranking prior to New
Beverly Common Stock as to the payment of dividends. It is anticipated that New
Beverly will be subject to certain restrictions under its banking arrangements
related to the payment of cash dividends on its common stock.
The Registrar and Transfer Agent for New Beverly Common Stock is The Bank
of New York.
NEW BEVERLY COMMON STOCK PURCHASE RIGHTS
The New Beverly Board of Directors on May 29, 1997 adopted a stockholders
rights plan, pursuant to which one common stock purchase right (a "Right" or
"Rights") will be issued with respect to each share of New Beverly Common Stock
(the "Common Shares"), outstanding at the close of business on the Distribution
Date. The Rights are identical in substance to the stock purchase rights
currently outstanding in connection with the Beverly stockholders rights plan.
Each Right entitles the registered holder thereof, after the Right becomes
exercisable and until (or the earlier redemption, exchange, or
termination of the Right), to purchase from New Beverly one Common Share at a
price of $ per share, subject to adjustment (the "Purchase Price"). The
description and terms of the Rights are set forth in a Rights Agreement dated
(the "Rights Agreement") between New Beverly and The Bank of New York,
as Rights Agent (the "Rights Agent").
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The Rights are represented by the Common Share certificates and are not
exercisable until a Distribution Date (as defined). A Distribution Date is
defined as the earlier of the following: (i) ten days following the Shares
Acquisition Date (the first date of a public announcement by New Beverly or an
Acquiring Person (as defined in the Rights Agreement) which reveals the
existence of an Acquiring Person) or (ii) the tenth day after the date of the
commencement of, or of the first public announcement of the intent of any person
(other than New Beverly, any of its subsidiaries, or any of its Employee Benefit
Plans) to commence a tender or exchange offer which would result in any Person
becoming the beneficial owner of common shares aggregating 15% or more of the
outstanding New Beverly Common Shares (an "Acquiring Person"). The Board of
Directors of New Beverly may postpone, under certain circumstances, one or more
times, a Distribution Date beyond the dates set forth above. As soon as
practicable, after a Distribution Date, the Rights Agent will send to each
record holder of New Beverly Common Shares, as of the close of business on a
Distribution Date, a certificate for Rights evidencing one Right for each Common
Share. The Rights will first become exercisable on a Distribution Date, unless
earlier redeemed or exchanged, and may then begin trading separately. The Rights
will not at any time have any voting rights.
Each holder of a Right (other than those owned by the Acquiring Person
which shall be void) will have the right to receive upon its exercise that
number of Common Shares having a market value of two times the then current
Purchase Price of one Right if one of the following events is triggered: (1) a
person becomes an Acquiring Person (except under certain circumstances where
cash offers for all outstanding Common Shares are approved by the Board of
Directors of New Beverly); or (2) if New Beverly is the surviving corporation in
a merger with an Acquiring Person or any Associate or Affiliate (as defined in
Section 12b-2 of the Exchange Act) of any Acquiring Person, and the Common
Shares were not changed or exchanged. In the event that a person or group
becomes an Acquiring Person, or New Beverly is acquired in a merger or other
business combination transaction where more than 50% of its assets or earning
power was sold, proper provision shall be made so that each holder of a Right
shall thereafter have the right to receive, upon the exercise thereof at the
then current Purchase Price of the Right, that number of shares of common stock
of the acquiring company which at the time of such transaction would have the
market value of two times the then current Purchase Price of one Right.
The New Beverly Board of Directors has the right at any time prior to an
acquisition of an Acquiring Person of 50% or more of the then outstanding Common
Shares to cause New Beverly to acquire the Rights (other than those owned by the
Acquiring Person which are void) in exchange for that number of Common Shares
which has an aggregate value, per Right, equal to the excess of the value of the
Common Shares issuable upon exercise of a Right after a person becomes an
Acquiring Person over the Purchase Price.
The New Beverly Board of Directors may redeem the Rights in whole at a
price of $.01 per Right (the "Redemption Price") at any time prior to the close
of business on the tenth day following the public announcement of an Acquiring
Person. The ten-day redemption period may be changed by a majority of the Board
of Directors under certain circumstances. The right to exercise the Rights will
immediately terminate upon action by the New Beverly Board of Directors to
redeem the Rights and the holders of the Rights will only have the right to
receive the Redemption Price. The Rights will expire on , unless
earlier redeemed or exchanged.
The Purchase Price, the number of shares covered by each Right and the
number of Rights outstanding are subject to adjustment from time to time to
prevent dilution. Such adjustments may be made in the event New Beverly (i)
declares a stock dividend on, or a subdivision, combination or reclassification
of, the Common Shares, (ii) upon the grant to holders of the Common Shares of
certain rights or warrants to subscribe for or purchase Common Shares or
convertible securities at less than the current market price of the Common
Shares or (iii) upon the distribution to holders of the Common Shares of
evidences of indebtedness, securities or assets (excluding regular periodic cash
dividends at a rate not in excess of 125% of the last regular periodic cash
dividend paid, or if not previously paid at a rate not to exceed 50% of the
average net income per share of New Beverly for the four quarters ended
immediately prior to the payment of such dividend, or dividends payable in
Common Shares (which dividends will be subject to the adjustment described in
clause (i) above) or of subscription rights or warrants (other than those
referred to above).
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No adjustment in the Purchase Price will be required until cumulative
adjustments require an adjustment of at least 1% in such Purchase Price. No
fractional shares will be issued and in lieu thereof, a payment in cash will be
made based on the market price of the Common Shares on the last trading date
prior to the date of exercise.
Until a Right is exercised, the holder thereof will have no rights as a
stockholder of New Beverly beyond those as an existing stockholder, including,
without limitation, the right to vote or to receive dividends.
Any provisions of the Rights Agreement may be amended by the Board of
Directors of New Beverly prior to a Distribution Date. After a Distribution
Date, New Beverly and the Rights Agent may amend or supplement the Rights
Agreement without the approval of any holders of Right Certificates to cure any
ambiguity, to correct or supplement any provision contained therein which may be
defective or inconsistent with any other provisions therein, to shorten or
lengthen any period under the Rights Agreement (requiring a majority of the
Board of Directors under certain circumstances), or so long as the interest of
the holders of Right Certificates (other than an Acquiring Person or an
affiliate or associate of an Acquiring Person) are not adversely affected,
thereby, to make any other provision in regard to matters or questions arising
thereunder which New Beverly and the Rights Agent may deem necessary or
desirable, including but not limited to extending the Final Expiration Date. New
Beverly may at any time prior to a Person becoming an Acquiring Person amend the
Rights Agreement to lower the thresholds described above to not less than the
greater of (i) any percentage greater than the largest percentage of the
outstanding Common Shares then known by New Beverly to be beneficially owned by
any person or group of affiliated or associated persons and (ii) 10%.
The Rights will cause substantial dilution to a person or group that
acquires 15% or more of New Beverly's stock on terms not approved by the New
Beverly's Board of Directors, except pursuant to an offer conditioned on
substantial number of Rights being acquired. The Rights should not interfere
with any merger or other business combination approved by the Board of Directors
prior to ten days after the time that a Person or group has become an Acquiring
Person as the Rights may be redeemed by New Beverly at $.01 per Right prior to
such time.
THE CHARTER AND BYLAWS OF NEW BEVERLY
The provisions of the New Beverly Certificate of Incorporation (the "New
Beverly Certificate") and the New Beverly Bylaws will be amended and restated by
Beverly prior to the Distribution to duplicate the substance of the provisions
of Beverly's current Certificate of Incorporation (the "Beverly Certificate")
and the Beverly Bylaws, respectively. For a discussion of the material
provisions of the Beverly Certificate and the Beverly Bylaws, see the
information set forth in the Joint Proxy Statement/Prospectus under the caption
"Comparative Rights of Stockholders."
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Distribution, New Beverly will have an estimated
110,424,677 shares of New Beverly Common Stock outstanding, all of which will be
freely tradable without restriction or further registration under the Securities
Act, except to the extent such shares are held by "affiliates" of New Beverly,
which will be subject to the limitations of Rule 144 promulgated under the
Securities Act. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this Prospectus, persons who may be deemed affiliates of
New Beverly, as that term is defined in the Securities Act would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of New Beverly Common
Stock (approximately 1.1 million shares immediately after the Distribution) or
the average weekly trading volume during the four calendar weeks preceding a
sale by such person. Sales under Rule 144 are also subject to certain provisions
relating to the manner and notice of sale and availability of current public
information about New Beverly. Following the Distribution, approximately 5.5
million shares of New Beverly Common Stock will be issuable upon the exercise of
options held by directors and employees of New Beverly and former employees of
Beverly.
LEGAL MATTERS
Certain legal matters in connection with the Distribution will be passed
upon for New Beverly by Giroir, Gregory, Holmes & Hoover, PLC, Little Rock,
Arkansas, and certain other legal matters in connection with this Offering will
be passed upon for New Beverly by John W. MacKenzie, Deputy General Counsel of
New Beverly.
EXPERTS
The consolidated financial statements and schedule of Beverly Enterprises,
Inc. at December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements and schedule of Pharmacy Corporation
of America at December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, appearing in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The balance sheet of New Beverly Holdings, Inc. as of May 31, 1997,
appearing in this Prospectus and Registration Statement, has been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
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BEVERLY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
The following financial statements and schedules are included herein:
<TABLE>
<S> <C>
BEVERLY ENTERPRISES, INC.
Condensed Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996................................... F-2
Condensed Consolidated Statements of Income for the
three-month and six-month periods ended June 30, 1997
and 1996................................................ F-3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996................. F-4
Notes to Condensed Consolidated Financial Statements...... F-5
PHARMACY CORPORATION OF AMERICA
Condensed Consolidated Balance Sheets as of June 30, 1997
and December 31, 1996................................... F-8
Condensed Consolidated Statements of Income for the
three-month and six-month periods ended June 30, 1997
and 1996................................................ F-9
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996................. F-10
Notes to Condensed Consolidated Financial Statements...... F-11
BEVERLY ENTERPRISES, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-13
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................... F-14
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994........................ F-15
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994............ F-16
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................ F-17
Notes to Consolidated Financial Statements................ F-18
Schedule II -- Valuation and Qualifying Accounts.......... F-36
PHARMACY CORPORATION OF AMERICA
Report of Ernst & Young LLP, Independent Auditors......... F-37
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................... F-38
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1996, 1995 and 1994.... F-39
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................ F-40
Notes to Consolidated Financial Statements................ F-41
Schedule II -- Valuation and Qualifying Accounts.......... F-51
NEW BEVERLY HOLDINGS, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-52
Balance Sheet as of May 31, 1997.......................... F-53
Note to Balance Sheet..................................... F-54
</TABLE>
F-1
<PAGE> 85
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 71,756 $ 69,761
Accounts receivable -- patient, less allowance for
doubtful accounts:
1997 -- $34,755; 1996 -- $25,618........................ 502,511 491,063
Accounts receivable -- nonpatient, less allowance for
doubtful accounts:
1997 -- $580; 1996 -- $401.............................. 10,429 13,480
Notes receivable.......................................... 9,260 10,746
Operating supplies........................................ 55,713 55,348
Deferred income taxes..................................... 23,547 14,543
Prepaid expenses and other................................ 43,738 42,304
---------- ----------
Total current assets................................ 716,954 697,245
Property and equipment, net of accumulated depreciation and
amortization:
1997 -- $635,982; 1996 -- $643,085...................... 1,188,197 1,248,785
Other assets:
Notes receivable, less allowance for doubtful notes:
1997 -- $5,674; 1996 -- $4,951.......................... 28,958 37,306
Designated and restricted funds........................... 74,182 75,848
Goodwill, net............................................. 375,221 356,197
Other, net................................................ 107,454 109,701
---------- ----------
Total other assets.................................. 585,815 579,052
---------- ----------
$2,490,966 $2,525,082
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 96,854 $ 99,121
Accrued wages and related liabilities..................... 128,892 131,072
Accrued interest.......................................... 17,683 16,969
Other accrued liabilities................................. 107,660 93,042
Current portion of long-term obligations.................. 35,669 38,826
---------- ----------
Total current liabilities........................... 386,758 379,030
Long-term obligations....................................... 1,018,551 1,106,256
Deferred income taxes payable............................... 98,769 83,610
Other liabilities and deferred items........................ 96,171 95,091
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued: 1997 -- 104,712,723;
1996 -- 104,432,848..................................... 10,471 10,443
Additional paid-in capital................................ 777,172 774,672
Retained earnings......................................... 173,390 133,957
Treasury stock, at cost: 1997 -- 6,274,108;
1996 -- 5,423,408....................................... (70,316) (57,977)
---------- ----------
Total stockholders' equity.......................... 890,717 861,095
---------- ----------
$2,490,966 $2,525,082
========== ==========
</TABLE>
- ---------------
NOTE: The balance sheet at December 31, 1996 has been derived from the audited
consolidated financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes.
F-2
<PAGE> 86
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net operating revenues.......................... $817,503 $798,333 $1,634,219 $1,609,380
Interest income................................. 3,161 3,475 6,726 6,935
-------- -------- ---------- ----------
Total revenues........................ 820,664 801,808 1,640,945 1,616,315
Costs and expenses:
Operating and administrative:
Wages and related.......................... 448,074 444,527 897,856 894,522
Other...................................... 287,944 280,006 577,874 573,490
Interest...................................... 21,971 22,983 44,687 46,128
Depreciation and amortization................. 27,725 25,967 54,806 51,023
-------- -------- ---------- ----------
Total costs and expenses.............. 785,714 773,483 1,575,223 1,565,163
-------- -------- ---------- ----------
Income before provision for income taxes........ 34,950 28,325 65,722 51,152
Provision for income taxes...................... 13,980 11,330 26,289 20,461
-------- -------- ---------- ----------
Net income...................................... $ 20,970 $ 16,995 $ 39,433 $ 30,691
======== ======== ========== ==========
Net income per share of common stock:
Primary:
Net income per share of common stock....... $ .21 $ .17 $ .40 $ .31
======== ======== ========== ==========
Shares used to compute net income per
share.................................... 99,048 100,079 99,230 100,028
======== ======== ========== ==========
Fully diluted:
Net income per share of common stock....... $ .20 $ .16 $ .38 $ .30
======== ======== ========== ==========
Shares used to compute net income per
share.................................... 110,640 111,341 110,865 111,299
======== ======== ========== ==========
</TABLE>
Primary earnings per share for the three-month and six-month periods ended
June 30, 1997 and 1996 were computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period and the
weighted average number of shares issuable upon exercise of common stock
equivalents (principally stock options), calculated using the treasury stock
method. Fully diluted earnings per share for the three-month and six-month
periods ended June 30, 1997 and 1996 were computed as above and assumed
conversion of the Company's 5 1/2% convertible subordinated debentures.
Conversion of the Company's 7 5/8% convertible subordinated debentures and zero
coupon notes would have an anti-dilutive effect and, therefore, were not
assumed.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which is
required to be adopted in financial statements for periods ending after December
15, 1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior periods.
Under the new requirements, primary earnings per share will be renamed basic
earnings per share and will exclude the dilutive effect of stock options. The
impact is not expected to result in a change in the Company's primary earnings
per share or fully diluted earnings per share (which will be renamed dilutive
earnings per share) for the three-month and six-month periods ended June 30,
1997 and 1996.
See accompanying notes.
F-3
<PAGE> 87
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 39,433 $ 30,691
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 54,806 51,023
Provision for reserves and discounts on patient, notes
and other receivables, net............................ 19,818 11,549
Amortization of deferred financing costs............... 1,336 2,726
Gains on dispositions of facilities and other assets,
net................................................... (20,842) (2,890)
Deferred taxes......................................... 6,632 8,271
Net increase (decrease) in insurance related
accounts.............................................. 383 (8,204)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable -- patient....................... (33,960) (22,809)
Operating supplies................................... (2,036) 2,247
Prepaid expenses and other receivables............... (727) (1,752)
Accounts payable and other accrued expenses.......... 829 (19,662)
Income taxes payable................................. (4,309) 6,199
Other, net........................................... 154 (359)
--------- ---------
Total adjustments................................. 22,084 26,339
--------- ---------
Net cash provided by operating activities......... 61,517 57,030
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (45,373) (25,721)
Proceeds from dispositions of facilities and other
assets................................................. 143,409 12,579
Collections on notes receivable and REMIC investment...... 18,441 6,005
Capital expenditures...................................... (70,317) (61,392)
Other, net................................................ (3,263) (4,820)
--------- ---------
Net cash provided by (used for) investing
activities...................................... 42,897 (73,349)
Cash flows from financing activities:
Revolver borrowings....................................... 772,000 601,000
Repayments of Revolver borrowings......................... (838,000) (624,000)
Proceeds from issuance of long-term obligations........... 3,534 180,000
Repayments of long-term obligations....................... (28,242) (136,834)
Purchase of common stock for treasury..................... (14,736) (6,238)
Proceeds from exercise of stock options................... 2,546 2,426
Deferred financing costs.................................. (354) (5,893)
Dividends paid on preferred stock......................... -- (688)
Proceeds from designated funds, net....................... 833 1,676
--------- ---------
Net cash provided by (used for) financing
activities...................................... (102,419) 11,449
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 1,995 (4,870)
Cash and cash equivalents at beginning of period............ 69,761 56,303
--------- ---------
Cash and cash equivalents at end of period.................. $ 71,756 $ 51,433
========= =========
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized).................. $ 42,637 $ 37,026
Income taxes (net of refunds).......................... 23,966 5,991
</TABLE>
See accompanying notes.
F-4
<PAGE> 88
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(i) The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, and include all adjustments of a
normal recurring nature which are, in the opinion of management, necessary for a
fair presentation of the results of operations for the three-month and six-month
periods ended June 30, 1997 and 1996 pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures in these condensed consolidated financial statements are adequate to
make the information presented not misleading. These condensed consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included in the
Company's 1996 Annual Report on Form 10-K filed with the Securities and Exchange
Commission. The results of operations for the three-month and six-month periods
ended June 30, 1997 are not necessarily indicative of the results for a full
year. Unless the context indicates otherwise, the Company means Beverly
Enterprises, Inc. and its consolidated subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
(ii) The provisions for income taxes for the three-month and six-month
periods ended June 30, 1997 and 1996 were based on an estimated annual effective
tax rate of 40%. The Company's estimated annual effective tax rates for 1997 and
1996 are different than the federal statutory rate primarily due to the impact
of state income taxes and amortization of nondeductible goodwill. The provisions
for income taxes consist of the following for the three-month and six-month
periods ended June 30 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------
1997 1996 1997 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Federal:
Current...................................... $10,009 $ 4,946 $15,307 $ 9,499
Deferred..................................... 2,075 4,074 6,915 6,839
State:
Current...................................... 3,079 1,377 4,350 2,691
Deferred..................................... (1,183) 933 (283) 1,432
------- ------- ------- -------
$13,980 $11,330 $26,289 $20,461
======= ======= ======= =======
</TABLE>
(iii) During the six months ended June 30, 1997, the Company purchased six
previously leased nursing facilities (758 beds) and certain other assets
including, among other things, 14 institutional pharmacies and 17 outpatient
therapy clinics, for approximately $44,700,000 cash and approximately $3,800,000
closing and other costs. Also during such period, the Company sold or terminated
the leases on 59 nursing facilities (7,244 beds) and certain other assets for
cash proceeds of approximately $143,700,000. The Company primarily used the net
cash proceeds from the disposition of facilities and other assets to repay
Revolver borrowings, to repurchase the zero coupon notes and to repay various
other indebtedness. The operations of these facilities were immaterial to the
Company's financial position and results of operations.
F-5
<PAGE> 89
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1997, the Company entered into a definitive agreement with
Capstone Pharmacy Services, Inc. ("Capstone") to combine Pharmacy Corporation of
America ("PCA"), a wholly-owned subsidiary of the Company, with Capstone (the
"Merger") to create one of the nation's largest independent institutional
pharmacy companies. The Company will receive approximately $275,000,000 of cash
as partial repayment for PCA's intercompany debt, with any remaining
intercompany balance contributed to PCA's capital. The Company intends to use
the $275,000,000 to repay Revolver borrowings, to pay off the 7 5/8% convertible
subordinated debentures, to pay off the 8 3/4% Senior Notes, to repay certain
other notes and mortgages and for general corporate purposes. Pursuant to the
Merger Agreement, at the effective time of the Merger (the "Effective Time")
each share of the Company's Common Stock issued and outstanding immediately
prior to the Effective Time (other than fractional shares) will be converted
into the right to receive that number of newly issued shares of Capstone common
stock equal to the quotient, expressed to four decimal places, of (a) 50,000,000
divided by (b) the number of shares of the Company's Common Stock outstanding
immediately prior to the Effective Time. The Merger, which is subject to
approvals by the shareholders of both the Company and Capstone, completion of
the Distribution (as discussed below), and approvals by various government
agencies, is expected to close by year-end.
In connection with the restructuring, the Company will transfer all of its
non-PCA assets and liabilities to New Beverly Holdings, Inc. ("New Beverly"), in
exchange for the issuance of New Beverly common stock. The Company will then
distribute (the "Distribution") such New Beverly common stock to the then
current shareholders of the Company's Common Stock on a one-for-one basis. In
connection with the Distribution, the Company will be required to restructure,
repay or otherwise renegotiate substantially all of its outstanding debt
instruments and renegotiate or make certain payments under various employment
agreements with officers of the Company. The Company estimates that the costs of
such undertakings will approximate $10,200,000 as it relates to restructuring,
repaying or renegotiating debt instruments and approximately $14,000,000 as it
relates to renegotiating or paying certain amounts under various employment
agreements. It is expected that such amounts, along with other transaction costs
will be funded with a portion of the $275,000,000 proceeds to be received as a
partial repayment of PCA's intercompany debt, as discussed above.
On July 17, 1997, the Company called its 5 1/2% convertible subordinated
debentures (the "5 1/2% Debentures") for redemption on August 18, 1997. The
Company has obtained a stand-by commitment for the issuance of subordinated
indebtedness, whose net cash proceeds would qualify under the restrictive
covenant contained in an indenture dated as of February 1, 1996, to be used to
redeem the 5 1/2% Debentures. The Company anticipates that if the price of the
Company's Common Stock is more than 3.30% above the conversion price of $13.33
immediately prior to the redemption date, the holders will be likely to convert
their 5 1/2% Debentures to the Company's Common Stock. The right to convert the
5 1/2% Debentures into shares of the Company's Common Stock will expire at the
close of business August 15, 1997. Conversion of all or substantially all of the
5 1/2% Debentures into the Company's Common Stock prior to the Effective Time of
the Merger would cause an increase in the Company's outstanding Common Stock of
approximately 11,250,000 shares and would result in holders of the Company's
Common Stock receiving a comparatively smaller number of shares of Capstone
common stock in the Merger.
(iv) There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
(v) Effective July 31, 1987, Beverly Enterprises, a California corporation
("Beverly California"), became a wholly-owned subsidiary of Beverly Enterprises,
Inc., a Delaware corporation ("Beverly Delaware"). Effective January 1, 1995,
Beverly California changed its name to Beverly Health and Rehabilitation
Services, Inc. ("BHRS"). Beverly Delaware (the parent) provides financial,
administrative and legal services to its subsidiaries, including BHRS, for which
it charges management fees.
F-6
<PAGE> 90
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarized unaudited financial information concerning BHRS is
being reported because BHRS's 7 5/8% convertible subordinated debentures due
March 2003 and its zero coupon notes (collectively, the "Debt Securities") are
publicly-held. Beverly Delaware is co-obligor of the Debt Securities. Summary
unaudited financial information for BHRS is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenues............................. $668,891 $664,929 $1,339,244 $1,345,202
Total costs and expenses................... 629,525 635,114 1,271,880 1,293,854
Net income................................. 23,619 17,889 40,418 30,809
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Current assets............................................. $ 362,080 $ 369,501
Long-term assets........................................... 1,318,214 1,404,292
Current liabilities........................................ 204,962 184,887
Long-term liabilities...................................... 641,584 795,593
</TABLE>
F-7
<PAGE> 91
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6,668 $ 7,575
Accounts receivable, less allowance for doubtful accounts:
1997 -- $14,608; 1996 -- $13,070....................... 109,798 93,078
Notes and other receivables, less allowance for doubtful
accounts:
1997 -- $394; 1996 -- $820............................. 873 1,383
Inventory................................................. 25,322 22,025
Prepaid expenses and other................................ 494 335
-------- --------
Total current assets.............................. 143,155 124,396
Property and equipment, net of accumulated depreciation and
amortization:
1997 -- $27,307; 1996 -- $23,263.......................... 35,215 32,698
Other assets:
Goodwill, net............................................. 290,931 276,430
Systems development, net.................................. 4,720 4,837
Other, net................................................ 7,525 3,215
-------- --------
Total other assets................................ 303,176 284,482
-------- --------
$481,546 $441,576
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 21,237 $ 18,017
Accrued wages and related liabilities..................... 6,006 6,656
Other accrued liabilities................................. 6,639 6,621
Current portion of long-term obligations.................. 1,195 968
-------- --------
Total current liabilities......................... 35,077 32,262
Long-term obligations....................................... 1,588 1,334
Deferred income taxes payable............................... 4,046 3,980
Due to Parent............................................... 333,115 312,395
Commitments and contingencies
Stockholder's equity:
Common stock, 1,000 shares issued......................... 1 1
Additional paid-in capital................................ 3,866 3,866
Retained earnings......................................... 103,853 87,738
-------- --------
Total stockholder's equity........................ 107,720 91,605
-------- --------
$481,546 $441,576
======== ========
</TABLE>
NOTE: The balance sheet at December 31, 1996 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
See accompanying notes.
F-8
<PAGE> 92
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Non-affiliates................................ $128,634 $104,930 $251,024 $210,151
Affiliates.................................... 25,102 19,925 50,304 39,080
-------- -------- -------- --------
Total revenues........................ 153,736 124,855 301,328 249,231
Cost of goods sold.............................. 82,310 67,498 162,397 133,170
-------- -------- -------- --------
Gross profit.................................... 71,426 57,357 138,931 116,061
Costs and expenses:
Wages and related............................. 33,443 28,665 65,476 58,279
Selling, general and administrative........... 15,073 12,314 29,277 24,669
Provision for doubtful accounts............... 2,807 1,515 5,178 3,704
Depreciation and amortization................. 5,082 3,975 9,908 7,782
Management fees............................... 889 886 1,556 1,415
-------- -------- -------- --------
Total costs and expenses.............. 57,294 47,355 111,395 95,849
-------- -------- -------- --------
Income before provision for income taxes........ 14,132 10,002 27,536 20,212
Provision for income taxes...................... 5,845 4,197 11,421 8,481
-------- -------- -------- --------
Net income...................................... $ 8,287 $ 5,805 $ 16,115 $ 11,731
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-9
<PAGE> 93
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 16,115 $ 11,731
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 9,908 7,782
Provision for reserves on accounts, notes and other
receivables, net...................................... 5,178 3,704
Deferred taxes......................................... 66 2,405
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable.................................. (19,610) (5,194)
Inventory............................................ (1,839) 2,577
Prepaid expenses and other receivables............... (128) (464)
Accounts payable and other accrued expenses.......... 2,588 (6,152)
-------- --------
Total adjustments................................. (3,837) 4,658
-------- --------
Net cash provided by operating activities......... 12,278 16,389
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (27,589) (110)
Capital expenditures...................................... (5,242) (3,498)
Systems development....................................... (365) (330)
Other, net................................................ (1) 1,810
-------- --------
Net cash used for investing activities............ (33,197) (2,128)
Cash flows from financing activities:
Advances (to) from Parent, net............................ 20,531 (12,787)
Repayments of long-term obligations....................... (519) (270)
-------- --------
Net cash provided by (used for) financing
activities...................................... 20,012 (13,057)
-------- --------
Net increase (decrease) in cash and cash equivalents........ (907) 1,204
Cash and cash equivalents at beginning of period............ 7,575 3,315
-------- --------
Cash and cash equivalents at end of period.................. $ 6,668 $ 4,519
======== ========
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest............................................... $ 130 $ (28)
</TABLE>
See accompanying notes.
F-10
<PAGE> 94
PHARMACY CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
(i) The condensed consolidated financial statements included herein have
been prepared by Pharmacy Corporation of America (the "Company"), without audit,
and include all adjustments of a normal recurring nature which are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the three-month and six-month periods ended June 30, 1997 and
1996 pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures in these
condensed consolidated financial statements are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the Company's December 31, 1996 consolidated
financial statements and the notes thereto. The results of operations for the
three-month and six-month periods ended June 30, 1997 are not necessarily
indicative of the results for a full year. Unless the context indicates
otherwise, the Company means Pharmacy Corporation of America and its
consolidated subsidiaries.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(ii) The provisions for income taxes for the three-month and six-month
periods ended June 30, 1997 and 1996 were based on estimated annual effective
tax rates of 41.5% and 42.0%, respectively. The Company's estimated annual
effective tax rates for 1997 and 1996 are different than the federal statutory
rate primarily due to the impact of state income taxes and amortization of
nondeductible goodwill. The provisions for income taxes consist of the following
for the three-month and six-month periods ended June 30 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- ------
<S> <C> <C> <C> <C>
Federal:
Current...................................... $5,617 $2,474 $ 9,345 $5,001
Deferred..................................... (807) 980 54 1,979
State:
Current...................................... 1,208 532 2,010 1,075
Deferred..................................... (173) 211 12 426
------ ------ ------- ------
$5,845 $4,197 $11,421 $8,481
====== ====== ======= ======
</TABLE>
(iii) During the six months ended June 30, 1997, the Company purchased 14
pharmacies for approximately $27,600,000 cash. The operations of these
pharmacies were immaterial to the Company's financial position and results of
operations.
In April 1997, Beverly Enterprises, Inc. ("Beverly") entered into a
definitive agreement with Capstone Pharmacy Services, Inc. ("Capstone") to
combine the Company, a wholly-owned subsidiary of Beverly, with Capstone (the
"Merger") to create one of the nation's largest independent institutional
pharmacy companies. Beverly will receive approximately $275,000,000 of cash as
partial repayment for the Company's intercompany debt, with any remaining
intercompany balance contributed to the Company's capital. Beverly intends to
use the $275,000,000 to repay Revolver borrowings, to pay off the 7 5/8%
convertible subordinated debentures, to pay off the 8 3/4% Notes, to repay
certain other notes and mortgages and for general corporate purposes. Pursuant
to the Merger Agreement, at the effective time of the Merger (the "Effective
Time") each share of Beverly's Common Stock issued and outstanding immediately
prior to the Effective Time (other than
F-11
<PAGE> 95
PHARMACY CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fractional shares) will be converted into the right to receive that number of
newly issued shares of Capstone common stock equal to the quotient, expressed to
four decimal places, of (a) 50,000,000 divided by (b) the number of shares of
Beverly's Common Stock outstanding immediately prior to the Effective Time. In
connection with the Merger, Beverly will transfer all of its non-Company assets
and liabilities to New Beverly Holdings, Inc. ("New Beverly"), in exchange for
the issuance of New Beverly common stock. Beverly will then distribute (the
"Distribution") such New Beverly common stock to the then current stockholders
of Beverly's Common Stock on a one-for-one basis. The Merger, which is subject
to approvals by the stockholders of both Beverly and Capstone, completion of the
Distribution and approvals by various government agencies, is expected to close
by year-end.
(iv) There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
(v) The Company provides its pharmaceutical dispensing, infusion therapy
products and services and its pharmacy and nursing consulting services to
nursing facilities operated by Beverly, and to the residents of Beverly
facilities. Revenues from sales directly to Beverly nursing facilities were
approximately $50,304,000 and $39,080,000 for the six months ended June 30, 1997
and 1996, respectively. Revenues from sales to residents of Beverly facilities,
which are not considered by the Company to be revenues from affiliates, are
estimated to be approximately $51,000,000 and $42,000,000 for the six months
ended June 30, 1997 and 1996, respectively.
Beverly provides certain administrative services to the Company. These
services have included, among others, cash management, finance, legal, tax,
financial reporting, executive management, payroll and payables processing and
employee benefit plans maintenance. The responsibility for certain of these
services, including finance, tax and payables processing was transferred to the
Company in mid-1996 as part of a consolidation and reorganization of the
Company's accounting and related functions. Substantially all cash received by
the Company is deposited daily and wired to Beverly's corporate cash account. In
turn, all of the Company's operating expenses, capital expenditures and other
cash needs are paid by Beverly, and charged back to the Company along with a
management fee for handling such services. Fees for these services amounted to
approximately $1,556,000 and $1,415,000 for the six months ended June 30, 1997
and 1996, respectively. The Company believes that the charges for services
provided by Beverly to the Company are a reasonable allocation of the costs
incurred by Beverly on behalf of the Company in providing these services;
however, such costs are not necessarily indicative of the costs that would have
been incurred if the Company operated as a stand-alone entity.
The net result of all intercompany transactions between the Company and
Beverly is recorded in the "Due to Parent" account in the accompanying
consolidated balance sheets. There are currently no required repayment terms for
this account nor do such amounts bear interest.
F-12
<PAGE> 96
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Beverly Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Beverly
Enterprises, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included
financial statement Schedule II-Valuation and Qualifying Accounts of Beverly
Enterprises, Inc. These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Beverly Enterprises, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ ERNST & YOUNG LLP
Little Rock, Arkansas
February 7, 1997, except
for Note 2, paragraph 3,
as to which the date is
March 13, 1997
F-13
<PAGE> 97
BEVERLY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 69,761 $ 56,303
Accounts receivable -- patient, less allowance for
doubtful accounts:
1996 -- $25,618; 1995 -- $22,860....................... 491,063 514,820
Accounts receivable -- nonpatient, less allowance for
doubtful accounts:
1996 -- $401; 1995 -- $497............................. 13,480 15,995
Notes receivable.......................................... 10,746 7,460
Operating supplies........................................ 55,348 59,109
Deferred income taxes..................................... 14,543 24,892
Prepaid expenses and other................................ 42,304 38,013
---------- ----------
Total current assets.............................. 697,245 716,592
Property and equipment, net................................. 1,248,785 1,189,985
Other assets:
Notes receivable, less allowance for doubtful notes:
1996 -- $4,951; 1995 -- $4,953......................... 37,306 41,915
Designated and restricted funds........................... 75,848 57,082
Goodwill, net............................................. 356,197 380,681
Other, net................................................ 109,701 120,206
---------- ----------
Total other assets................................ 579,052 599,884
---------- ----------
$2,525,082 $2,506,461
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 99,121 $ 155,385
Accrued wages and related liabilities..................... 131,072 134,391
Accrued interest.......................................... 16,969 10,261
Other accrued liabilities................................. 93,042 88,869
Current portion of long-term obligations.................. 38,826 84,639
---------- ----------
Total current liabilities......................... 379,030 473,545
Long-term obligations....................................... 1,106,256 1,066,909
Deferred income taxes payable............................... 83,610 54,687
Other liabilities and deferred items........................ 95,091 90,987
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued: 1996 -- 104,432,848;
1995 -- 102,618,241.................................... 10,443 10,262
Additional paid-in capital................................ 774,672 766,549
Retained earnings......................................... 133,957 83,657
Treasury stock, at cost: 1996 -- 5,423,408 shares;
1995 -- 3,972,208 shares............................... (57,977) (40,135)
---------- ----------
Total stockholders' equity........................ 861,095 820,333
---------- ----------
$2,525,082 $2,506,461
========== ==========
</TABLE>
See accompanying notes.
F-14
<PAGE> 98
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net operating revenues................................... $3,267,189 $3,228,553 $2,969,239
Interest income.......................................... 13,839 14,228 14,578
---------- ---------- ----------
Total revenues................................. 3,281,028 3,242,781 2,983,817
Costs and expenses:
Operating and administrative:
Wages and related................................... 1,819,500 1,736,151 1,600,580
Other............................................... 1,139,442 1,224,681 1,114,916
Interest............................................... 91,111 84,245 64,792
Depreciation and amortization.......................... 105,468 103,581 88,734
Impairment of long-lived assets:
Adoption of SFAS No. 121............................ -- 68,130 --
Development and other costs......................... -- 32,147 --
---------- ---------- ----------
Total costs and expenses....................... 3,155,521 3,248,935 2,869,022
---------- ---------- ----------
Income (loss) before provision for income taxes and
extraordinary charge................................... 125,507 (6,154) 114,795
Provision for income taxes............................... 73,481 1,969 37,882
---------- ---------- ----------
Income (loss) before extraordinary charge................ 52,026 (8,123) 76,913
Extraordinary charge, net of income taxes of $1,099 in
1996 and $1,188 in 1994................................ (1,726) -- (2,412)
---------- ---------- ----------
Net income (loss)........................................ $ 50,300 $ (8,123) $ 74,501
========== ========== ==========
Net income (loss) applicable to common shares............ $ 50,300 $ (14,998) $ 66,251
========== ========== ==========
Income (loss) per share of common stock:
Primary:
Before extraordinary charge......................... $ .52 $ (.16) $ .79
Extraordinary charge................................ (.02) -- (.03)
---------- ---------- ----------
Net income (loss)................................... $ .50 $ (.16) $ .76
========== ========== ==========
Shares used to compute per share amounts............ 99,646 92,233 87,087
========== ========== ==========
Fully-diluted:
Before extraordinary charge......................... $ .50 $ (.16) $ .78
Extraordinary charge................................ (.02) -- (.02)
---------- ---------- ----------
Net income (loss)................................... $ .48 $ (.16) $ .76
========== ========== ==========
Shares used to compute per share amounts............ 111,002 92,233 98,428
========== ========== ==========
</TABLE>
See accompanying notes.
F-15
<PAGE> 99
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
--------- -------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994................ $ 150,000 $ 8,825 $590,909 $ 33,263 $(40,135) $ 742,862
Exercise of stock option grant........... -- 100 11,900 -- -- 12,000
Employee stock transactions, net......... -- 37 4,830 -- -- 4,867
Preferred stock dividends................ -- -- -- (8,250) -- (8,250)
Issuance of ATH preferred stock(1)....... -- -- 1,264 -- -- 1,264
Accretion of amounts due upon redemption
of ATH preferred stock(1)............. -- -- 859 (859) -- --
Net income............................... -- -- -- 74,501 -- 74,501
--------- -------- -------- -------- -------- ---------
Balances at December 31, 1994.............. 150,000 8,962 609,762 98,655 (40,135) 827,244
Issuance of 12,361,184 shares of common
stock for the purchase of PMSI........ -- 1,236 149,693 -- -- 150,929
Exchange of Preferred Stock into 5 1/2%
Debentures............................ (150,000) -- -- -- -- (150,000)
Employee stock transactions, net......... -- 64 7,094 -- -- 7,158
Preferred stock dividends................ -- -- -- (6,875) -- (6,875)
Net loss................................. -- -- -- (8,123) -- (8,123)
--------- -------- -------- -------- -------- ---------
Balances at December 31, 1995.............. -- 10,262 766,549 83,657 (40,135) 820,333
Employee stock transactions, net......... -- 181 8,123 -- -- 8,304
Purchase of common stock for treasury.... -- -- -- -- (17,842) (17,842)
Net income............................... -- -- -- 50,300 -- 50,300
--------- -------- -------- -------- -------- ---------
Balances at December 31, 1996.............. $ -- $ 10,443 $774,672 $133,957 $(57,977) $ 861,095
========= ======== ======== ======== ======== =========
</TABLE>
- ---------------
(1) Amounts were recorded by ATH prior to its merger with the Company in
September 1994.
See accompanying notes.
F-16
<PAGE> 100
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 50,300 $ (8,123) $ 74,501
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 105,468 103,581 88,734
Impairment of long-lived assets.................. -- 100,277 --
Provision for reserves and discounts on patient,
notes and other receivables, net............... 28,544 15,889 14,107
Amortization of deferred financing costs......... 3,210 4,379 4,241
Extraordinary charge............................. 2,825 -- 3,600
Gains on dispositions of facilities and other
assets, net.................................... (20,951) (2,253) (9,749)
Deferred taxes................................... 33,765 (20,394) (2,031)
Net increase (decrease) in insurance related
accounts....................................... (22,336) (10,531) 8,342
Changes in operating assets and liabilities, net
of acquisitions and dispositions:
Accounts receivable -- patient................. (25,851) (84,420) (76,320)
Operating supplies............................. 3,226 1,649 (2,777)
Prepaid expenses and other receivables......... 771 (154) 1,597
Accounts payable and other accrued expenses.... (53,029) 16,370 (2,809)
Income taxes payable........................... 26,711 (6,194) 7,332
Other, net..................................... 527 (3,867) (13,361)
----------- ---------- ---------
Total adjustments........................... 82,880 114,332 20,906
----------- ---------- ---------
Net cash provided by operating activities... 133,180 106,209 95,407
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired..... (80,981) (34,184) (267,227)
Proceeds from dispositions of facilities and other
assets........................................... 121,660 46,892 77,211
Collections on notes receivable and REMIC
investment....................................... 12,809 15,594 8,393
Capital expenditures................................ (136,442) (161,911) (124,742)
Other, net.......................................... (8,547) (10,945) (12,375)
----------- ---------- ---------
Net cash used for investing activities...... (91,501) (144,554) (318,740)
Cash flows from financing activities:
Revolver borrowings................................. 1,308,000 1,017,000 62,000
Repayments of Revolver borrowings................... (1,230,000) (939,000) (62,000)
Proceeds from issuance of long-term obligations..... 228,862 25,000 309,308
Repayments of long-term obligations................. (318,447) (68,400) (98,340)
Purchase of common stock for treasury............... (15,445) -- --
Proceeds from exercise of stock options............. 3,620 2,146 14,509
Proceeds from issuance of ATH preferred stock....... -- -- 1,264
Deferred financing costs............................ (7,560) (2,161) (7,653)
Dividends paid on preferred stock................... (688) (8,250) (8,250)
Proceeds from designated funds, net................. 3,437 349 3,401
----------- ---------- ---------
Net cash provided by (used for) financing
activities................................ (28,221) 26,684 214,239
----------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... 13,458 (11,661) (9,094)
Cash and cash equivalents at beginning of year........ 56,303 67,964 77,058
----------- ---------- ---------
Cash and cash equivalents at end of year.............. $ 69,761 $ 56,303 $ 67,964
=========== ========== =========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)............. $ 81,193 $ 80,433 $ 59,242
Income taxes (net of refunds).................... 11,906 28,557 31,501
</TABLE>
See accompanying notes.
F-17
<PAGE> 101
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
References herein to the Company include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries. The Company provides long-term healthcare in 35
states and the District of Columbia. Its operations include nursing facilities,
acute long-term transitional hospitals, institutional and mail service
pharmacies, rehabilitation therapy services, outpatient therapy clinics,
assisted living centers, hospices and home healthcare centers. The consolidated
financial statements of the Company include the accounts of the Company and all
of its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and certificates of deposit
with original maturities of three months or less.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligations
less accumulated amortization. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the assets.
Intangible Assets
Goodwill (stated at cost less accumulated amortization of $38,446,000 in
1996 and $30,431,000 in 1995) is being amortized over 40 years or, if
applicable, the life of the lease using the straight-line method. Operating and
leasehold rights and licenses, which are included in the consolidated balance
sheet caption "Other, net," (stated at cost less accumulated amortization of
$18,716,000 in 1996 and $19,040,000 in 1995) are being amortized over the lives
of the related assets (principally 40 years) and leases (principally 10 to 15
years), using the straight-line method.
On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall. As of December 31,
1996, the Company does not believe there is any indication that the carrying
value or the amortization period of its intangibles needs to be adjusted. See
"-- Impairment of Long-Lived Assets."
Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets
F-18
<PAGE> 102
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amounts. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. In accordance with SFAS No. 121, the Company
assesses the need for an impairment write-down when such indicators of
impairment are present. There were no material impairment adjustments recorded
during the year ended December 31, 1996.
In the fourth quarter of 1995, the Company recorded an impairment loss of
approximately $68,130,000 upon adoption of SFAS No. 121. Such loss primarily
related to certain nursing facilities, transitional hospitals, institutional
pharmacies and assisted living centers with current period operating losses.
Such current period operating losses, combined with a history of operating
losses and anticipated future operating losses, led management to believe that
impairment existed at such facilities. In addition, there were certain nursing
facilities for which management expected an adverse impact on future earnings
and cash flows as a result of recent changes in state Medicaid reimbursement
programs. Accordingly, management estimated the undiscounted future cash flows
to be generated by each facility. If the undiscounted future cash flow estimates
were less than the carrying value of the corresponding facility, management
estimated the fair value of such facility and wrote the carrying value down to
their estimate of fair value. Management calculated the fair value of the
impaired facilities by using the present value of estimated future cash flows,
or its best estimate of what such facility, or similar facilities in that state,
would sell for in the open market. Management believes it has the knowledge to
make such estimates of open market sales prices based on the volume of
facilities the Company has purchased and sold in previous years.
In addition to the SFAS No. 121 charge, the Company recorded a fourth
quarter of 1995 impairment loss for other long-lived assets of approximately
$32,147,000 primarily related to the write-off of software and business
development costs. During the fourth quarter of 1995, the Company hired a new
Senior Vice President of Information Technology, who redirected the Company's
systems development initiatives, causing a write-down, or a write-off, of
certain software and software development projects. In addition, the Company
wrote off certain business development and other costs where the Company
believed the carrying amount was unrecoverable.
Insurance
The Company insures auto liability, general liability and workers'
compensation risks, in most states, through insurance policies with third
parties, some of which may be subject to reinsurance agreements between the
insurer and Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company.
The liabilities for estimated incurred losses not covered by third party
insurance are discounted at 10% to their present value based on expected loss
payment patterns determined by independent actuaries. The discounted insurance
liabilities are included in the consolidated balance sheet captions as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accrued wages and related liabilities....................... $ 32,644 $ 35,265
Other accrued liabilities................................... 8,226 6,572
Other liabilities and deferred items........................ 90,714 84,720
-------- --------
$131,584 $126,557
======== ========
</TABLE>
On an undiscounted basis, the total insurance liabilities as of December
31, 1996 and 1995 were $170,099,000 and $164,060,000, respectively. As of
December 31, 1996, the Company had deposited approximately $94,500,000 in funds
(the "Beverly Indemnity funds") that are restricted for the payment of
F-19
<PAGE> 103
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
insured claims. In addition, the Company anticipates that approximately
$21,700,000 of its existing cash at December 31, 1996, while not legally
restricted, will be utilized to fund certain workers' compensation and general
liability claims, and the Company does not expect to use such cash for other
purposes.
Stock-Based Awards
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair value on the date of grant. The Company has elected to continue to
account for its stock-based awards in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for its stock option grants. See
Note 6 for the pro forma effects on the Company's reported net income and
earnings per share assuming the election had been made to recognize compensation
expense on stock-based awards in accordance with SFAS No. 123.
Revenues
The Company's revenues are derived primarily from providing long-term
healthcare services. Approximately 75%, 77% and 80% of the Company's net
operating revenues for 1996, 1995 and 1994, respectively, were derived from
funds under federal and state medical assistance programs, and approximately
73%, 72% and 78% of the Company's net patient accounts receivable at December
31, 1996, 1995 and 1994, respectively, are due from such programs. These
revenues and receivables are reported at their estimated net realizable amounts
and are subject to audit and retroactive adjustment. Provisions for estimated
third-party payor settlements are provided in the period the related services
are rendered and are adjusted in the period of settlement. Changes in estimates
related to third party receivables resulted in the recording of approximately
$10,900,000, $19,700,000 and $11,000,000 of revenues for the years ended
December 31, 1996, 1995 and 1994, respectively.
Concentration of Credit Risk
The Company has significant accounts receivable, notes receivable and other
assets whose collectibility or realizability is dependent upon the performance
of certain governmental programs, primarily Medicaid and Medicare. These
receivables and other assets represent the only concentration of credit risk for
the Company. The Company does not believe there are significant credit risks
associated with these governmental programs. The Company believes that an
adequate provision has been made for the possibility of these receivables and
other assets proving uncollectible and continually monitors and adjusts these
allowances as necessary.
Earnings per Share
For the years ended December 31, 1995 and 1994, net income (loss)
applicable to common shares was computed by deducting preferred stock dividends
from net income (loss), when dilutive. During the fourth quarter of 1995, the
Company exchanged its cumulative convertible exchangeable preferred stock into
5 1/2% convertible subordinated debentures. Primary earnings per share for the
years ended December 31, 1996 and 1994 were computed by dividing net income
applicable to common shares by the weighted average number of shares of Common
Stock outstanding during the period and the weighted average number of shares
issuable upon exercise of stock options, calculated using the treasury stock
method. Fully diluted earnings per share for the year ended December 31, 1996
was computed as above and assumed conversion of the Company's 5 1/2% convertible
subordinated debentures. Fully diluted earnings per share for the year ended
December 31, 1994
F-20
<PAGE> 104
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
was computed as above and assumed conversion of the Company's cumulative
convertible exchangeable preferred stock. Conversion of the Company's 7 5/8%
convertible subordinated debentures and zero coupon notes would have an
anti-dilutive effect and, therefore, were not assumed. For the year ended
December 31, 1995, primary and fully diluted earnings per share were computed by
dividing net loss applicable to common shares by the weighted average number of
shares of Common Stock outstanding during the period.
Other
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
2. ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1996, the Company acquired 22 nursing
facilities (2,138 beds)(15 of such facilities (1,747 beds)were previously
leased), one previously managed nursing facility (180 beds) and certain other
assets including, among other things, pharmacy, hospice and outpatient therapy
businesses, for approximately $80,000,000 cash, approximately $7,500,000
acquired debt, approximately $7,000,000 closing and other costs, approximately
$4,800,000 reduction in receivables and approximately $1,900,000 security and
other deposits. The acquisitions of such facilities and other assets were
accounted for as purchases. The Company does not operate three of such nursing
facilities which were subleased to other nursing home operators in prior year
transactions. Also during such period, the Company sold or terminated the leases
on 83 nursing facilities (5,230 beds) (including the three nursing facilities
which were not operated by the Company, as mentioned above) and certain other
assets for cash proceeds of approximately $36,700,000 and approximately
$4,200,000 of notes receivable. The operations of these facilities and certain
other assets were immaterial to the Company's financial position and results of
operations.
In November 1996, the Company sold its MedView Services unit ("MedView")
for cash of approximately $89,700,000 (approximately $2,200,000 of which was
included in accounts receivable-nonpatient at December 31, 1996). MedView
provides a full range of managed care services to the workers' compensation
market and is the nation's largest workers' compensation-related preferred
provider organization with 120,000 member providers. It also offers case
management and injury reporting and tracking services. The operations of MedView
were immaterial to the Company's financial position and results of operations.
On March 13, 1997, the Company announced that it has entered into a
definitive agreement to sell 49 of its skilled nursing facilities in the state
of Texas to Complete Care Services, L.P. The transaction is scheduled to close
during the second quarter of 1997 and is subject to normal regulatory review.
The Company anticipates using the net cash proceeds generated from the sale for
one or more of the following purposes: strategic investments; repay
indebtedness; and repurchase Common Stock. The operations of these facilities
are immaterial to the Company's financial position and results of operations.
During the year ended December 31, 1995, the Company purchased 17
previously leased nursing facilities (2,118 beds), one previously leased
retirement living center (17 units) and certain other assets for approximately
$32,700,000 cash, approximately $40,400,000 acquired debt and approximately
$1,700,000 security and other deposits. The Company does not operate four of
such facilities which were subleased to other nursing home operators in prior
year transactions. Also during such period, the Company sold, subleased or
terminated the leases on 11 nursing facilities (1,199 beds), 12 homes for the
developmentally disabled (1,065 beds), six retirement living centers (1,141
units) and certain other assets for cash proceeds of approximately $39,400,000,
approximately $3,700,000 of notes receivable and the assumption of approximately
$52,800,000 of debt. In addition, the Company terminated a management agreement
on two nursing
F-21
<PAGE> 105
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
facilities (150 beds) and four assisted living centers (510 units). The
operations of these facilities were immaterial to the Company's financial
position and results of operations.
In June 1995, the Company acquired Pharmacy Management Services, Inc.
("PMSI") in exchange for approximately 12,400,000 shares of the Company's Common
Stock plus closing and related costs. PMSI is a leading nationwide provider of
medical cost containment and managed care services to workers' compensation
payors and claimants. The acquisition was accounted for as a purchase and was
not material to the Company's financial position or results of operations.
During the year ended December 31, 1994, the Company purchased 19
previously leased nursing facilities (2,202 beds), one previously leased
retirement living center (20 units) and certain other assets for approximately
$43,600,000 cash, approximately $1,000,000 issuance of debt, approximately
$16,900,000 assumed and acquired debt and approximately $1,400,000 security and
other deposits. Also during such period, the Company sold, subleased or
terminated the leases on 77 nursing facilities (7,192 beds) and certain other
assets for cash proceeds of approximately $80,200,000, approximately $700,000 of
notes receivable and the assumption of approximately $40,000 of debt. The
operations of these facilities were immaterial to the Company's financial
position and results of operations.
During the third quarter of 1994, the Company issued 2,400,000 shares of
Common Stock for all of the outstanding stock of American Transitional
Hospitals, Inc. ("ATH"). ATH operates licensed hospitals specializing in
long-term acute care and transitional acute care to medically complex,
chronically ill patients. The merger was accounted for as a pooling of interests
and, accordingly the Company's consolidated financial statements were restated
to reflect ATH's financial position, results of operations and cash flows for
each period prior to the merger. All transactions between the Company and ATH
prior to the merger were eliminated in the restated consolidated financial
statements. The merger of ATH was not material to the Company's financial
position or results of operations.
In November 1994, Pharmacy Corporation of America ("PCA"), a wholly-owned
subsidiary of the Company, acquired Insta-Care Holdings, Inc. ("Insta-Care"),
for cash of approximately $112,000,000, as well as other costs incurred totaling
approximately $10,500,000. Insta-Care provides pharmaceutical dispensing
services in six states to approximately 65,000 patients in nursing homes and
correctional facilities. In December 1994, PCA acquired three institutional
pharmacy subsidiaries of Synetic, Inc. ("Synetic pharmacies"), for cash of
approximately $107,300,000, as well as other costs incurred totaling
approximately $6,000,000. The Synetic businesses provide pharmaceutical
dispensing services in the New England area and the state of Indiana to
approximately 45,000 patients in various institutions, including nursing homes,
transitional care facilities, correctional facilities and group homes. These
acquisitions were accounted for as purchases and were not material to the
Company's financial position or results of operations.
F-22
<PAGE> 106
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
3. PROPERTY AND EQUIPMENT
Following is a summary of property and equipment and related accumulated
depreciation and amortization, by major classification, at December 31 (in
thousands):
<TABLE>
<CAPTION>
TOTAL OWNED LEASED
----------------------- ----------------------- -----------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Land, buildings and improvements................ $1,476,988 $1,375,945 $1,424,517 $1,319,008 $52,471 $56,937
Furniture and equipment......................... 375,479 347,478 365,678 340,220 9,801 7,258
Construction in progress........................ 39,403 47,587 39,403 47,587 -- --
---------- ---------- ---------- ---------- ------- -------
1,891,870 1,771,010 1,829,598 1,706,815 62,272 64,195
Less accumulated depreciation and
amortization.................................. 643,085 581,025 601,330 537,704 41,755 43,321
---------- ---------- ---------- ---------- ------- -------
$1,248,785 $1,189,985 $1,228,268 $1,169,111 $20,517 $20,874
========== ========== ========== ========== ======= =======
</TABLE>
The Company provides depreciation and amortization using the straight-line
method over the following estimated useful lives: land improvements -- 5 to 15
years; buildings -- 35 to 40 years; building improvements -- 5 to 20 years;
leasehold improvements -- 5 to 20 years or term of lease, if less; furniture and
equipment -- 5 to 15 years. Capitalized lease assets are amortized over the
remaining initial terms of the leases.
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1996, 1995 and 1994 was $85,221,000, $82,752,000
and $77,575,000, respectively.
F-23
<PAGE> 107
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31 (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notes and mortgages, less imputed interest: 1996 -- $257,
1995 -- $312; due in installments through the year 2031,
at effective interest rates of 5.89% to 14.00%, a portion
of which is secured by property, equipment and other
assets with a net book value of $272,875 at December 31,
1996...................................................... $ 178,983 $ 158,597
Industrial development revenue bonds, less imputed interest:
1996 -- $48, 1995 -- $61; due in installments through the
year 2013, at effective interest rates of 4.99% to 10.52%,
a portion of which is secured by property and other assets
with a net book value of $221,964 at December 31, 1996.... 203,606 214,107
9% Senior Notes due February 15, 2006, unsecured............ 180,000 --
1996 Credit Agreement due December 31, 2001................. 156,000 --
1994 Credit Agreement (repaid in December 1996)............. -- 280,500
Term Loan under the 1992 Credit Facility (repaid in December
1996)..................................................... -- 55,000
Nippon Term Loan under the Nippon Credit Agreement (repaid
in December 1996)......................................... -- 20,000
Term Loan under the GE Capital Facility..................... 9,547 --
8 3/4% First Mortgage Bonds due July 1, 2008, secured by
first mortgages on eight nursing facilities with an
aggregate net book value of $16,924 at December 31,
1996...................................................... 19,362 19,765
8 5/8% First Mortgage Bonds due October 1, 2008, secured by
first mortgages on 11 nursing facilities with an aggregate
net book value of $30,417 at December 31, 1996............ 29,062 29,788
8 3/4% Notes due December 31, 2003, unsecured............... 24,845 24,875
7 3/4% Note due in quarterly installments through June 1,
2001, secured by first mortgages on 11 nursing facilities
and one assisted living center with an aggregate net book
value of $22,109 at December 31, 1996..................... 22,554 23,589
Series 1995 Bonds due June 2005, at interest rates of 6.88%
with respect to $7,000 and 7.24% with respect to $18,000,
secured by a letter of credit............................. 25,000 25,000
Medium Term Notes due June 15, 2000, at an interest rate
based on LIBOR, as defined, plus .35%, secured by eligible
receivables of selected nursing facilities of $70,902 at
December 31, 1996, which cannot be used to satisfy claims
of the Company or any of its subsidiaries................. 50,000 50,000
7 5/8% convertible subordinated debentures due March 15,
2003, convertible at $20.47 per share of Common Stock..... 67,924 67,924
5 1/2% convertible subordinated debentures due August 1,
2018, convertible at $13.33 per share of Common Stock..... 150,000 150,000
Zero coupon notes, face amount, less unamortized discount:
1996 -- $785, 1995 -- $1,039; maturing July 16, 2003,
anticipated to be due September 30, 1997, convertible into
13.32 shares of Common Stock per $1 note.................. 1,172 1,288
---------- ----------
1,118,055 1,120,433
Present value of capital lease obligations, less imputed
interest: 1996 -- $863, 1995 -- $972, at effective
interest rates of 5.71% to 13.00%......................... 27,027 31,115
---------- ----------
1,145,082 1,151,548
Less amounts due within one year............................ 38,826 84,639
---------- ----------
$1,106,256 $1,066,909
========== ==========
</TABLE>
F-24
<PAGE> 108
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. LONG-TERM OBLIGATIONS -- (CONTINUED)
In February 1996, the Company completed the sale of $180,000,000 of 9%
Senior Notes due February 15, 2006 (the "Senior Notes") through a public
offering (the "Senior Notes offering") for net cash proceeds of approximately
$174,850,000. The Company used approximately $87,500,000 of such net proceeds to
prepay certain scheduled maturities on the Term Loan under its 1994 Credit
Agreement, approximately $28,000,000 to prepay certain scheduled maturities on
the Term Loan under its 1992 Credit Facility, approximately $8,750,000 to prepay
certain scheduled maturities under its Nippon Term Loan, and the remaining net
proceeds to repay Revolver borrowings and for general corporate purposes. The
Senior Notes are unsecured obligations, guaranteed by substantially all of the
Company's present and future subsidiaries (collectively, the "Subsidiary
Guarantors"), and impose on the Company certain restrictive covenants. Separate
financial statements of the Subsidiary Guarantors are not considered to be
material to holders of the Senior Notes since the guaranty of each of the
Subsidiary Guarantors is joint and several and full and unconditional (except
that liability thereunder is limited to an aggregate amount equal to the largest
amount that would not render its obligations thereunder subject to avoidance
under Section 548 of the Bankruptcy Code of 1978, as amended, or any comparable
provisions of applicable state law), and Beverly Enterprises, Inc., the parent,
has no operations or assets separate from its investment in its subsidiaries.
In July 1996, the Company entered into a term loan facility (the "GE
Capital Facility"), whereby the Company may borrow up to $25,000,000 from time
to time in separate series, in amounts and at interest rates based on the
three-year U.S. Treasury Note rate plus 230 basis points at the date of funding.
The GE Capital Facility requires monthly principal and interest payments and is
secured by a security interest in certain lighting equipment of various nursing
facilities. As of December 31, 1996, approximately $14,900,000 of aggregate
principal amount under the GE Capital Facility remained unissued.
In December 1996, the Company entered into a $375,000,000 Amended and
Restated Credit Agreement (the "1996 Credit Agreement") which provides for a
Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). The proceeds
from the 1996 Credit Agreement were used to repay the Term Loan and Revolver
borrowings under the 1994 Credit Agreement, the Term Loan under the 1992 Credit
Facility and the Nippon Term Loan. Borrowings under the 1996 Credit Agreement
bear interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the
adjusted CD rate, as defined, plus 1%, at the Company's option. Such interest
rates may be adjusted quarterly based on certain financial ratio calculations.
The Company pays certain commitment fees and commissions with respect to the
Revolver/LOC Facility and had approximately $186,800,000 of unused commitments
under such facility at December 31, 1996. The 1996 Credit Agreement is secured
by a security interest in the stock of PCA and certain of its subsidiaries and
imposes on the Company certain financial tests and restrictive covenants. The
Company incurred a $1,726,000 extraordinary charge, net of income taxes, in 1996
related to the write-off of unamortized deferred financing costs associated with
the repayment of these debt instruments, as well as certain bond refundings.
The Company entered into various other notes and mortgages during 1996
totaling approximately $38,700,000 in conjunction with the purchase of certain
nursing facilities. Such debt instruments bear interest at rates ranging from
8.25% to 9.08%, require monthly installments of principal and interest, and are
secured by mortgage interests in the real property and security interests in the
personal property of the purchased nursing facilities.
During 1996, the Company filed a Registration Statement covering
$200,000,000 of debt securities, shares of preferred stock, shares of Common
Stock and warrants to purchase Common Stock which may be offered, separately or
together, in separate series in amounts, at prices and on terms to be determined
at the time of sale. The net proceeds from the offerings are anticipated to be
used for general corporate purposes,
F-25
<PAGE> 109
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. LONG-TERM OBLIGATIONS -- (CONTINUED)
which may include, but are not limited to, working capital, capital
expenditures, repayments of indebtedness and acquisitions. As of December 31,
1996, no securities have been issued under such registration statement.
In 1993, the Company registered with the Securities and Exchange Commission
$100,000,000 aggregate principal amount of certain debt securities, which are to
be offered from time to time as separate series in amounts, at prices and on
terms to be determined at the time of sale. The Company issued $20,000,000 of
8 3/4% First Mortgage Bonds, $30,000,000 of 8 5/8% First Mortgage Bonds and
$25,000,000 of 8 3/4% Notes under such registration. As of December 31, 1996,
$25,000,000 of aggregate principal amount of debt securities under such
registration remained unissued.
Maturities and sinking fund requirements of long-term obligations,
including capital leases, for the years ending December 31 are as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------- ------- ------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Future minimum lease payments.................... $ 6,682 $ 5,191 $ 4,272 $ 3,202 $ 3,228 $ 24,920 $ 47,495
Less interest.................................... 2,457 2,127 1,839 1,620 1,446 10,979 20,468
------- ------- ------- ------- -------- -------- ----------
Net present value of future minimum lease
payments....................................... 4,225 3,064 2,433 1,582 1,782 13,941 27,027
Notes, mortgages, bonds and debentures........... 34,601 39,790 34,687 87,076 205,525 716,376 1,118,055
------- ------- ------- ------- -------- -------- ----------
$38,826 $42,854 $37,120 $88,658 $207,307 $730,317 $1,145,082
======= ======= ======= ======= ======== ======== ==========
</TABLE>
Many of the capital and operating leases contain at least one renewal
option (which could extend the term of the leases by five to fifteen years),
purchase options, escalation clauses and provisions for payments by the Company
of real estate taxes, insurance and maintenance costs.
The industrial development revenue bonds were originally issued prior to
1985 primarily for the construction or acquisition of nursing facilities. Bond
reserve funds are included in designated funds. These funds are invested
primarily in certificates of deposit and in United States government securities
and are carried at cost, which approximates market value. Net capitalized
interest relating to construction was not material in 1996, 1995 or 1994.
5. COMMITMENTS AND CONTINGENCIES
The future minimum rental commitments required by all noncancelable
operating leases with initial or remaining terms in excess of one year as of
December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997............................................................... $ 73,533
1998............................................................... 58,579
1999............................................................... 47,373
2000............................................................... 32,578
2001............................................................... 22,036
Thereafter......................................................... 57,076
--------
$291,175
========
</TABLE>
Total future minimum rental commitments are net of approximately
$15,194,000 of minimum sublease rental income due in the future under
noncancelable subleases. Rent expense on operating leases, net of sublease
rental income, for the years ended December 31 was as follows:
1996 -- $116,718,000; 1995 -- $127,074,000; 1994 -- $127,187,000. Sublease rent
income was approximately $4,595,000, $5,426,000 and
F-26
<PAGE> 110
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
$5,410,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Contingent rent expense, based primarily on revenues, was approximately
$18,000,000, $22,000,000 and $22,000,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
In 1992, the Company entered into an agreement to outsource its management
information systems functions for a period of seven years, with an option to
renew based on mutual agreement among the parties. The future minimum
commitments as of December 31, 1996 required under such agreement, as amended,
are as follows: 1997 -- $6,133,000; 1998 -- $6,133,000; 1999 -- $3,578,000. The
Company incurred approximately $8,711,000, $8,529,000 and $8,906,000 under such
agreement during the years ended December 31, 1996, 1995 and 1994, respectively.
The Company is contingently liable for approximately $105,596,000 of
long-term obligations maturing on various dates through 2019, as well as annual
interest and letter of credit fees of approximately $8,460,000. Such contingent
liabilities principally arose from the Company's sale of nursing facilities and
retirement living centers. The Company operates the facilities related to
approximately $25,891,000 of the principal amount for which it is contingently
liable, pursuant to long-term agreements accounted for as operating leases. In
addition, the Company is contingently liable for various operating leases that
were assumed by purchasers and are secured by the rights thereto.
Approximately 100 of the Company's facilities are represented by various
labor unions. Certain labor unions have publicly stated that they are
concentrating their organizing efforts within the long-term healthcare industry.
The Company, being one of the largest employers within the long-term healthcare
industry, has been the target of a "corporate campaign" by two AFL-CIO
affiliated unions attempting to organize certain of the Company's facilities.
Although the Company has never experienced any material work stoppages and
believes that its relations with its employees (and the existing unions that
represent certain of them) are generally good, the Company cannot predict the
effect continued union representation or organizational activities will have on
the Company's future activities. There can be no assurance that continued union
representation and organizational activities will not result in material work
stoppages, which could have a material adverse effect on the Company's
operations.
There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
6. STOCKHOLDERS' EQUITY
The Company had 300,000,000 shares of authorized $.10 par value common
stock ("Common Stock") at December 31, 1996 and 1995. The Company is subject to
certain restrictions under its long-term debt agreements related to the payment
of cash dividends on its Common Stock. The Company had 25,000,000 shares of
authorized $1 par value preferred stock at December 31, 1996 and 1995, all of
which remained unissued. The Board of Directors has authority, without further
stockholder action, to set rights, privileges and preferences for any unissued
shares of preferred stock.
In June 1996, the Company announced that its Board of Directors had
authorized a stock repurchase program whereby the Company may repurchase, from
time to time on the open market, up to a total of 10,000,000 shares of its
outstanding Common Stock. During 1996, the Company repurchased approximately
1,500,000 shares of its Common Stock at a cost of approximately $17,800,000. The
repurchases were financed primarily through proceeds from dispositions and
borrowings under the Company's Revolver/LOC Facility.
F-27
<PAGE> 111
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
During 1994, the Board of Directors of the Company adopted a Stockholder
Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution
of one Common Stock Purchase Right (the "Rights") for each share of Common Stock
outstanding at the close of business on November 2, 1994. Under certain
circumstances, the Rights become exercisable to purchase shares of Common Stock,
or securities of an acquiring entity, at one-half of market value. The Rights
are designed to protect stockholders in the event of an unsolicited attempt to
acquire the Company and to deal with the possibility of unilateral actions by
hostile acquirors. These Rights are redeemable at the option of the Company at
$.01 per Right. The issuance of the Rights has no dilutive effect on the
Company's earnings per share.
During 1996, the Beverly Enterprises, Inc. 1996 Long-Term Incentive Plan
was approved (the "1996 Long-Term Incentive Plan"). Such plan became effective
July 1, 1996 and will remain in effect until December 31, 2006, subject to the
earlier termination by the Board of Directors. The Company has 4,000,000 shares
of Common Stock authorized for issuance, subject to certain adjustments, under
the 1996 Long-Term Incentive Plan in the form of nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock,
performance awards and other stock unit awards. Nonqualified and incentive stock
options must be granted at a purchase price equal to market price on the date of
grant. All options are exercisable no sooner than six months from the grant date
and expire no later than 10 years from the grant date. Stock appreciation rights
may be granted alone, in tandem with an option or in addition to an option.
Stock appreciation rights are exercisable no sooner than six months from the
grant date and expire no later than 10 years from the grant date. Restricted
stock awards are outright stock grants which have a minimum vesting period of
one year for performance-based awards and three years for other awards.
Performance awards and other stock unit awards may be granted based on the
achievement of certain performance or other goals and will carry certain
restrictions, as defined. The Compensation Committee of the Board of Directors
is responsible for administering the 1996 Long-Term Incentive Plan and will have
complete discretion in determining the number of shares or units to be granted,
in setting performance goals and in applying other restrictions to awards, as
needed, under the plan.
The Company has 200,000 shares of Common Stock authorized for issuance,
subject to certain adjustments, under its Nonemployee Directors' Plan. The
Nonemployee Directors' Plan provides that 2,500 nonqualified stock options be
granted to each nonemployee director on June 1 of each year until the plan is
terminated, subject to the availability of shares. Such nonqualified stock
options are granted at a purchase price equal to fair market value on the date
of grant, become exercisable one year after date of grant and expire ten years
after date of grant.
The Company has 3,000,000 shares of Common Stock authorized for issuance,
subject to certain adjustments, under its 1993 Incentive Stock Plan in the form
of nonqualified stock options, incentive stock options, restricted stock,
performance awards and other stock unit awards. Incentive stock options must be
granted at a purchase price equal to market price on the date of grant.
Nonqualified stock options may be granted at no less than 85% of market price on
the date of grant. All grants made at less than market price must be in lieu of
cash payments. All options are exercisable no sooner than one year from the
grant date and expire no later than 10 years from the grant date. Restricted
stock awards are outright stock grants which have a minimum vesting period of
one year for performance-based awards, and three years for other awards.
Performance awards and other stock unit awards, including phantom units, may be
granted based on the achievement of certain performance or other goals and will
carry certain restrictions, as defined. The Compensation Committee of the Board
of Directors is responsible for administering the 1993 Incentive Stock Plan and
will have complete discretion in determining the number of shares or units to be
granted, in setting performance goals and in applying other restrictions to
awards, as needed, under the plan.
F-28
<PAGE> 112
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The Company has 2,400,000 shares of Common Stock authorized for issuance
under its 1985 Nonqualified Stock Option Plan. Under the plan, options are
granted at a purchase price equal to market price on the date of grant, become
exercisable no sooner than one year after date of grant and expire no later than
12 years after date of grant, as determined by the Compensation Committee of the
Board of Directors. In addition to options, the plan provides for outright
grants of Common Stock, subject to forfeiture provisions. As a condition
precedent to the release of such shares, the employee must be continuously
employed with the Company from and after the date of grant and remain employed
on share release dates. Commencing one year after the grant date, the shares
will be released in accordance with a schedule determined at the time of grant.
During 1995, in conjunction with the acquisition of PMSI, the Company
assumed PMSI's 1990 Incentive and Non-statutory Stock Option Plan, as amended,
(the "PMSI Plan") and issued options to purchase shares of the Company's Common
Stock in exchange for each option then outstanding under the PMSI Plan. During
1994, in conjunction with the merger of ATH, the Company assumed ATH's 1993
Nonqualified Stock Option Plan (the "ATH Plan") and issued options to purchase
shares of the Company's Common Stock in exchange for each option then
outstanding under the ATH Plan. In addition, the Company signed an option
agreement with an officer of ATH and issued options to purchase shares of ATH
stock previously held by such officer. Also during 1994, in conjunction with the
acquisition of Insta-Care, the Company issued options to purchase shares of its
Common Stock in exchange for each option then outstanding under the Insta-Care
Holdings, Inc. First Employees Stock Option Plan (the "Insta-Care Plan"). No
options are available for grant under the PMSI Plan, the ATH Plan or the
Insta-Care Plan.
F-29
<PAGE> 113
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The following table summarizes stock option, restricted stock and other
stock units data relative to the Company's 1996 Long-Term Incentive Plan, the
Nonemployee Directors' Plan, the 1993 Incentive Stock Plan, the 1985
Nonqualified Stock Option Plan, the PMSI Plan, the ATH Plan and the Insta-Care
Plan for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 4,394,382 $ 9.02 4,375,441 $ 8.74 3,989,411 $ 8.26
Changes during the year:
Granted................ 1,696,500 12.38 355,500 13.04 635,000 14.01
Acquired............... -- -- 342,311 6.17 269,620 1.22
Exercised.............. (833,587) 5.41 (416,010) 5.22 (375,369) 6.35
Cancelled.............. (348,568) 12.39 (262,860) 12.19 (143,221) 10.82
--------- --------- ---------
Options outstanding at
end of year............ 4,908,727(1) 10.55 4,394,382 9.02 4,375,441 8.74
========= ========= =========
Options exercisable at
end of year............ 2,560,209 8.75 3,028,903 7.52 2,340,512 7.24
========= ========= =========
Options available for
grant.................. 3,052,403 1,243,953 1,735,318
========= ========= =========
Restricted stock
outstanding at
beginning of year...... 306,052 267,353 431,800
Changes during the year:
Granted................ 29,000 236,555 14,553
Vested................. (148,352) (182,153) (167,000)
Forfeited.............. (41,500) (15,703) (12,000)
--------- --------- ---------
Restricted stock
outstanding at end of
year................... 145,200 306,052 267,353
========= ========= =========
Phantom units outstanding
at beginning of year... 90,942 44,529 --
Changes during the year:
Granted................ -- 54,110 44,529
Vested................. (6,982) -- --
Cancelled.............. (7,191) (7,697) --
--------- --------- ---------
Phantom units outstanding
at end of year......... 76,769 90,942 44,529
========= ========= =========
Performance units
outstanding at
beginning of year...... -- -- --
Changes during the year:
Granted................ 1,040,000 -- --
Cancelled.............. (48,000) -- --
--------- --------- ---------
Performance units
outstanding at end of
year................... 992,000 -- --
========= ========= =========
</TABLE>
- ---------------
(1) Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.83 to $18.63. The weighted-average remaining contractual life of these
options is seven years.
F-30
<PAGE> 114
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The Company accounts for its stock-based awards in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related Interpretations because, as discussed
below, the alternative fair value accounting provided for under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Since the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized for
employee stock options under APB No. 25. The Company recognizes compensation
expense for its restricted stock grants, performance unit grants (when the
performance targets are achieved) and other stock unit awards. The total charges
to the Company's consolidated statements of operations for the years ended
December 31, 1996, 1995 and 1994 related to these stock-based awards were
approximately $509,000, $3,065,000 and $1,189,000, respectively.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its 1996 and 1995 stock option and performance unit grants under
the fair value method as prescribed by such statement. The fair value for stock
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for the years ended
December 31, 1996 and 1995, respectively: risk-free interest rates of 6.5% and
6.0%; volatility factors of the expected market price of the Company's Common
Stock of .34 and .35; and a weighted-average expected life of the option of 10
years. The Company does not currently pay cash dividends on its Common Stock and
no future dividends are currently planned. Such weighted-average assumptions
resulted in a weighted average fair value of options granted during 1996 and
1995 of $7.30 per share and $7.65 per share, respectively. The fair value of the
performance unit grants was based on the market value of the Company's Common
Stock on the date of grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
stock options and performance units is amortized to expense over their
respective vesting periods. The pro forma effects on reported net income (loss)
and earnings per share assuming the Company had elected to account for its stock
option and performance unit grants in accordance with SFAS No. 123 for the years
ended December 31, 1996 and 1995, respectively, would have been net income of
$48,964,000 or $.49 per share and net loss of $8,408,000 or $.17 per share. Such
pro forma effects are not necessarily indicative of the effect on future years.
The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of Common Stock at the current market
price through payroll deductions. The Company makes contributions in the amount
of 30% of the participant's contribution. Each participant specifies the amount
to be withheld from earnings per two-week pay period, subject to certain
limitations. The total charges to the Company's consolidated statements of
operations for the years ended December 31, 1996, 1995 and 1994 related to this
plan were approximately $2,258,000, $2,201,000 and $1,790,000, respectively.
F-31
<PAGE> 115
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. INCOME TAXES
The provisions for taxes on income before extraordinary charge consist of
the following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Federal:
Current............................................ $31,615 $ 17,518 $31,523
Deferred........................................... 29,466 (16,877) (2,824)
State:
Current............................................ 8,101 4,845 8,390
Deferred........................................... 4,299 (3,517) 793
------- -------- -------
$73,481 $ 1,969 $37,882
======= ======== =======
</TABLE>
The Company had an annual effective tax rate of 59% for the year ended
December 31, 1996, compared to a negative annual effective tax rate of 32% and
an annual effective tax rate of 33% for the years ended December 31, 1995 and
1994, respectively. The annual effective tax rate in 1996 was different than the
federal statutory rate primarily due to the impact of nondeductible goodwill
associated with the MedView disposition (see Note 2). The annual effective tax
rate in 1995 was different than the federal statutory rate primarily due to the
impact of nondeductible goodwill included in the adjustments resulting from the
adoption of SFAS No. 121. In addition, the Company's annual effective tax rate
for 1994 was lower than the federal statutory rate primarily due to the
utilization of certain tax credit carryforwards, partially offset by the impact
of state income taxes.
A reconciliation of the provision for (benefit from) income taxes, computed
at the statutory rate, to the Company's annual effective tax rate is summarized
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) at statutory
rate........................... $43,927 35 $(2,154) 35 $ 40,178 35
General business tax credits..... -- -- (1,014) 17 (16,199) (14)
State tax provision, net......... 8,060 6 863 (14) 6,130 5
Nondeductible intangibles........ 20,881 17 3,797 (62) 940 1
Other............................ 613 1 477 (8) 6,833 6
------- -- ------- --- -------- ---
$73,481 59 $ 1,969 (32) $ 37,882 33
======= == ======= === ======== ===
</TABLE>
F-32
<PAGE> 116
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences giving rise to the Company's deferred tax assets and liabilities at
December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
ASSET LIABILITY ASSET LIABILITY
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Insurance reserves.............................. $ 55,540 $ -- $ 53,333 $ --
General business tax credit carryforwards....... 12,236 -- 20,784 --
Alternative minimum tax credit carryforwards.... 14,698 -- 15,129 --
Provision for dispositions...................... 11,009 6,152 17,825 6,771
Depreciation and amortization................... 1,401 141,804 25,395 143,267
Operating supplies.............................. -- 14,206 -- 13,378
Other........................................... 22,995 24,784 23,666 22,511
-------- -------- -------- --------
$117,879 $186,946 $156,132 $185,927
======== ======== ======== ========
</TABLE>
At December 31, 1996, the Company had general business tax credit
carryforwards of $12,236,000 for income tax purposes which expire in years 2005
through 2011. For financial reporting purposes, the general business tax credit
carryforwards have been utilized to offset existing net taxable temporary
differences reversing during the carryforward periods.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Statement No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments:
Cash and Cash Equivalents
The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents approximates its fair value.
Notes Receivable, Net (Including Current Portion)
For variable-rate notes that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for other loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
F-33
<PAGE> 117
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Beverly Indemnity Funds
The fair value of the Beverly Indemnity funds is based on information
obtained from the trustee and the manager of such funds. Such funds are included
in the consolidated balance sheet captions "Prepaid expenses and other" and
"Designated and restricted funds" based on when the corresponding claims are
expected to be paid. These funds are invested primarily in United States
government securities with maturity dates ranging primarily from one to five
years. The Company intends to hold such securities to maturity.
Investment in a Real Estate Mortgage Investment Conduit (REMIC)
The fair value of the Company's REMIC investment, which is included in the
consolidated balance sheet caption "Other, net," is based on information
obtained from the REMIC servicer. The Company intends to convert the REMIC
investment to notes receivable from the underlying note makers during 1997. Such
conversion to notes in 1997 is not expected to have a material adverse effect on
the carrying amount or fair value disclosed.
Long-term Obligations (Including Current Portion)
The carrying amounts of the Company's variable-rate borrowings approximate
their fair values. The fair values of the remaining long-term obligations are
estimated using discounted cash flow analyses, based on the Company's
incremental borrowing rates for similar types of borrowing arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 69,761 $ 69,761 $ 56,303 $ 56,303
Notes receivable, net (including
current portion)................ 48,052 49,900 49,375 51,800
Beverly Indemnity funds........... 94,472 94,821 58,284 59,806
REMIC investment.................. 8,052 8,084 17,974 18,000
Long-term obligations (including
current portion)................ 1,145,082 1,161,031 1,151,548 1,175,000
</TABLE>
In order to consummate certain dispositions and other transactions, the
Company has agreed to guarantee the debt assumed or acquired by the purchaser or
the performance under a lease, by the lessor. It was not practicable to estimate
the fair value of the Company's off-balance sheet guarantees (See Note 5). The
Company does not charge a fee for entering into such agreements and contracting
with a financial institution to estimate such amounts could not be done without
incurring excessive costs. In addition, unlike the Company, a financial
institution would not be in a position to assume the underlying obligations and
operate the nursing facilities collateralizing the obligations, which would
significantly impact the calculation of the fair value of such off-balance sheet
guarantees.
9. ADDITIONAL INFORMATION
Effective July 31, 1987, Beverly Enterprises, a California corporation
("Beverly California"), became a wholly-owned subsidiary of Beverly Enterprises,
Inc., a Delaware corporation ("Beverly Delaware"). Effective
F-34
<PAGE> 118
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. ADDITIONAL INFORMATION -- (CONTINUED)
January 1, 1995, Beverly California changed its name to Beverly Health and
Rehabilitation Services, Inc. ("BHRS") and distributed certain of its
wholly-owned subsidiaries to Beverly Delaware in an effort to better focus
management's attention on specific services delivered by the Company within the
long-term healthcare arena. Beverly Delaware (the parent) provides financial,
administrative and legal services to its subsidiaries, including BHRS, for which
it charges management fees.
The following summarized financial information concerning BHRS is being
reported because BHRS's 7 5/8% convertible subordinated debentures due March
2003 and its zero coupon notes (collectively, the "Debt Securities") are
publicly-held. Beverly Delaware is co-obligor of these Debt Securities. Summary
financial information for BHRS is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues.......................................... $2,717,360 $2,797,348 $2,985,107
Total costs and expenses................................ 2,581,647 2,780,463 2,870,529
Income before extraordinary charge...................... 80,071 7,598 76,767
Net income.............................................. 78,345 7,598 74,777
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C> <C>
Current assets.......................................... $ 369,501 $ 421,641
Long-term assets........................................ 1,404,292 1,365,413
Current liabilities..................................... 184,887 367,074
Long-term liabilities................................... 795,593 709,515
</TABLE>
F-35
<PAGE> 119
BEVERLY ENTERPRISES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE TO
BALANCE AT CHARGED ACQUISITIONS BALANCE
BEGINNING (CREDITED) TO AND AT END OF
DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS DISPOSITIONS OTHER YEAR
----------- ---------- ------------- ---------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts:
Accounts receivable -- patient.... $22,860 $ 28,637 $(29,163) $ 2,555 $ 729 $ 25,618
Accounts
receivable -- nonpatient........ 813 56 (223) -- (9) 637*
Notes receivable.................. 4,953 (149) (257) 24 380 4,951
------- -------- -------- -------- -------- --------
$28,626 $ 28,544 $(29,643) $ 2,579 $ 1,100 $ 31,206
======= ======== ======== ======== ======== ========
Year ended December 31, 1995:
Allowance for doubtful accounts:
Accounts receivable -- patient.... $28,293 $ 21,008 $(30,326) $ 3,885 $ -- $ 22,860
Accounts
receivable -- non-patient....... 2,802 (1,919) (70) -- -- 813*
Notes receivable.................. 6,429 (3,200) (61) 1,285 500 4,953
------- -------- -------- -------- -------- --------
$37,524 $ 15,889 $(30,457) $ 5,170 $ 500 $ 28,626
======= ======== ======== ======== ======== ========
Valuation allowance on deferred tax
assets............................ $ 198 $ (198) $ -- $ -- $ -- $ --
======= ======== ======== ======== ======== ========
Year ended December 31, 1994:
Allowance for doubtful accounts:
Accounts receivable -- patient.... $19,999 $ 18,124 $(20,109) $ 10,339 $ (60) $ 28,293
Accounts
receivable -- nonpatient........ 343 233 (334) -- 2,560 2,802*
Notes receivable.................. 10,440 (4,250) (58) -- 297 6,429
------- -------- -------- -------- -------- --------
$30,782 $ 14,107 $(20,501) $ 10,339 $ 2,797 $ 37,524
======= ======== ======== ======== ======== ========
Accrued restructuring costs......... $34,310 $ (2,400) $ -- $(15,684) $(16,226)(1) $ --
======= ======== ======== ======== ======== ========
Valuation allowance on deferred tax
assets............................ $15,097 $(14,899) $ -- $ -- $ -- $ 198
======= ======== ======== ======== ======== ========
</TABLE>
- ---------------
* Includes amounts classified in long-term other assets as well as current
assets.
(1) Primarily relates to costs of relocating certain administrative, operations
and management information system support functions.
F-36
<PAGE> 120
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Pharmacy Corporation of America
We have audited the accompanying consolidated balance sheets of Pharmacy
Corporation of America as of December 31, 1996 and 1995, and the related
consolidated statements of income and retained earnings, and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement Schedule II -- Valuation and Qualifying
Accounts of Pharmacy Corporation of America. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Pharmacy Corporation of America at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Little Rock, Arkansas
April 18, 1997
F-37
<PAGE> 121
PHARMACY CORPORATION OF AMERICA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,575 $ 3,315
Accounts receivable, less allowance for doubtful accounts:
1996 -- $13,070, 1995 -- $17,913....................... 93,078 84,651
Notes and other receivables, less allowance for doubtful
accounts: 1996 -- $820, 1995 -- $352................... 1,383 2,892
Inventory................................................. 22,025 25,175
Prepaid expenses and other................................ 335 298
-------- --------
Total current assets.............................. 124,396 116,331
Property and equipment, net (Note 3)........................ 32,698 28,551
Other assets:
Goodwill, net............................................. 276,430 277,360
Systems development, net.................................. 4,837 4,627
Other, net................................................ 3,215 2,003
-------- --------
Total other assets................................ 284,482 283,990
-------- --------
$441,576 $428,872
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,017 $ 25,039
Accrued wages and related liabilities..................... 6,656 4,212
Other accrued liabilities................................. 6,621 8,938
Current portion of long-term obligations (Note 4)......... 968 630
-------- --------
Total current liabilities......................... 32,262 38,819
Long-term obligations (Note 4).............................. 1,334 125
Deferred income taxes....................................... 3,980 --
Due to Parent (Notes 4, 6, 9 and 10)........................ 312,395 318,610
Commitments and contingencies (Note 5)
Stockholder's equity:
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding................................. 1 1
Additional paid-in capital................................ 3,866 3,866
Retained earnings......................................... 87,738 67,451
-------- --------
Total stockholder's equity........................ 91,605 71,318
-------- --------
$441,576 $428,872
======== ========
</TABLE>
See accompanying notes.
F-38
<PAGE> 122
PHARMACY CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Non-affiliates............................................ $434,317 $377,664 $170,299
Affiliates (Note 9)....................................... 82,083 74,021 77,213
-------- -------- --------
Total revenues.................................... 516,400 451,685 247,512
Cost of goods sold.......................................... 280,468 242,761 117,045
-------- -------- --------
Gross profit................................................ 235,932 208,924 130,467
Operating expenses:
Wages and related......................................... 118,888 106,742 61,619
Selling, general and administrative....................... 50,377 48,334 28,302
Provision for doubtful accounts........................... 13,500 17,679 7,388
Depreciation and amortization............................. 16,392 13,219 5,734
Management fees (Note 9).................................. 1,820 2,844 2,075
Impairment of long-lived assets (Note 1):
Adoption of SFAS No. 121............................... -- 5,392 --
Development costs...................................... -- 4,151 --
-------- -------- --------
Total operating expenses.......................... 200,977 198,361 105,118
-------- -------- --------
Income before provision for income taxes.................... 34,955 10,563 25,349
Provision for income taxes (Note 6)......................... 14,668 5,977 10,291
-------- -------- --------
Net income.................................................. 20,287 4,586 15,058
Retained earnings, beginning of year........................ 67,451 62,865 47,807
-------- -------- --------
Retained earnings, end of year.............................. $ 87,738 $ 67,451 $ 62,865
======== ======== ========
</TABLE>
See accompanying notes.
F-39
<PAGE> 123
PHARMACY CORPORATION OF AMERICA
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 20,287 $ 4,586 $ 15,058
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 16,392 13,219 5,734
Impairment of long-lived assets........................ -- 9,543 --
Gain on dispositions of assets......................... (250) -- --
Provision for doubtful accounts........................ 13,500 17,679 7,388
Deferred income taxes (benefit)........................ 4,159 (909) 635
Change in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable.................................. (21,474) (22,489) (14,972)
Inventory............................................ 3,510 2,282 (1,173)
Prepaid expenses and other receivables............... (44) 614 147
Accounts payable and accrued expenses................ (7,498) (2,836) 6,595
-------- -------- ---------
Total adjustments................................. 8,295 17,103 4,354
-------- -------- ---------
Net cash provided by operating activities......... 28,582 21,689 19,412
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (10,835) (2,151) (223,435)
Proceeds from dispositions................................ 2,152 -- --
Capital expenditures...................................... (7,803) (10,497) (6,903)
Systems development....................................... (1,813) (2,601) (504)
Other, net................................................ 329 1,852 (11)
-------- -------- ---------
Net cash used for investing activities............ (17,970) (13,397) (230,853)
Cash flows from financing activities:
Advances (to) from Parent, net............................ (5,064) (9,716) 216,735
Proceeds from issuance of long-term obligations........... -- 143 --
Repayments of long-term obligations....................... (1,288) (877) (1,079)
-------- -------- ---------
Net cash provided by (used for) financing
activities...................................... (6,352) (10,450) 215,656
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents........ 4,260 (2,158) 4,215
Cash and cash equivalents at beginning of year.............. 3,315 5,473 1,258
-------- -------- ---------
Cash and cash equivalents at end of year.................... $ 7,575 $ 3,315 $ 5,473
======== ======== =========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest............................................... $ 11 $ 35 $ 517
</TABLE>
See accompanying notes.
F-40
<PAGE> 124
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pharmacy Corporation of America (the "Company") is a wholly-owned
subsidiary of Beverly Enterprises, Inc. ("Beverly"). The Company is one of the
nation's largest institutional pharmacies delivering drugs and related products
and services, infusion therapy and other healthcare products (enteral and
urological) to nursing facilities, acute care and transitional care hospitals,
home care providers, psychiatric facilities, correctional facilities, assisted
living centers, retirement homes and their patients. The Company also provides
consultant pharmacist services, which include evaluations of patient drug
therapy, and drug handling, distribution and administration within a nursing
facility as well as assistance with state and federal regulatory compliance. The
Company's mail service pharmacy delivers drugs and medical equipment to workers'
compensation payors, claimants and employers. As of December 31, 1996, the
Company operated 57 pharmacies and pharmacy-related outlets located in 25
states. All references to the Company shall mean Pharmacy Corporation of America
and its consolidated subsidiaries. All significant intercompany accounts and
transactions between the Company and its subsidiaries have been eliminated. (See
Note 10.)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include time deposits and certificates of deposit
with original maturities of three months or less.
INVENTORY
Inventory, consisting of pharmaceuticals and other products held for
resale, are carried primarily at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligation
less accumulated amortization. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the assets.
INTANGIBLES
Goodwill (stated at cost less accumulated amortization of approximately
$17,865,000 and $10,586,000 in 1996 and 1995, respectively) is being amortized
over 40 years using the straight-line method.
Software development (stated at cost less accumulated amortization of
approximately $5,674,000 and $4,068,000 in 1996 and 1995, respectively) is being
amortized over five years using the straight-line method. Software development
costs consist of incremental wages and related costs as well as travel expenses
directly attributable to the development of software to be used in the
operations of the Company and the cost of any purchased software packages.
On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such
F-41
<PAGE> 125
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
shortfall. As of December 31, 1996, the Company does not believe there is any
indication that the carrying value or the amortization period of its intangibles
needs to be adjusted.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No. 121")
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted future
cash flows are not sufficient to recover the assets' carrying amounts. The
impairment loss is measured by comparing the fair value of an asset to its
carrying amount.
In 1995, the Company recorded an impairment loss of approximately
$5,392,000 upon adoption of SFAS No. 121. The impairment indicators which led to
recording this loss were as follows: two pharmacies, purchased by the Company in
late 1994, had operating losses in 1995, and the Company anticipated future
operating losses for these facilities primarily related to Beverly's lack of
presence in the markets; one pharmacy, located in a state where Beverly had
recently sold all of its interest, began to lose the contracts that had been
assumed by the new owners, and it became apparent that the operations would not
recover to their previous level; and, lastly, the Company operates a medical
records servicing business which lost approximately half of its business in 1995
when Beverly pursued a different vendor for this service. Accordingly,
management estimated the undiscounted future cash flows to be generated by each
business. The undiscounted future cash flow estimates were less than the
carrying value of such businesses, so management estimated the fair value of
such businesses and wrote the carrying values down to their estimates of fair
value. Management calculated the fair values of the impaired businesses by using
the present values of estimated future cash flows.
In addition to the SFAS No. 121 charge, the Company recorded an impairment
loss in 1995 of approximately $4,151,000 primarily related to the write-off of
software costs. In conjunction with the Company's 1995 acquisition of
Prescription Management Services, Inc. ("PMSI") (see Note 2), PMSI's Vice
President of Management Information Systems assumed the management information
systems' functions for the Company and redirected the Company's systems
development initiatives, which caused a write-off of certain software and
systems development costs.
INSURANCE
The Company is insured for general liability and workers' compensation
risks through Beverly's self-insurance programs. Beverly allocates expense to
the Company based on the relative percentage of insurance costs incurred by
Beverly on behalf of the Company. Total insurance allocations to the Company
were approximately $1,829,000, $1,409,000 and $919,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Management believes these
charges represent a reasonable allocation of the costs incurred by Beverly on
behalf of the Company.
STOCK-BASED AWARDS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair value on the date of grant. The Company has elected to continue to
account for stock-based awards in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees,"
F-42
<PAGE> 126
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
and, accordingly, recognizes no compensation expense for stock option grants.
See Note 7 for the pro forma effects on the Company's reported net income
assuming the election had been made to recognize compensation expense on
stock-based awards in accordance with SFAS No. 123.
REVENUES
The Company's revenues are derived primarily from providing pharmaceuticals
and related healthcare products and services to long-term care facilities, acute
care and transitional care hospitals, home care providers, psychiatric
facilities, correctional facilities and their patients. The Company's mail
service pharmacy delivers drugs and medical equipment to workers' compensation
payors, claimants and employers. The Company records fees at the time the
services or products are provided. These revenues are reported at the estimated
net amounts to be received from individuals, third party payors, nursing
facilities and others. Approximately 37%, 41% and 41% of the Company's operating
revenues for 1996, 1995 and 1994, respectively, were derived from funds under
federal and state medical assistance programs, and approximately 43% of the
Company's net accounts receivable at December 31, 1996 and 1995 are due from
such programs.
Concentration of Credit Risk
The Company has significant accounts receivable whose collectibility or
realizability is dependent upon the performance of certain governmental
programs, primarily Medicaid and Medicare. These receivables represent the only
concentration of credit risk for the Company. The Company does not believe there
are significant credit risks associated with these governmental programs. The
Company believes that an adequate provision has been made for the possibility of
these receivables proving uncollectible and continually monitors and adjusts
these allowances as necessary. See also Note 9 for a discussion of business with
Beverly.
2. ACQUISITIONS
During 1996, the Company acquired three institutional pharmacies for cash
of approximately $10,835,000 and disposed of one institutional pharmacy for cash
proceeds of approximately $2,152,000. The acquisitions were accounted for as
purchases.
In June 1995, Beverly acquired Pharmacy Management Services, Inc. ("PMSI")
in exchange for approximately 12,361,000 shares of Beverly common stock, plus
closing and related costs, for a total purchase price of approximately
$162,900,000. As a leading independent nationwide provider of medical cost
containment and managed care services to workers' compensation payors and
claimants, PMSI's services included pharmacy benefit management through both a
national retail pharmacy network and home delivery of prescription drugs,
medical supplies and medical equipment ("mail service business") as well as
workers' compensation preferred provider organization ("PPO business"). The
mail-service business was contributed by Beverly to the Company in June 1995,
and has been operated by the Company since that time. The PPO business was
transferred to another of Beverly's wholly-owned subsidiaries. Beverly's
acquisition of PMSI was accounted for as a purchase and resulted in additional
goodwill to Beverly of approximately $139,600,000. Based on the fair value of
the mail service net assets, Beverly allocated approximately $97,700,000 of the
PMSI purchase price to the Company, including goodwill of approximately
$83,800,000. The Company also purchased one institutional pharmacy during 1995
for cash of approximately $2,492,000. This acquisition was accounted for as a
purchase.
In November 1994, the Company acquired Insta-Care Holdings, Inc.,
("Insta-Care") for cash of approximately $112,000,000 as well as other costs
incurred totaling approximately $8,600,000. Insta-Care provided pharmaceutical
dispensing services in six states to approximately 65,000 patients in nursing
homes
F-43
<PAGE> 127
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
2. ACQUISITIONS -- (CONTINUED)
and correctional facilities. In December 1994, the Company acquired three
institutional pharmacy subsidiaries of Synetic, Inc., ("Synetic") for cash of
approximately $107,300,000, as well as other costs incurred totaling
approximately $6,000,000. The Synetic businesses provided pharmaceutical
dispensing services in New England and Indiana to approximately 45,000 patients
in various institutions, including nursing homes, transitional care facilities,
correctional facilities and group homes. These acquisitions were accounted for
as purchases and resulted in additional goodwill for the Company of
approximately $95,100,000 related to Insta-Care and approximately $90,800,000
related to Synetic. The Company consummated such transactions with funds
provided by Beverly. Beverly borrowed such funds through banking arrangements
(see Note 4). The Company also purchased one institutional pharmacy during 1994
for cash of approximately $782,000. This acquisition was accounted for as a
purchase.
Summarized below are the unaudited proforma consolidated results of
operations of the Company for the years ended December 31, 1995 and 1994,
assuming the PMSI, Insta-Care and Synetic transactions discussed above had
occurred as of January 1, 1994. The operations of all of the other pharmacies
acquired or disposed of during 1996, 1995 and 1994 were immaterial to the
Company's financial position and results of operations.
These unaudited proforma consolidated results of operations have been
prepared for comparative purposes only and do not purport to be indicative of
what would have occurred had those transactions been made at January 1, 1994, or
of results which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1994
-------- ------------------------
INSTA-CARE,
INSTA-CARE SYNETIC
PMSI & SYNETIC & PMSI
-------- ---------- -----------
<S> <C> <C> <C>
Revenues.................................................... $493,262 $421,379 $505,350
Income before provision for income taxes.................... 12,827 30,217 35,863
Net income.................................................. 5,567 17,950 21,304
</TABLE>
3. PROPERTY AND EQUIPMENT
Following is a summary of property and equipment and related accumulated
depreciation and amortization by major classifications at December 31 (in
thousands):
<TABLE>
<CAPTION>
TOTAL OWNED LEASED
----------------- ----------------- ---------------
1996 1995 1996 1995 1996 1995
------- ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Leasehold improvements..................... $11,460 $ 9,941 $11,460 $ 9,941 $ -- $ --
Furniture and equipment.................... 44,156 34,859 39,764 33,146 4,392 1,713
Construction in progress................... 345 550 345 550 -- --
------- ------- ------- ------- ------ ------
55,961 45,350 51,569 43,637 4,392 1,713
Less: accumulated depreciation and
amortization......................... 23,263 16,799 21,238 15,456 2,025 1,343
------- ------- ------- ------- ------ ------
$32,698 $28,551 $30,331 $28,181 $2,367 $ 370
======= ======= ======= ======= ====== ======
</TABLE>
The estimated useful lives of the assets are as follows: leasehold
improvements 5 to 20 years or term of lease, if less; furniture and equipment 5
to 15 years. Capitalized lease assets are amortized over the initial terms of
the leases.
Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1996, 1995 and 1994 was approximately $6,737,000,
$4,534,000 and $3,363,000, respectively.
F-44
<PAGE> 128
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Present value of capital lease obligations, at effective
interest rates of 6.25% to 9.25%.......................... $2,262 $412
Non-interest bearing note due July 1996..................... -- 250
Other notes payable......................................... 40 93
------ ----
2,302 755
Less amounts due within one year............................ 968 630
------ ----
$1,334 $125
====== ====
</TABLE>
Scheduled maturities of long-term obligations, including capital leases,
for the years ending December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------ ---- ---- ---- ---- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Future minimum lease payments................ $1,088 $983 $440 $4 $4 $1 $2,520
Less interest................................ 157 82 18 1 -- -- 258
------ ---- ---- -- -- --- ------
Net present value of future minimum lease
payments................................... 931 901 422 3 4 1 2,262
Notes payable................................ 37 3 -- -- -- -- 40
------ ---- ---- -- -- --- ------
$ 968 $904 $422 $3 $4 $1 $2,302
====== ==== ==== == == === ======
</TABLE>
Included in the Company's "Due to Parent" account at December 31, 1996 and
1995 is a $225,000,000 obligation to repay Beverly for certain bank debt, as
discussed below. Beverly executed a credit agreement on November 1, 1994, which
provided for, among other things, a $225,000,000 Term Loan (the "Term Loan").
The proceeds from the Term Loan were used to consummate the Insta-Care and
Synetic acquisitions (as previously discussed). No interest has been charged to
the Company related to this debt obligation or any other amounts included in the
"Due to Parent" account. In December 1996, Beverly repaid the Term Loan with the
net proceeds from a $375,000,000 Amended and Restated Credit Agreement. Such
credit agreement provides for a Revolver/Letter of Credit Facility (the
"Revolver/LOC Facility"). Borrowings under the Revolver/LOC Facility bear
interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the
adjusted CD rate, as defined, plus 1%, at Beverly's option. Such interest rates
may be adjusted quarterly based on certain financial ratio calculations. The
Revolver/LOC Facility is secured by a security interest in the stock of the
Company and matures on December 31, 2001.
F-45
<PAGE> 129
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
5. COMMITMENTS AND CONTINGENCIES
The future minimum rental commitments required by noncancelable operating
leases on the Company's pharmacy locations with initial or remaining terms in
excess of one year as of December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997...................................................... $ 3,830
1998...................................................... 3,215
1999...................................................... 2,586
2000...................................................... 1,895
2001...................................................... 1,493
Thereafter................................................ 3,610
-------
$16,629
=======
</TABLE>
The Company leases all of its pharmacy locations and certain of its
equipment primarily under operating leases. Rent expense on operating leases for
the years ended December 31 was as follows: 1996 -- $12,142,000;
1995 -- $13,005,000; 1994 -- $8,037,000. Contingent rent, based primarily on
increases in the consumer price index, was approximately $343,000, $437,000 and
$511,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company's capital and operating leases primarily have initial terms of
five years with renewal options (which could extend the term of the leases by up
to five years), contain escalation clauses and have provisions for payments by
the Company of real estate taxes, insurance and maintenance costs.
The Company is contingently liable for Beverly's $180,000,000 of 9% Senior
Notes due February 15, 2006 (the "Senior Notes"). Beverly issued the Senior
Notes in February 1996 through a public offering and used the net cash proceeds
to repay indebtedness. The Senior Notes are unsecured obligations of Beverly,
guaranteed by substantially all of Beverly's present and future subsidiaries and
impose certain restrictive covenants.
There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
F-46
<PAGE> 130
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
6. INCOME TAXES
The Company joins with Beverly in the filing of consolidated income tax
returns. The tax provisions for Beverly subsidiaries, including the Company, are
determined on a separate company basis, as required. The resultant income taxes
payable to, or tax benefit receivable from, Beverly flows through the "Due to
Parent" account. Beverly accounts for income taxes using the liability method
required by Financial Accounting Standards Statement No. 109, "Accounting for
Income Taxes." The Company's provision for income taxes consists of the
following for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------ -------
<S> <C> <C> <C>
Federal:
Current.................................................. $ 8,649 $5,667 $ 7,946
Deferred................................................. 3,423 (748) 523
State:
Current.................................................. 1,860 1,219 1,710
Deferred................................................. 736 (161) 112
------- ------ -------
$14,668 $5,977 $10,291
======= ====== =======
</TABLE>
The Company's annual effective tax rate was approximately 42%, 56.6% and
40.6% for the years ended December 31, 1996, 1995 and 1994, respectively. A
reconciliation of the provision for income taxes, computed at the statutory
rate, to the Company's annual effective tax rate is summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------ ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory rate.................. $12,234 35.0 $3,697 35.0 $ 8,872 35.0
State tax provision.................... 1,688 4.8 688 6.5 1,185 4.7
Amortization of intangibles............ 561 1.6 1,519 14.4 182 0.7
Other.................................. 185 0.6 73 0.7 52 0.2
------- ---- ------ ---- ------- ----
$14,668 42.0 $5,977 56.6 $10,291 40.6
======= ==== ====== ==== ======= ====
</TABLE>
In accordance with Statement No. 109, deferred income taxes for 1996, 1995
and 1994 reflect the impact of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. The tax effects of temporary differences
giving rise to the Company's deferred tax assets and liabilities at December 31,
1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
ASSET LIABILITY ASSET LIABILITY
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Provision for bad debts...................... $5,014 $ -- $6,582 $ --
Uniform capitalization of inventory.......... 363 -- 363 --
Depreciation and amortization................ -- 9,569 -- 7,230
Other........................................ 212 -- 464 --
------ ------ ------ ------
$5,589 $9,569 $7,409 $7,230
====== ====== ====== ======
</TABLE>
Due to Parent includes cumulative amounts for current and deferred income
taxes as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Current taxes payable....................................... $56,700 $46,191
Deferred taxes payable (receivable)......................... 3,980 (179)
------- -------
$60,680 $46,012
======= =======
</TABLE>
F-47
<PAGE> 131
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
7. STOCK-BASED AWARDS
The Company accounts for stock-based awards granted to its employees by
Beverly in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") and related
Interpretations because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") requires use of
option valuation models that were not developed for use in valuing employee
stock options. Since the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized for employee stock options under APB No. 25.
The Company recognizes compensation expense for its restricted stock grants,
performance unit grants (when the performance targets are achieved) and other
stock unit awards. The total charges to the Company's consolidated statements of
income and retained earnings for the years ended December 31, 1996, 1995 and
1994 related to these stock-based awards were approximately $24,000, $616,000
and $104,000, respectively.
Pro forma information regarding net income is required by SFAS No. 123, and
has been determined as if the Company had accounted for its 1996 and 1995 stock
option and performance unit grants under the fair value method as prescribed by
such statement. The fair value for stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the years ended December 31, 1996 and 1995,
respectively: risk-free interest rates of 6.5% and 6.0%; volatility factors of
the expected market price of Beverly's common stock of .34 and .35; and a
weighted-average expected life of the option of 10 years. Beverly does not
currently pay cash dividends on its common stock and no future dividends are
currently planned. Such weighted-average assumptions resulted in a weighted
average fair value of options granted during 1996 and 1995 of $7.11 per share
and $7.31 per share, respectively. The fair value of the performance unit grants
was based on the market value of Beverly's common stock on the date of grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because Beverly's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of employee
stock options and performance units granted by Beverly to employees of the
Company is amortized to expense over their respective vesting periods. Pro forma
net income, assuming the Company had elected to account for these stock option
and performance unit grants in accordance with SFAS No. 123, would have been
approximately $19,987,000 and $4,577,000 for the years ended December 31, 1996
and 1995, respectively. Such pro forma effects are not necessarily indicative of
the effects on future years.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Statement No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the
F-48
<PAGE> 132
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
instrument. Statement No. 107 excludes certain financial instruments and all
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Company.
The Company used the following methods and assumptions in estimating its
fair value disclosures for financial instruments. The carrying amount of cash
and cash equivalents reported in the consolidated balance sheets approximates
its fair value. The fair value of notes receivable, net, which are included in
the consolidated balance sheet captions "Notes and other receivables" and
"Other, net" was estimated using discounted cash flow analyses, using interest
rates currently being offered for loans with similar terms to borrowers of
similar credit quality. The fair value of long-term obligations was estimated
using discounted cash flow analyses based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Cash and cash equivalents.......................... $7,575 $7,575 $3,315 $3,315
Notes receivable, net.............................. 1,163 1,163 1,735 1,701
Long-term obligations.............................. 2,302 2,274 755 730
</TABLE>
It was not practicable to estimate the fair value of the "Due to Parent"
account as no formal agreement exists for repayment of the balance. It was also
not practicable to estimate the fair value of the Company's off-balance sheet
guarantee of Beverly's Senior Notes (see Note 4) since the Company did not
charge a fee for entering into this agreement and contracting with a financial
institution to estimate such amount could not be done without incurring
excessive costs.
9. RELATED PARTY TRANSACTIONS
The Company provides its pharmaceutical dispensing, infusion therapy
products and services and its pharmacy and nursing consulting services to
nursing facilities operated by Beverly, and to the residents of Beverly
facilities. Revenues from sales directly to Beverly nursing facilities were
approximately $82,083,000, $74,021,000 and $77,213,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Revenues from sales to residents
of Beverly facilities, which are not considered by the Company to be revenues
from affiliates, are estimated to be approximately $78,000,000, $89,000,000 and
$80,000,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Beverly provides certain administrative services to the Company. These
services have included, among others, cash management, finance, legal, tax,
financial reporting, executive management, payroll and payables processing and
employee benefit plans maintenance. The responsibility for certain of these
services, including finance, tax and payables processing was transferred to the
Company in mid-1996 as part of a consolidation and reorganization of the
Company's accounting and related functions. Substantially all cash received by
the Company is deposited daily and wired to Beverly's corporate cash account. In
turn, all of the Company's operating expenses, capital expenditures and other
cash needs are paid by Beverly, and charged back to the Company along with a
management fee for handling such services. Fees for these services amounted to
approximately $1,820,000, $2,844,000 and $2,075,000 for the years ended December
31, 1996, 1995, and 1994, respectively. See Note 1 for a description of the
charges for insurance. The Company believes that the charges for services
provided by Beverly to the Company are a reasonable allocation of the costs
incurred by Beverly
F-49
<PAGE> 133
PHARMACY CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
9. RELATED PARTY TRANSACTIONS -- (CONTINUED)
on behalf of the Company in providing these services; however, such costs are
not necessarily indicative of the costs that would have been incurred if the
Company operated as a stand-alone entity.
The net result of all intercompany transactions between the Company and
Beverly are recorded in the "Due to Parent" account in the accompanying
consolidated balance sheets. As of December 31, 1996, 1995 and 1994, the
Company's intercompany balances were $312,395,000, $318,610,000 and
$225,006,000, respectively. The average of such intercompany balances were
approximately $315,500,000, $272,900,000 and $34,100,000, for the years ended
December 31, 1996, 1995 and 1994, respectively. There are currently no required
repayment terms for this account nor do such amounts bear interest.
The net increase in the Company's intercompany balance for the year ended
December 31, 1994 was due to the following: approximately $234,000,000 due to
the pushdown of the Insta-Care and Synetic acquisitions; approximately
$10,300,000 due to the allocation of current and deferred income taxes; and
approximately $2,100,000 due to fees charged by Beverly for certain
administrative and management services provided to the Company as discussed
above. These increases in the Company's intercompany balance were partially
offset by approximately $28,700,000 due primarily to net cash transfers from the
Company to Beverly and fees charged to Beverly's nursing facilities for products
and services provided by the Company.
The net increase in the Company's intercompany balance for the year ended
December 31, 1995 was due to the following: approximately $100,200,000 due to
the pushdown of the PMSI acquisition and the acquisition of one institutional
pharmacy; approximately $6,000,000 due to the allocation of current and deferred
income taxes; and approximately $2,800,000 due to fees charged by Beverly for
certain administrative and management services provided to the Company. These
increases in the Company's intercompany balance were partially offset by
approximately $15,400,000 due primarily to net cash transfers from the Company
to Beverly and fees charged to Beverly's nursing facilities for products and
services provided by the Company.
The net decrease in the Company's intercompany balance for the year ended
December 31, 1996 was due to the following: approximately $31,300,000 due
primarily to net cash transfers from the Company to Beverly and fees charged to
Beverly's nursing facilities for products and services provided by the Company;
and approximately $2,200,000 due to the disposition of one institutional
pharmacy. These decreases in the Company's intercompany balance were partially
offset by approximately $10,800,000 due to the pushdown of the acquisition of
three institutional pharmacies; approximately $14,700,000 due to the allocation
of current and deferred income taxes; and approximately $1,800,000 due to fees
charged by Beverly for certain administrative and management services provided
to the Company.
10. SUBSEQUENT EVENTS
In January 1997, the Company purchased 12 pharmacies from Interstate
Pharmacy Corporation for cash of approximately $19,800,000. The acquisition was
accounted for as a purchase and was not material to the Company's financial
position or results of operations.
In April 1997, Beverly signed a definitive agreement to combine the Company
with Capstone Pharmacy Services, Inc. ("Capstone"), which will create one of the
nation's largest independent institutional pharmacy companies. Capstone will
issue approximately 50,000,000 shares of its common stock to Beverly
stockholders and Beverly will be repaid approximately $275,000,000 of the
Company's "Due to Parent," with any remaining balance contributed to capital.
Beverly stockholders will own a majority of the combined pharmacy company after
the combination; however, Beverly will not retain any ownership interest. The
exact conversion ratio of Beverly to Capstone shares will be determined based on
the total number of shares of Beverly stock outstanding on the record date of
this transaction. The record date has not yet been set. The transaction is
subject to approval by the stockholders of both Beverly and Capstone, as well as
to approvals by various government agencies. It is expected to close by year-end
1997.
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<PAGE> 134
PHARMACY CORPORATION OF AMERICA
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
DUE TO
BALANCE AT ACQUISITIONS BALANCE
BEGINNING CHARGED TO AND AT END
DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS, NET DISPOSITIONS OTHER OF YEAR
----------- ---------- ---------- --------------- ------------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts:
Accounts
receivable -- patient....... $17,913 $12,840 $(17,304) $ (8) $(371) $13,070
Notes and other receivables... 995 660 (371) 0 371 1,655*
------- ------- -------- ------ ----- -------
$18,908 $13,500 $(17,675) $ (8) $ 0 $14,725
======= ======= ======== ====== ===== =======
Year ended December 31, 1995:
Allowance for doubtful accounts:
Accounts
receivable -- patient....... $11,469 $17,679 $(10,966) $ 459 $(728) $17,913
Notes and other receivables... 92 -- 175 -- 728 995*
------- ------- -------- ------ ----- -------
$11,561 $17,679 $(10,791) $ 459 $ 0 $18,908
======= ======= ======== ====== ===== =======
Year ended December 31, 1994:
Allowance for doubtful accounts:
Accounts
receivable -- patient....... $ 2,671 $ 7,362 $ (6,453) $7,949 $ (60) $11,469
Notes and other receivables... 66 26 (60) -- 60 92*
------- ------- -------- ------ ----- -------
$ 2,737 $ 7,388 $ (6,513) $7,949 $ 0 $11,561
======= ======= ======== ====== ===== =======
</TABLE>
- ---------------
* Includes amounts classified in long-term other assets as well as current
assets.
F-51
<PAGE> 135
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholder
New Beverly Holdings, Inc.
We have audited the accompanying balance sheet of New Beverly Holdings,
Inc. as of May 31, 1997. This balance sheet is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of New Beverly Holdings, Inc. at May
31, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Little Rock, Arkansas
June 2, 1997
F-52
<PAGE> 136
NEW BEVERLY HOLDINGS, INC.
(A WHOLLY-OWNED SUBSIDIARY OF BEVERLY ENTERPRISES, INC.)
BALANCE SHEET
MAY 31, 1997
ASSETS
<TABLE>
<S> <C>
Cash.................................... $100
----
Total assets.................. $100
====
STOCKHOLDER'S EQUITY
Stockholder's equity:
Common stock, $.10 par value; 3,000
shares authorized; 1,000 shares
issued and outstanding............. $100
----
Total stockholder's equity.... $100
====
</TABLE>
See accompanying note.
F-53
<PAGE> 137
NOTE TO BALANCE SHEET
MAY 31, 1997
New Beverly Holdings, Inc. ("New Beverly") was incorporated in the state of
Delaware on April 15, 1997, as a wholly-owned subsidiary of Beverly Enterprises,
Inc. ("Beverly"). New Beverly was formed in connection with the execution of an
Agreement and Plan of Distribution (the "Distribution Agreement") by and between
Beverly and New Beverly dated April 15, 1997. Under the Distribution Agreement,
Beverly will transfer all of its skilled nursing and rehabilitation facilities,
transitional acute care hospitals, outpatient therapy clinics, assisted living
facilities, hospice and home health agencies and other health care and related
services and businesses, other than its institutional and mail service pharmacy
business currently operated by Pharmacy Corporation of America ("PCA"), to New
Beverly, and shares of New Beverly will be distributed to the Beverly
stockholders in a tax-free spin-off. Beverly, then consisting solely of the
institutional and mail service pharmacy business operated by PCA, will merge
into and be acquired by Capstone Pharmacy Services, Inc. ("Capstone") through a
tax-free exchange of shares of common stock of Capstone for Beverly common
shares (the "Merger"), all as contemplated by an Agreement and Plan of Merger
dated April 15, 1997 (the "Merger Agreement").
New Beverly will become a public company upon the effectiveness of this
registration statement, will change its name to Beverly Enterprises, Inc. and
will be treated as the continuation of Beverly. Closing under the Merger
Agreement is subject to certain conditions, including but not limited to the
approvals of both Beverly and Capstone stockholders, completion of all
requirements under the Distribution Agreement, customary regulatory approvals
and the receipt, at the option of Beverly, of either a favorable tax ruling from
the Internal Revenue Service or an opinion of counsel or Ernst & Young LLP
concerning the tax-free nature of the transaction. For accounting and financial
reporting purposes, such transactions will be treated as the spin-off of PCA and
a reorganization/recapitalization of Beverly into New Beverly since New Beverly
will continue the majority of the Beverly businesses. No gain will be recognized
as a result of the spin-off for the difference between the market value of the
Capstone shares received and the carrying value of the net assets of PCA. In
addition, since Beverly stockholders will own a majority of the outstanding
shares of Capstone after the Merger, the Merger transaction will be accounted
for as a reverse acquisition of Capstone by PCA.
New Beverly has had no operations from its inception through May 31, 1997.
Therefore, the Statement of Operations and the Statement of Cash Flows have been
omitted from these financial statements.
F-54
<PAGE> 138
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Registration fee............................................ 100.00
-------
Printing and engraving expenses............................. +*
Transfer agent fees......................................... +*
Legal fees and expenses..................................... +*
Accounting fees and expenses................................ +*
Blue Sky fees and expenses.................................. +*
New York Stock Exchange listing fee......................... +*
Miscellaneous expense....................................... +*
Total............................................. +*
-------
$ +*
=======
</TABLE>
- ---------------
* Estimated
+ To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation and Bylaws and the
indemnification agreements between the Registrant and its officers and directors
contain provisions regarding the indemnification of officers and directors. The
Registrant's Certificate of Incorporation and Bylaws provide that the
Registrant, to the fullest extent permitted, and in the manner required by the
laws of the State of Delaware as in effect at the time of the adoption of the
Certificate of Incorporation and Bylaw provisions regarding indemnification or
as the same may be amended from time to time, shall (i) indemnify any person
(and the heirs and legal representatives of such person) who is made or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether in nature civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director
officer, employee or agent of the Registrant or of any constituent corporation
absorbed into the Registrant by consolidation or merger, or serves or served
with another corporation, partnership, joint venture, trust or enterprise, or
non-profit entity, including service with respect to employee benefit plans, at
the request of the Registrant or of any such constituent corporation against all
liability and (ii) provide to any such person (and the heirs and legal
representatives of such person) advances for expenses incurred in defending any
such action, suit or proceeding, upon receipt of an undertaking by or on behalf
of such person (and the heirs and legal representatives of such person) to repay
such advances unless it is ultimately determined that he or she is not entitled
to indemnification by the Registrant.
Section 145 of the Delaware General Corporation Law ("DGCL") applies to the
Company and the relevant portion of the DGCL provides as follows:
145. INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.
(a) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of
any action, suit or proceeding
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<PAGE> 139
by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification
of the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by a majority vote of the directors who were not parties to such
action, suit or proceeding, even though less than a quorum, or (2) if there
are no such directors, or if such directors so direct, by independent legal
counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any bylaw, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability
under this section.
(h) For purposes of this section, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and
II-2
<PAGE> 140
authority to indemnify its directors, officers and employees or agents, so
that any person who is or was a director, officer, employee or agent of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this section with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to an employee benefit
plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with the exclusive
jurisdiction to hear and determine all actions for advancement of expenses
or indemnification brought under this section or under any bylaw,
agreement, vote of stockholders or disinterested directors, or otherwise.
The Court of Chancery may summarily determine a corporation's obligation to
advance expenses (including attorneys' fees).
The Certificate of Incorporation limits the liability of directors (in
their capacity as directors, but not in their capacity as officers) to the
Registrant or its stockholders to the fullest extent permitted by the DGCL, as
amended. Specifically, no director of the Registrant will be personally liable
to the Registrant or its stockholders for monetary damages for breach of the
director's fiduciary duty as a director, except as provided in Section 102 of
the DGCL for liability: (i) for any breach of the director's duty of loyalty to
the Registrant or its stockholders; (ii) for acts or omissions not in good faith
and which involve intentional misconduct or knowing violation of law; (iii)
under Section 174 of the DGCL, which relates to unlawful payments of dividends
or unlawful stock repurchases or redemptions; or (iv) for any transaction from
which the director derived an improper personal benefit. The inclusion of this
provision in the Certificate of Incorporation may have the effect of reducing
the likelihood of derivative litigation against directors, and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such action, if successful, might
otherwise have benefitted the Registrant and its stockholders.
Under the Certificate of Incorporation and in accordance with Section 145
of the DGCL, the Registrant will indemnify any person who was or is a party, or
is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than a "derivative" action by or in the right of the
Registrant) by reason of the fact that such person was or is a director or
officer of the Registrant, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Registrant, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe such acts were unlawful. A
similar standard of care is applicable in the case of derivative actions, except
that indemnification only extends to expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such an action and then, where the person is adjudged to be liable to the
Registrant, only if and to the extent that the Court of Chancery of the State of
Delaware or the court in which such action was brought determines that such
person is fairly and reasonably entitled to such indemnity and then only for
such expenses as the court deems proper. The Registrant will indemnify, pursuant
to the standard enumerated in Section 145 of the DGCL, any past or present
officer or
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<PAGE> 141
director who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed derivative action by or in the right of the
Registrant.
The Certification of Incorporation of the Registrant provides that the
Registrant may pay for the expenses incurred by an indemnified director or
officer in defending the proceedings specified above in advance of their final
disposition, provided that, if the DGCL so requires, such indemnified person
agrees to reimburse the Registrant if it is ultimately determined that such
person is not entitled to indemnification. The Registrant's Certificate of
Incorporation also allows the Registrant, in its sole discretion, to indemnify
any person who is or was one of its employees and agents to the same degree as
the foregoing indemnification of directors and officers. To the extent that a
director, officer, employee or agent of the Registrant has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in subsections (a) and (b) of Section 145 of the DGCL, or in defense of any
claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection therewith. In addition, the Registrant may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Registrant or another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against and
incurred by such person in such capacity, or arising out of the person's status
as such whether or not the Registrant would have the power or obligation to
indemnify such person against such liability under the provisions of the DGCL.
The Registrant maintains insurance for the benefit of the Registrant's officers
and directors insuring such persons against certain liabilities, including civil
liabilities under the securities laws. Additionally, the Registrant has entered
into indemnification agreements with each of the Directors of the Registrant,
which, among other things, provides that the Registrant will indemnify such
Directors to the fullest extent permitted by the Certificate of Incorporation
and the DGCL and will advance expenses of defending claims against such
Directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following exhibits are filed as part of the Registration Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger dated April 15, 1997 by and
between Beverly Enterprises, Inc. and Capstone Pharmacy
Services, Inc. (incorporated by reference to Exhibit 2.1
to Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated April 15, 1997).
2.2 -- Agreement and Plan of Distribution by and among Beverly
Enterprises, Inc., New Beverly Holdings, Inc. and
Capstone Pharmacy Services, Inc. dated as of April 15,
1997 (incorporated by reference to Exhibit 2.2 to Beverly
Enterprises, Inc.'s Current Report on Form 8-K dated
April 15, 1997).
3.1* -- Certificate of Incorporation of New Beverly Holdings,
Inc. dated April 15, 1997.
3.2* -- Amended Certificate of Incorporation of New Beverly
Holdings, Inc. dated May 29, 1997.
3.3*** -- Amended and Restated Certificate of Incorporation of New
Beverly Holdings, Inc. dated , 1997.
3.4* -- Bylaws of New Beverly Holdings, Inc.
4.1 -- Indenture dated as of February 1, 1996 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee, with
respect to Beverly Enterprises, Inc.'s 9% Senior Notes
due February 15, 2006 (incorporated by reference to
Exhibit 4.1 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1995).
</TABLE>
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<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.2 -- Indenture dated as of April 1, 1993 (the "First Mortgage
Bond Indenture"), among Beverly Enterprises, Inc.,
Delaware Trust Company, as Corporate Trustee, and Richard
N. Smith, as Individual Trustee, with respect to First
Mortgage Bonds (incorporated by reference to Exhibit 4.1
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1993).
4.3 -- First Supplemental Indenture dated as of April 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 3/4%
First Mortgage Bonds due 2008 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31,
1993).
4.4 -- Second Supplemental Indenture dated as of July 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 5/8%
First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated July 15, 1993) (incorporated by reference to
Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993).
4.5 -- Indenture dated as of December 30, 1993 (the "Notes
Indenture"), between Beverly Enterprises, Inc. and
Boatmen's Trust Company, as Trustee, with respect to the
8.75% Notes (incorporated by reference to Exhibit 4.2 to
Beverly Enterprises, Inc.'s Registration Statement on
Form S-3 filed on November 9, 1993 (File No. 33-50965)).
4.6 -- First Supplemental Indenture dated as of December 30,
1993 to the Notes Indenture, with respect to 8 3/4% Notes
due 2003 (incorporated by reference to Exhibit 4.4 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated January 4, 1994).
4.7 -- Rights Agreement dated as of September 29, 1994, between
Beverly Enterprises, Inc. and The Bank of New York, as
Rights Agent (incorporated by reference to Exhibit 1 to
Beverly Enterprises, Inc.'s Registration Statement on
Form 8-A filed on October 18, 1994).
4.8 -- Amendment, dated as of April 6, 1995, to the Rights
Agreement between Beverly Enterprises, Inc. and The Bank
of New York, as Rights Agent (incorporated by reference
to Exhibit 4.20 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995).
In accordance with item 601(b)(4)(iii) of Regulation S-K,
certain instruments pertaining to Beverly Enterprises,
Inc.'s long-term obligations have not been filed; copies
thereof will be furnished to the Securities and Exchange
Commission upon request.
5.1** -- Opinion of Giroir, Gregory, Holmes & Hoover, PLC as to
certain legal matters.
5.2*** -- Opinion of John W. MacKenzie as to certain legal matters.
10.1 -- Executive Medical Reimbursement Plan assumed by New
Beverly Holdings, Inc. (incorporated by reference to
Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1987).
10.2 -- Amended and Restated Beverly Enterprises, Inc. Executive
Life Insurance Plan and Summary Plan Description (the
"Executive Life Plan") assumed by New Beverly Holdings,
Inc. (incorporated by reference to Exhibit 10.7 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1993).
10.3 -- Amendment No. 1, effective September 29, 1994, to the
Executive Life Plan assumed by New Beverly Holdings, Inc.
(incorporated by reference to Exhibit 10.10 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4
filed on February 13, 1995 (File No. 33-57663)).
10.4 -- Executive Physicals Policy assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.8
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1993).
</TABLE>
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<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5 -- Amended and Restated Deferred Compensation Plan effective
July 18, 1991 assumed by New Beverly Holdings, Inc.
(incorporated by reference to Exhibit 10.6 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1991).
10.6 -- Amendment No. 1, effective September 29, 1994, to the
Deferred Compensation Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit
10.13 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663)).
10.7 -- Executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.9
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1987).
10.8 -- Amendment No. 1, effective as of July 1, 1991, to the
Executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.8
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991).
10.9 -- Amendment No. 2, effective as of December 12, 1991, to
the Executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.9
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991).
10.10 -- Amendment No. 3, effective as of July 31, 1992, to the
executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit
10.10 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1992).
10.11 -- Amendment No. 4, effective as of January 1, 1993, to the
Executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit
10.18 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1994).
10.12 -- Amendment No. 5, effective as of September 29, 1994, to
the Executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit
10.19 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1994).
10.13 -- Beverly Enterprises, Inc. Executive Deferred Compensation
Plan assumed by New Beverly Holdings, Inc. (incorporated
by reference to Exhibit 10.23 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996).
10.14 -- Beverly Enterprises, Inc. Supplemental Long-Term
Disability Plan assumed by New Beverly Holdings, Inc.
(incorporated by reference to Exhibit 10.24 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1996).
10.15 -- Severance Plan for Corporate and Regional Employees
effective December 1, 1989 assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit
10.21 to Amendment No. 1 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on February 26,
1990 (File No. 33-33052)).
10.16 -- Employment Contract, made as of December 8, 1995, between
Beverly Enterprises, Inc. and David R. Banks
(incorporated by reference to Exhibit 10.2 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).
</TABLE>
II-6
<PAGE> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.17** -- Employment Contract, made as of August 22, 1997 between
New Beverly Holdings, Inc. and David R. Banks.
10.18 -- Employment Contract, made as of December 8, 1995, between
Beverly Enterprises, Inc. and Boyd W. Hendrickson
(incorporated by reference to Exhibit 10.3 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996).
10.19 -- Form of Change In Control Severance Agreement, made as of
December 8, 1995, between Beverly Enterprises, Inc. and
its Executive Vice Presidents (incorporated by reference
to Exhibit 10.31 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31,
1995).
10.20** -- Form of Employment Contract, made as of August 22, 1997
between New Beverly Holdings, Inc. and certain officers.
10.21 -- Form of Change In Control Severance Agreement, made as of
December 8, 1995, between Beverly Enterprises, Inc. and
certain of its officers (incorporated by reference to
Exhibit 10.32 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31,
1995).
10.22** -- Form of Severance Agreement made as of August 26, 1997
between New Beverly Holdings, Inc. and certain officers.
10.23** -- Amended and Restated Credit Agreement, dated as of August
20, 1997, among Beverly Enterprises, Inc., the Banks
listed therein, and Morgan Guaranty Trust Company of New
York, as Issuing Bank and as Agent.
10.24 -- Trust Indenture dated as of December 1, 1994 from Beverly
Funding Corporation, as Issuer, to Chemical Bank, as
Trustee (the "Chemical Indenture") (incorporated by
reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on February 13,
1995 (File No. 33-57663)).
10.25 -- Series Supplement dated as of December 1, 1994 to the
Chemical Indenture (incorporated by reference to Exhibit
10.46 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663)).
10.26 -- Data Processing Agreement, dated as of August 1, 1992, by
and between Systematics Telecommunications Services, Inc.
and Beverly California Corporation (incorporated by
reference to Exhibit 10 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992).
10.27 -- Form of Irrevocable Trust Agreement for the Beverly
Enterprises, Inc. Executive Benefits Plan assumed by New
Beverly Holdings, Inc. (incorporated by reference to
Exhibit 10.55 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663)).
10.28 -- Form of Indemnification and Pledge Agreement assumed by
New Beverly Holdings, Inc. (Incorporated by reference to
Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31,
1997).
10.29 -- Beverly Enterprises, Inc. Non-Employee Director Deferred
Compensation Plan assumed by New Beverly Holdings, Inc.
(incorporated by reference to Exhibit 10.1 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
</TABLE>
II-7
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.30*** -- Participation Agreement, dated as of March 21, 1997,
among Vantage Healthcare Corporation, Petersen Health
Care, Inc., Beverly Savana Cay Manor, Inc., Beverly
Enterprises-Georgia, Inc., and Beverly
Enterprises-California, Inc. as Lessees and Structural
Guarantors; Beverly Enterprises, Inc. as Representative,
Construction Agent and Parent Guarantor; BMO Leasing
(U.S.), Inc. as Agent Lessor and Lessor; The Long-Term
Credit Bank of Japan, LTD., Los Angeles Agency and Bank
of Montreal, as Lenders; The Long-Term Credit Bank of
Japan, LTD., Los Angeles Agency as Arranger and
Administrative Agent for the Lenders; and Bank of
Montreal as Co-Arranger and Syndication Agent with
respect to the Lease Financing of Assisted Living and
Nursing Facilities for Beverly Enterprises, Inc.
(incorporated by reference to Exhibit 10.2 of Beverly
Enterprises, Inc., Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
10.31** -- Amendment No. 1 and Waiver to Participation Agreement,
dated as of May 27, 1997.
10.32** -- Amendment No. 2 to Participation Agreement, dated as of
August 20, 1997.
11.1 -- Computation of Net Income (Loss) Per Share for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992
(incorporated by reference to Exhibit 11.1 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1996).
21.1*** -- Subsidiaries of Registrant.
23.1** -- Consent of Ernst & Young LLP, Independent Auditors.
23.2** -- Consent of Giroir, Gregory, Holmes & Hoover, PLC
(included as part of Exhibit 5.1).
24.1* -- Power of Attorney.
27.1* -- New Beverly Holdings, Inc. Financial Data Schedule.
</TABLE>
- ---------------
* Filed by the registrant on June 4, 1997.
** Filed herewith.
*** To be filed by amendment.
(b) Accounting schedules:
Schedule II -- Valuation and Qualifying Accounts
Beverly Enterprises, Inc.
Pharmacy Corporation of America
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-8
<PAGE> 146
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Fort Smith,
State of Arkansas, on the th day of September, 1997.
NEW BEVERLY HOLDINGS, INC.
By: /s/ SCOTT M. TABAKIN
----------------------------------
Scott M. Tabakin
Executive Vice President,
Chief Financial Officer and
Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed on the dates indicated by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board,
- ----------------------------------------------------- Chief Executive Officer
David R. Banks and Director September , 1997
* President, Chief Operating
- ----------------------------------------------------- Officer and Director
Boyd W. Hendrickson September , 1997
* Executive Vice President,
- ----------------------------------------------------- General Counsel,
Robert W. Pommerville Secretary and Director September , 1997
* Executive Vice President --
- ----------------------------------------------------- Asset Management and
Bobby W. Stephens Director September , 1997
/s/ SCOTT M. TABAKIN Executive Vice President,
- ----------------------------------------------------- Chief Financial Officer
Scott M. Tabakin and Director September , 1997
* Vice President, Controller
- ----------------------------------------------------- and Chief Accounting
Pamela H. Daniels Officer September , 1997
/s/ *JOHN W. MACKENZIE
- -----------------------------------------------------
As Attorney-in-Fact
</TABLE>
II-9
<PAGE> 147
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger dated April 15, 1997 by and
between Beverly Enterprises, Inc. and Capstone Pharmacy
Services, Inc. (incorporated by reference to Exhibit 2.1
to Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated April 15, 1997).
2.2 -- Agreement and Plan of Distribution by and among Beverly
Enterprises, Inc., New Beverly Holdings, Inc. and
Capstone Pharmacy Services, Inc. dated as of April 15,
1997 (incorporated by reference to Exhibit 2.2 to Beverly
Enterprises, Inc.'s Current Report on Form 8-K dated
April 15, 1997).
3.1* -- Certificate of Incorporation of New Beverly Holdings,
Inc. dated April 15, 1997.
3.2* -- Amended Certificate of Incorporation of New Beverly
Holdings, Inc. dated May 29, 1997.
3.3*** -- Amended and Restated Certificate of Incorporation of New
Beverly Holdings, Inc. dated , 1997.
3.4* -- Bylaws of New Beverly Holdings, Inc.
4.1 -- Indenture dated as of February 1, 1996 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee, with
respect to Beverly Enterprises, Inc.'s 9% Senior Notes
due February 15, 2006 (incorporated by reference to
Exhibit 4.1 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1995).
4.2 -- Indenture dated as of April 1, 1993 (the "First Mortgage
Bond Indenture"), among Beverly Enterprises, Inc.,
Delaware Trust Company, as Corporate Trustee, and Richard
N. Smith, as Individual Trustee, with respect to First
Mortgage Bonds (incorporated by reference to Exhibit 4.1
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1993).
4.3 -- First Supplemental Indenture dated as of April 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 3/4%
First Mortgage Bonds due 2008 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31,
1993).
4.4 -- Second Supplemental Indenture dated as of July 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 5/8%
First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated July 15, 1993) (incorporated by reference to
Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993).
4.5 -- Indenture dated as of December 30, 1993 (the "Notes
Indenture"), between Beverly Enterprises, Inc. and
Boatmen's Trust Company, as Trustee, with respect to the
8.75% Notes (incorporated by reference to Exhibit 4.2 to
Beverly Enterprises, Inc.'s Registration Statement on
Form S-3 filed on November 9, 1993 (File No. 33-50965)).
4.6 -- First Supplemental Indenture dated as of December 30,
1993 to the Notes Indenture, with respect to 8 3/4% Notes
due 2003 (incorporated by reference to Exhibit 4.4 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated January 4, 1994).
4.7 -- Rights Agreement dated as of September 29, 1994, between
Beverly Enterprises, Inc. and The Bank of New York, as
Rights Agent (incorporated by reference to Exhibit 1 to
Beverly Enterprises, Inc.'s Registration Statement on
Form 8-A filed on October 18, 1994).
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.8 -- Amendment, dated as of April 6, 1995, to the Rights
Agreement between Beverly Enterprises, Inc. and The Bank
of New York, as Rights Agent (incorporated by reference
to Exhibit 4.20 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1995).
In accordance with item 601(b)(4)(iii) of Regulation S-K,
certain instruments pertaining to Beverly Enterprises,
Inc.'s long-term obligations have not been filed; copies
thereof will be furnished to the Securities and Exchange
Commission upon request.
5.1** -- Opinion of Giroir, Gregory, Holmes & Hoover, PLC as to
certain legal matters.
5.2*** -- Opinion of John W. MacKenzie as to certain legal matters.
10.1 -- Executive Medical Reimbursement Plan assumed by New
Beverly Holdings, Inc. (incorporated by reference to
Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1987).
10.2 -- Amended and Restated Beverly Enterprises, Inc. Executive
Life Insurance Plan and Summary Plan Description (the
"Executive Life Plan") assumed by New Beverly Holdings,
Inc. (incorporated by reference to Exhibit 10.7 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1993).
10.3 -- Amendment No. 1, effective September 29, 1994, to the
Executive Life Plan assumed by New Beverly Holdings, Inc.
(incorporated by reference to Exhibit 10.10 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4
filed on February 13, 1995 (File No. 33-57663)).
10.4 -- Executive Physicals Policy assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.8
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1993).
10.5 -- Amended and Restated Deferred Compensation Plan effective
July 18, 1991 assumed by New Beverly Holdings, Inc.
(incorporated by reference to Exhibit 10.6 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1991).
10.6 -- Amendment No. 1, effective September 29, 1994, to the
Deferred Compensation Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit
10.13 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663)).
10.7 -- Executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.9
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1987).
10.8 -- Amendment No. 1, effective as of July 1, 1991, to the
Executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.8
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991).
10.9 -- Amendment No. 2, effective as of December 12, 1991, to
the Executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.9
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991).
10.10 -- Amendment No. 3, effective as of July 31, 1992, to the
executive Retirement Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit
10.10 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1992).
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------------------------ ------------------------------------------------------------------------------------------
<C> <S>
10.11 -- Amendment No. 4, effective as of January 1, 1993, to the Executive Retirement Plan
assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.18 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1994).
10.12 -- Amendment No. 5, effective as of September 29, 1994, to the Executive Retirement Plan
assumed by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.19 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1994).
10.13 -- Beverly Enterprises, Inc. Executive Deferred Compensation Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.23 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996).
10.14 -- Beverly Enterprises, Inc. Supplemental Long-Term Disability Plan assumed by New Beverly
Holdings, Inc. (incorporated by reference to Exhibit 10.24 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996).
10.15 -- Severance Plan for Corporate and Regional Employees effective December 1, 1989 assumed
by New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.21 to Amendment
No. 1 to Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed on
February 26, 1990 (File No. 33-33052)).
10.16 -- Employment Contract, made as of December 8, 1995, between Beverly Enterprises, Inc. and
David R. Banks (incorporated by reference to Exhibit 10.2 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.17** -- Employment Contract, made as of August 22, 1997 between New Beverly Holdings, Inc. and
David R. Banks.
10.18 -- Employment Contract, made as of December 8, 1995, between Beverly Enterprises, Inc. and
Boyd W. Hendrickson (incorporated by reference to Exhibit 10.3 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.19 -- Form of Change In Control Severance Agreement, made as of December 8, 1995, between
Beverly Enterprises, Inc. and its Executive Vice Presidents (incorporated by reference
to Exhibit 10.31 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1995).
10.20** -- Form of Employment Contract, made as of August 22, 1997 between New Beverly Holdings,
Inc. and certain officers.
10.21 -- Form of Change In Control Severance Agreement, made as of December 8, 1995, between
Beverly Enterprises, Inc. and certain of its officers (incorporated by reference to
Exhibit 10.32 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1995).
10.22** -- Form of Severance Agreement made as of August 26, 1997 between New Beverly Holdings,
Inc. and certain officers.
10.23** -- Amended and Restated Credit Agreement, dated as of August 20, 1997, among Beverly
Enterprises, Inc., the Banks listed therein, and Morgan Guaranty Trust Company of New
York, as Issuing Bank and as Agent.
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 -- Trust Indenture dated as of December 1, 1994 from Beverly Funding Corporation, as
Issuer, to Chemical Bank, as Trustee (the "Chemical Indenture") (incorporated by
reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s Registration Statement on
Form S-4 filed on February 13, 1995 (File No. 33-57663)).
10.25 -- Series Supplement dated as of December 1, 1994 to the Chemical Indenture (incorporated
by reference to Exhibit 10.46 to Beverly Enterprises, Inc.'s Registration Statement on
Form S-4 filed on February 13, 1995 (File No. 33-57663)).
10.26 -- Data Processing Agreement, dated as of August 1, 1992, by and between Systematics
Telecommunications Services, Inc. and Beverly California Corporation (incorporated by
reference to Exhibit 10 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 1992).
10.27 -- Form of Irrevocable Trust Agreement for the Beverly Enterprises, Inc. Executive
Benefits Plan assumed by New Beverly Holdings, Inc. (incorporated by reference to
Exhibit 10.55 to Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed
on February 13, 1995 (File No. 33-57663)).
10.28 -- Form of Indemnification and Pledge Agreement assumed by New Beverly Holdings, Inc.
(Incorporated by reference to Exhibit 10.1 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1997).
10.29 -- Beverly Enterprises, Inc. Non-Employee Director Deferred Compensation Plan assumed by
New Beverly Holdings, Inc. (incorporated by reference to Exhibit 10.1 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
10.30*** -- Participation Agreement, dated as of March 21, 1997, among Vantage Healthcare
Corporation, Petersen Health Care, Inc., Beverly Savana Cay Manor, Inc., Beverly
Enterprises-Georgia, Inc., and Beverly Enterprises-California, Inc. as Lessees and
Structural Guarantors; Beverly Enterprises, Inc. as Representative, Construction Agent
and Parent Guarantor; BMO Leasing (U.S.), Inc. as Agent Lessor and Lessor; The
Long-Term Credit Bank of Japan, LTD., Los Angeles Agency and Bank of Montreal, as
Lenders; The Long-Term Credit Bank of Japan, LTD., Los Angeles Agency as Arranger and
Administrative Agent for the Lenders; and Bank of Montreal as Co-Arranger and
Syndication Agent with respect to the Lease Financing of Assisted Living and Nursing
Facilities for Beverly Enterprises, Inc. (incorporated by reference to Exhibit 10.2 of
Beverly Enterprises, Inc., Quarterly Report on Form 10-Q for the quarter ended June 30,
1997).
10.31** -- Amendment No. 1 and Waiver to Participation Agreement, dated as of May 27, 1997.
10.32** -- Amendment No. 2 to Participation Agreement, dated as of August 20, 1997.
11.1 -- Computation of Net Income (Loss) Per Share for the years ended December 31, 1996, 1995,
1994, 1993 and 1992 (incorporated by reference to Exhibit 11.1 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996).
</TABLE>
<PAGE> 151
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
21.1*** -- Subsidiaries of Registrant.
23.1** -- Consent of Ernst & Young LLP, Independent Auditors.
23.2** -- Consent of Giroir, Gregory, Holmes & Hoover, PLC (included as part of Exhibit 5.1).
24.1* -- Power of Attorney.
27.1* -- New Beverly Holdings, Inc. Financial Data Schedule.
</TABLE>
- ---------------
* Filed by the registrant on June 4, 1997.
** Filed herewith.
*** To be filed by amendment.
<PAGE> 1
EXHIBIT 5.1
[LETTERHEAD]
August 22, 1997
Board of Directors
New Beverly Holdings, Inc.
5111 Rogers Avenue -- Suite 40A
Fort Smith, Arkansas 72919-0155
Re: Form S-1 Registration Statement
Commission File No. 333-28521
Gentlemen:
As counsel for New Beverly Holdings, Inc. (the "Company"), we have
participated in the preparation of the Company's referenced Registration
Statement on Form S-1 as filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, relating to the issuance by the Company
of up to 110,424,677 shares (the "Shares") of the Company's Common Stock (the
"Common Stock"), to stockholders of Beverly Enterprises, Inc. ("Beverly") as
part of a Plan of Distribution (the "Distribution") approved by the Board of
Directors of Beverly in connection with approval of an Agreement and Plan of
Merger dated as of April 15, 1997 between Beverly and Capstone Pharmacy
Services, Inc. ("Capstone").
As counsel for the Company, we have examined such corporate records,
certificates and other documents of the Company and such questions of law, and
have made inquiry of such officers of the Company, as we have deemed necessary
or appropriate for the purposes of this opinion, and on the basis of such
examination, we are of the opinion that:
1. The Company has been duly incorporated and is validly existing
under the laws of the State of Delaware.
2. The Shares, when issued and delivered in the Distribution in the
manner set forth in the Registration Statement relating to the Shares, will
be duly authorized, validly issued, fully paid and non-assessable shares of
the Common Stock of the Company.
We hereby consent to the inclusion of this opinion as an exhibit to the
Registration Statement on Form S-1 filed by the Company and the reference to our
firm in the prospectus contained therein, under the caption "Legal Matters."
Very truly yours,
GIROIR, GREGORY, HOLMES & HOOVER, PLC
<PAGE> 1
EXHIBIT 10.17
EMPLOYMENT CONTRACT
AGREEMENT made as of August 22, 1997 between NEW BEVERLY
HOLDINGS, INC., a Delaware corporation (the "Company"), and DAVID R. BANKS
(the "Executive"), but to be effective as of the Effective Date.
WHEREAS, Executive is currently employed by Beverly Enterprises,
Inc. ("Beverly") and the Company is a wholly-owned subsidiary of Beverly; and
WHEREAS, the Company, Beverly, and Capstone Pharmacy Services,
Inc. ("Capstone") have entered into an Agreement and Plan of Distribution dated
as of April 15, 1997 whereby Beverly intends to transfer all of its business
except the institutional pharmacy business to the Company and the Company will
be spun-off as a separate public corporation (the "Distribution"), and
immediately thereafter Beverly will merge with and into Capstone (the "Merger")
pursuant to an Agreement and Plan of Merger dated as of April 15, 1997 (the
"Merger Agreement"), and the Company will change its name to Beverly
Enterprises, Inc.; and
WHEREAS, as a result of the Distribution, the Executive will
become an employee of the Company or one of its wholly-owned consolidated
subsidiaries; and
WHEREAS, in connection with this Agreement and in exchange for
the consideration described herein (the receipt and sufficiency of which is
hereby acknowledged), the Executive has agreed to waive any rights he may
currently have under any change in control, severance, or employment agreement
or other compensation or employee benefit plan with or previously assumed by
Beverly and has agreed to waive any claim that either the Distribution or the
Merger constitutes a "Change in Control" under any such agreements or other
employee benefit or compensation plans under this Agreement; and
WHEREAS, the Company desires to assure itself of the management
services of the Executive by directly engaging the Executive as the Chairman
and Chief Executive Officer of the Company; and
WHEREAS, the Company recognizes that the Executive's contribution
to the Company's growth and success after the Distribution will be substantial;
and
WHEREAS, the Company wishes to encourage the Executive to remain
with and devote full time and attention to the business affairs of the Company
and wishes to provide income protection to the Executive for a period of time
in the event of an involuntary Termination of Employment not for Cause or a
voluntary Termination of Employment for Good Reason within the Term of this
Agreement, whether or not in connection with a Change in Control (other than a
Change in Control in connection with the Distribution or Merger);
NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein and for other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the Company and the
Executive hereby agrees as follows:
1. Definitions.
(a) "Base Salary" shall mean the Executive's regular
annual rate of base pay, as set forth in Paragraph 4(a), as of the date
in question.
<PAGE> 2
(b) The "Benefit Multiplier" shall be equal to 2.0
except that if Executive's Termination of Employment is pursuant to
Paragraphs 6(b) or 6(c) it shall be equal to 3.0.
(c) The "Benefit Period" shall be the period of years
equal to the Benefit Multiplier which follows the Executive's
Termination of Employment.
(d) "Cause" shall mean the Executive's (i) conviction
of a crime involving moral turpitude or theft or embezzlement of
property from the Company or (ii) willful misconduct or willful failure
substantially to perform the duties of his position, but only if such
has continued after receipt of notice from the Company's Board of
Directors and such reasonable cure period as is set forth in such
notice.
(e) A "Change in Control" shall be deemed to have taken
place if, after the Distribution and Merger: (i) any person,
corporation, or other entity or group, including any "group" as defined
in Section l3(d)(3) of the Securities Exchange Act of 1934, other than
any employee benefit plan then maintained by the Company, becomes the
beneficial owner of shares of the Company having 30 percent or more of
the total number of votes that may be cast for the election of Directors
of the Company; (ii) as the result of, or in connection with, any
contested election for the Board of Directors of the Company, or any
tender or exchange offer, merger or other business combination or sale
of assets, or any combination of the foregoing (a "Transaction"), the
persons who were Directors of the Company before the Transaction shall
cease to constitute a majority of the Board of Directors of the Company
or any successor to the Company or its assets, or (iii) at any time (a)
the Company shall consolidate with, or merge with, any other Person and
the Company shall not be the continuing or surviving corporation, (b)
any Person shall consolidate with, or merge with the Company, and the
Company shall be the continuing or surviving corporation and in
connection therewith, all or part of the outstanding Company stock shall
be changed into or exchanged for stock or other securities of any other
Person or cash or any other property, (c) the Company shall be a party
to a statutory share exchange with any other Person after which the
Company is a subsidiary of any other Person, or (d) the Company shall
sell or otherwise transfer 50% or more of the assets or earning power of
the Company and its subsidiaries (taken as a whole) to any Person or
Persons; provided, however, that notwithstanding anything to the
contrary herein, a Change in Control shall not include either (a) the
Distribution or Merger, or (b) any transfer to a consolidated
subsidiary, reorganization, spin-off, split-up, distribution, or other
similar or related transaction(s) or any combination of the foregoing in
which the core business and assets of the Company and its subsidiaries
(taken as a whole) are transferred to another entity ("Controlled") with
respect to which (1) the majority of the Board of Directors of the
Company (as constituted immediately prior to such transaction(s)) also
serve as directors of Controlled and immediately after such
transaction(s) constitute a majority of Controlled's board of directors,
and (2) more than 70% of the shareholders of the Company (immediately
prior to such transaction(s)) become shareholders or other owners of
Controlled and immediately after the transaction(s) control more than
70% of the ownership and voting rights of Controlled.
(f) The "Change in Control Date" shall mean the date
immediately prior to the effectiveness of the Change in Control.
(g) The "Committee" shall mean the Compensation
Committee of the Company's Board of Directors.
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(h) The "Competitive Businesses" shall mean any of the
health care businesses in which the Company is engaged on the effective
date of the Distribution. Executive's serving on the Board of Directors
of Capstone is specifically excluded from the definition of competitive
businesses.
(i) "Effective Date" shall mean the effective date of
the Distribution; provided, however, that (a) in the event the Merger
Agreement is terminated prior to consummation of the Merger, or (b) all
of the Enumerated Executives do not enter into employment agreements
with the Company on or before the effective date of the Distribution,
then this Agreement shall be null and void ab initio and of no effect.
For purposes hereof, the "Enumerated Executives" consist of David R.
Banks, Boyd W. Hendrickson, William A. Mathies, T. Jerald Moore, Robert
W. Pommerville, Bobby W. Stephens, Scott M. Tabakin, Mark D. Wortley,
Schuyler Hollingsworth, Jr., Phillip W. Small and David G. Merrell.
(j) The Executive shall have "Good Reason" to terminate
employment if: (i) the Executive is not elected, reelected, or otherwise
continued in the office of the Company or any of its subsidiaries which
he held immediately prior to the Change in Control Date, or he is
removed as a member of the Board of Directors of the Company or any of
its subsidiaries if the Executive was a director immediately prior to
the Change in Control Date; (ii) the Executive's duties,
responsibilities or authority as an employee are materially reduced or
diminished from those in effect on the Change in Control Date without
the Executive's consent; (iii) the Executive's duties, responsibilities,
or authority as an employee are materially reduced or diminished from
those in effect on the Effective Date without the Executive's consent;
(iv) the Executive's compensation or benefits are reduced without the
Executive's consent, unless all Executive-level officers have their
compensation or benefits reduced in the same percentage amount; (v) the
Company reduces the potential earnings of the Executive under any
performance-based bonus or incentive plan of the Company in effect
immediately prior to the Change in Control Date; (vi) the Company
requires that the Executive's employment be based other than at its
location on the Effective Date without his consent; (vii) any purchaser,
assign, surviving corporation, or successor of the Company or its
business or assets (whether by acquisition, merger, liquidation,
consolidation, reorganization, sale or transfer of assets or business,
or otherwise) fails or refuses to expressly assume in writing this
Agreement and all of the duties and obligations of the Company hereunder
pursuant to Section 18 hereof; or (viii) the Company breaches any of the
provisions of this Agreement.
(k) "Person" shall have the meaning ascribed to such
term in Section 3(a)(9) of the Securities Exchange Act of 1934 and used
in Sections 13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d).
(l) "Target Bonus" shall mean the target bonus (100%
level) established for the Executive for the year in question under the
Company's "Annual Incentive Plan."
(m) "Termination of Employment" shall mean the
termination of the Executive's employment by the Company other than such
a termination in connection with an offer of immediate reemployment by a
successor or assign of the Company or purchaser of the Company or its
assets under terms and conditions which would not permit the Executive
to terminate his employment for Good Reason.
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2. Term. The initial term of this Agreement shall be for the
period commencing on the Effective Date and ending on the third anniversary of
the Effective Date. The Term shall be automatically extended by one additional
day for each day beyond the Effective Date of this Agreement that the Executive
remains employed by the Company until such time as the Company elects to cease
such extension by giving written notice of such to the Executive. (In such
event, the Agreement shall thus terminate on the third anniversary of the
effective date of such notice).
3. Position and Duties. During the Term, the Executive shall
serve, as an employee, as the Chairman and Chief Executive Officer of the
Company and shall have such duties, functions, responsibilities and authority
as are consistent with the Executive's position as the senior executive officer
in charge of the general management, business and affairs of the Company.
4. Compensation and Related Matters.
(a) Annual Base Salary. The Executive shall receive a
Base Salary at a rate of $700,000 per annum through December 31, 1997
and thereafter at any such greater rate as is determined by the
Committee.
(b) Benefits. During the Term, the Executive shall be
entitled to all of the following and any other benefits and
prerequisites offered by the Company to executives generally:
(i) Participate in the Company's present and
future stock option, restricted stock, phantom stock and other
similar equity-based incentive plans, pursuant to their terms.
Executive shall be 100% vested in his current stock option,
restricted stock, phantom stock, and performance share awards
issued by Beverly prior to the Distribution, and hereby agrees to
a substitution for all such stock options by a new grant of
similar Company stock options, as adjusted in number of shares
and exercise price to take into account the effect of the
Distribution.
(ii) Participate in the Company's Employee Stock
Purchase Plan, pursuant to its terms;
(iii) Participate in the Company's Executive
Deferred Compensation Plan, pursuant to its terms;
(iv) Participate in the Company's Executive
Retirement Plan, pursuant to its terms;
(v) $600,000 of individual life insurance
coverage under the Company's Executive Split Dollar Life
Insurance Plan;
(vi) $700,000 (or such greater amount as the
Company may make available to its senior executives generally) of
group term life insurance coverage;
(vii) $100,000 (or such greater amount as the
Company may make available to its senior executives generally) of
business travel accident insurance coverage when traveling on
Company business;
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(viii) Participate in the Company's Medical Plan,
and Dental Plan, pursuant to their terms, except that the premium
cost for such shall be treated as a benefit under the Company's
Executive Medical Reimbursement Plan, described below, (and
therefore at the present time, there shall be no payroll
deduction as a condition of coverage in the Medical Plan and
Dental Plan);
(ix) Participate in the Company's Executive
Medical Reimbursement Plan (with a maximum benefit of $11,500 (or
such greater amount as the Company may make available to its
senior executives generally), a portion of which shall be deemed
applied to the payment of premiums under the Company's Medical
Plan and Dental Plan as described above), pursuant to its terms;
(x) Participate in the Company's group Long-Term
Disability Plan, at the maximum benefit level, pursuant to its
terms, and participate in the Company's Supplemental Long-Term
Disability Plan, according to its terms;
(xi) 4 weeks of paid vacation;
(xii) Participate in or receive benefits under any
other employee benefit plan or other arrangement made available
by the Company to any of its employees, subject to and on a basis
consistent with the terms, conditions and overall administration
of such plan or arrangement.
(c) Annual Bonus. As additional compensation for
services rendered, the Executive shall be eligible to receive an annual
bonus in cash pursuant to the Company's Annual Incentive Plan.
(d) Expenses. The Company shall promptly reimburse the
Executive for all reasonable travel and other business expenses incurred
by the Executive in the performance of his duties to the Company
hereunder.
(e) Reporting. The Executive shall report directly to
the Board of Directors of the Company.
5. Non-Solicitation.
(a) Executive shall not at any time during the period
of his employment with the Company, or during the one (1) year period
immediately following his Termination of Employment with the Company
("Non-Solicitation Period"), without the prior written consent of the
Company, on behalf of himself or any other person, solicit for
employment or employ any of the current officers or employees of the
Company; provided, however, that nothing contained herein shall prohibit
Executive from hiring employees of the Company when such employment
results from general solicitations for employment.
(b) Executive shall not at any time during the period
of his employment with the Company, or during the Non-Solicitation
Period, without the prior written consent of the Company, solicit for
his own use, or for the use of any company or person by whom he is
employed, or for whom he may be acting, any of the current customers of
the Company, nor shall he divulge to any other person any information or
fact relating to the management,
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business (including prospective business), finances, its customers or
the terms of any of the contracts of the Company which has heretofore or
which may hereafter come to the knowledge of Executive which is not
freely available to the public.
(c) Executive shall not, during the Non-Solicitation
Period, in any way defame the Company or disparage its business
capabilities, products, plans or management to any customer, potential
customer, vendor, supplier, contractor, subcontractor of the Company so
as to affect adversely the goodwill or business of the Company.
(d) Executive covenants and agrees that a breach of
these subparagraphs (a), (b) or (c) would immediately and irreparably
harm the Company and that a remedy at law would be inadequate to
compensate the Company for its losses by reason of such breach and
therefore that the Company shall, in addition to any rights and remedies
available under this Agreement, at law or otherwise, be entitled to any
injunction to be issued by any court of competent jurisdiction enjoining
and restraining Executive from committing any violation of these
subparagraphs (a), (b) or (c), and Executive hereby consent to the
issuance of such injunction.
(e) For purposes of this Section 5 and in consideration
of this Agreement, this non-solicitation agreement has been separately
negotiated and bargained for, and constitutes a substantial portion of
the consideration for this Agreement.
6. Eligibility for Severance Benefits. The Executive shall
be eligible for the benefits described in Paragraph 7 (the "Severance
Benefits") if:
(a) during the Term, the Executive has a Termination
Employment initiated (i) by the Company without Cause or (ii) by the
Executive for Good Reason, and, in either case, subsections (b) or (c)
do not apply,
(b) during the Term there has been a Change in Control
and during the 31 day period commencing on the first day of the 13th
calendar month following the Change in Control Date (e.g. the period
April 1, 1999 - May 1, 1999, inclusive, for a Change in Control which is
effective in the month of March, 1998), the Executive has a Termination
of Employment initiated by the Executive without Good Reason, or
(c) during the Term either (i) there has been a Change
in Control and during the two year period commencing on the Change in
Control Date the Executive has a Termination of Employment which is
initiated by the Company without Cause or by the Executive for Good
Reason, or (ii) the Executive has a Termination of Employment initiated
by the Company without Cause or by the Executive for Good Reason
following the commencement of any discussion with a third person that
ultimately results in a Change in Control with such third person within
12 months of the commencement of such discussions (in which case, the
date of such discussion shall be substituted for the Change in Control
Date wherever appropriate, including in the definition of "Good Reason"
and in Paragraph 7 hereof).
7. Severance Benefit. Upon satisfaction of the requirements
set forth in Paragraph 6, and subject to Paragraphs 8 and 11, the Executive
shall be entitled to the following Severance Benefits:
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(a) Cash Payment. The Executive shall be entitled to
receive an amount of cash equal to the Benefit Multiplier times the
greater of:
(i) the sum of the Executive's Base Salary as in
effect upon the Termination of Employment, and the greater of
(A) the Executive's Target Bonus as in
effect upon the Termination of Employment or,
(B) the Executive's actual bonus under
the Company's "Annual Incentive Plan" for the year prior
to the year of the Executive's Termination of Employment;
or
(ii) the sum of the Executive's Base Salary as in
effect on the Change in Control Date, and the greater of
(A) the Executive's Target Bonus as in
effect upon the Change in Control Date or,
(B) the Executive's actual bonus under
the Company's "Annual Incentive Plan" for the year prior
to the Change in Control Date.
The payment shall be made in a single lump sum within ten days following the
Executive's Termination of Employment.
(b) Long-Term Incentive Award; Equity-Based
Compensation. The Executive's interest under all of the Company's long-
term incentive plans shall be fully vested. Any and all (i) options to
purchase Company stock and (ii) restricted stock of the Company, owned
by the Executive shall be fully vested.
(c) Continuation of Benefits.
(i) For the Benefit Period, the Executive shall
be treated as if he had continued to be an executive employee for
all purposes under the Company's Medical Plan, Executive Medical
Reimbursement Plan and Dental Plan, as described in Paragraph
4(b). Following this period, the Executive shall be entitled to
receive continuation coverage under Part Six of Title I of ERISA
("COBRA Benefits") treating the end of this period as a
termination of the Executive's employment (other than for gross
misconduct).
(ii) The Company shall fully vest and maintain in
force, at its own expense, for the remainder of the Executive's
life, the life insurance in effect under the Company's Executive
Split Dollar Life Insurance Plan (as described in Paragraph 4(b))
as of the Change in Control Date or as of the date of Termination
of Employment, whichever is greater.
(d) Relocation Benefit; Office.
(i) If, within three years after the Executive's
Termination of Employment with the Company, the Executive gives
the Company written notice that
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he desires to relocate within the continental United States, the
Company will reimburse the Executive for any reasonable
relocation expenses (in accordance with the Company's general
relocation policy for executives as then in effect, or, at the
Executive's election, as in effect on the Change in Control Date)
in connection with such relocation.
(ii) For the lesser of the Benefit Period or the
date Executive commences employment which provides an office to
Executive, the Company shall provide Executive with first-class
office space of not more than 800 square feet in a city to be
selected by the Executive and approved by the Company (with such
approval not to be unreasonably withheld).
(e) Executive Retirement Plan. For the year of the
Executive's Termination of Employment, the Company will make the
contribution to the Executive Retirement Plan on behalf of the Executive
that it would have made if the Executive had not had a Termination of
Employment, but in no event less than the percentage contribution it
made for the Executive in the immediately preceding year (and increased
to take account of the additional year of service), in each case taking
account of the Executive's annualized rate of "Compensation" (as defined
in the Executive Retirement Plan) and the percentage of such
Compensation that the Executive is contributing to the Executive
Retirement Plan, as of the date of Termination of Employment, and the
Company's matching contribution rate for such year (or, if greater, the
preceding year). The portion of the Company's matching contribution
which is based on the preceding year's contribution percentage shall be
contributed to the Executive Retirement Plan on behalf of the Executive
immediately upon the Executive's Termination of Employment and any
additional contribution required shall be paid as soon as the amount is
determined.
(f) Executive Deferred Compensation Plan. For the year
of the Executive's Termination of Employment, the Company will make the
contribution to its Executive Deferred Compensation Plan (the "EDC
Plan") that it would have made if the Executive had not had a
Termination of Employment determined based on the Executive's deferral
for such year. At Executive's election, the Company contribution shall
be paid to the Executive immediately upon his Termination of Employment.
(g) Disability. For the Benefit Period, the Company
shall provide long-term disability insurance benefits coverage to
Executive equivalent to the coverage that the Executive would have had
had he remained employed under the Company's Long-Term Disability Plan
and Supplemental Long-Term Disability Plan as described in Paragraph
4(b) applicable to Executive on the date of Termination of Employment,
or, at the Executive's election, the plan or plans applicable to
Executive as of the Change in Control Date. Should Executive become
disabled during such period, Executive shall be entitled to receive such
benefits, and for such duration, as the applicable plan(s) provide.
(h) Plan Amendments. The Company shall adopt such
amendments to its employee benefit plans and insurance policies as are
necessary to effectuate the provisions of this Agreement. If and to the
extent any benefits under this Paragraph 7 are not paid or payable or
otherwise provided to the Executive or his dependents or beneficiaries
under any such plan or policy (whether due to the terms of the plan or
policy, the termination thereof, applicable law, or otherwise), then the
Company itself shall pay or provide for such benefits.
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8. Golden Parachute Gross-Up. If, in the written opinion of
a Big 6 accounting firm engaged by either the Company or the Executive for this
purpose (at the Company's expense), or if so alleged by the Internal Revenue
Service, the aggregate of the benefit payments under Paragraph 7 would cause
the payment of one or more of such benefits to constitute an "excess parachute
payment" as defined in Section 280G(b) of the Internal Revenue Code ("Code"),
then the Company will pay to the Executive an additional amount in cash (the
"Gross-Up Payment") equal to the amount necessary to cause the net amount
retained by the Executive, after deduction of any (i) excise tax on the
payments under Paragraph 7, (ii) federal, state or local income tax on the
Gross-Up Payment, and (iii) excise tax on the Gross-Up Payment, to be equal to
the aggregate remuneration the Executive would have received under Section 7,
excluding such Gross-Up Payment (net of all federal, state and local excise and
income taxes), as if Sections 280G and 4999 of the Code (and any successor
provisions thereto) had not been enacted into law. The Gross-Up Payment
provided for in this Paragraph shall be made within ten (10) days after the
termination of Executive's employment, provided however that if the amount of
the payment cannot be finally determined at the time, the Company shall pay to
Executive an estimate as determined in good faith by the Company of such
payments (together with interest at the rate provided in section 1274(b)(2)(B)
of the Code) as soon as the amount thereof can be determined but in no event
later than the thirtieth (30th) day after the date of termination. Any dispute
concerning the application of this Paragraph shall be resolved pursuant to
Paragraph 10, and if Paragraph 11 applies, any reference in this Paragraph to
Paragraph 7 shall also be deemed to include a reference to Paragraph 11 as
well.
9. Waiver of Other Severance Benefits. The benefits payable
pursuant to this Agreement are in lieu of any other severance benefits which
may otherwise be payable to the Executive upon termination of employment with
either Beverly or the Company, whether or not in connection with a Change in
Control (including, without limitation, any benefits to which Executive might
otherwise have been entitled under any employment, change in control, or
severance agreement or other compensation or employee benefit plan to which
Beverly was a party or which was assumed by Beverly), except those benefits
which are to be made available to the Executive as required by applicable law.
10. Disputes. Any dispute or controversy arising under, out
of, in connection with or in relation to this Agreement shall, at the election
and upon written demand of either party, be finally determined and settled by
binding arbitration in the city of Fort Smith, Arkansas, using a single
arbitrator, in accordance with the Labor Arbitration rules and procedures of
the American Arbitration Association, and judgment upon the award may be
entered in any court having jurisdiction thereof. The arbitrator shall have
the power to order specific performance, mandamus, or other appropriate legal
or equitable relief to enforce the provisions of this Agreement. The Company
shall pay all costs of the arbitration and all reasonable attorney's and
accountant's fees of the Executive in connection therewith.
11. Additional Payments Due to Dispute. Notwithstanding
anything to the contrary herein, and without limiting the Executive's rights at
law or in equity, if the Company fails or refuses to timely pay to the
Executive the benefits due under Paragraphs 7 and/or 8 hereof, then the
benefits under Paragraph 7(a) shall be increased and the benefits under
Paragraphs 7(c), 7(d), and 7(g) shall each be continued by one additional day
for each day of any such failure or refusal of the Company to pay. In
addition, any Gross-Up Payment due under Paragraph 8 shall be increased to take
into account any increased benefits under this Paragraph.
12. No Set-Off. There shall be no right of set-off or
counterclaim in respect of any claim, debt, or obligation against any payment
to or benefit for the Executive provided for in this Agreement.
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13. No Mitigation Obligation. The parties hereto expressly
agree that the payment of the benefits by the Company to the Executive in
accordance with the terms of this Agreement will be liquidated damages, and
that the Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor
shall any profits, income, earnings or other benefits from any source
whatsoever create any mitigation, offset, reduction or any other obligation on
the part of the Executive hereunder or otherwise.
14. Trust. Any payments or installments that may be required
to be made to Executive under this Agreement shall be funded immediately prior
to any Change in Control Date (or, if earlier, within ten (10) days after any
Termination of Employment) by a contribution by the Company of the necessary
amount of cash, as determined by independent actuaries acceptable to both
Executive and the Company, to the irrevocable grantor trust created for such
purpose by Beverly and assumed by and transferred to the Company in connection
with the Distribution, with Chemical Bank as Trustee, a copy of which Trust
Agreement may be obtained from the Company or the Trustee.
15. Letter of Credit for Legal Fees. In order to ensure the
benefits intended to be provided to the Executive hereunder, immediately prior
to any Change in Control Date the Company shall establish and hereby agrees to
maintain throughout the remaining Term an irrevocable standby Letter of Credit
in favor of the Executive and each other person who is named an Executive under
similar agreements, drawn on a bank selected by the Company (the "Letter of
Credit") which provides for a credit amount of $250,000 being made available to
the Executive against presentation at any time and from time to time of his
clean sight drafts, accompanied by statements of his counsel for fees and
expenses, in an aggregate amount not to exceed $250,000, unless a larger amount
is authorized by either the Chief Executive Officer, General Counsel, Chief
Financial Officer, or an Executive Vice President of the Company.
16. Waiver of Rights with Respect to Beverly Enterprises, Inc.
Executive hereby waives any rights against Beverly, including without
limitation any rights under any employment, change in control, or severance
agreement; under any stock option or long-term incentive plan or any other
compensation or employee benefit plan; or any rights he may have by virtue of
the Distribution or Merger constituting a Change in Control under any such
agreement or plan or any other Beverly compensation or employee benefit plan.
Executive also agrees to the cancellation of his Beverly stock options and the
substitution of such options with new stock options to be issued by the Company
with similar terms and conditions (including 100% vesting) as the prior
options, other than an increase in the number of such options and a decrease in
the exercise price thereof in order to take into account the effect of the
Distribution. Executive also waives any rights against the Company or Capstone
which he might otherwise have by virtue of the Distribution or Merger
constituting a Change in Control under any such aforementioned Beverly
agreements or plans.
17. Non-disclosure of Proprietary Information, Surrender of
Records; Inventions and Patents.
(a) Proprietary Information. Executive shall not
during the term of employment or at any time thereafter (irrespective of
the circumstances under which Executive's employment terminates),
directly or indirectly use for his own purpose or for the benefit of any
person or entity other than Company, nor otherwise disclose, any
proprietary information, as defined below, to any individual or entity,
unless such disclosure has been authorized in writing by the Company or
is otherwise required by law. For purposes of this Agreement, the term
"proprietary information" shall include, but is not limited to: (a) the
name or address of any
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client or affiliate of Company or any information concerning the
transactions or relations of any client or affiliate of Company with
Company or any of its shareholders; (b) any information concerning any
product, service, methodology, analysis, presentation, technology or
procedure employed by Company but not generally known to its clients or
competitors, or under development by or being tested by Company but not
at the time offered generally to clients; (c) any information relating
to Company's computer software, computer systems, pricing or marketing
methods, capital structure, operating results, borrowing arrangements or
business plans; (d) any information which is generally regarded as
confidential or proprietary in any line of business engaged in by
Company; (e) any information contained in any of Company's written or
oral policies and procedures or employee manuals; (f) any information
belonging to clients or affiliates of Company which Company has agreed
to hold in confidence; (g) any inventions, innovations or improvements
covered by subsection 17(c) below; (h) any other information which
Company has reasonably determined to be confidential or proprietary; and
(i) all written, graphic, electronic and other material relating to any
of the foregoing. Information that is not novel or copyrighted or
patented may nonetheless be proprietary information. Proprietary
information, however, shall not include any information that is or
becomes generally known to the industries in which Company competes
through sources independent of Company or Executive or through
authorized publication by Company to persons other than Company's
employees.
(b) Confidentiality and Surrender of Records.
Executive shall not during the term of employment or at any time
thereafter (irrespective of the circumstances under which Executive's
employment terminates), except as required by law, directly or
indirectly give or disclose any "confidential records" (as hereinafter
defined) to, or permit any inspection or copying of confidential records
by, any individual or entity other than in the ordinary course and scope
of such individual's or entity's employment or retention by Company, nor
shall he use or retain any of the same following termination of his
employment. Executive shall promptly return to Company all
"confidential records" upon the termination of Executive's employment
with Company. For purposes hereof, "confidential records" means all
correspondence, memoranda, files, analyses, studies, reports, notes,
documents, manuals, books, lists, financial, operating or marketing
records, computer software, magnetic tape, or electronic or other media
or equipment of any kind which may be in Executive's possession or under
his control or accessible to him which contain any proprietary
information as defined in subsection 17(a) above. All confidential
records shall be and remain the sole property of Company during the
term of employment and thereafter.
(c) Inventions, Patents, and Copyrights. All
inventions, innovations or improvements in Company's method of
conducting its business (including policies, procedures, products,
improvements, software, ideas and discoveries, whether or not patentable
or copyrightable) conceived or made by Executive, either alone or
jointly with others, during the term of employment belong to Company.
Executive will promptly disclose in writing such inventions, innovations
or improvements to Company and perform all actions reasonably requested
by Company to establish and confirm such ownership by Company,
including, but not limited to, cooperating with and assisting Company in
obtaining patents and copyrights for Company in the United States and in
foreign countries. Any patent or copyright application filed by
Executive within a year after termination of his employment hereunder
shall be presumed to relate to an invention or work of authorship which
was made during the term of employment unless Executive can provide
conclusive evidence to the contrary.
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18. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by the
voluntary or involuntary dissolution of the Company or by any merger or
consolidation where the Company is not the surviving corporation, or
upon any transfer of all or substantially all of the Company's assets,
or any other Change in Control. The Company shall require any
purchaser, assign, surviving corporation or successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or
otherwise) to all or substantially all of the business and/or assets of
the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required to
perform if no such succession had taken place. This Agreement shall be
binding upon and inure to the benefit of the Company and any purchaser,
assign, surviving corporation or successor to the Company, including
without limitation any persons acquiring directly or indirectly all or
substantially all of the business and/or assets of the Company whether
by purchase, merger, consolidation, reorganization, transfer of all or
substantially all of the business or assets of the Company, or otherwise
(and such purchaser, assign, surviving corporation or successor shall
thereafter be deemed the "Company" for the purposes of this Agreement),
but this Agreement shall not otherwise be assignable, transferable or
delegable by the Company.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees and/or
legatees.
(c) This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the other, assign,
transfer or delegate this Agreement or any rights or obligations
hereunder except as expressly provided in this Section 18. Without
limiting the generality of the foregoing, the Executive's right to
receive payments hereunder shall not be assignable, transferable or
delegable, whether by pledge, creation of a security interest or
otherwise, or otherwise subject to anticipation, alienation, sale,
encumbrance, charge, hypothecation, or set-off in respect of any claim,
debt, or obligation, or to execution, attachment, levy or similar
process, or assignment by operation of law, other than by a transfer by
his will or by the laws of descent and distribution. Any attempt,
voluntarily or involuntarily, to effect any action prohibited by this
Paragraph shall be null, void, and of no effect.
19. Notices. Any notice, request, claim, demand, document and
other communication hereunder to any party shall be effective upon receipt (or
refusal of receipt) and shall be writing and delivered personally or sent by
telex, telecopy, or certified or registered mail, postage prepaid, or other
similar means of communication, as follows:
(a) If to the Company, addressed to its principal
executive offices to the attention of its Secretary;
(b) If to the Executive, to him at the address set
forth below under the Executive's signature, or at any such other
address as either party shall have specified by notice in writing to the
other.
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20. Amendments; Waivers. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, signed by the
Executive and by a duly authorized representative of the Board of Directors.
By an instrument in writing similarly executed, either party may waive
compliance by the other party with any provision of this Agreement that such
other party was or is obligated to comply with or perform; provided, however,
that such waiver shall not operate as a waiver of, or estoppel with respect to,
any other or subsequent failure. No failure to exercise and no delay in
exercising any right, remedy, or power hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy, or
power hereunder preclude any other or further exercise thereof or the exercise
of any other right, remedy, or power provided herein or by law or in equity.
21. Entire Agreement. This Agreement sets forth the entire
agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto. The parties further
intend that this Agreement shall constitute the complete and exclusive
statement of its terms and that no extrinsic evidence whatsoever may be
introduced in any judicial, administrative, or other legal proceeding involving
this Agreement.
22. Severability; Enforcement. If any provision of this
Agreement, or the application thereof to any person, place, or circumstance
shall be held by a court of competent jurisdiction to be invalid, unenforceable
or void, the remainder of this Agreement and such provisions as applied to
other persons, places and circumstances shall remain in full force and effect.
23. Indemnification. The Company shall indemnify, defend, and
hold the Executive harmless from and against any liability, damages, costs, or
expenses (including attorney's fees) in connection with any claim, cause of
action, investigation, litigation, or proceeding involving him by reason of his
having been an officer, director, employee, or agent of either the Company or
Beverly, unless it is judicially determined, in a final, nonappealable order
that the Executive was guilty of gross negligence or willful misconduct. The
Company also agrees to maintain adequate directors and officers liability
insurance for the benefit of Executive for the term of this Agreement and for
at least three years thereafter.
24. Governing Law. This Agreement shall be interpreted,
administered and enforced in accordance with the law of the State of Arkansas,
except to the extent pre-empted by Federal law.
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<PAGE> 14
The parties have duly executive this Agreement as of the date
first written above.
NEW BEVERLY HOLDINGS, INC. EXECUTIVE
By:
------------------------------------- ----------------------------------
Beryl F. Anthony, Jr. David R. Banks
Chairman, Compensation Committee 3421 Free Ferry
Board of Directors Fort Smith, AR 72903
By:
-------------------------------------
Robert W. Pommerville Agreed as to those provisions
Secretary relating to or affecting
Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A BEVERLY ENTERPRISES, INC.
Fort Smith, AR 72919
Attention: Secretary By:
------------------------------
Beryl F. Anthony, Jr.
Chairman, Compensation
Committee Board of
Directors
By:
------------------------------
Robert W. Pommerville
Secretary
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<PAGE> 1
EXHIBIT 10.20
EMPLOYMENT CONTRACT
AGREEMENT made as of August 22, 1997 between NEW BEVERLY
HOLDINGS, INC., a Delaware corporation (the "Company"), and Name1~ (the
"Executive"), but to be effective as of the Effective Date.
WHEREAS, Executive is currently employed by Beverly Enterprises,
Inc. ("Beverly") and the Company is a wholly-owned subsidiary of Beverly; and
WHEREAS, the Company, Beverly, and Capstone Pharmacy Services,
Inc. ("Capstone") have entered into an Agreement and Plan of Distribution dated
as of April 15, 1997 whereby Beverly intends to transfer all of its business
except the institutional pharmacy business to the Company and the Company will
be spun-off as a separate public corporation (the "Distribution"), and
immediately thereafter Beverly will merge with and into Capstone (the "Merger")
pursuant to an Agreement and Plan of Merger dated as of April 15, 1997 (the
"Merger Agreement"), and the Company will change its name to Beverly
Enterprises, Inc.; and
WHEREAS, as a result of the Distribution, the Executive will
become an employee of the Company or one of its wholly-owned consolidated
subsidiaries; and
WHEREAS, in connection with this Agreement and in exchange for
the consideration described herein (the receipt and sufficiency of which is
hereby acknowledged), the Executive has agreed to waive any rights he may
currently have under any change in control, severance, or employment agreement
or other compensation or employee benefit plan with or previously assumed by
Beverly and has agreed to waive any claim that either the Distribution or the
Merger constitutes a "Change in Control" under any such agreements or other
employee benefit or compensation plans under this Agreement; and
WHEREAS, the Company desires to assure itself of the management
services of the Executive by directly engaging the Executive as the Title~ of
the Company; and
WHEREAS, the Company recognizes that the Executive's contribution
to the Company's growth and success after the Distribution will be substantial;
and
WHEREAS, the Company wishes to encourage the Executive to remain
with and devote full time and attention to the business affairs of the Company
and wishes to provide income protection to the Executive for a period of time
in the event of an involuntary Termination of Employment not for Cause or a
voluntary Termination of Employment for Good Reason within the Term of this
Agreement, whether or not in connection with a Change in Control (other than a
Change in Control in connection with the Distribution or Merger);
NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein and for other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the Company and the
Executive hereby agrees as follows:
1. Definitions.
(a) "Base Salary" shall mean the Executive's regular
annual rate of base pay, as set forth in Paragraph 4(a), as of the date
in question.
<PAGE> 2
(b) The "Benefit Multiplier" shall be equal to 2.0
except that if Executive's Termination of Employment is pursuant to
Paragraphs 6(b) or 6(c) it shall be equal to 3.0.
(c) The "Benefit Period" shall be the period of years
equal to the Benefit Multiplier which follows the Executive's
Termination of Employment.
(d) "Cause" shall mean the Executive's (i) conviction
of a crime involving moral turpitude or theft or embezzlement of
property from the Company or (ii) willful misconduct or willful failure
substantially to perform the duties of his position, but only if such
has continued after receipt of notice from the Company's Board of
Directors and such reasonable cure period as is set forth in such
notice.
(e) A "Change in Control" shall be deemed to have taken
place if, after the Distribution and Merger: (i) any person,
corporation, or other entity or group, including any "group" as defined
in Section l3(d)(3) of the Securities Exchange Act of 1934, other than
any employee benefit plan then maintained by the Company, becomes the
beneficial owner of shares of the Company having 30 percent or more of
the total number of votes that may be cast for the election of Directors
of the Company; (ii) as the result of, or in connection with, any
contested election for the Board of Directors of the Company, or any
tender or exchange offer, merger or other business combination or sale
of assets, or any combination of the foregoing (a "Transaction"), the
persons who were Directors of the Company before the Transaction shall
cease to constitute a majority of the Board of Directors of the Company
or any successor to the Company or its assets, or (iii) at any time (a)
the Company shall consolidate with, or merge with, any other Person and
the Company shall not be the continuing or surviving corporation, (b)
any Person shall consolidate with, or merge with the Company, and the
Company shall be the continuing or surviving corporation and in
connection therewith, all or part of the outstanding Company stock shall
be changed into or exchanged for stock or other securities of any other
Person or cash or any other property, (c) the Company shall be a party
to a statutory share exchange with any other Person after which the
Company is a subsidiary of any other Person, or (d) the Company shall
sell or otherwise transfer 50% or more of the assets or earning power of
the Company and its subsidiaries (taken as a whole) to any Person or
Persons; provided, however, that notwithstanding anything to the
contrary herein, a Change in Control shall not include either (a) the
Distribution or Merger, or (b) any transfer to a consolidated
subsidiary, reorganization, spin-off, split-up, distribution, or other
similar or related transaction(s) or any combination of the foregoing in
which the core business and assets of the Company and its subsidiaries
(taken as a whole) are transferred to another entity ("Controlled") with
respect to which (1) the majority of the Board of Directors of the
Company (as constituted immediately prior to such transaction(s)) also
serve as directors of Controlled and immediately after such
transaction(s) constitute a majority of Controlled's board of directors,
and (2) more than 70% of the shareholders of the Company (immediately
prior to such transaction(s)) become shareholders or other owners of
Controlled and immediately after the transaction(s) control more than
70% of the ownership and voting rights of Controlled.
(f) The "Change in Control Date" shall mean the date
immediately prior to the effectiveness of the Change in Control.
(g) The "Committee" shall mean the Compensation
Committee of the Company's Board of Directors.
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<PAGE> 3
(h) The "Competitive Businesses" shall mean any of the
health care businesses in which the Company is engaged on the effective
date of the Distribution. Executive's serving on the Board of Directors
of Capstone is specifically excluded from the definition of competitive
businesses.
(i) "Effective Date" shall mean the effective date of
the Distribution; provided, however, that (a) in the event the Merger
Agreement is terminated prior to consummation of the Merger, or (b) all
of the Enumerated Executives do not enter into employment agreements
with the Company on or before the effective date of the Distribution,
then this Agreement shall be null and void ab initio and of no effect.
For purposes hereof, the "Enumerated Executives" consist of David R.
Banks, Boyd W. Hendrickson, William A. Mathies, T. Jerald Moore, Robert
W. Pommerville, Bobby W. Stephens, Scott M. Tabakin, Mark D. Wortley,
Schuyler Hollingsworth, Jr., Phillip W. Small and David G. Merrell.
(j) The Executive shall have "Good Reason" to terminate
employment if: (i) the Executive is not elected, reelected, or otherwise
continued in the office of the Company or any of its subsidiaries which
he held immediately prior to the Change in Control Date, or he is
removed as a member of the Board of Directors of the Company or any of
its subsidiaries if the Executive was a director immediately prior to
the Change in Control Date; (ii) the Executive's duties,
responsibilities or authority as an employee are materially reduced or
diminished from those in effect on the Change in Control Date without
the Executive's consent; (iii) the Executive's duties, responsibilities,
or authority as an employee are materially reduced or diminished from
those in effect on the Effective Date without the Executive's consent;
(iv) the Executive's compensation or benefits are reduced without the
Executive's consent, unless all Executive-level officers have their
compensation or benefits reduced in the same percentage amount; (v) the
Company reduces the potential earnings of the Executive under any
performance-based bonus or incentive plan of the Company in effect
immediately prior to the Change in Control Date; (vi) the Company
requires that the Executive's employment be based other than at its
location on the Effective Date without his consent; (vii) any purchaser,
assign, surviving corporation, or successor of the Company or its
business or assets (whether by acquisition, merger, liquidation,
consolidation, reorganization, sale or transfer of assets or business,
or otherwise) fails or refuses to expressly assume in writing this
Agreement and all of the duties and obligations of the Company hereunder
pursuant to Section 18 hereof; or (viii) the Company breaches any of the
provisions of this Agreement.
(k) "Person" shall have the meaning ascribed to such
term in Section 3(a)(9) of the Securities Exchange Act of 1934 and used
in Sections 13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d).
(l) "Target Bonus" shall mean the target bonus (100%
level) established for the Executive for the year in question under the
Company's "Annual Incentive Plan."
(m) "Termination of Employment" shall mean the
termination of the Executive's employment by the Company other than such
a termination in connection with an offer of immediate reemployment by a
successor or assign of the Company or purchaser of the Company or its
assets under terms and conditions which would not permit the Executive
to terminate his employment for Good Reason.
3
<PAGE> 4
2. Term. The initial term of this Agreement shall be for the
period commencing on the Effective Date and ending on the third anniversary of
the Effective Date. The Term shall be automatically extended by one additional
day for each day beyond the Effective Date of this Agreement that the Executive
remains employed by the Company until such time as the Company elects to cease
such extension by giving written notice of such to the Executive. (In such
event, the Agreement shall thus terminate on the third anniversary of the
effective date of such notice).
3. Position and Duties. During the Term, the Executive shall
serve, as an employee, as the Title of the Company and shall have such duties,
functions, responsibilities and authority as are consistent with the
Executive's position as the senior executive officer in charge of the Duties of
the Company.
4. Compensation and Related Matters.
(a) Annual Base Salary. The Executive shall receive a
Base Salary at a rate of Salary per annum through December 31, 1997 and
thereafter at any such greater rate as is determined by the Committee.
(b) Benefits. During the Term, the Executive shall be
entitled to all of the following and any other benefits and
prerequisites offered by the Company to executives generally:
(i) Participate in the Company's present and
future stock option, restricted stock, phantom stock and other
similar equity-based incentive plans, pursuant to their terms.
Executive shall be 100% vested in his current stock option,
restricted stock, phantom stock, and performance share awards
issued by Beverly prior to the Distribution, and hereby agrees to
a substitution for all such stock options by a new grant of
similar Company stock options, as adjusted in number of shares
and exercise price to take into account the effect of the
Distribution.
(ii) Participate in the Company's Employee Stock
Purchase Plan, pursuant to its terms;
(iii) Participate in the Company's Executive
Deferred Compensation Plan, pursuant to its terms;
(iv) Participate in the Company's Executive
Retirement Plan, pursuant to its terms;
(v) Life of individual life insurance coverage
under the Company's Executive Split Dollar Life Insurance Plan;
(vi) Group (or such greater amount as the Company
may make available to its senior executives generally) of group
term life insurance coverage;
(vii) $100,000 (or such greater amount as the
Company may make available to its senior executives generally) of
business travel accident insurance coverage when traveling on
Company business;
4
<PAGE> 5
(viii) Participate in the Company's Medical Plan,
and Dental Plan, pursuant to their terms, except that the premium
cost for such shall be treated as a benefit under the Company's
Executive Medical Reimbursement Plan, described below, (and
therefore at the present time, there shall be no payroll
deduction as a condition of coverage in the Medical Plan and
Dental Plan);
(ix) Participate in the Company's Executive
Medical Reimbursement Plan (with a maximum benefit of $11,500 (or
such greater amount as the Company may make available to its
senior executives generally), a portion of which shall be deemed
applied to the payment of premiums under the Company's Medical
Plan and Dental Plan as described above), pursuant to its terms;
(x) Participate in the Company's group Long-Term
Disability Plan, at the maximum benefit level, pursuant to its
terms, and participate in the Company's Supplemental Long-Term
Disability Plan, according to its terms;
(xi) 4 weeks of paid vacation;
(xii) Participate in or receive benefits under any
other employee benefit plan or other arrangement made available
by the Company to any of its employees, subject to and on a basis
consistent with the terms, conditions and overall administration
of such plan or arrangement.
(c) Annual Bonus. As additional compensation for
services rendered, the Executive shall be eligible to receive an annual
bonus in cash pursuant to the Company's Annual Incentive Plan.
(d) Expenses. The Company shall promptly reimburse the
Executive for all reasonable travel and other business expenses incurred
by the Executive in the performance of his duties to the Company
hereunder.
(e) Reporting. The Executive shall report directly to
the Reports of the Company.
5. Non-Solicitation.
(a) Executive shall not at any time during the period
of his employment with the Company, or during the one (1) year period
immediately following his Termination of Employment with the Company
("Non-Solicitation Period"), without the prior written consent of the
Company, on behalf of himself or any other person, solicit for
employment or employ any of the current officers or employees of the
Company; provided, however, that nothing contained herein shall prohibit
Executive from hiring employees of the Company when such employment
results from general solicitations for employment.
5
<PAGE> 6
(b) Executive shall not at any time during the period
of his employment with the Company, or during the Non-Solicitation
Period, without the prior written consent of the Company, solicit for
his own use, or for the use of any company or person by whom he is
employed, or for whom he may be acting, any of the current customers of
the Company, nor shall he divulge to any other person any information or
fact relating to the management, business (including prospective
business), finances, its customers or the terms of any of the contracts
of the Company which has heretofore or which may hereafter come to the
knowledge of Executive which is not freely available to the public.
(c) Executive shall not, during the Non-Solicitation
Period, in any way defame the Company or disparage its business
capabilities, products, plans or management to any customer, potential
customer, vendor, supplier, contractor, subcontractor of the Company so
as to affect adversely the goodwill or business of the Company.
(d) Executive covenants and agrees that a breach of
these subparagraphs (a), (b) or (c) would immediately and irreparably
harm the Company and that a remedy at law would be inadequate to
compensate the Company for its losses by reason of such breach and
therefore that the Company shall, in addition to any rights and remedies
available under this Agreement, at law or otherwise, be entitled to any
injunction to be issued by any court of competent jurisdiction enjoining
and restraining Executive from committing any violation of these
subparagraphs (a), (b) or (c), and Executive hereby consent to the
issuance of such injunction.
(e) For purposes of this Section 5 and in consideration
of this Agreement, this non-solicitation agreement has been separately
negotiated and bargained for, and constitutes a substantial portion of
the consideration for this Agreement.
6. Eligibility for Severance Benefits. The Executive shall
be eligible for the benefits described in Paragraph 7 (the "Severance
Benefits") if:
(a) during the Term, the Executive has a Termination
Employment initiated (i) by the Company without Cause or (ii) by the
Executive for Good Reason, and, in either case, subsections (b) or (c)
do not apply,
(b) during the Term there has been a Change in Control
and during the 31 day period commencing on the first day of the 13th
calendar month following the Change in Control Date (e.g. the period
April 1, 1999 - May 1, 1999, inclusive, for a Change in Control which is
effective in the month of March, 1998), the Executive has a Termination
of Employment initiated by the Executive without Good Reason, or
(c) during the Term either (i) there has been a Change
in Control and during the two year period commencing on the Change in
Control Date the Executive has a Termination of Employment which is
initiated by the Company without Cause or by the Executive for Good
Reason, or (ii) the Executive has a Termination of Employment initiated
by the Company without Cause or by the Executive for Good Reason
following the commencement of any discussion with a third person that
ultimately results in a Change in Control with such third person within
12 months of the commencement of such discussions (in which case, the
date of such discussion shall be substituted for the Change in Control
Date
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<PAGE> 7
wherever appropriate, including in the definition of "Good Reason" and
in Paragraph 7 hereof).
7. Severance Benefit. Upon satisfaction of the requirements
set forth in Paragraph 6, and subject to Paragraphs 8 and 11, the Executive
shall be entitled to the following Severance Benefits:
(a) Cash Payment. The Executive shall be entitled to
receive an amount of cash equal to the Benefit Multiplier times the
greater of:
(i) the sum of the Executive's Base Salary as in
effect upon the Termination of Employment, and the greater of
(A) the Executive's Target Bonus as in
effect upon the Termination of Employment or,
(B) the Executive's actual bonus under
the Company's "Annual Incentive Plan" for the year prior
to the year of the Executive's Termination of Employment;
or
(ii) the sum of the Executive's Base Salary as in
effect on the Change in Control Date, and the greater of
(A) the Executive's Target Bonus as in
effect upon the Change in Control Date or,
(B) the Executive's actual bonus under
the Company's "Annual Incentive Plan" for the year prior
to the Change in Control Date.
The payment shall be made in a single lump sum within ten days following the
Executive's Termination of Employment.
(b) Long-Term Incentive Award; Equity-Based
Compensation. The Executive's interest under all of the Company's long-
term incentive plans shall be fully vested. Any and all (i) options to
purchase Company stock and (ii) restricted stock of the Company, owned
by the Executive shall be fully vested.
(c) Continuation of Benefits.
(i) For the Benefit Period, the Executive shall
be treated as if he had continued to be an executive employee for
all purposes under the Company's Medical Plan, Executive Medical
Reimbursement Plan and Dental Plan, as described in Paragraph
4(b). Following this period, the Executive shall be entitled to
receive continuation coverage under Part Six of Title I of ERISA
("COBRA Benefits") treating the end of this period as a
termination of the Executive's employment (other than for gross
misconduct).
(ii) The Company shall fully vest and maintain in
force, at its own expense, for the remainder of the Executive's
life, the life insurance in effect under the Company's Executive
Split Dollar Life Insurance Plan (as described in Paragraph 4(b))
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<PAGE> 8
as of the Change in Control Date or as of the date of Termination
of Employment, whichever is greater.
(d) Relocation Benefit. If, within three years after
the Executive's Termination of Employment with the Company, the
Executive gives the Company written notice that he desires to relocate
within the continental United States, the Company will reimburse the
Executive for any reasonable relocation expenses (in accordance with the
Company's general relocation policy for executives as then in effect,
or, at the Executive's election, as in effect on the Change in Control
Date) in connection with such relocation.
(e) Executive Retirement Plan. For the year of the
Executive's Termination of Employment, the Company will make the
contribution to the Executive Retirement Plan on behalf of the Executive
that it would have made if the Executive had not had a Termination of
Employment, but in no event less than the percentage contribution it
made for the Executive in the immediately preceding year (and increased
to take account of the additional year of service), in each case taking
account of the Executive's annualized rate of "Compensation" (as defined
in the Executive Retirement Plan) and the percentage of such
Compensation that the Executive is contributing to the Executive
Retirement Plan, as of the date of Termination of Employment, and the
Company's matching contribution rate for such year (or, if greater, the
preceding year). The portion of the Company's matching contribution
which is based on the preceding year's contribution percentage shall be
contributed to the Executive Retirement Plan on behalf of the Executive
immediately upon the Executive's Termination of Employment and any
additional contribution required shall be paid as soon as the amount is
determined.
(f) Executive Deferred Compensation Plan. For the year
of the Executive's Termination of Employment, the Company will make the
contribution to its Executive Deferred Compensation Plan (the "EDC
Plan") that it would have made if the Executive had not had a
Termination of Employment determined based on the Executive's deferral
for such year. At Executive's election, the Company contribution shall
be paid to the Executive immediately upon his Termination of Employment.
(g) Disability. For the Benefit Period, the Company
shall provide long-term disability insurance benefits coverage to
Executive equivalent to the coverage that the Executive would have had
had he remained employed under the Company's Long-Term Disability Plan
and Supplemental Long-Term Disability Plan as described in Paragraph
4(b) applicable to Executive on the date of Termination of Employment,
or, at the Executive's election, the plan or plans applicable to
Executive as of the Change in Control Date. Should Executive become
disabled during such period, Executive shall be entitled to receive such
benefits, and for such duration, as the applicable plan(s) provide.
(h) Plan Amendments. The Company shall adopt such
amendments to its employee benefit plans and insurance policies as are
necessary to effectuate the provisions of this Agreement. If and to the
extent any benefits under this Paragraph 7 are not paid or payable or
otherwise provided to the Executive or his dependents or beneficiaries
under any such plan or policy (whether due to the terms of the plan or
policy, the termination thereof, applicable law, or otherwise), then the
Company itself shall pay or provide for such benefits.
8. Golden Parachute Gross-Up. If, in the written opinion of a
Big 6 accounting firm
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<PAGE> 9
engaged by either the Company or the Executive for this purpose (at the
Company's expense), or if so alleged by the Internal Revenue Service, the
aggregate of the benefit payments under Paragraph 7 would cause the payment of
one or more of such benefits to constitute an "excess parachute payment" as
defined in Section 280G(b) of the Internal Revenue Code ("Code"), then the
Company will pay to the Executive an additional amount in cash (the "Gross-Up
Payment") equal to the amount necessary to cause the net amount retained by the
Executive, after deduction of any (i) excise tax on the payments under
Paragraph 7, (ii) federal, state or local income tax on the Gross-Up Payment,
and (iii) excise tax on the Gross-Up Payment, to be equal to the aggregate
remuneration the Executive would have received under Section 7, excluding such
Gross-Up Payment (net of all federal, state and local excise and income taxes),
as if Sections 280G and 4999 of the Code (and any successor provisions thereto)
had not been enacted into law. The Gross-Up Payment provided for in this
Paragraph shall be made within ten (10) days after the termination of
Executive's employment, provided however that if the amount of the payment
cannot be finally determined at the time, the Company shall pay to Executive an
estimate as determined in good faith by the Company of such payments (together
with interest at the rate provided in section 1274(b)(2)(B) of the Code) as
soon as the amount thereof can be determined but in no event later than the
thirtieth (30th) day after the date of termination. Any dispute concerning the
application of this Paragraph shall be resolved pursuant to Paragraph 10, and
if Paragraph 11 applies, any reference in this Paragraph to Paragraph 7 shall
also be deemed to include a reference to Paragraph 11 as well.
9. Waiver of Other Severance Benefits. The benefits payable
pursuant to this Agreement are in lieu of any other severance benefits which
may otherwise be payable to the Executive upon termination of employment with
either Beverly or the Company, whether or not in connection with a Change in
Control (including, without limitation, any benefits to which Executive might
otherwise have been entitled under any employment, change in control, or
severance agreement or other compensation or employee benefit plan to which
Beverly was a party or which was assumed by Beverly), except those benefits
which are to be made available to the Executive as required by applicable law.
10. Disputes. Any dispute or controversy arising under, out
of, in connection with or in relation to this Agreement shall, at the election
and upon written demand of either party, be finally determined and settled by
binding arbitration in the city of Fort Smith, Arkansas, using a single
arbitrator, in accordance with the Labor Arbitration rules and procedures of
the American Arbitration Association, and judgment upon the award may be
entered in any court having jurisdiction thereof. The arbitrator shall have
the power to order specific performance, mandamus, or other appropriate legal
or equitable relief to enforce the provisions of this Agreement. The Company
shall pay all costs of the arbitration and all reasonable attorney's and
accountant's fees of the Executive in connection therewith.
11. Additional Payments Due to Dispute. Notwithstanding
anything to the contrary herein, and without limiting the Executive's rights at
law or in equity, if the Company fails or refuses to timely pay to the
Executive the benefits due under Paragraphs 7 and/or 8 hereof, then the
benefits under Paragraph 7(a) shall be increased and the benefits under
Paragraphs 7(c), 7(d), and 7(g) shall each be continued by one additional day
for each day of any such failure or refusal of the Company to pay. In
addition, any Gross-Up Payment due under Paragraph 8 shall be increased to take
into account any increased benefits under this Paragraph.
12. No Set-Off. There shall be no right of set-off or
counterclaim in respect of any claim, debt, or obligation against any payment
to or benefit for the Executive provided for in this Agreement.
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<PAGE> 10
13. No Mitigation Obligation. The parties hereto expressly
agree that the payment of the benefits by the Company to the Executive in
accordance with the terms of this Agreement will be liquidated damages, and
that the Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor
shall any profits, income, earnings or other benefits from any source
whatsoever create any mitigation, offset, reduction or any other obligation on
the part of the Executive hereunder or otherwise.
14. Trust. Any payments or installments that may be required
to be made to Executive under this Agreement shall be funded immediately prior
to any Change in Control Date (or, if earlier, within ten (10) days after any
Termination of Employment) by a contribution by the Company of the necessary
amount of cash, as determined by independent actuaries acceptable to both
Executive and the Company, to the irrevocable grantor trust created for such
purpose by Beverly and assumed by and transferred to the Company in connection
with the Distribution, with Chemical Bank as Trustee, a copy of which Trust
Agreement may be obtained from the Company or the Trustee.
15. Letter of Credit for Legal Fees. In order to ensure the
benefits intended to be provided to the Executive hereunder, immediately prior
to any Change in Control Date the Company shall establish and hereby agrees to
maintain throughout the remaining Term an irrevocable standby Letter of Credit
in favor of the Executive and each other person who is named an Executive under
similar agreements, drawn on a bank selected by the Company (the "Letter of
Credit") which provides for a credit amount of $250,000 being made available to
the Executive against presentation at any time and from time to time of his
clean sight drafts, accompanied by statements of his counsel for fees and
expenses, in an aggregate amount not to exceed $250,000, unless a larger amount
is authorized by either the Chief Executive Officer, General Counsel, Chief
Financial Officer, or an Executive Vice President of the Company.
16. Waiver of Rights with Respect to Beverly Enterprises, Inc.
Executive hereby waives any rights against Beverly, including without
limitation any rights under any employment, change in control, or severance
agreement; under any stock option or long-term incentive plan or any other
compensation or employee benefit plan; or any rights he may have by virtue of
the Distribution or Merger constituting a Change in Control under any such
agreement or plan or any other Beverly compensation or employee benefit plan.
Executive also agrees to the cancellation of his Beverly stock options and the
substitution of such options with new stock options to be issued by the Company
with similar terms and conditions (including 100% vesting) as the prior
options, other than an increase in the number of such options and a decrease in
the exercise price thereof in order to take into account the effect of the
Distribution. Executive also waives any rights against the Company or Capstone
which he might otherwise have by virtue of the Distribution or Merger
constituting a Change in Control under any such aforementioned Beverly
agreements or plans.
17. Non-disclosure of Proprietary Information, Surrender of
Records; Inventions and Patents.
(a) Proprietary Information. Executive shall not
during the term of employment or at any time thereafter (irrespective of
the circumstances under which Executive's employment terminates),
directly or indirectly use for his own purpose or for the benefit of any
person or entity other than Company, nor otherwise disclose, any
proprietary information, as defined below, to any individual or entity,
unless such disclosure has been authorized in writing by the Company or
is otherwise required by law. For purposes of this Agreement, the term
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<PAGE> 11
"proprietary information" shall include, but is not limited to: (a) the
name or address of any client or affiliate of Company or any information
concerning the transactions or relations of any client or affiliate of
Company with Company or any of its shareholders; (b) any information
concerning any product, service, methodology, analysis, presentation,
technology or procedure employed by Company but not generally known to
its clients or competitors, or under development by or being tested by
Company but not at the time offered generally to clients; (c) any
information relating to Company's computer software, computer systems,
pricing or marketing methods, capital structure, operating results,
borrowing arrangements or business plans; (d) any information which is
generally regarded as confidential or proprietary in any line of
business engaged in by Company; (e) any information contained in any of
Company's written or oral policies and procedures or employee manuals;
(f) any information belonging to clients or affiliates of Company which
Company has agreed to hold in confidence; (g) any inventions,
innovations or improvements covered by subsection 17(c) below; (h) any
other information which Company has reasonably determined to be
confidential or proprietary; and (i) all written, graphic, electronic
and other material relating to any of the foregoing. Information that
is not novel or copyrighted or patented may nonetheless be proprietary
information. Proprietary information, however, shall not include any
information that is or becomes generally known to the industries in
which Company competes through sources independent of Company or
Executive or through authorized publication by Company to persons other
than Company's employees.
(b) Confidentiality and Surrender of Records.
Executive shall not during the term of employment or at any time
thereafter (irrespective of the circumstances under which Executive's
employment terminates), except as required by law, directly or
indirectly give or disclose any "confidential records" (as hereinafter
defined) to, or permit any inspection or copying of confidential records
by, any individual or entity other than in the ordinary course and scope
of such individual's or entity's employment or retention by Company, nor
shall he use or retain any of the same following termination of his
employment. Executive shall promptly return to Company all
"confidential records" upon the termination of Executive's employment
with Company. For purposes hereof, "confidential records" means all
correspondence, memoranda, files, analyses, studies, reports, notes,
documents, manuals, books, lists, financial, operating or marketing
records, computer software, magnetic tape, or electronic or other media
or equipment of any kind which may be in Executive's possession or under
his control or accessible to him which contain any proprietary
information as defined in subsection 17(a) above. All confidential
records shall be and remain the sole property of Company during the
term of employment and thereafter.
(c) Inventions, Patents, and Copyrights. All
inventions, innovations or improvements in Company's method of
conducting its business (including policies, procedures, products,
improvements, software, ideas and discoveries, whether or not patentable
or copyrightable) conceived or made by Executive, either alone or
jointly with others, during the term of employment belong to Company.
Executive will promptly disclose in writing such inventions, innovations
or improvements to Company and perform all actions reasonably requested
by Company to establish and confirm such ownership by Company,
including, but not limited to, cooperating with and assisting Company in
obtaining patents and copyrights for Company in the United States and in
foreign countries. Any patent or copyright application filed by
Executive within a year after termination of his employment hereunder
shall be
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<PAGE> 12
presumed to relate to an invention or work of authorship which was made
during the term of employment unless Executive can provide conclusive
evidence to the contrary.
18. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by the
voluntary or involuntary dissolution of the Company or by any merger or
consolidation where the Company is not the surviving corporation, or
upon any transfer of all or substantially all of the Company's assets,
or any other Change in Control. The Company shall require any
purchaser, assign, surviving corporation or successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or
otherwise) to all or substantially all of the business and/or assets of
the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required to
perform if no such succession had taken place. This Agreement shall be
binding upon and inure to the benefit of the Company and any purchaser,
assign, surviving corporation or successor to the Company, including
without limitation any persons acquiring directly or indirectly all or
substantially all of the business and/or assets of the Company whether
by purchase, merger, consolidation, reorganization, transfer of all or
substantially all of the business or assets of the Company, or otherwise
(and such purchaser, assign, surviving corporation or successor shall
thereafter be deemed the "Company" for the purposes of this Agreement),
but this Agreement shall not otherwise be assignable, transferable or
delegable by the Company.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees and/or
legatees.
(c) This Agreement is personal in nature and neither of
the parties hereto shall, without the consent of the other, assign,
transfer or delegate this Agreement or any rights or obligations
hereunder except as expressly provided in this Section 18. Without
limiting the generality of the foregoing, the Executive's right to
receive payments hereunder shall not be assignable, transferable or
delegable, whether by pledge, creation of a security interest or
otherwise, or otherwise subject to anticipation, alienation, sale,
encumbrance, charge, hypothecation, or set-off in respect of any claim,
debt, or obligation, or to execution, attachment, levy or similar
process, or assignment by operation of law, other than by a transfer by
his will or by the laws of descent and distribution. Any attempt,
voluntarily or involuntarily, to effect any action prohibited by this
Paragraph shall be null, void, and of no effect.
19. Notices. Any notice, request, claim, demand, document and
other communication hereunder to any party shall be effective upon receipt (or
refusal of receipt) and shall be writing and delivered personally or sent by
telex, telecopy, or certified or registered mail, postage prepaid, or other
similar means of communication, as follows:
(a) If to the Company, addressed to its principal
executive offices to the attention of its Secretary;
(b) If to the Executive, to him at the address set
forth below under the
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<PAGE> 13
Executive's signature, or at any such other address as either party
shall have specified by notice in writing to the other.
20. Amendments; Waivers. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, signed by the
Executive and by a duly authorized representative of the Board of Directors.
By an instrument in writing similarly executed, either party may waive
compliance by the other party with any provision of this Agreement that such
other party was or is obligated to comply with or perform; provided, however,
that such waiver shall not operate as a waiver of, or estoppel with respect to,
any other or subsequent failure. No failure to exercise and no delay in
exercising any right, remedy, or power hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, remedy, or
power hereunder preclude any other or further exercise thereof or the exercise
of any other right, remedy, or power provided herein or by law or in equity.
21. Entire Agreement. This Agreement sets forth the entire
agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto. The parties further
intend that this Agreement shall constitute the complete and exclusive
statement of its terms and that no extrinsic evidence whatsoever may be
introduced in any judicial, administrative, or other legal proceeding involving
this Agreement.
22. Severability; Enforcement. If any provision of this
Agreement, or the application thereof to any person, place, or circumstance
shall be held by a court of competent jurisdiction to be invalid, unenforceable
or void, the remainder of this Agreement and such provisions as applied to
other persons, places and circumstances shall remain in full force and effect.
23. Indemnification. The Company shall indemnify, defend, and
hold the Executive harmless from and against any liability, damages, costs, or
expenses (including attorney's fees) in connection with any claim, cause of
action, investigation, litigation, or proceeding involving him by reason of his
having been an officer, director, employee, or agent of either the Company or
Beverly, unless it is judicially determined, in a final, nonappealable order
that the Executive was guilty of gross negligence or willful misconduct. The
Company also agrees to maintain adequate directors and officers liability
insurance for the benefit of Executive for the term of this Agreement and for
at least three years thereafter.
24. Governing Law. This Agreement shall be interpreted,
administered and enforced in accordance with the law of the State of Arkansas,
except to the extent pre-empted by Federal law.
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<PAGE> 14
The parties have duly executive this Agreement as of the date
first written above.
NEW BEVERLY HOLDINGS, INC. EXECUTIVE
By:
-------------------------------------- ---------------------------------
David R. Banks Name
Chairman and Chief Executive Address
Officer State zip
By:
--------------------------------------
Robert W. Pommerville Agreed as to those provisions
Executive Vice President, relating to or affecting Beverly
General Counsel and Secretary Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A BEVERLY ENTERPRISES, INC.
Fort Smith, AR 72919
Attention: Secretary By:
------------------------------
David R. Banks
Chairman and Chief Executive
Officer
By:
------------------------------
Robert W. Pommerville
Executive Vice President,
General Counsel and Secretary
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<PAGE> 1
EXHIBIT 10.22
SEVERANCE AGREEMENT
AGREEMENT made as of August 26, 1997 between NEW BEVERLY HOLDINGS,
INC., a Delaware corporation (the "Company"), and (the "Executive"), but to be
effective as of the Effective Date.
WHEREAS, the Executive is employed by Beverly Enterprises, Inc.
("Beverly"), or by one of its wholly-owned consolidated subsidiaries, and the
Company is a wholly-owned subsidiary of Beverly; and
WHEREAS, the Company, Beverly, and Capstone Pharmacy Services, Inc.
("Capstone") have entered into an Agreement and Plan of Distribution dated as
of April 15, 1997 whereby Beverly intends to transfer all of its business
except the institutional pharmacy business to the Company and the Company will
be spun-off as a separate public corporation (the "Distribution"), and
immediately thereafter Beverly will merge with and into Capstone (the "Merger")
pursuant to an Agreement and Plan of Merger dated as of April 15, 1997 (the
"Merger Agreement"), and the Company will change its name to Beverly
Enterprises, Inc.; and
WHEREAS, as a result of the Distribution, the Executive will become an
employee of the Company or one of its wholly-owned consolidated subsidiaries;
and
WHEREAS, in connection with this Agreement and in exchange for the
consideration described herein (the receipt and sufficiency of which is hereby
acknowledged), the Executive has agreed to waive any rights he may currently
have under any change in control, severance, or employment agreement or other
compensation or employee benefit plan with or previously assumed by Beverly and
has agreed to waive any claim that either the Distribution or the Merger
constitutes a "Change in Control" under any such agreements or other employee
benefit or compensation plans under this Agreement; and
WHEREAS, the Company desires to assure itself of the management
services of the Executive by directly engaging the Executive as the of the
Company; and
WHEREAS, the Company recognizes that the Executive's contribution to
the Company's growth and success after the Distribution will be substantial;
and
WHEREAS, the Company wishes to encourage the Executive to remain with
and devote full time and attention to the business affairs of the Company and
wishes to provide income protection to the Executive for a period of time in
the event of an involuntary Termination of Employment not for Cause or a
voluntary Termination of Employment for Good Reason within the Term of this
Agreement, whether or not in connection with a Change in Control (other than a
Change in Control in connection with the Distribution or Merger);
NOW, THEREFORE, in consideration of the mutual agreements and
understandings set forth herein and for other good and valuable consideration,
the receipt and adequacy of which is hereby acknowledged, the Company and the
Executive hereby agree as follows:
<PAGE> 2
1. Definitions.
(a) "Base Salary" shall mean the Executive's regular annual
rate of base pay as of the date in question.
(b) The "Benefit Multiplier" shall be equal to 1.0 except that
if Executive's Termination of Employment is pursuant to paragraph 3(b), it
shall be equal to Multiplier.
(c) The "Benefit Period" shall be the period of years, equal
to the Benefit Multiplier, which follows the Executive's Termination of
Employment.
(d) "Cause" shall mean the Executive's (i) conviction of a
crime involving moral turpitude, theft or embezzlement of property from
the Company or (ii) willful misconduct or willful failure substantially to
perform the duties of his position, but only if such has continued after
receipt of such notices and cure periods as are provided for by the
Company's disciplinary process.
(e) A "Change in Control" shall be deemed to have taken place
if, after the Distribution and Merger: (i) any person, corporation, or
other entity or group, including any "group" as defined in Section
l3(d)(3) of the Securities Exchange Act of 1934, other than any employee
benefit plan then maintained by the Company, becomes the beneficial owner
of shares of the Company having 30 percent or more of the total number of
votes that may be cast for the election of Directors of the Company; (ii)
as the result of, or in connection with, any contested election for the
Board of Directors of the Company, or any tender or exchange offer, merger
or other business combination or sale of assets, or any combination of the
foregoing (a "Transaction"), the persons who were Directors of the Company
before the Transaction shall cease to constitute a majority of the Board
of Directors of the Company or any successor to the Company or its assets,
or (iii) at any time (a) the Company shall consolidate with, or merge
with, any other Person and the Company shall not be the continuing or
surviving corporation, (b) any Person shall consolidate with, or merge
with the Company, and the Company shall be the continuing or surviving
corporation and in connection therewith, all or part of the outstanding
Company stock shall be changed into or exchanged for stock or other
securities of any other Person or cash or any other property, (c) the
Company shall be a party to a statutory share exchange with any other
Person after which the Company is a subsidiary of any other Person, or (d)
the Company shall sell or otherwise transfer 50% or more of the assets or
earning power of the Company and its subsidiaries (taken as a whole) to
any Person or Persons; provided, however, that notwithstanding anything to
the contrary herein, a Change in Control shall not include either (a) the
Distribution or Merger, or (b) any transfer to a consolidated subsidiary,
reorganization, spin-off, split-up, distribution, or other similar or
related transaction(s) or any combination of the foregoing in which the
core business and assets of the Company and its subsidiaries (taken as a
whole) are transferred to another entity ("Controlled") with respect to
which (1) the majority of the Board of Directors of the Company (as
constituted immediately prior to such transaction(s)) also serve as
directors of Controlled and immediately after such transaction(s)
constitute a majority of Controlled's board of directors, and (2) more
than 70% of the shareholders of the Company (immediately prior to such
transaction(s)) become shareholders or other owners of Controlled and
immediately after the transaction(s) control more than 70% of the
ownership and voting rights of Controlled.
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<PAGE> 3
(f) The "Change in Control Date" shall mean the date
immediately prior to the effectiveness of the Change in Control.
(g) The "Committee" shall mean the Compensation Committee of
the Company's Board of Directors.
(h) The "Competitive Businesses" shall mean any of the health
care businesses in which the Company is engaged on the effective date of
the Distribution.
(i) "Effective Date" shall mean the effective date of the
Distribution; provided, however, that in the event the Merger Agreement is
terminated prior to consummation of the Merger, then this Agreement shall
be null and void ab initio and of no effect.
(j) The Executive shall have "Good Reason" to terminate
employment if: (i) the Executive is not elected, reelected, or otherwise
continued in the office of the Company or any of its subsidiaries which he
held immediately prior to the Change in Control Date, or he is removed as
a member of the Board of Directors of the Company or any of its
subsidiaries if the Executive was a director immediately prior to the
Change in Control Date; (ii) the Executive's duties, responsibilities or
authority as an employee are materially reduced or diminished from those
in effect on the Change in Control Date without the Executive's consent;
(iii) the Executive's duties, responsibilities, or authority as an
employee are materially reduced or diminished from those in effect on the
Effective Date without the Executive's consent; (iv) the Executive's
compensation or benefits are reduced without the Executive's consent,
unless all Executive-level officers have their compensation or benefits
reduced in the same percentage amount; (v) the Company reduces the
potential earnings of the Executive under any performance-based bonus or
incentive plan of the Company in effect immediately prior to the Change in
Control Date; (vi) the Company requires that the Executive's employment be
based other than at its location on the Effective Date without his
consent; (vii) any purchaser, assign, surviving corporation, or successor
of the Company or its business or assets (whether by acquisition, merger,
liquidation, consolidation, reorganization, sale or transfer of assets or
business, or otherwise) fails or refuses to expressly assume in writing
this Agreement and all of the duties and obligations of the Company
hereunder pursuant to Section 16 hereof; or (viii) the Company breaches
any of the provisions of this Agreement.
(k) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Securities Exchange Act of 1934 and used in
Sections 13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d).
(l) "Target Bonus" shall mean the target bonus (100% level)
established for the Executive for the year in question under the Company's
"Annual Incentive Plan."
(m) "Termination of Employment" shall mean the termination of
the Executive's employment by the Company other than such a termination in
connection with an offer of immediate reemployment by a successor or
assign of the Company or purchaser of the Company or its assets under
terms and conditions which would not permit the Executive to terminate his
employment for Good Reason.
3
<PAGE> 4
2. Term. The initial term of this Agreement shall be for the
period commencing on the Effective Date and ending on the third anniversary of
the Effective Date. The Term shall be automatically extended by one additional
day for each day beyond the Effective Date of this Agreement that the Executive
remains employed by the Company until such time as the Company elects to cease
such extension by giving written notice of such to the Executive. (In such
event, the Agreement shall thus terminate on the third anniversary of the
effective date of such notice).
3. Eligibility for Severance Benefits. The Executive shall be
eligible for the benefits described in Paragraph 4 (the "Severance Benefits")
if, (a) during the Term, the Executive has a Termination of Employment
initiated (i) by the Company without Cause, or (ii) by the Executive for Good
Reason, and, in either case, subsection (b) does not apply; or (b) during the
Term (i) there has been a Change in Control and during the two year period
commencing on the Change in Control Date, the Executive has a Termination of
Employment initiated by the Company without Cause or by the Executive for Good
Reason, or (ii) the Executive has a Termination of Employment initiated by the
Company without Cause or by the Executive for Good Reason following the
commencement of any discussion with a third person that ultimately results in a
Change in Control with such third person within 12 months of the commencement
of such discussions (in which case, the date of such discussion shall be
substituted for the Change in Control Date wherever appropriate, including the
definition of "Good Reason" and in Paragraph 4 hereof).
4. Severance Benefit. Upon satisfaction of the requirements set
forth in Paragraph 3, and subject to Paragraphs 5 and 9, the Executive shall be
entitled to the following Severance Benefits:
(a) Cash Payment. The Executive shall be entitled to receive
an amount of cash equal to the Benefit Multiplier times the greater of:
(i) the sum of the Executive's Base Salary as in
effect upon the Termination of Employment, and the greater of
(A) the Executive's Target Bonus as in effect
upon the Termination of Employment or,
(B) the Executive's actual bonus under the
Company's "Annual Incentive Plan" for the year prior to the year
of the Executive's Termination of Employment; or
(ii) the sum of the Executive's Base Salary as in
effect on the Change in Control Date, and the greater of
(A) the Executive's Target Bonus as in effect
upon the Change in Control Date or,
(B) the Executive's actual bonus under the
Company's "Annual Incentive Plan" for the year prior to the
Change in Control Date.
The payment shall be made in a single lump sum within ten days following the
Executive's Termination of Employment.
4
<PAGE> 5
(b) Long-Term Incentive Award; Equity-Based Compensation. The
Executive's interest under the Company's long-term incentive plans shall
be fully vested. Any and all (i) options, phantom units, and other awards
granted to Executive to purchase Company stock or which is measured by the
current market value of Company stock and (ii) restricted stock of the
Company, owned by the Executive, shall be fully vested.
(c) Continuation of Benefits.
(i) For the Benefit Period, the Executive shall be
treated as if he or she had continued to be an employee for all
purposes under the Company's Medical Plan, Executive Medical
Reimbursement Plan and Dental Plan. Following this period, the
Executive shall be entitled to receive continuation coverage under Part
Six of Title I of ERISA ("COBRA Benefits) treating the end of this
period as a termination of the Executive's employment (other than for
gross misconduct).
(ii) The Company shall maintain in force, at its own
expense, for the remainder of the Executive's life, the vested life
insurance in effect under the Company's Executive Life Insurance Plan
as of the Change in Control Date or as of the date of Termination of
Employment, whichever is greater.
(d) Relocation Benefit. If within the Benefit Period after
the Executive's Termination of Employment, the Executive gives the Company
written notice that he or she desires to relocate within the continental
United States, the Company will reimburse the Executive for any reasonable
relocation expenses (in accordance with the Company's general relocation
policy for executives as then in effect, or, at the Executive's election,
as in effect on the Change in Control Date) in connection with such
relocation.
(e) Executive Retirement Plan. For the year of the
Executive's Termination of Employment, the Company will make the
contribution to its Executive Retirement Plan (the "Retirement Plan") that
it would have made if the Executive had not had a Termination of
Employment, but in no event less than the percentage contribution it made
for the Executive in the immediately preceding year (and increased to take
account of the additional year of service), in each case taking account of
the Executive's annualized rate of "Compensation" (as defined in the
Retirement Plan) and the percentage of such Compensation that the
Executive is contributing to the Retirement Plan, as of the date of
Termination of Employment, and the Company's matching contribution rate
for such year (or, if greater, the preceding year). The portion of the
Company's matching contribution which is based on the preceding year's
contribution percentage shall be paid to the Executive immediately upon
his Termination of Employment and any additional contribution shall be
paid as soon as it is determined.
(f) Executive Deferred Compensation Plan. For the year of the
Executive's Termination of Employment, the Company will make the
contribution to its Executive Deferred Compensation Plan (the "EDC Plan")
that it would have made if the Executive had not had a Termination of
Employment determined based on the Executive's deferral for such year. At
Executive's election, the Company contribution shall be paid to the
Executive immediately upon his Termination of Employment.
5
<PAGE> 6
(g) Disability. For the Benefit Period, the Company shall
provide long-term disability insurance benefits coverage to Executive
equivalent to the coverage that the Executive would have had had he
remained employed under the Company's Long-Term Disability Plan and
Supplemental Long-Term Disability Plan applicable to Executive on the date
of Termination of Employment, or, at the Executive's election, the plan or
plans applicable to Executive as of the Change in Control Date. Should
Executive become disabled during such period, Executive shall be entitled
to receive such benefits, and for such duration, as the applicable plan(s)
provide.
(h) Plan Amendments. The Company shall adopt such amendments
to its employee benefit plans and insurance policies as are necessary to
effectuate the provisions of this Agreement. If and to the extent any
benefits under this Paragraph 4 are not paid or payable or otherwise
provided to the Executive or his dependents or beneficiaries under any
such plan or policy (whether due to the terms of the plan or policy, the
termination thereof, applicable law, or otherwise), then the Company
itself shall pay or provide for such benefits.
5. Golden Parachute Gross-Up. If, in the written opinion of a Big 6
accounting firm engaged by either the Company or the Executive for this purpose
(at the Company's expense), or if so alleged by the Internal Revenue Service,
the aggregate of the benefit payments under Paragraph 4 would cause the payment
of one or more of such benefits to constitute an "excess parachute payment" as
defined in Section 280G(b) of the Internal Revenue Code ("Code"), then the
Company will pay to the Executive an additional amount in cash (the "Gross-Up
Payment") equal to the amount necessary to cause the net amount retained by the
Executive, after deduction of any (i) excise tax on the payments under
Paragraph 4, (ii) federal, state or local income tax on the Gross-Up Payment,
and (iii) excise tax on the Gross-Up Payment, to be equal to the aggregate
remuneration the Executive would have received under Section 4, excluding such
Gross-Up Payment (net of all federal, state and local excise and income taxes),
as if Sections 280G and 4999 of the Code (and any successor provisions thereto)
had not been enacted into law. The Gross-Up Payment provided for in this
Paragraph shall be made within ten (10) days after the termination of
Executive's employment, provided however that if the amount of the payment
cannot be finally determined at the time, the Company shall pay to Executive an
estimate as determined in good faith by the Company of such payments (together
with interest at the rate provided in section 1274(b)(2)(B) of the Code) as
soon as the amount thereof can be determined but in no event later than the
thirtieth (30th) day after the date of termination. Any dispute concerning the
application of this Paragraph shall be resolved pursuant to Paragraph 8, and if
Paragraph 9 applies, any reference in this Paragraph to Paragraph 4 shall also
be deemed to include a reference to Paragraph 9 as well.
6. Non-Solicitation.
(a) Executive shall not at any time during the period of his
employment with the Company, or during the one (1) year period immediately
following his Termination of Employment with the Company
("Non-Solicitation Period"), without the prior written consent of the
Company, on behalf of himself or any other person, solicit for employment
or employ any of the current officers or employees of the Company;
provided, however, that nothing contained herein shall prohibit Executive
from hiring employees of the Company when such employment results from
general solicitations for employment.
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<PAGE> 7
(b) Executive shall not at any time during the period of his
employment with the Company, or during the Non-Solicitation Period,
without the prior written consent of the Company, solicit for his own use,
or for the use of any company or person by whom he is employed, or for
whom he may be acting, any of the current customers of the Company, nor
shall he divulge to any other person any information or fact relating to
the management, business (including prospective business), finances, its
customers or the terms of any of the contracts of the Company which has
heretofore or which may hereafter come to the knowledge of Executive which
is not freely available to the public.
(c) Executive shall not, during the Non-Solicitation Period,
in any way defame the Company or disparage its business capabilities,
products, plans or management to any customer, potential customer, vendor,
supplier, contractor, subcontractor of the Company so as to affect
adversely the goodwill or business of the Company.
(d) Executive covenants and agrees that a breach of these
subparagraphs (a), (b) or (c) would immediately and irreparably harm the
Company and that a remedy at law would be inadequate to compensate the
Company for its losses by reason of such breach and therefore that the
Company shall, in addition to any rights and remedies available under this
Agreement, at law or otherwise, be entitled to any injunction to be issued
by any court of competent jurisdiction enjoining and restraining Executive
from committing any violation of these subparagraphs (a), (b) or (c), and
Executive hereby consent to the issuance of such injunction.
(e) For purposes of this Section 6 and in consideration of
this Agreement, this non-solicitation agreement has been separately
negotiated and bargained for, and constitutes a substantial portion of the
consideration for this Agreement.
7. Waiver of Other Severance Benefits. The benefits payable
pursuant to this Agreement are in lieu of any other severance benefits which
may otherwise be payable to the Executive upon termination of employment with
either Beverly or the Company, whether or not in connection with a Change in
Control (including without limitation, any benefits to which Executive might
otherwise have been entitled under any employment, change in control or
severance agreement or other compensation or employee benefit plan to which
Beverly was a party or which was assumed by Beverly), except those benefits
which are to be made available to the Executive as required by applicable law.
8. Disputes. Any dispute or controversy arising under, out of, in
connection with or in relation to this Agreement shall, at the election and
upon written demand of either party, be finally determined and settled by
binding arbitration in the city of Fort Smith, Arkansas, using a single
arbitrator, in accordance with the Labor Arbitration rules and procedures of
the American Arbitration Association, and judgment upon the award may be
entered in any court having jurisdiction thereof. The arbitrator shall have
the power to order specific performance, mandamus, or other appropriate legal
or equitable relief to enforce the provisions of this Agreement. The Company
shall pay all costs of the arbitration and all reasonable attorney's and
accountant's fees of the Executive in connection therewith.
9. Additional Payments Due to Dispute. Notwithstanding anything to
the contrary herein, and without limiting the Executive's rights at law or in
equity, if the Company fails or refuses to timely pay to the Executive the
benefits due under Paragraphs 4 and/or 5 hereof, then the benefits under
Paragraph 4(a) shall be increased and the benefits under Paragraphs 4(c), 4(d),
and 4(g) shall each be continued by one additional day for each day of any such
failure or refusal of the Company to pay. In
7
<PAGE> 8
addition, any Gross-Up Payment due under Paragraph 5 shall be increased to take
into account any increased benefits under this Paragraph.
10. No Set-Off. There shall be no right of set-off or counterclaim
in respect of any claim, debt, or obligation against any payment to or benefit
for the Executive provided for in this Agreement.
11. No Mitigation Obligation. The parties hereto expressly agree
that the payment of the benefits by the Company to the Executive in accordance
with the terms of this Agreement will be liquidated damages, and that the
Executive shall not be required to mitigate the amount of any payment provided
for in this Agreement by seeking other employment or otherwise, nor shall any
profits, income, earnings or other benefits from any source whatsoever create
any mitigation, offset, reduction or any other obligation on the part of the
Executive hereunder or otherwise.
12. Trust. Any payments or installments that may be required to be
made to Executive under this Agreement shall be funded immediately prior to any
Change in Control Date (or, if earlier, within ten (10) days after any
Termination of Employment) by a contribution by the Company of the necessary
amount of cash, as determined by independent actuaries acceptable to both
Executive and the Company, to the irrevocable grantor trust created for such
purpose by the Company, with Chemical Bank as Trustee, dated July 18, 1995, a
copy of which Trust Agreement may be obtained from the Company or the Trustee.
13. Letter of Credit for Legal Fees. In order to ensure the
benefits intended to be provided to the Executive hereunder, immediately prior
to any Change in Control Date the Company shall establish and hereby agrees to
maintain throughout the remaining Term an irrevocable standby Letter of Credit
in favor of the Executive and each other person who is named an Executive under
similar agreements, drawn on a bank selected by the Company (the "Letter of
Credit") which provides for a credit amount of $250,000 being made available to
the Executive against presentation at any time and from time to time of his
clean sight drafts, accompanied by statements of his counsel for fees and
expenses, in an aggregate amount not to exceed $250,000, unless a larger amount
is authorized by either the Chief Executive Officer, General Counsel, Chief
Financial Officer, or an Executive Vice President of the Company.
14. Waiver of Rights with Respect to Beverly Enterprises, Inc.
Executive hereby waives any rights against Beverly, including without
limitation any rights under any employment, change in control, or severance
agreement; under any stock option or long-term incentive plan or any other
compensation or employee benefit plan; or any rights he may have by virtue of
the Distribution or Merger constituting a Change in Control under any such
agreement or plan or any other Beverly compensation or employee benefit plan.
Executive also agrees to the cancellation of his Beverly stock options and the
substitution of such options with new stock options to be issued by the Company
with similar terms and conditions (including 100% vesting) as the prior
options, other than an increase in the number of such options and a decrease in
the exercise price thereof in order to take into account the effect of the
Distribution. Executive also waives any rights against the Company or Capstone
which he might otherwise have by virtue of the Distribution or Merger
constituting a Change in Control under any such aforementioned Beverly
agreements or plans.
15. Non-disclosure of Proprietary Information, Surrender of Records;
Inventions and Patents.
(a) Proprietary Information. Executive shall not during the
term of employment or at any time thereafter (irrespective of the
circumstances under which Executive's employment terminates), directly or
indirectly use for his own purpose or for the benefit of any person or
entity
8
<PAGE> 9
other than Company, nor otherwise disclose, any proprietary information,
as defined below, to any individual or entity, unless such disclosure has
been authorized in writing by the Company or is otherwise required by law.
For purposes of this Agreement, the term "proprietary information" shall
include, but is not limited to: (a) the name or address of any client or
affiliate of Company or any information concerning the transactions or
relations of any client or affiliate of Company with Company or any of its
shareholders; (b) any information concerning any product, service,
methodology, analysis, presentation, technology or procedure employed by
Company but not generally known to its clients or competitors, or under
development by or being tested by Company but not at the time offered
generally to clients; (c) any information relating to Company's computer
software, computer systems, pricing or marketing methods, capital
structure, operating results, borrowing arrangements or business plans;
(d) any information which is generally regarded as confidential or
proprietary in any line of business engaged in by Company; (e) any
information contained in any of Company's written or oral policies and
procedures or employee manuals; (f) any information belonging to clients
or affiliates of Company which Company has agreed to hold in confidence;
(g) any inventions, innovations or improvements covered by subsection
15(c) below; (h) any other information which Company has reasonably
determined to be confidential or proprietary; and (i) all written,
graphic, electronic and other material relating to any of the foregoing.
Information that is not novel or copyrighted or patented may nonetheless
be proprietary information. Proprietary information, however, shall not
include any information that is or becomes generally known to the
industries in which Company competes through sources independent of
Company or Executive or through authorized publication by Company to
persons other than Company's employees.
(b) Confidentiality and Surrender of Records. Executive shall
not during the term of employment or at any time thereafter (irrespective
of the circumstances under which Executive's employment terminates),
except as required by law, directly or indirectly give or disclose any
"confidential records" (as hereinafter defined) to, or permit any
inspection or copying of confidential records by, any individual or entity
other than in the ordinary course and scope of such individual's or
entity's employment or retention by Company, nor shall he use or retain
any of the same following termination of his employment. Executive shall
promptly return to Company all "confidential records" upon the termination
of Executive's employment with Company. For purposes hereof,
"confidential records" means all correspondence, memoranda, files,
analyses, studies, reports, notes, documents, manuals, books, lists,
financial, operating or marketing records, computer software, magnetic
tape, or electronic or other media or equipment of any kind which may be
in Executive's possession or under his control or accessible to him which
contain any proprietary information as defined in subsection 15(a) above.
All confidential records shall be and remain the sole property of Company
during the term of employment and thereafter.
(c) Inventions, Patents, and Copyrights. All inventions,
innovations or improvements in Company's method of conducting its business
(including policies, procedures, products, improvements, software, ideas
and discoveries, whether or not patentable or copyrightable) conceived or
made by Executive, either alone or jointly with others, during the term
of employment belong to Company. Executive will promptly disclose in
writing such inventions, innovations or improvements to Company and
perform all actions reasonably requested by Company to establish and
confirm such ownership by Company, including, but not limited to,
cooperating with and assisting Company in obtaining patents and copyrights
for Company in the United States and in foreign countries. Any patent or
copyright application filed by Executive within a year after termination
of his employment hereunder shall be presumed to relate to an invention or
work of
9
<PAGE> 10
authorship which was made during the term of employment unless Executive
can provide conclusive evidence to the contrary.
16. Successors; Binding Agreement.
(a) This Agreement shall not be terminated by the voluntary or
involuntary dissolution of the Company or by any merger or consolidation
where the Company is not the surviving corporation, or upon any transfer
of all or substantially all of the Company's assets, or any other Change
in Control. The Company shall require any purchaser, assign, surviving
corporation, or successor (whether direct or indirect, by purchase,
merger, consolidation, reorganization or otherwise) to all or
substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to the Executive, expressly
to assume and agree to perform this Agreement in the same manner and to
the same extent the Company would be required to perform if no such
succession had taken place. This Agreement shall be binding upon and
inure to the benefit of the Company and any purchaser, assign, surviving
corporation or successor to the Company, including without limitation any
persons acquiring directly or indirectly all or substantially all of the
business and/or assets of the Company whether by purchase, merger,
consolidation, reorganization, transfer of all or substantially all of the
business or assets of the Company, or otherwise (and such purchaser,
assign, surviving corporation or successor shall thereafter be deemed the
"Company" for the purposes of this Agreement), but this Agreement shall
not otherwise be assignable, transferable or delegable by the Company.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees and/or
legatees.
(c) This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign, transfer
or delegate this Agreement or any rights or obligations hereunder except
as expressly provided in this Section 16. Without limiting the generality
of the foregoing, the Executive's right to receive payments hereunder
shall not be assignable, transferable or delegable, whether by pledge,
creation of a security interest or otherwise, or otherwise subject to
anticipation, alienation, sale, encumbrance, charge, hypothecation, or
set-off in respect of any claim, debt, or obligation, or to execution,
attachment, levy or similar process, or assignment by operation of law,
other than by a transfer by his will or by the laws of descent and
distribution. Any attempt, voluntarily or involuntarily, to effect any
action prohibited by this Paragraph shall be null, void, and of no effect.
17. Notices. Any notice, request, claim, demand, document and other
communication hereunder to any party shall be effective upon receipt (or
refusal of receipt) and shall be in writing and delivered personally or sent by
telex, telecopy, or certified or registered mail, postage prepaid, or other
similar means of communication, as follows:
(a) If to the Company, addressed to its principal executive
offices to the attention of its Secretary;
(b) If to the Executive, to him or her at the address set
forth below under the Executive's signature; or at any such other address
as either party shall have specified by notice in writing to the other.
10
<PAGE> 11
18. Amendments; Waivers. This Agreement may not be modified,
amended, or terminated except by an instrument in writing, signed by the
Executive and by a duly authorized representative of the Company. By an
instrument in writing similarly executed, either party may waive compliance by
the other party with any provision of this Agreement that such other party was
or is obligated to comply with or perform; provided, however, that such waiver
shall not operate as a waiver of, or estoppel with respect to, any other or
subsequent failure. No failure to exercise and no delay in exercising any
right, remedy, or power hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any right, remedy, or power hereunder
preclude any other or further exercise thereof or the exercise of any other
right, remedy, or power provided herein or by law or in equity.
19. Entire Agreement. This Agreement sets forth the entire
agreement of the parties hereto in respect of the subject matter contained
herein and supersedes all prior agreements, promises, covenants, arrangements,
communications, representations or warranties, whether oral or written, by any
officer, employee or representative of any party hereto. The parties further
intend that this Agreement shall constitute the complete and exclusive
statement of its terms and that no extrinsic evidence whatsoever may be
introduced in any judicial, administrative, or other legal proceeding involving
this Agreement.
20. Severability; Enforcement. If any provision of this Agreement,
or the application thereof to any person, place, or circumstance shall be held
by a court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this Agreement and such provisions as applied to other persons,
places and circumstances shall remain in full force and effect.
21. Indemnification. The Company shall indemnify, defend, and hold
the Executive harmless from and against any liability, damages, costs, or
expenses (including attorney's fees) in connection with any claim, cause of
action, investigation, litigation, or proceeding involving him by reason of his
having been an officer, director, employee, or agent of the Company, unless it
is judicially determined, in a final, nonappealable order, that the Executive
was guilty of gross negligence or willful misconduct. The Company also agrees
to maintain adequate directors and officers liability insurance for the benefit
of Executive for the term of this Agreement and for at least three years
thereafter.
22. ERISA. This Agreement is pursuant to the Company's Severance
Plan for Executives (the "Plan") which is unfunded and maintained by the
Company primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees. The Plan
constitutes an employee welfare benefit plan ("Welfare Plan") within the
meaning of Section 3(1) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"). Any payments pursuant to this Agreement which could
cause the Plan not to constitute a Welfare Plan shall be deemed instead to be
made pursuant to a separate "employee pension benefit plan" within the meaning
of Section 3(2) of ERISA as to which the applicable portions of the document
constituting the Plan shall be deemed to be incorporated by reference. None of
the benefits hereunder may be assigned in any way.
23. Governing Law. This Agreement shall be interpreted,
administered and enforced in accordance with the law of the State of Arkansas,
except to the extent pre-empted by Federal law.
11
<PAGE> 12
The parties have duly executed this Agreement as of the date first
written above.
NEW BEVERLY HOLDINGS, INC. EXECUTIVE
By:
----------------------------------- ------------------------------
David R. Banks Name
Chairman and Chief Executive Officer Address
State zip
By:
-----------------------------------
Robert W. Pommerville Agreed as to those provisions
Executive Vice President, relating to or affecting
General Counsel and Secretary Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A BEVERLY ENTERPRISES, INC.
Fort Smith, AR 72919
Attention: Secretary By:
----------------------------
David R. Banks
Chairman and Chief Executive
Officer
By:
----------------------------
Robert W. Pommerville
Executive Vice President,
General Counsel and Secretary
12
<PAGE> 1
EXHIBIT 10.23
[CONFORMED COPY]
$375,000,000
AMENDED AND RESTATED CREDIT AGREEMENT
dated as of
December 20, 1996
among
BEVERLY ENTERPRISES, INC.
The BANKS Listed Herein
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Issuing Bank,
and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent
<PAGE> 2
TABLE OF CONTENTS
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ARTICLE 1
Definitions
Section 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 1.02. Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 1.03. Types of Loans and Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE 2
The Credits
Section 2.01. The Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.02. Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 2.03. Notice to Banks; Funding of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 2.04. Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 2.05. Maturity of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 2.06. Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 2.07. Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 2.08. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 2.09. Optional Termination or Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . 33
Section 2.10. Mandatory Termination of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 2.11. Method of Electing Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Section 2.12. Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 2.13. General Provisions as to Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Section 2.14. Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 2.15. Computation of Interest, Fees and Commissions . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 2.16. Withholding Tax Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 2.17. Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE 3
Conditions
Section 3.01. Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 3.02. Borrowings and Letter of Credit Issuances . . . . . . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE 4
Representations and Warranties
Section 4.01. Corporate Existence and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 4.02. Corporate and Governmental Authorization; No Contravention . . . . . . . . . . . . . . . . . 42
Section 4.03. Binding Effect; Liens of Pledge Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 42
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Section 4.04. Financial Information; Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 4.05. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 4.06. Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 4.07. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 4.08. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 4.09. Title to and Condition of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 4.10. Not an Investment Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 4.11. Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 4.12. Representations in Subsidiary Guaranty and Pledge Agreement . . . . . . . . . . . . . . . . . 45
Section 4.13. Existing Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE 5
Covenants
Section 5.01. Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 5.02. Maintenance of Property; Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 5.03. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 5.04. Inspection of Property, Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 5.05. Minimum Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 5.06. Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 5.07. Adjusted Consolidated Debt Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 5.08. Ownership of Stock of Wholly-Owned Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 50
Section 5.09. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Section 5.10. Restricted Payments on Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 5.11. Negative Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 5.12. Consolidations, Mergers and Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 5.13. Incurrence of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 5.14. Use of Proceeds and Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 5.15. Additional Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 5.16. Lease Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 5.17. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
ARTICLE 6
Defaults
Section 6.01. Events of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 6.02. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
ARTICLE 7
The Agent
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Section 7.01. Appointment and Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 7.02. Agent and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 7.03. Action by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 7.04. Consultation with Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 7.05. Liability of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 7.06. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 7.07. Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 7.08. Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 7.09. Agent's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
ARTICLE 8
Change in Circumstances
Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair . . . . . . . . . . . . . . . . . . 64
Section 8.02. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 8.03. Increased Cost and Reduced Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans . . . . . . . . . . . . . . . . . . 68
ARTICLE 9
Miscellaneous
Section 9.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Section 9.02. No Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 9.03. Expenses; Documentary Taxes; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 69
Section 9.04. Sharing of Set-Offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 9.05. Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Section 9.06. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Section 9.07. Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.08. GOVERNING LAW; SUBMISSION TO JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.09. Consent to Execution and Delivery of Certain Financing Documents . . . . . . . . . . . . . . 73
Section 9.10. Counterparts; Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.11. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Section 9.12. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
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Schedule I - Pricing Schedule
Schedule II - Commitment Schedule
Schedule III - Existing Subsidiary Debt
Schedule IV - Subsidiaries of the Borrower
Schedule V - Existing Letters of Credit
Exhibit A Note
Exhibit B Form of Pledge and Security Agreement
Exhibit C Form of Subsidiary Guaranty
Exhibit D Opinion of Special New York Counsel to the Borrower
Exhibit E Opinion of Vice President and Deputy General Counsel
of the Borrower
Exhibit F Opinion of Special Counsel to the Agent
Exhibit G Form of Assignment and Assumption Agreement
</TABLE>
iv
<PAGE> 6
AMENDED AND RESTATED CREDIT AGREEMENT
AGREEMENT dated as of December 20, 1996 among BEVERLY ENTERPRISES,
INC. (with its successors, the "Borrower"), a Delaware corporation, the BANKS
listed on the signature pages hereof, MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Issuing Bank, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent
(with its successors in such capacity, the "Agent"), amending and restating the
Credit Agreement dated as of November 1, 1994 (as amended, the "Existing Credit
Agreement") among Beverly California Corporation, the Borrower, the banks
listed on the signature pages thereof and Morgan Guaranty Trust Company of New
York, as issuing bank and as agent.
WHEREAS, Beverly California Corporation has changed its name to
Beverly Health and Rehabilitation Services, Inc. ("Beverly Health");
WHEREAS, the Borrower and Beverly Health have requested that certain
provisions of the Existing Credit Agreement be amended, and the Banks and the
Agent have agreed to such amendments, subject to the satisfaction of the terms
and conditions set forth herein, which amendments shall become effective only
at such time as this Agreement becomes effective in accordance with Section
3.01;
WHEREAS, the parties have agreed that Beverly Enterprises, Inc., the
guarantor under the Existing Credit Agreement, shall become the borrower under
the Credit Agreement and shall assume all the obligations of Beverly Health
with respect to the Loans and Letters of Credit under the Existing Credit
Agreement;
WHEREAS, Beverly Health, the borrower under the Existing Credit
Agreement, shall sign a Subsidiary Guaranty Agreement as of the date hereof and
become a Subsidiary Guarantor under the Credit Agreement;
WHEREAS, the parties have agreed that on the Effective Date, (i) all
outstanding Loans made pursuant to the Existing Credit Agreement, all
outstanding "Nippon Loans" made pursuant to the Nippon Credit Agreement and all
outstanding "LTCB Loans" made pursuant to the LTCB Credit Agreement will be
repaid, (ii) certain of the banks party to the Nippon Credit Agreement and the
LTCB Credit Agreement will become parties hereto and (iii) the revolving
Commitments will be increased to $375 million and allocated among the Banks as
set forth in the Commitment Schedule herein;
<PAGE> 7
WHEREAS, the parties have agreed that, upon the effectiveness of this
Agreement, any outstanding "Letters of Credit" issued pursuant to the Existing
Credit Agreement shall constitute "Letters of Credit" hereunder and shall be
governed by the terms and conditions of this Agreement; and
WHEREAS, in order to set forth in one document, for the convenience of
the parties, the text of the Existing Credit Agreement as amended by the
amendments to be made upon the effectiveness hereof, the Existing Credit
Agreement will upon satisfaction of the conditions set forth in Section 3.01
hereof, be amended and restated to read in full as set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.01. Definitions. The following terms, as used herein, have
the following meanings:
"Adjusted CD Rate" has the meaning set forth in Section 2.06(b).
"Adjusted Consolidated Debt" means at any date the sum, without
duplication, of (i) all liabilities of the Borrower and its Subsidiaries at
such date of the types classified as "current liabilities: short-term
borrowings", "current liabilities: current portion of long-term obligations"
and "long-term obligations" on the consolidated balance sheet included in the
Base Financials (including any Subordinated Notes), (ii) all guarantees at such
date of obligations of other issuers (other than guarantees outstanding on the
date hereof of obligations outstanding on the date hereof, in amounts not in
excess of $110,901,000 and reported in the Base Financials) and (iii) an amount
equal to the product of eight multiplied by the Consolidated Rental Expense for
the four fiscal quarters of the Borrower most recently completed on or prior to
such date.
"Adjusted London Interbank Offered Rate" has the meaning set forth in
Section 2.06(c).
"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrower) duly completed by such Bank.
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<PAGE> 8
"Affiliate" means any Person (other than the Borrower, any Subsidiary
of the Borrower or any Bank) (a) which directly or indirectly through one or
more intermediaries controls, or is controlled by, or is under common control
with, the Borrower or (b) which is the Beneficial Owner of 10% or more of any
class of the Voting Stock of the Borrower. As used herein, the term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting stock, by contract or otherwise.
"Agent" means Morgan Guaranty Trust Company of New York in its
capacity as agent for the Banks hereunder, and its successors in such capacity.
"Applicable Lending Office" means, with respect to any Bank, (i) in
the case of its Domestic Loans, its Domestic Lending Office and (ii) in the
case of its Euro-Dollar Loans, its Euro-Dollar Lending Office.
"Appraised Value" means, with respect to any asset subjected to or
released from any Lien, the value of such asset as determined by an independent
appraisal performed within 90 days of, and as of a date not less than 90 days
prior to, the date upon which such asset is subjected to or released from such
Lien.
"Assessment Rate" has the meaning set forth in Section 2.06(b).
"Assignee" has the meaning set forth in Section 9.06(c).
"Authorized Financial Officer" of any Person means the Chief Financial
Officer, Treasurer or Controller of such Person.
"Bank" means each bank listed on the signature pages hereof, each
Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective
successors.
"Base Financials" means the consolidated balance sheet of the Borrower
and its Consolidated Subsidiaries as of December 31, 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended, together with the notes thereto, included in the
Borrower's 1995 Form 10-K and reported on without qualification by Ernst &
Young LLP.
3
<PAGE> 9
"Base Rate" means, for any day, a rate per annum equal to the higher
of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the
Federal Funds Rate for such day.
"Base Rate Loan" means (i) a Loan which bears interest at the Base
Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate
Election or the provisions of Article 8 or (ii) an overdue amount that was a
Base Rate Loan immediately before it became overdue.
"Base Rate Margin" has the meaning set forth in Section 2.06(a).
"Beneficial Owner" means a Person who is deemed to be the "Beneficial
Owner" of securities pursuant to Rule 13d-3 or 13d-5 of the Securities Exchange
Act of 1934 (as in effect on the date hereof).
"Beverly Health" means Beverly Health and Rehabilitation Services,
Inc., formerly known as Beverly California Corporation, a California
corporation, and its successors.
"Borrower" means Beverly Enterprises, Inc., a Delaware corporation,
and its successors.
"Borrower's 1995 Form 10-K" means the Borrower's annual report on Form
10-K for 1995, as filed with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, as amended.
"Borrowing" has the meaning set forth in Section 1.03.
"CD Base Rate" has the meaning set forth in Section 2.06(b).
"CD Loan" means (i) a Loan which bears interest at a CD Rate pursuant
to the applicable Notice of Borrowing or Notice of Interest Rate Election or
(ii) an overdue amount that was a CD Loan immediately before it became overdue.
"CD Margin" has the meaning set forth in Section 2.06(b).
"CD Rate" means a rate of interest determined pursuant to Section
2.06(b) on the basis of an Adjusted CD Rate.
"CD Reference Banks" means PNC Bank, National Association,
NationsBank, N.A. and Morgan Guaranty Trust Company of New York.
4
<PAGE> 10
"Collateral" means the property in which the Agent is granted, or is
purported to be granted, a lien or security interest from time to time under
the Pledge Agreement, which lien or security interest has not been released in
accordance with the terms hereof or thereof.
"Commitment" means, with respect to any Bank, the amount set forth
opposite the name of such Bank as such Bank's Commitment on the Commitment
Schedule, as such amount may be reduced from time to time pursuant to Section
2.09.
"Commitment Fee Rate" has the meaning set forth in Section 2.08(a).
"Commitment Schedule" means Schedule II attached hereto.
"Consolidated EBITDA" means, for any period, Consolidated Net Income
of the Borrower and its Consolidated Subsidiaries for such period plus, without
duplication, any amounts deducted in determining such Consolidated Net Income
in respect of (a) Consolidated Interest Charges for such period, (b)
Consolidated Tax Charges for such period and (c) expenses for such period of
the types classified as "depreciation and amortization" on the consolidated
statement of operations included in the Base Financials.
"Consolidated EBITDAR" means, for any period, the sum of Consolidated
EBITDA and Consolidated Rental Expense for such period.
"Consolidated Gross Capital Expenditures" means, for any period the
total amount of additions to property and equipment, other than software
development costs, of the Borrower and its Consolidated Subsidiaries during
such period of the types classified as "Capital Expenditures" on the
consolidated statement of cash flows included in the Base Financials.
"Consolidated Interest Charges" means, for any period, all items for
such period of the types classified as "interest" on the consolidated statement
of operations included in the Base Financials.
"Consolidated Net Income" means, for any period, the net income (loss)
(calculated (a) before preferred and common stock dividends and (b) exclusive
of the effect of any extraordinary or other material non-recurring gain or loss
outside the ordinary course of business) of the Borrower and its Consolidated
Subsidiaries, determined on a consolidated basis for such period.
5
<PAGE> 11
"Consolidated Net Worth" means at any date the consolidated
stockholders' equity of the Borrower and its Consolidated Subsidiaries at such
date.
"Consolidated Rental Expense" means, for any period, the rental
expense (net of sublease income) of the Borrower and its Consolidated
Subsidiaries for such period.
"Consolidated Subsidiary" means, with respect to any Person and at any
date, any of its Subsidiaries or any other entity the accounts of which would
be consolidated with those of such Person in its consolidated financial
statements if such statements were prepared as of such date.
"Consolidated Tax Charges" means, for any period, all items for such
period of the types classified as "provision for income taxes" on the
consolidated statement of operations included in the Base Financials.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business, (iv) all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting principles, (v)
all obligations of such Person with respect to letters of credit and similar
instruments, including, without limitation, obligations under reimbursement
agreements, (vi) all mandatorily redeemable preferred stock of such Person,
(vii) all Debt of others secured by a Lien on any asset of such Person, whether
or not such Debt is assumed by such Person, and (viii) all Debt of others
Guaranteed by such Person.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Derivatives Obligations" of any Person means all obligations of such
Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency
option or any other similar transaction (including any option with respect to
any of the foregoing transactions) or any combination of the foregoing
transactions.
6
<PAGE> 12
"Domestic Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in New York City are authorized by law to
close.
"Domestic Lending Office" means, as to each Bank, its office located
at its address set forth in its Administrative Questionnaire (or identified in
its Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Agent.
"Domestic Loans" means CD Loans or Base Rate Loans or both.
"Domestic Reserve Percentage" has the meaning set forth in Section
2.06(b).
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 3.01.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating
to the environment, the effect of the environment on human health or to
emissions, discharges or releases of pollutants, contaminants, Hazardous
Substances or wastes into the environment, including, without limitation,
ambient air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, Hazardous Substances or
wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Borrower and all members of a controlled group
of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with the Borrower, are treated as a single
employer under Section 414(b) or 414(c) of the Internal Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
7
<PAGE> 13
"Euro-Dollar Lending Office" means, as to each Bank, its office,
branch or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or affiliate of such
Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice
to the Borrower and the Agent.
"Euro-Dollar Loan" means (i) a Loan which bears interest at a
Euro-Dollar Rate pursuant to the applicable Notice of Borrowing or Notice of
Interest Rate Election or (ii) an overdue amount that was a Euro-Dollar Loan
immediately before it became overdue.
"Euro-Dollar Margin" has the meaning set forth in Section 2.06(c).
"Euro-Dollar Rate" means a rate of interest determined pursuant to
Section 2.06(c) on the basis of an Adjusted London Interbank Offered Rate.
"Euro-Dollar Reference Banks" means the principal Nassau office of PNC
Bank, National Association and the principal London offices of NationsBank,
N.A. and Morgan Guaranty Trust Company of New York.
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
2.06(c).
"Event of Default" has the meaning set forth in Section 6.01.
"Existing Bank" means a Bank (as defined in the Existing Credit
Agreement).
"Existing Credit Agreement" means the Credit Agreement dated as of
November 1, 1994 among Beverly Health, the Borrower, the banks listed on the
signature pages thereof, and Morgan Guaranty Trust Company of New York, as
issuing bank and as agent, as the same has been amended on or prior to the
Effective Date.
"Existing Financing Documents" means the Financing Documents (as
defined in the Existing Credit Agreement).
"Existing Letter of Credit" means a Letter of Credit (as defined in
the Existing Credit Agreement).
"Existing Loan" means a Loan (as defined in the Existing Credit
Agreement).
8
<PAGE> 14
"Exposure" means, for any day and with respect to any Bank, the sum on
such day of the Letter of Credit Exposure of such Bank and the aggregate
outstanding principal amount of the Loans of such Bank.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day; provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan Guaranty Trust Company of New
York on such day on such transactions, as determined by the Agent.
"Financing Documents" means this Agreement, the Notes, the Subsidiary
Guaranty and the Pledge Agreement.
"Fixed Charge Coverage Ratio" means, on any date, the ratio of (i)
Consolidated EBITDAR minus Consolidated Gross Capital Expenditures for the four
consecutive fiscal quarters most recently ended on or prior to such date to
(ii) the sum of Consolidated Interest Charges and Consolidated Rental Expense
for such four fiscal quarters.
"Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or both.
"Former Borrower" means Beverly Health.
"Group of Loans" means at any time a group of Loans consisting of (i)
all Loans that are Base Rate Loans at such time or (ii) all Loans that are
Fixed Rate Loans of the same type having the same Interest Period at such time;
provided that, if a Loan of any particular Bank is converted to or made as a
Base Rate Loan pursuant to Section 8.02 or 8.04, such Loan shall be included in
the same Group or Groups of Loans from time to time as it would have been in if
it had not been so converted or made.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to
9
<PAGE> 15
purchase or pay (or advance or supply funds for the purchase or payment of)
such Debt or other obligation (whether arising by virtue of partnership
arrangements, by agreement to keep-well, to purchase assets, goods, securities
or services, to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for the purpose of assuring in any other manner
the obligee of such Debt or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided that the term Guarantee shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Hazardous Substance" means any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives,
by-products and other hydrocarbons, or any substance having any constituent
elements displaying any of the foregoing characteristics.
"Interest Period" means: (1) with respect to each Euro-Dollar Loan, a
period commencing on the date of borrowing specified in the applicable Notice
of Borrowing or the date specified in the applicable Notice of Interest Rate
Election and ending one week or one, two, three or six months thereafter, as
the Borrower may elect in the applicable Notice of Borrowing or Notice of
Interest Rate Election; provided that:
(a) any Interest Period (other than an Interest Period
determined pursuant to clause (c)(i) below) that would
otherwise end on a day that is not a Euro-Dollar Business Day
shall be extended to the next succeeding Euro-Dollar Business
Day unless, in the case of any Interest Period other than a
one-week Interest Period, such Euro-Dollar Business Day falls
in another calendar month, in which case such Interest Period
shall end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period (other than an Interest Period of
one week or an Interest Period determined pursuant to clause
(c) below) that begins on the last Euro-Dollar Business Day of
a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end
of such Interest Period) shall end on the last Euro-Dollar
Business Day of a calendar month; and
(c) if any Interest Period includes a date on which a
payment of principal of the Loans is required to be made under
Section 2.05 but does not end on such date, then (i) the
principal amount (if any) of each Euro-Dollar Loan required to
be repaid on such date shall
10
<PAGE> 16
have an Interest Period ending on such date and (ii) the
remainder (if any) of each such Euro-Dollar Loan shall have an
Interest Period determined as set forth above; and
(2) with respect to each CD Loan, a period commencing on the date of
borrowing specified in the applicable Notice of Borrowing or on the date
specified in the applicable Notice of Interest Rate Election and ending 30, 60,
90 or 180 days thereafter, as the Borrower may elect in the applicable Notice
of Borrowing or Notice of Interest Rate Election; provided that:
(a) any Interest Period (other than an Interest Period
determined pursuant to clause (b)(i) below) that would
otherwise end on a day that is not a Euro-Dollar Business Day
shall be extended to the next succeeding Euro-Dollar Business
Day; and
(b) if any Interest Period includes a date on which a
payment of principal of the Loans is required to be made under
Section 2.05 but does not end on such date, then (i) the
principal amount (if any) of each CD Loan required to be
repaid on such date shall have an Interest Period ending on
such date and (ii) the remainder (if any) of each such CD Loan
shall have an Interest Period determined as set forth above.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"Investment" means any investment in any Person, whether by means of
share purchase, capital contribution, loan, time deposit or otherwise.
"Issuing Bank" means Morgan Guaranty Trust Company of New York in its
capacity as issuer of the Letters of Credit, and its successors in such
capacity.
"Lease Cancellation Payment" means any payment made to cancel or
terminate a lease of a facility and related property prior to the end of its
term.
"Lease Conversion" means any acquisition by the Borrower or any of its
Subsidiaries of a facility and related property that had theretofore been
leased by the Borrower or any such Subsidiary and that the Borrower or any of
its Subsidiaries continues to operate.
"Letter of Credit" means a letter of credit issued, or deemed to have
been issued, by the Issuing Bank pursuant to Section 2.07(a).
11
<PAGE> 17
"Letter of Credit Commission Rate" has the meaning set forth in
Section 2.07(f).
"Letter of Credit Commitment" means, with respect to any Bank at any
time, an amount equal to the lesser of (i) such Bank's Commitment at such time
and (ii) the product of $100,000,000 multiplied by a fraction, the numerator of
which is such Bank's Commitment at such time and the denominator of which is
the aggregate Commitments of all Banks at such time.
"Letter of Credit Exposure" means, with respect to any Bank at any
time, the sum of (i) its participation in the undrawn amount which is then, or
may thereafter become, available for drawing under each outstanding Letter of
Credit and (ii) its participation in the amount of each unpaid Reimbursement
Obligation for drawings theretofore made under any Letter of Credit.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, the
Borrower or any of its Subsidiaries shall be deemed to own subject to a Lien
any asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.
"Loan" means a loan made by a Bank pursuant to Section 2.01; provided
that if any such loan or loans (or portions thereof) are combined or subdivided
pursuant to a Notice of Interest Rate Election, the term "Loan" shall refer to
the combined principal amount resulting from such combination or to each of the
separate principal amounts resulting from such subdivision, as the case may be.
"London Interbank Offered Rate" has the meaning set forth in Section
2.06(c).
"LTCB Agent" means the Agent (as defined in the LTCB Credit
Agreement).
"LTCB Collateral" means the real property and related personal
property which constitute Collateral (as defined in the LTCB Credit Agreement)
immediately prior to the Effective Date.
"LTCB Credit Agreement" means that certain Credit Agreement, dated as
of March 24, 1992, among Beverly Health, the Borrower, the lenders party
thereto
12
<PAGE> 18
(the "LTCB Lenders"), Bank of Montreal, as co-agent, and The Long-Term Credit
Bank of Japan, Ltd., Los Angeles Agency, as agent, as amended, supplemented or
modified.
"LTCB Financing Documents" means the LTCB Credit Agreement, the LTCB
Notes and the LTCB Mortgages.
"LTCB Loan" means a Loan (as defined in the LTCB Credit Agreement).
"LTCB Mortgages" means the Mortgages (as defined in the LTCB Credit
Agreement).
"LTCB Notes" means the Notes (as defined in the LTCB Credit Agreement)
in favor of the LTCB Lenders.
"Material Commitment" means an outstanding commitment by a financial
institution or a syndicate of financial institutions to provide financial
accommodations to the Borrower and/or one or more of its Subsidiaries, arising
in one or more related transactions, in an amount equal to or exceeding in the
aggregate $50,000,000.
"Material Financial Obligations" means a principal or face amount of
Debt and/or (in the case of Section 6.01(f)) payment obligations in respect of,
or (in the case of Section 6.01(g)) mark-to-market value of, Derivatives
Obligations of the Borrower and/or one or more of its Subsidiaries, arising in
one or more related or unrelated transactions, exceeding in the aggregate
$20,000,000.
"Material Plan" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $1,000,000.
"Material Subsidiary" means, at any time, any Subsidiary of the
Borrower that at such time constitutes a "significant subsidiary" of the
Borrower within the meaning of Regulation S-X promulgated by the Securities and
Exchange Commission; provided that for purposes of this definition of the term
"Material Subsidiary" each reference to "10 percent" contained in the
definition of "significant subsidiary" set forth in Regulation S-X shall be
replaced by "5 percent".
"Multiemployer Plan" means at any time an employee pension benefit
plan within the meaning of Section 4001(a)(3) of ERISA to which any member of
the ERISA Group is then making or accruing an obligation to make contributions
or has within the preceding five plan years made contributions.
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<PAGE> 19
"Nippon" means The Nippon Credit Bank, Ltd. and its successors.
"Nippon Agent" means the Agent (as defined in the Nippon Credit
Agreement).
"Nippon Collateral" means the real property and related personal
property which constitute Collateral (as defined in the Nippon Credit
Agreement) immediately prior to the Effective Date.
"Nippon Credit Agreement" means that certain Credit Agreement, dated
as of March 2, 1993, among Beverly Health, the Borrower, the lenders party
thereto (the "Nippon Lenders") and Nippon, as agent, as amended, supplemented
or modified.
"Nippon Financing Documents" means the Nippon Credit Agreement, the
Nippon Notes and the Nippon Mortgages.
"Nippon Loan" means a Loan (as defined in the Nippon Credit
Agreement).
"Nippon Mortgages" means the Mortgages (as defined in the Nippon
Credit Agreement).
"Nippon Notes" means the Notes (as defined in the Nippon Credit
Agreement) in favor of the Nippon Lenders.
"Notes" means promissory notes of the Borrower, substantially in the
form of Exhibit A hereto, evidencing the obligation of the Borrower to repay
the Loans, and "Note" means any one of such promissory notes issued hereunder.
"Notice of Borrowing" has the meaning set forth in Section 2.02.
"Notice of Interest Rate Election" has the meaning set forth in
Section 2.11(a).
"Notice of Issuance" has the meaning set forth in Section 2.07(b).
"Other Plan" means an employee pension benefit plan (other than a Plan
or a Multiemployer Plan) which is covered by Title IV of ERISA or subject to
the minimum funding standards under Section 412 of the Internal Revenue Code.
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<PAGE> 20
"Parent" means, with respect to any Bank, any Person controlling such
Bank.
"Participant" has the meaning set forth in Section 9.06(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Receivables Financing Securities" means debt securities or
preferred stock issued by a Special Purpose Receivables Financing Subsidiary
pursuant to a Receivables Financing Program and borrowings by a Special Purpose
Receivables Financing Subsidiary under a related Receivables Financing Backstop
Facility.
"Permitted Preferred Stock" means preferred stock of the Borrower that
has no mandatory redemption or redemption at the option of the holder thereof
prior to the first anniversary of the Termination Date and no required increase
in the rate of dividends payable thereon prior to such first anniversary other
than increases arising from the resetting of the rate of dividends on the basis
of a reasonable market or other similar index or a market interest rate.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Pharmacy" means Pharmacy Corporation of America, a California
corporation, and its successors.
"Plan" means at any time an employee pension benefit plan (other than
a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and is
maintained, or contributed to, by any member of the ERISA Group for employees
of any member of the ERISA Group.
"Pledge Agreement" means the Amended and Restated Pledge and Security
Agreement dated as of the date hereof among the Borrower, Pharmacy and the
Agent, substantially in the form of Exhibit B hereto, as the same may be
amended from time to time.
"Pledged Stock" has the meaning set forth in the Pledge Agreement.
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"Pricing Ratio" has the meaning set forth in the Pricing Schedule
attached hereto.
"Pricing Schedule" means Schedule I attached hereto.
"Prime Rate" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
"Quarterly Date" means any March 31, June 30, September 30 or December
31 or, in the case of any such date that is not a Euro-Dollar Business Day, the
next preceding Euro-Dollar Business Day.
"Receivables Financing Backstop Facility" means a credit facility
entered into by a Special Purpose Receivables Financing Subsidiary for the
purposes of providing liquidity with respect to securities issued by such
Special Purpose Receivables Financing Subsidiary and of financing transactions
of the type intended to be financed with the proceeds of such securities.
"Receivables Financing Program" means a program pursuant to which a
Special Purpose Receivables Financing Subsidiary issues debt securities or
preferred stock secured by (i) Medicaid, Medicare or other patient accounts
receivable or Permitted Receivables Financing Securities purchased from the
Borrower and its Subsidiaries or (ii) security interests in Medicaid, Medicare
or other patient accounts receivable or Permitted Receivables Financing
Securities granted by the Borrower and its Subsidiaries.
"Reference Banks" means the CD Reference Banks or the Euro-Dollar
Reference Banks, as the context may require, and "Reference Bank" means any one
of such Reference Banks.
"Refinanced Debt" has the meaning set forth in clause (v) of Section
5.13(a).
"Refinancing Debt" has the meaning set forth in clause (v) of Section
5.13(a).
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
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<PAGE> 22
"Reimbursement Obligation" means an obligation of the Borrower to
reimburse the Issuing Bank pursuant to Section 2.07(d) for the amount of a
drawing under a Letter of Credit.
"Relevant Debt" has the meaning set forth in Section 9.04.
"Required Banks" means at any time Banks having at least 66 2/3% of
the aggregate Total Exposures of all Banks.
"Secured Obligations" has the meaning set forth in the Pledge
Agreement.
"Secured Parties" has the meaning set forth in the Pledge Agreement.
"Segregated Collateral Account" has the meaning set forth in the
Pledge Agreement.
"Senior Note Agreement" means that certain Indenture, dated as of
February 1, 1996, among the Borrower, the corporations listed on the signature
pages thereto and The Chase Manhattan Bank, formerly known as Chemical Bank, as
Trustee, as amended, modified or supplemented.
"Special Purpose Receivables Financing Subsidiary" means a
Wholly-Owned Subsidiary of the Borrower the sole purpose of which is to issue
debt securities and/or preferred stock and to purchase Medicare, Medicaid or
other patient accounts receivable of the Borrower and its Subsidiaries and/or
Permitted Receivables Financing Securities and make advances to the Borrower
and its Subsidiaries secured by security interests in such Medicare, Medicaid
or other patient accounts receivable and/or Permitted Receivables Financing
Securities, which accounts receivable, Permitted Receivables Financing
Securities and/or security interests therein may be pledged to secure such debt
securities and/or preferred stock and/or borrowings by such Special Purpose
Receivables Financing Subsidiary under a Receivables Financing Backstop
Facility.
"Subordinated Notes" means the Borrower's 5 1/2% Convertible
Subordinated Debentures issued from time to time in exchange for the Borrower's
$2.75 Cumulative Convertible Exchangeable Preferred Stock.
"Subsidiary" means, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by
such Person; provided that, with respect to the Borrower, Subsidiary shall not
(except for
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financial reporting purposes and determination of compliance with financial
covenants) include any corporations or other entities (i) which are inactive,
(ii) each of which has neither assets nor liabilities, calculated on a
consolidated basis for each such corporation or other entity, of $1,600,000 or
more and (iii) which taken together have neither aggregate assets nor aggregate
liabilities, calculated on a consolidated basis, of $3,000,000 or more.
"Subsidiary Guarantor" means, at any time, a Subsidiary of the
Borrower party to the Subsidiary Guaranty at such time.
"Subsidiary Guaranty" means the Amended and Restated Subsidiary
Guaranty dated as of the date hereof by the Borrower and the Subsidiaries of
the Borrower parties thereto in favor of the Banks, the Agent and the Issuing
Bank, substantially in the form of Exhibit C hereto, as the same may be amended
from time to time.
"Temporary Cash Investment" means any Investment in (i) direct
obligations of the United States or any agency thereof, or obligations
guaranteed by the United States or any agency thereof, (ii) commercial paper
with maturities of not more than 180 days rated at least P-1 by Moody's
Investors Service, Inc. or A-1 by Standard & Poor's Ratings Group, (iii)
deposit accounts in, and certificates of deposit, repurchase agreements and
bankers' acceptances of, United States branches of commercial banks whose
unsecured senior long-term debt is rated A or better by Moody's Investors
Service, Inc. or Standard & Poor's Ratings Group, in each case maturing within
one year from the date of acquisition thereof or (iv) in addition to the
accounts and instruments referred to in clause (iii), deposit accounts and
certificates of deposit in United States branches of banks insured by the
Federal Deposit Insurance Corporation which do not aggregate more than $100,000
in any one bank.
"Termination Date" means December 31, 2001.
"Total Exposure" means, for any day and with respect to any Bank, the
greater of (x) the Commitment of such Bank and (y) the Exposure of such Bank.
"Unfunded Liabilities" means, with respect to any employee pension
benefit plan which is covered by Title IV of ERISA, or subject to the minimum
funding standards under Section 412 of the Internal Revenue Code, at any time,
the amount (if any) by which (i) the present value of all benefit liabilities
(within the meaning of Section 4001(a)(16) of ERISA) under such plan exceeds
(ii) the fair market value of all plan assets allocable to such benefit
liabilities (excluding any accrued but unpaid contributions), all determined as
of the then most recent
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<PAGE> 24
valuation date for such plan in accordance with the relevant provisions of
Title IV of ERISA and regulations promulgated thereunder, but only to the
extent that such excess represents a potential liability of a member of the
ERISA Group to the PBGC or any other Person under Title IV of ERISA.
"Voting Stock" means capital stock of any class or classes (however
designated) having ordinary voting power for the election of directors of the
Borrower, other than stock having such power only by reason of the happening of
a contingency.
"Wholly-Owned Subsidiary" means, with respect to any Person, any
Subsidiary of such Person all of the shares of Voting Stock or other ownership
interests of which (except directors' qualifying shares) are at the time
directly or indirectly owned by such Person.
"Workout Transaction" means any adjustment, renegotiation, exchange,
subordination, amendment, sale or other disposition of any note receivable,
Investment or other similar asset of the Borrower or any of its Subsidiaries,
any release, subordination, renegotiation or other adjustment or any Lien
securing any Debt or other obligation of any Person held by or owed to the
Borrower or any of its Subsidiaries, any acquisition of any asset by the
Borrower or any of its Subsidiaries or the making of any Investment by the
Borrower or any of its Subsidiaries, in each case in connection with (i) the
foreclosure, enforcement or realization by the Borrower or any such Subsidiary
on any Lien securing any Debt or other obligation of any Person held by or owed
to the Borrower or any such Subsidiary or (ii) any renegotiation, composition,
adjustment, amendment or restructuring of, or any other similar arrangement
with respect to, any such Debt or obligation, in each case in connection with
the bankruptcy, insolvency, financial distress or other similar condition of
such Person; provided that any such adjustment, renegotiation, exchange,
subordination, amendment, sale, disposition, release or acquisition or the
making of any such Investment (A) will, in the reasonable opinion of an
Authorized Financial Officer of the Borrower, in light of the circumstances
affecting the relevant obligor, be likely to maximize the amount to be realized
by the Borrower and its Subsidiaries with respect to such Debt or other
obligation or (B) is imposed on the Borrower or any of its Subsidiaries
pursuant to voting arrangements mandated by any law or contract arrangements
binding upon the Borrower or such Subsidiary.
Section 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally
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<PAGE> 25
accepted accounting principles as in effect from time to time, applied on a
basis consistent (except for changes concurred in by the Borrower's independent
public accountants) with the Base Financials; provided that if any change in
generally accepted accounting principles after December 31, 1995 in itself
materially affects the calculation of any financial covenant in Article 5, the
Borrower may by notice to the Agent, or the Agent (at the request of the
Required Banks) may by notice to the Borrower, require that such covenant
thereafter be calculated in accordance with generally accepted accounting
principles as in effect, and applied by the Borrower, immediately before such
change in generally accepted accounting principles occurs. If such notice is
given, the compliance certificates delivered pursuant to Section 5.01(d) after
such change occurs shall be accompanied by reconciliations of the difference
between the calculation set forth therein and a calculation made in accordance
with generally accepted accounting principles as in effect from time to time
after such change occurs.
Section 1.03. Types of Loans and Borrowings. The term "Borrowing"
denotes the aggregation of Loans made to the Borrower pursuant to Article 2 on
a single date and, in the case of a Borrowing consisting of Fixed Rate Loans,
for a single Interest Period. Loans and Borrowings are distinguished by
"type". The "type" of a Loan (or a Borrowing consisting of such Loans) refers
to the pricing of the Loans, whether such Loan is a Euro-Dollar Loan, a CD Loan
or a Base Rate Loan, each of which constitutes a type.
ARTICLE 2.
The Credits
Section 2.01. The Loans. (a) Repayment of Existing Loans, Nippon
Loans and LTCB Loans. Prior to the Effective Date, each Existing Bank, Nippon
Lender and LTCB Lender has made Existing Loans, Nippon Loans and LTCB Loans,
respectively, to the Former Borrower guaranteed by the Borrower pursuant to the
Existing Credit Agreement, the Nippon Credit Agreement and the LTCB Credit
Agreement. On the Effective Date, the Former Borrower shall repay all Existing
Loans, all Nippon Loans and all LTCB Loans outstanding under the Existing
Credit Agreement, the Nippon Credit Agreement and the LTCB Credit Agreement.
(b) Loans on and after the Effective Date. Each Bank severally
agrees, on the terms and conditions set forth in this Agreement, to make loans
to the Borrower pursuant to this Section 2.01(b) from time to time from and
including the Effective Date to but excluding the Termination Date in amounts
such that such Bank's Exposure shall not exceed such Bank's Commitment. Each
Borrowing under this Section 2.01(b) shall be in an aggregate principal amount
of
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$1,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing
may be in the aggregate amount available under Section 3.02(b) and shall be
made from the several Banks ratably in proportion to their respective
Commitments. Within the foregoing limits, the Borrower may borrow under this
Section 2.01(b), prepay loans to the extent permitted by Section 2.12, and
reborrow pursuant to this Section 2.01(b).
Section 2.02. Notice of Borrowing. The Borrower shall give the Agent
notice (a "Notice of Borrowing") not later than (x) 12:00 Noon (New York City
time) on the date of each Base Rate Borrowing, (y) 12:00 Noon (New York City
time) on the second Domestic Business Day before each CD Borrowing and (z)
12:00 Noon (New York City time) on the third Euro-Dollar Business Day before
each Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic Business
Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the
case of a Euro-Dollar Borrowing,
(b) the aggregate amount of such Borrowing,
(c) whether the Loans comprising such Borrowing are to bear
interest initially calculated on the basis of the Base Rate, a CD Rate or a
Euro-Dollar Rate,
(d) in the case of a Borrowing consisting of Fixed Rate Loans, the
duration of the Interest Period applicable thereto, subject to the provisions
of the definition of Interest Period.
Section 2.03. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing, the Agent shall
promptly notify each Bank of the contents thereof and of such Bank's share of
such Borrowing and such Notice of Borrowing shall not thereafter be revocable
by the Borrower.
(b) Not later than 3:00 P.M. (New York City time) on the date of
each Borrowing, each Bank shall (except as provided in subsection (c) below)
make available its ratable share of such Borrowing, in Federal or other funds
immediately available in New York City, to the Agent at its address specified
in or pursuant to Section 9.01. Unless the Agent determines that any
applicable condition specified in Article 3 has not been satisfied, the Agent
will promptly
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make the funds so received from the Banks available to the Borrower at the
Agent's aforesaid address.
(c) If any Bank that makes any Loan on the Effective Date is the
holder, on the Effective Date, of any Existing Loan that is to be repaid on the
Effective Date, such Bank shall apply the proceeds of its Loan to make such
repayment and only an amount equal to the difference (if any) between the
amount of the Loan being borrowed and the amount of such Existing Loan to be so
repaid shall be made available by the Bank to the Agent as provided in
subsection (b) or remitted by the Borrower to such Bank as provided in the
Existing Credit Agreement.
(d) Unless the Agent shall have received notice from a Bank prior to
the date of any Borrowing that such Bank will not make available to the Agent
such Bank's share of such Borrowing, the Agent may assume that such Bank has
made such share available to the Agent on the date of such Borrowing in
accordance with subsection (b) of this Section 2.03 and the Agent may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so
made such share available to the Agent, such Bank and the Borrower severally
agree to repay to the Agent forthwith on demand such corresponding amount
together with interest thereon, for each day from and including the date such
amount is made available to the Borrower to but excluding the date such amount
is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum
equal to the higher of the Federal Funds Rate and the interest rate then
applicable to the Loans contained in such Borrowing pursuant to Section 2.06
and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall
repay to the Agent such corresponding amount, such amount so repaid shall
constitute such Bank's Loan included in such Borrowing for purposes of this
Agreement.
Section 2.04. Notes.
(a) In connection with the effectiveness of the Existing Credit
Agreement, the Former Borrower delivered to the Agent, for the account of each
Existing Bank, duly executed "Notes" substantially in the form of Exhibit A to
the Existing Credit Agreement (collectively, the "Existing Notes") to evidence
the Existing Loans of each bank under the Existing Credit Agreement. In
connection with the effectiveness of the Nippon Credit Agreement and the LTCB
Credit Agreement, the Former Borrower delivered to the Nippon Agent and the
LTCB Agent, respectively, the Nippon Notes and the LTCB Notes to evidence the
Nippon Loans and the LTCB Loans, respectively, of each bank under the Nippon
Credit Agreement and the LTCB Credit Agreement. On or prior to the Effective
Date, the Borrower shall deliver to the Agent, for the account of each Bank,
duly
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executed Notes, substantially in the form of Exhibit A hereto. On the Effective
Date, each Bank's Existing Note, Nippon Note or LTCB Note shall be
automatically canceled, and from and after the Effective Date, the Loans of
each Bank shall be evidenced by a single Note payable to the order of such Bank
for the account of its Applicable Lending Office in an amount equal to the
aggregate unpaid principal amount of such Bank's Loans. On or promptly after
the Effective Date, each Existing Bank, Nippon Lender and LTCB Lender shall
deliver to the Agent, the Nippon Agent or the LTCB Agent, as the case may be,
for delivery to the Borrower its Existing Note, Nippon Note or LTCB Note (or in
the case of loss thereof, a written agreement of indemnity by such Bank for
such loss in customary form and executed by such Bank) marked "CANCELED".
(b) Each Bank may, by notice to the Borrower and the Agent,
request that its Loans of a particular type be evidenced by a separate Note in
an amount equal to the aggregate unpaid principal amount of its Loans of such
type. Each such Note shall be in substantially the form of Exhibit A hereto
with appropriate modifications to reflect the fact that it evidences solely
Loans of the relevant type. Each reference in this Agreement to the "Note" of
such Bank shall be deemed to refer to and include any or all of such Notes, as
the context may require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.01(b),
the Agent shall forward such Note to such Bank. Each Bank shall record the
date, amount and type of each Loan made by it and the date and amount of each
payment of principal made by the Borrower with respect thereto, and prior to
any transfer of its Note may endorse on the schedule forming a part thereof
appropriate notations to evidence the foregoing information with respect to
each such Loan then outstanding; provided that the failure of any Bank to make
any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or of the Borrower under the Notes. Each Bank is hereby
irrevocably authorized by the Borrower so to endorse its Note and to attach to
and make a part of its Note a continuation of any such schedule as and when
required.
Section 2.05. Maturity of Loans. Each Loan shall mature, and the
principal amount thereof shall be due and payable in full, on the Termination
Date.
Section 2.06. Interest Rates. (a) Each Base Rate Loan shall bear
interest on the outstanding principal amount thereof, for each day from and
including the date such Loan is made to but excluding the date it becomes due,
at a rate per annum equal to the sum of the Base Rate Margin for such day plus
the Base Rate for such day. Such interest shall be payable quarterly in
arrears on each Quarterly Date and, with respect to the principal amount of any
Base Rate Loan converted
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to a Fixed Rate Loan, on each day a Base Rate Loan is so converted. Any
overdue principal of or interest on any Base Rate Loan shall bear interest,
payable on demand, for each day from and including the date upon which it
becomes due to but excluding the date upon which it is paid, at a rate per
annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate
Loans for such day.
"Base Rate Margin" means a rate per annum determined in accordance
with the Pricing Schedule.
(b) Each CD Loan shall bear interest on the outstanding principal
amount thereof, for each day during each Interest Period applicable thereto, at
a rate per annum equal to the sum of the CD Margin for such day plus the
Adjusted CD Rate applicable to such Interest Period; provided that if any CD
Loan or any portion thereof shall, as a result of clause (2)(b)(i) of the
definition of Interest Period, have an Interest Period of less than 30 days,
such portion shall bear interest during such Interest Period at the rate
applicable to Base Rate Loans during such period. Such interest shall be
payable for each Interest Period on the last day thereof and, if such Interest
Period is longer than 90 days, at intervals of 90 days after the first day
thereof. Any overdue principal of or interest on any CD Loan shall bear
interest, payable on demand, for each day until paid at a rate per annum equal
to the sum of 2% plus (i) for each day during such Interest Period, the sum of
the CD Margin for such day plus the Adjusted CD Rate applicable to such Loan,
and (ii) for each day after the end of such Interest Period, the rate
applicable to Base Rate Loans for such day.
"CD Margin" means a rate per annum determined in accordance with the
Pricing Schedule.
The "Adjusted CD Rate" applicable to any Interest Period means a rate
per annum determined pursuant to the following formula:
[ CDBR ]*
ACDR = [ -------------- ] + AR
[ 1.00 - DRP ]
ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate
__________
* The amount in brackets being rounded upward, if necessary, to the
next higher 1/100 of 1%
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<PAGE> 30
The "CD Base Rate" applicable to any Interest Period is the rate of
interest determined by the Agent to be the average (rounded upward, if
necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum
bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable)
on the first day of such Interest Period by two or more New York certificate of
deposit dealers of recognized standing for the purchase at face value from each
CD Reference Bank of its certificates of deposit in an amount comparable to the
principal amount of the CD Loan of such CD Reference Bank to which such
Interest Period applies and having a maturity comparable to such Interest
Period.
"Domestic Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including, without limitation, any
basic, supplemental or emergency reserves) for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of new non-personal time deposits in dollars in New York City having a
maturity comparable to the related Interest Period and in an amount of $100,000
or more. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Domestic Reserve Percentage.
"Assessment Rate" means for any day the annual assessment rate in
effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. Section 327.3(e) (or any successor provision) to the Federal Deposit
Insurance Corporation (or any successor) for such Corporation's (or such
successor's) insuring time deposits at offices of such institution in the
United States. The Adjusted CD Rate shall be adjusted automatically on and as
of the effective date of any change in the Assessment Rate.
(c) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during each Interest Period applicable
thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for
such day plus the Adjusted London Interbank Offered Rate applicable to such
Interest Period. Such interest shall be payable for each Interest Period on
the last day thereof and, if such Interest Period is longer than three months,
at intervals of three months after the first day thereof.
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The "Adjusted London Interbank Offered Rate" applicable to any
Interest Period means the rate per annum equal to the quotient obtained
(rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i)
the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar
Reserve Percentage.
"Euro-Dollar Margin" means a rate per annum determined in accordance
with the Pricing Schedule.
The "London Interbank Offered Rate" applicable to any Interest Period
means the average (rounded upward, if necessary, to the next higher 1/16 of 1%)
of the respective rates per annum at which deposits in dollars are offered to
each of the Euro-Dollar Reference Banks in the London interbank market at
approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the
first day of such Interest Period in an amount approximately equal to the
principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to
which such Interest Period is to apply and for a period of time comparable to
such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or
other assets which includes loans by a non-United States office of any Bank to
United States residents).
(d) Any overdue principal of or interest on any Euro-Dollar Loan
shall bear interest, payable on demand, for each day from and including the
date upon which it becomes due to but excluding the date upon which it is paid,
at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of
the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered
Rate applicable to such Loan at the date such payment was due and (ii) the
Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the respective rates
per annum at which one day (or, if such amount due remains unpaid more than
three Euro-Dollar Business Days, then for such other period of time not longer
than six months as the Agent may select) deposits in dollars in an amount
approximately equal to such overdue payment due to each of the Euro-Dollar
Reference Banks are offered to such
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<PAGE> 32
Euro-Dollar Reference Bank in the London interbank market for the applicable
period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve
Percentage (or, if the circumstances described in clause (a) or (b) of Section
8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate
applicable to Base Rate Loans for such day).
(e) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
Banks by telex, cable or facsimile transmission of each rate of interest so
determined, and its determination thereof shall be conclusive in the absence of
manifest error.
(f) Each Reference Bank agrees to use its best efforts to furnish
quotations to the Agent as contemplated by this Section. If any Reference Bank
does not furnish a timely quotation, the Agent shall determine the relevant
interest rate on the basis of the quotation or quotations furnished by the
remaining Reference Bank or Reference Banks, or if none of such quotations is
available on a timely basis, the provisions of Section 8.01 shall apply.
Section 2.07. Letters of Credit.
(a) Commitment to Issue Letters of Credit.
(i) The Borrower may from time to time request that the
Issuing Bank issue a letter of credit pursuant to which the Issuing
Bank shall be obligated to the beneficiary to pay any drawings made
thereunder and the Banks shall be obligated to the Issuing Bank to
participate ratably in such drawings in proportion to their respective
Commitments as hereinafter provided.
(ii) Subject to Section 2.07(a)(iv) below, and in
accordance with its customary procedures (to the extent such
procedures are not inconsistent with the terms of this Agreement), the
Issuing Bank agrees, on the terms and conditions set forth in this
Agreement and at the request of the Borrower, to issue Letters of
Credit for the account of the Borrower or any of its Subsidiaries from
time to time prior to the Termination Date. Each Bank agrees to
participate ratably in proportion to its Commitment in any drawings
made under each Letter of Credit.
(iii) Notwithstanding any reference in any Existing Letter
of Credit to the Existing Credit Agreement, on and as of the Effective
Date, each Existing Letter of Credit shall be deemed to be a Letter of
Credit and to have been issued pursuant to clause (ii) above on the
Effective Date.
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(iv) In addition to the conditions precedent set forth in
Article 3, the obligations of the Issuing Bank to issue Letters of
Credit pursuant to clause (ii) above are subject to the additional
conditions that:
(A) no Letter of Credit shall have an
expiry date later than one Domestic Business Day
prior to the Termination Date; provided that with
respect to a Letter of Credit issued for the purpose
of providing credit support for obligations of the
Borrower or any of its Subsidiaries in connection
with self-insurance provided by or insurance procured
on behalf of the Borrower and its Subsidiaries, it
shall not be a violation of the condition set forth
in this clause (iv) if such Letter of Credit (1) is
certified by an Authorized Officer of the Borrower to
be required by applicable insurance law or regulation
to provide, and does provide, that if there shall
occur with respect to the Issuing Bank one of the
events described in Article 17 of the 1993 revision
of the Uniform Customs and Practice for Documentary
Credits of the International Chamber of Commerce
(Publication No. 500), as the same may be revised,
amended, supplemented or superseded, the expiry date
shall be extended until not later than a specified
number of days (the "Extension Period") after the
resumption of business of the Issuing Bank following
such event and (2) provides for an expiry date prior
to the Termination Date by at least 30 days more than
the number of days included in the Extension Period;
and
(B) the fact that, immediately
after the issuance of such Letter of Credit, no
Bank's Letter of Credit Exposure will exceed such
Bank's Letter of Credit Commitment.
(b) Notice of Issuance. Except in the case of Letters of
Credit deemed, pursuant to clause (iii) of Section 2.07(a) above, to be issued
on the Effective Date, the Borrower shall give the Agent and the Issuing Bank
notice (a "Notice of Issuance") at least three Domestic Business Days before
each Letter of Credit is to be issued, specifying: (i) the date of issuance
and expiry date of such Letter of Credit, (ii) the proposed terms of such
Letter of Credit, including the face amount thereof and (iii) the transaction
that is to be supported or financed by such Letter of Credit. Upon receipt of
a Notice of Issuance, the Issuing Bank shall promptly notify each Bank and the
Agent of the contents thereof and of the amount of such
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Bank's participation in such Letter of Credit and such Notice of Issuance shall
not thereafter be revocable by the Borrower.
(c) Drawings under Letters of Credit.
(i) Upon receipt from the beneficiary of any Letter of
Credit of demand for payment under such Letter of Credit, the Issuing
Bank shall determine in accordance with the terms of such Letter of
Credit whether such demand for payment should be honored.
(ii) If the Issuing Bank determines that a demand for
payment by the beneficiary of a Letter of Credit should be honored,
the Issuing Bank shall make available to the beneficiary in accordance
with the terms of such Letter of Credit the amount of the drawing
under such Letter of Credit. The Issuing Bank shall thereupon notify
the Borrower, the Agent and each Bank of the amount of such drawing
paid by it and the amount of each Bank's participation therein.
(d) Reimbursement and Other Payments by the Borrower.
(i) If any amount is drawn under any Letter of Credit,
the Borrower irrevocably and unconditionally agrees to reimburse the
Issuing Bank for all amounts paid by the Issuing Bank upon such
drawing, together with any and all reasonable charges and expenses
which any Bank or the Issuing Bank may pay or incur relative to such
drawing and interest on the amount drawn at the average rate charged
to the Issuing Bank on overnight Federal funds transactions for each
day from and including the date such amount is drawn to but excluding
the date such reimbursement payment is due and payable. Such
reimbursement payment shall be due and payable (x) not later than
12:00 Noon (New York City time) on the date the Issuing Bank notifies
the Borrower of such drawing, if such notice is given at or before
10:00 A.M. (New York City time) on such date, or (y) not later than
12:00 Noon (New York City time) on the first Domestic Business Day
succeeding the date such notice is given, if such notice is given
after 10:00 A.M. (New York City time); provided that no payment
otherwise required by this sentence to be made by the Borrower not
later than 12:00 Noon (New York City time) on any day shall be overdue
hereunder if arrangements for such payment satisfactory to the Issuing
Bank, in its sole discretion, shall have been made by the Borrower not
later than 12:00 Noon (New York City time) on such day and such
payment is actually made not later than 3:00 P.M. (New
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York City time) on such day. The Issuing Bank shall provide a copy of
any such notice to the Agent.
(ii) In addition, the Borrower agrees to pay to the
Issuing Bank (A) interest on any and all amounts unpaid by the
Borrower when due hereunder with respect to a Letter of Credit, for
each day from and including the date when such amount becomes due to
but excluding the date such amount is paid in full, whether before or
after judgment, payable on demand, at a rate per annum equal to the
sum of 2% plus the rate applicable to Base Rate Loans for such day,
and (B) upon each transfer of any Letter of Credit in accordance with
its terms, a sum equal to such amount as shall be necessary to cover
the reasonable costs and expenses of the Issuing Bank incurred in
connection with such transfer.
(iii) Each payment to be made by the Borrower pursuant to
this Section 2.07(d) shall be made, in Federal or other funds
immediately available in New York City, to the Issuing Bank at its
address referred to in or pursuant to Section 9.01.
(e) Payments by Banks with Respect to Letters of Credit.
(i) Each Bank shall make available an amount equal to its
ratable share of any drawing under a Letter of Credit, in Federal or
other funds immediately available in New York City, to the Issuing
Bank by 3:00 P.M. (New York City time) on the Domestic Business Day
following such drawing, together with interest on such amount at the
average rate charged to the Issuing Bank on overnight Federal funds
transactions on the date of such drawing as determined by the Issuing
Bank, at the Issuing Bank's address specified in or pursuant to
Section 9.01; provided that each Bank's obligation shall be reduced by
its pro rata share of any reimbursement theretofore paid by the
Borrower in respect of such drawing pursuant to Section 2.07(d)(i).
The Issuing Bank shall notify each Bank and the Agent of the amount of
such Bank's obligation in respect of any drawing under a Letter of
Credit not later than 1:00 P.M. (New York City time) on the day such
payment by such Bank is due. Each Bank shall be subrogated to the
rights of the Issuing Bank against the Borrower to the extent of all
amounts due from such Bank to the Issuing Bank, plus interest thereon,
for each day from and including the day such amount is due from such
Bank to the Issuing Bank to but excluding the day the Borrower makes
payment to the Issuing Bank pursuant to Section 2.07(d) above, whether
before or after judgment, at a rate per annum equal to the sum of 2%
plus the rate applicable to Base Rate Loans for such day.
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(ii) If any Bank fails to pay any amount required pursuant
to clause (i) of this subsection on the date on which such payment is
due, interest shall accrue on such Bank's obligation to make such
payment, for each day from and including the date such payment becomes
due to but excluding the date such Bank makes such payment, whether
before or after judgment, at a rate per annum equal to (A) in the case
of each day from and including the day such payment is due through and
including the first succeeding Domestic Business Day (and any
intervening days), the average rate charged to the Issuing Bank on
overnight Federal funds transactions for each such day as determined
by the Issuing Bank and (B) thereafter, the sum of 2% plus the rate
applicable to Base Rate Loans for such day. Any payment made by any
Bank after 3:00 P.M., New York City time, on any Domestic Business Day
shall be deemed for purposes of the preceding sentence to have been
made on the next succeeding Domestic Business Day.
(iii) If the Borrower shall reimburse the Issuing Bank for
any drawing under a Letter of Credit after the Banks shall have made
funds available to the Issuing Bank with respect to such drawing in
accordance with clause (i) of this subsection, the Issuing Bank shall
promptly upon receipt of such reimbursement distribute to each Bank
its pro rata share thereof, including interest, to the extent received
by the Issuing Bank.
(f) Letter of Credit Commission; Fronting Fee.
(i) The Borrower shall pay to the Agent for the account
of the Banks, ratably in proportion to their Commitments or, if all
Commitments have been terminated, in proportion to their Commitments
immediately before such termination, a letter of credit commission at
a rate per annum (the "Letter of Credit Commission Rate") determined
daily in accordance with the Pricing Schedule on the daily average
amount available for drawing (whether or not any conditions to drawing
can then be met) on all outstanding Letters of Credit. Such letter of
credit commission shall accrue from and including the Effective Date
to but excluding the Termination Date (or later date of expiration or
termination of the last Letter of Credit to expire or be terminated)
and shall be payable quarterly in arrears on each Quarterly Date, on
the date of termination of the Commitments in their entirety and, if
later, on the date of expiration or termination of the last Letter of
Credit to expire or be terminated.
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(ii) The Borrower agrees to pay to the Agent for the
account of the Issuing Bank a fronting fee in the amounts and at the
times previously agreed between the Borrower and the Issuing Bank.
(g) Payment upon Acceleration. If the Commitments shall be
terminated or the principal of the Notes shall become immediately due and
payable pursuant to Section 6.01, the Borrower shall pay to the Agent for
deposit in the Segregated Collateral Account an amount equal to the aggregate
amount which is then, or may thereafter become, available for drawing under all
outstanding Letters of Credit.
(h) Limited Liability of the Issuing Bank. The Borrower assumes
all risks of the acts or omissions of any beneficiary and any transferee of any
Letter of Credit with respect to its use of such Letter of Credit. The Banks,
the Issuing Bank and their respective officers, directors, employees and agents
shall not be liable or responsible for, and the obligations of each Bank to
make payments (other than obligations of such Bank resulting solely from the
gross negligence or willful misconduct of the Issuing Bank), and of the
Borrower to reimburse the Issuing Bank for payments, pursuant to this Section
shall not be excused by, any action or inaction of any Bank or the Issuing Bank
related to (i) the use which may be made of any Letter of Credit or any acts or
omissions of any beneficiary or transferee in connection therewith; (ii) the
validity, sufficiency or genuineness of documents presented under any Letter of
Credit, or of any endorsements thereon, even if such documents should in fact
prove to be in any or all respects invalid, insufficient, fraudulent or forged;
or (iii) payment by the Issuing Bank against presentation of documents to the
Issuing Bank which do not comply with the terms of any Letter of Credit,
including failure of any documents to bear any reference or adequate reference
to the Letter of Credit. Notwithstanding the foregoing, the Borrower shall
have a claim against the Issuing Bank, and the Issuing Bank shall be liable to
the Borrower, to the extent, but only to the extent, of any direct, as opposed
to consequential, damages suffered by the Borrower which were caused by (i) the
Issuing Bank's willful misconduct or gross negligence in determining whether
documents presented under any Letter of Credit comply with the terms thereof or
(ii) the Issuing Bank's willful failure to pay under any Letter of Credit after
the presentation to the Issuing Bank by any beneficiary (or a successor
beneficiary to whom such Letter of Credit has been transferred in accordance
with its terms) of documents strictly complying with the terms and conditions
of such Letter of Credit. Subject to the preceding sentence, the Issuing Bank
may accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary unless any beneficiary (or a successor beneficiary
to whom such Letter of Credit has been transferred in accordance with its
terms) and
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the Borrower shall have notified the Issuing Bank that such documents do not
comply with the terms and conditions of such Letter of Credit. Each Bank
shall, ratably in accordance with its Commitment, indemnify the Issuing Bank
(to the extent not reimbursed by the Borrower) against any cost, expense
(including counsel fees and disbursements), claim, demand, action, loss or
liability (except such as result from the Issuing Bank's gross negligence or
willful misconduct) that the Issuing Bank may suffer or incur in connection
with this Agreement or any action taken or omitted by the Issuing Bank
hereunder.
Section 2.08. Fees.
(a) The Borrower shall pay to the Agent for the account of the Banks,
ratably in proportion to their Commitments, a commitment fee at a rate per
annum (the "Commitment Fee Rate") determined daily in accordance with the
Pricing Schedule on the daily average amount by which the aggregate amount of
the Commitments exceeds the aggregate Exposure. Such commitment fee shall
accrue from and including the Effective Date to but excluding the Termination
Date (or earlier date of termination of the Commitments in their entirety).
(b) On the Effective Date, the Borrower shall pay to J.P. Morgan
Securities Inc., for its own account, an arrangement fee in the amount
previously agreed between the Borrower and the Agent.
(c) Accrued fees under Section 2.08(a) above shall be payable
quarterly in arrears on each Quarterly Date and upon the date of termination of
the Commitments in their entirety.
Section 2.09. Optional Termination or Reduction of Commitments.
(a) The Borrower may, upon at least three Domestic Business Days'
notice to the Agent, (i) terminate the Commitments at any time, if the
aggregate Exposures of all Banks shall be zero at the time of such termination,
or (ii) ratably reduce from time to time by an aggregate amount of $5,000,000
or any larger multiple of $1,000,000, the aggregate amount of the Commitments
in excess of the aggregate Exposures of all Banks..
(b) Each reduction of the Commitments pursuant to this Section
2.09 shall be applied ratably to the respective Commitments of all Banks.
Section 2.10. Mandatory Termination of Commitments. All
Commitments shall terminate in their entirety on the Termination Date.
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Section 2.11. Method of Electing Interest Rates. (a) The Loans
included in each Borrowing shall bear interest initially at the type of rate
specified by the Borrower in the applicable Notice of Borrowing. Thereafter,
the Borrower may from time to time elect to change or continue the type of
interest rate borne by each Group of Loans (subject in each case to the
provisions of Article 8), as follows:
(i) if such Loans are Base Rate Loans, the Borrower may
elect to convert such Loans to CD Loans as of any Domestic Business
Day or to Euro-Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are CD Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to
continue such Loans as CD Loans for an additional Interest Period, in
each case effective on the last day of the then current Interest
Period applicable to such Loans; and
(iii) if such Loans are Euro-Dollar Loans, the Borrower may
elect to convert such Loans to Base Rate Loans or CD Loans or elect to
continue such Loans as Euro-Dollar Loans for an additional Interest
Period, in each case effective on the last day of the then current
Interest Period applicable to such Loans.
Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Agent not later than 12:00 Noon (New York City time) (x)
if the relevant Loans are to be converted to Domestic Loans or continued as
Domestic Loans for an additional Interest Period, the second Domestic Business
Day before such conversion or continuation is to be effective and (y) if the
relevant Loans are to be converted to Euro-Dollar Loans or continued as
Euro-Dollar Loans for an additional Interest Period, the third Euro-Dollar
Business Day before such conversion or continuation is to be effective. A
Notice of Interest Rate Election may, if it so specifies, apply to only a
portion of the aggregate principal amount of the relevant Group of Loans;
provided that (i) such portion is allocated ratably among the Loans comprising
such Group of Loans and (ii) the portion to which such Notice of Interest Rate
Election applies, and the remaining portion to which it does not apply, are
each at least $1,000,000 and not more than one of such portions is other than a
multiple of $1,000,000.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such
notice applies;
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(ii) the date on which the conversion or continuation
selected in such notice is to be effective, which shall comply with
the applicable clause of Section 2.11(a) above;
(iii) if the Loans comprising such Group are to be
converted, the new type of Loans and, if such new Loans are Fixed Rate
Loans, the duration of the initial Interest Period applicable thereto;
and
(iv) if such Loans are to be continued as Fixed Rate Loans
for an additional Interest Period, the duration of such additional
Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to Section 2.11(a) above, the Agent shall promptly notify
each Bank of the contents thereof and such notice shall not thereafter be
revocable by the Borrower. If the Borrower fails to deliver a timely Notice of
Interest Rate Election to the Agent for any Group of Fixed Rate Loans, such
Loans shall be converted into Base Rate Loans on the last day of the then
current Interest Period applicable thereto.
Section 2.12. Optional Prepayments.
(a) The Borrower may, upon notice to the Agent not later than 11:00
A.M. (New York City time) on the date of such prepayment, prepay a Group of
Base Rate Loans in whole at any time, or from time to time in part in amounts
aggregating $1,000,000 or any larger multiple of $1,000,000, by paying the
principal amount to be prepaid together with accrued interest thereon to the
date of prepayment.
(b) The Borrower may, upon at least three Domestic Business Days'
notice to the Agent, in the case of a Group of CD Loans, or upon at least three
Euro-Dollar Business Days' notice to the Agent, in the case of a Group of
Euro-Dollar Loans, prepay the Loans comprising such Group in whole at any time,
or from time to time in part in amounts aggregating $1,000,000 or any larger
multiple of $1,000,000, by paying the principal amount to be prepaid together
with accrued interest thereon to the date of prepayment; provided that the
Borrower shall reimburse each Bank for any loss or expense incurred by it as a
result of any such prepayment in accordance with Section 2.14.
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(c) Each prepayment of all or part of a Group of Loans pursuant to
this Section 2.12 shall be applied to prepay ratably the Loans of the several
Banks included in such Group.
(d) Upon receipt of a notice of prepayment pursuant to this
Section, the Agent shall promptly notify each Bank of the contents thereof and
of such Bank's ratable share of such prepayment and such notice shall not
thereafter be revocable by the Borrower.
Section 2.13. General Provisions as to Payments.
(a) The Borrower shall make each payment of principal of, and
interest on, the Loans and of commissions and fees hereunder, not later than
12:00 Noon (New York City time) on the date when due, in Federal or other funds
immediately available in New York City, to the Agent at its address referred to
in or pursuant to Section 9.01. The Agent will promptly distribute to each
Bank its ratable share of each such payment received by the Agent for the
account of the Banks. Whenever any payment of principal of, or interest on,
the Domestic Loans or of commissions or fees shall be due on a day which is not
a Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic Business Day. Whenever any payment of principal of,
or interest on, the Euro-Dollar Loans shall be due on a day which is not a
Euro-Dollar Business Day, the date for payment thereof shall be extended to the
next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day
falls in another calendar month, in which case the date for payment thereof
shall be the next preceding Euro-Dollar Business Day. If the date for any
payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower
prior to the date on which any payment is due to the Banks hereunder that the
Borrower will not make such payment in full, the Agent may assume that the
Borrower has made such payment in full to the Agent on such date and the Agent
may, in reliance upon such assumption, cause to be distributed to each Bank on
such due date an amount equal to the amount then due such Bank. If and to the
extent that the Borrower shall not have so made such payment, each Bank shall
repay to the Agent forthwith on demand such amount distributed to such Bank
together with interest thereon, for each day from and including the date such
amount is distributed to such Bank to but excluding the date such Bank repays
such amount to the Agent, at the Federal Funds Rate.
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Section 2.14. Funding Losses. If the Borrower makes any payment of
principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is
converted to a Base Rate Loan (whether such payment or conversion is pursuant
to Article 2, 6 or 8 or otherwise) on any day other than the last day of an
Interest Period applicable thereto, or the last day of an applicable period
fixed pursuant to Section 2.06(d), or if the Borrower fails to borrow or prepay
any Fixed Rate Loans after notice has been given to any Bank in accordance with
Section 2.03(a) or 2.12(d), the Borrower shall reimburse each Bank within 15
days after demand for any resulting loss or expense incurred by it (or by an
existing or prospective Participant in the related Loan), including (without
limitation) any loss incurred in obtaining, liquidating or employing deposits
from third parties or terminating, covering, reversing or closing out interest
rate swap agreements with third parties, but excluding loss of margin for the
period after any such payment or conversion or failure to borrow or prepay;
provided that such Bank shall have promptly delivered to the Borrower a
certificate as to the amount of such loss or expense (setting forth in
reasonable detail, if the Borrower so requests, the calculation thereof), which
certificate shall be conclusive in the absence of manifest error.
Section 2.15. Computation of Interest, Fees and Commissions.
Interest based on the Prime Rate hereunder shall be computed on the basis of a
year of 365 days (or 366 days in a leap year) and paid for the actual number of
days elapsed (including the first day but excluding the last day). All other
interest, fees and commissions shall be computed on the basis of a year of 360
days and paid for the actual number of days elapsed (including the first day
but excluding the last day).
Section 2.16. Withholding Tax Exemption. At least five Domestic
Business Days prior to the first date on which interest, fees or commissions
are payable hereunder for the account of any Bank, each Bank that is not
incorporated under the laws of the United States of America or a state thereof
agrees that it will deliver to each of the Borrower and the Agent (and, in the
case of any Bank with any Letter of Credit Exposure, the Issuing Bank) two duly
completed copies of United States Internal Revenue Service Form 1001 or 4224,
certifying in either case that such Bank is entitled to receive payments under
this Agreement and the Notes without deduction or withholding of any United
States federal income taxes. Each Bank which so delivers a Form 1001 or 4224
further undertakes to deliver to each of the Borrower and the Agent (and, in
the case of any Bank with any Letter of Credit Exposure, the Issuing Bank) two
additional copies of such form (or a successor form) on or before the date that
such form expires or becomes obsolete or after the occurrence of any event
requiring a change in the most recent form so delivered by it, and such
amendments thereto or extensions or renewals thereof as may be reasonably
requested by the Borrower or the Agent (or, in the case of any Bank with any
Letter of Credit Exposure, the Issuing Bank),
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in each case certifying that such Bank is entitled to receive payments under
this Agreement and the Notes without deduction or withholding of any United
States federal income taxes, unless an event (including, without limitation,
any change in any treaty, law or regulation) has occurred prior to the date on
which any such delivery would otherwise be required which renders all such
forms inapplicable or which would prevent such Bank from duly completing and
delivering any such form with respect to it and such Bank advises the Borrower
and the Agent (and, in the case of any Bank with any Letter of Credit Exposure,
the Issuing Bank) that it is not capable of receiving payments without any
deduction or withholding of United States federal income tax.
Section 2.17. Maximum Interest Rate. (a) Nothing contained in this
Agreement or the Notes shall require the Borrower to pay interest at a rate
exceeding the maximum rate permitted by applicable law. Neither this Section
nor Section 9.08 is intended to limit the rate of interest payable for the
account of any Bank or the Issuing Bank, as the case may be, to the maximum
rate permitted by the laws of the State of New York if a higher rate is
permitted with respect to such Bank or the Issuing Bank, as the case may be, by
supervening provisions of United States federal law.
(b) If the amount of interest payable for the account of any Bank
or the Issuing Bank, as the case may be, on any date in respect of the
immediately preceding interest computation period, computed pursuant to Section
2.06 or, in the case of interest on Reimbursement Obligations or other amounts
payable in respect of Letters of Credit, Section 2.07, would exceed the maximum
amount permitted by applicable law to be charged by such Bank or the Issuing
Bank, as the case may be, the amount of interest payable for its account on
such date shall be automatically reduced to such maximum permissible amount.
(c) If the amount of interest payable for the account of any Bank
or the Issuing Bank, as the case may be, in respect of any interest computation
period is reduced pursuant to clause (b) of this Section and the amount of
interest payable for its account in respect of any subsequent interest
computation period, computed pursuant to Section 2.06 or, in the case of
interest on Reimbursement Obligations or other amounts payable in respect of
Letters of Credit, Section 2.07, would be less than the maximum permissible
amount permitted by applicable law to be charged by such Bank or the Issuing
Bank, as the case may be, then the amount of interest payable for its account
in respect of such subsequent interest computation period shall be
automatically increased to such maximum permissible amount; provided that at no
time shall the aggregate amount by which interest paid for the account of any
Bank or the Issuing Bank, as the case may be, has been increased
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pursuant to this clause (c) exceed the aggregate amount by which interest paid
for its account has theretofore been reduced pursuant to clause (b) of this
Section.
ARTICLE 3.
Conditions
Section 3.01. Effectiveness. This Agreement shall become effective on
the date that each of the following conditions shall have been satisfied (or
waived in accordance with Section 9.05):
(a) receipt by the Agent of counterparts hereof signed by each of
the parties hereto (or, in the case of any such party as to which an executed
counterpart shall not have been received, receipt by the Agent in form
satisfactory to it of telegraphic, telex, facsimile transmission or other
written confirmation from such party of execution of a counterpart hereof by
such party);
(b) receipt by the Agent for the account of each Bank of a duly
executed Note dated on or before the Effective Date complying with the
provisions of Section 2.04;
(c) receipt by the Agent, with sufficient copies for each Bank, of
opinions of Weil, Gotshal & Manges LLP, special New York counsel to the
Borrower, and the Vice President and Deputy General Counsel of the Borrower,
substantially in the forms of Exhibits D and E hereto, respectively, and in
each case covering such additional matters relating to the transactions
contemplated hereby as the Agent or the Required Banks may reasonably request;
(d) receipt by the Agent, with sufficient copies for each Bank, of
an opinion of Davis Polk & Wardwell, special counsel to the Agent,
substantially in the form of Exhibit F hereto and covering such additional
matters relating to the transactions contemplated hereby as the Agent or the
Required Banks may reasonably request;
(e) receipt by the Agent of evidence satisfactory to it that
Section 4.12 of the Senior Notes Agreement has been clarified to indicate that
an increase in the dollar amount secured by a Lien existing on the date thereof
does not cause the lien not to be a "Permitted Lien", as defined therein;
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(f) receipt by the Agent of a certificate signed by the chief
financial officer or treasurer of the Borrower to the effect set forth in
subsections (c) and (d) of Section 3.02;
(g) receipt by the Agent of duly executed counterparts of the
Pledge Agreement, together with evidence satisfactory to the Agent that the
securities required to be delivered to the Agent pursuant thereto have been so
delivered;
(h) receipt by the Agent of duly executed counterparts of the
Subsidiary Guaranty duly executed by all Subsidiary Guarantors, including
Beverly Health;
(i) receipt by the Agent of evidence satisfactory to it that such
action (including, without limitation, the filing of appropriately completed
and duly executed Uniform Commercial Code financing statements) as may be
necessary or as the Agent shall have reasonably requested to perfect the Liens
created pursuant to the Pledge Agreement shall have been taken;
(j) receipt by the Agent of evidence satisfactory to it of the
fact that all amounts payable by the Borrower to the Agent or the Banks on or
before such date shall have been paid or arrangements satisfactory to the Agent
shall have been made for such payment;
(k) the Agent shall have received a payoff letter, including an
undertaking to release all liens, executed by each mortgagee along with an
undertaking to file any document necessary to evidence and record the release
of all Liens created under the Nippon Financing Documents and the LTCB
Financing Documents;
(l) receipt by the Agent and the Issuing Bank of evidence
satisfactory to the Agent and the Issuing Bank that each Existing Letter of
Credit shall have been amended to the extent, if any, necessary to reflect the
fact that on and after the Effective Date such Letter of Credit shall be deemed
to have been issued hereunder;
(m) prior to or simultaneously with the transactions hereunder
contemplated to take place on the Effective Date, (i) all "Loans" outstanding
under the Existing Credit Agreement shall be repaid in full (with accrued
interest thereon) and (ii) all other amounts payable under the Existing Credit
Agreement , including without limitation "breakage costs" under Section 2.14
thereof, shall be paid in full;
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(n) receipt by the Agent of evidence satisfactory to it of the
termination of the commitments under the Nippon Credit Agreement and the LTCB
Credit Agreement and that the outstanding loans (together with interest
thereon) and all other amounts payable to the Nippon Lenders and the LTCB
Lenders under the Nippon Credit Agreement and the LTCB Credit Agreement as of
the Effective Date shall have been paid in full or will be paid in full with
the proceeds of a Borrowing to be made on the Effective Date;
(o) upon the effectiveness of this Agreement, the aggregate
amount of the Letter of Credit Exposures shall not exceed the aggregate amount
of the Letter of Credit Commitments; and
(p) receipt by the Agent of all documents it may reasonably
request relating to the existence of the Borrower and each of its Subsidiaries
party to any Financing Document, the corporate authority for and the validity
of the Financing Documents, and any other matters relevant hereto or thereto,
all in form and substance satisfactory to the Agent;
provided that this Agreement shall not become effective or be binding on any
party hereto unless all of the foregoing conditions are satisfied not later
than December 31, 1996. Prior to the effectiveness of this Agreement in
accordance with this Section 3.01, none of the terms and conditions of the
Existing Credit Agreement, Nippon Credit Agreement or LTCB Credit Agreement or
any Existing Financing Document, Nippon Financing Document or LTCB Financing
Document shall be amended, waived or otherwise modified by this Agreement and
all such terms and conditions shall remain in full force and effect and are
hereby ratified and confirmed in all respects. The Agent shall promptly notify
the Borrower, the Issuing Bank and the Banks of the Effective Date, and such
notice shall be conclusive and binding on all parties hereto.
Section 3.02. Borrowings and Letter of Credit Issuances. The
obligation of any Bank to make a Loan on the occasion of any Borrowing, and the
obligation of the Issuing Bank to issue any Letter of Credit (including the
deemed issuance of the initial Letters of Credit pursuant to Section
2.07(a)(iii)), are subject to the satisfaction of the following conditions:
(a) except in the case of the deemed issuance of the initial
Letters of Credit pursuant to Section 2.07(a)(iii), receipt by the Agent of a
Notice of Borrowing or Notice of Issuance as required by Section 2.02 or
2.07(b), as the case may be;
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<PAGE> 47
(b) in the case of any Borrowing or the issuance of a Letter of
Credit, the fact that, immediately after such Borrowing or the issuance of such
Letter of Credit, as the case may be, the aggregate Exposures of all Banks does
not exceed the aggregate Commitments of all Banks;
(c) the fact that, immediately before and after such Borrowing, or
the issuance of such Letter of Credit, as the case may be, no Default shall
have occurred and be continuing; and
(d) the fact that the representations and warranties of the
Borrower or any of its Subsidiaries contained in the Financing Documents shall
be true in all material respects on and as of the date of such Borrowing or
issuance, as the case may be.
Each Borrowing and each issuance of a Letter of Credit hereunder shall be
deemed to be a representation and warranty by the Borrower to the Agent, each
of the Banks and, in the case of an issuance of a Letter of Credit, the Issuing
Bank on the date of such Borrowing or issuance, as the case may be, as to the
facts specified in clauses (b), (c) and (d) of this Section.
ARTICLE 4.
Representations and Warranties
The Borrower hereby makes the following representations and
warranties:
Section 4.01. Corporate Existence and Power. Each of the Borrower
and its Subsidiaries party to any Financing Document is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all corporate powers and all
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted except where the failure to obtain such
governmental licenses, authorizations, consents and approvals would not
materially adversely affect the business, consolidated financial position or
consolidated results of operations of the Borrower and its Consolidated
Subsidiaries and would not in any manner draw into question the validity of any
Financing Document. The Borrower has no Subsidiaries on the Effective Date
other than those listed on Schedule IV hereto.
Section 4.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by each of the Borrower
and its Subsidiaries of each Financing Document to which it is a party are
within the Borrower's and each such Subsidiary's corporate powers, have been
duly authorized by all necessary corporate action, require no action by or in
respect of,
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<PAGE> 48
or filing with, any governmental body, agency or official and do not
contravene, or constitute a default under, any provision of applicable law or
regulation or of the certificate of incorporation or by-laws of the Borrower or
any such Subsidiary or of any agreement, judgment, injunction, order, decree or
other instrument that is material, individually or in the aggregate, and that
is binding upon the Borrower or any such Subsidiary or result in the creation
or imposition of any Lien on any asset of the Borrower or any of its
Subsidiaries (except the Liens created pursuant to the Pledge Agreement).
Section 4.03. Binding Effect; Liens of Pledge Agreement. (a) Each
Financing Document other than the Notes constitutes a valid and binding
agreement of the Borrower and each of the Subsidiaries party thereto,
enforceable against them in accordance with its terms, and the Notes, when
executed and delivered in accordance with this Agreement, will constitute valid
and binding obligations of the Borrower, enforceable against it in accordance
with their terms.
(b) The Pledge Agreement creates valid security interests in the
Collateral purported to be covered thereby, which security interests are and
will remain perfected security interests, prior to all Liens, subject, in the
case of the Pledged Stock, to the Agent's maintaining possession thereof.
Section 4.04. Financial Information; Valuations. (a) The Base
Financials, copies of which have been delivered to each of the Banks, fairly
present, in conformity with generally accepted accounting principles, the
consolidated financial position of the Borrower and its Consolidated
Subsidiaries as of December 31, 1995 and their consolidated results of
operations and cash flows for the fiscal year of the Borrower then ended.
(b) The unaudited condensed consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as of September 30, 1996 and the
related unaudited condensed consolidated statements of income and cash flows
for the nine months then ended, set forth in the Borrower's quarterly report
for the fiscal quarter ended September 30, 1996 as filed with the Securities
and Exchange Commission on Form 10-Q, a copy of which has been delivered to
each of the Banks, fairly present, in conformity with generally accepted
accounting principles applied on a basis consistent with the Base Financials,
the consolidated financial position of the Borrower and its Consolidated
Subsidiaries as of such date and their consolidated results of operations and
cash flows for such nine month period (subject to normal year-end adjustments,
the absence of footnote disclosure and condensation pursuant to the rules of
the Securities and Exchange Commission).
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<PAGE> 49
(c) Since September 30, 1996, there has been no material adverse
change in the business, financial position, results of operations or prospects
of the Borrower and its Consolidated Subsidiaries, considered as a whole.
Section 4.05. Litigation. Except as disclosed in the Borrower's 1995
Form 10-K or the Borrower's quarterly report for the fiscal quarter ended
September 30, 1996 as filed with the Securities and Exchange Commission on Form
10-Q, there is no action, suit or proceeding pending against, or to the
knowledge of the Borrower threatened against or affecting, the Borrower or any
of its Subsidiaries before any court or arbitrator or any governmental body,
agency or official in which there is a reasonable possibility of an adverse
decision which could materially adversely affect the business, consolidated
financial position or consolidated results of operations of the Borrower and
its Consolidated Subsidiaries or which in any manner draws into question the
validity of any Financing Document.
Section 4.06. Compliance with ERISA. Each member of the ERISA Group
has complied with its obligations under the minimum funding standards of ERISA
and the Internal Revenue Code with respect to each Plan and is in compliance in
all material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standards under Section 412 of
the Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan, or made any
amendment to any Plan, which has resulted or could reasonably be expected to
result, prior to the first anniversary of the Termination Date, in the
imposition of a Lien or the posting of a bond or other security under Section
302(f) of ERISA or Section 401(a)(29) or 412(n) of the Internal Revenue Code,
(iii) incurred any liability under Title IV of ERISA other than a liability to
the PBGC for premiums under Section 4007 of ERISA or (iv) within the preceding
five plan years, with respect to any Other Plan, engaged in any transaction
described in Section 4069 or Section 4212(c) of ERISA.
Section 4.07. Environmental Matters. (a) In the ordinary course of
its business, the Borrower conducts an ongoing review of the effect of
Environmental Laws on the business, operations and properties of the Borrower
and its Subsidiaries, in the course of which it identifies and evaluates
associated liabilities and costs. On the basis of this review, the Borrower
has reasonably concluded that Environmental Laws are unlikely to have a
material adverse effect on the business, financial condition, results of
operations or prospects of the Borrower and its Consolidated Subsidiaries,
considered as a whole.
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(b) As of the Effective Date, to the knowledge of the Borrower and
its Subsidiaries no material claim, investigation or written inquiry has been
made, and the Borrower is not aware of any circumstance which would warrant or
give rise to such a claim, investigation or inquiry, with regard to the
Borrower or any of its Subsidiaries, in respect of any facility owned, or to
the knowledge of the Borrower and its Subsidiaries, leased or operated, either
now or in the past, by the Borrower or any of its Subsidiaries, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended and in effect, or pursuant to any other Environmental Law, or by the
Environmental Protection Agency or by any state, local, municipal or foreign
enforcement agency having jurisdiction over the protection of the environment,
or by any other Person in respect of or under any Environmental Law.
Section 4.08. Taxes. United States federal income tax returns of the
Borrower and its Subsidiaries have been closed through the fiscal year ended
December 31, 1992. The Borrower and its Subsidiaries have filed all United
States federal income tax returns and all other material tax returns which are
required to be filed by them and have paid all taxes due pursuant to such
returns or pursuant to any assessment received by the Borrower or any of its
Subsidiaries other than any such taxes the amount or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with generally accepted accounting
principles have been established. The charges, accruals and reserves on the
books of the Borrower and its Subsidiaries in respect of taxes or other
governmental charges are, in the opinion of the Borrower, adequate.
Section 4.09. Title to and Condition of Properties. As of the
Effective Date (a) the Borrower and its Subsidiaries have good and marketable
title to all of the properties and other assets (real or personal, tangible,
intangible or mixed) they own or purport to own and (b) all leases to which the
Borrower or any of its Subsidiaries is a party as lessee or sublessee are in
full force and effect, except for such defects in title and such invalidity or
unenforceability of leases as, in the aggregate, could not materially adversely
affect the condition (financial or otherwise), earnings, business affairs or
business prospects of the Borrower and its Subsidiaries taken as a whole.
Section 4.10. Not an Investment Company. Neither the Borrower nor
any of its Subsidiaries is an "investment company" or a company "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
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Section 4.11. Full Disclosure. All information heretofore furnished
in writing by the Borrower to the Agent, the Issuing Bank or any Bank or
otherwise to the Banks generally for purposes of or in connection with this
Agreement or any transaction contemplated hereby was true and accurate in all
material respects on the date as of which such information was stated or
certified. The Borrower has disclosed to the Agent, the Issuing Bank and the
Banks in writing any and all facts which materially and adversely affect, or
may so affect (to the extent the Borrower can now reasonably foresee), the
business, operations or financial condition of the Borrower and its
Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower or
any of its Subsidiaries party to any of the Financing Documents to perform its
obligations under any Financing Document to which it is a party.
Section 4.12. Representations in Subsidiary Guaranty and Pledge
Agreement. Each representation and warranty contained in the Subsidiary
Guaranty or the Pledge Agreement is true and correct.
Section 4.13. Existing Letters of Credit. Schedule V hereto
identifies each Existing Letter of Credit outstanding as of November 30, 1996.
ARTICLE 5.
Covenants
The Borrower agrees that, so long as any Bank has any Commitment or
Letter of Credit Exposure hereunder or any amount payable under any Note
remains unpaid:
Section 5.01. Information. The Borrower will deliver to each of the
Banks:
(a) as soon as available and in any event within 90 days after the
end of each fiscal year of the Borrower, consolidated balance sheets of the
Borrower and its Consolidated Subsidiaries as of the end of such fiscal year
and the related consolidated statements of operations, stockholders' equity and
cash flows for such fiscal year, setting forth in each case in comparative form
the figures for the previous fiscal year, all reported on in a manner
acceptable to the Securities and Exchange Commission by Ernst & Young LLP or
other independent public accountants of nationally recognized standing and
certified as to consistency in compliance with Section 1.02 by an Authorized
Financial Officer of the Borrower;
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(b) as soon as available and in any event within 45 days after the
end of each of the first three quarters of each fiscal year of the Borrower,
condensed consolidated balance sheets of the Borrower and its Consolidated
Subsidiaries as of the end of such quarter and the related condensed
consolidated statements of income and cash flows for such quarter and for the
portion of the Borrower's fiscal year ended at the end of such quarter, setting
forth in each case in comparative form the figures for the corresponding
quarter and the corresponding portion of the Borrower's previous fiscal year,
all certified (subject to normal year-end adjustments and condensation pursuant
to the rules of the Securities and Exchange Commission) as to fairness of
presentation and consistency in compliance with Section 1.02 by an Authorized
Financial Officer of the Borrower;
(c) as soon as available and in any event within 30 days after the
end of each calendar month, consolidated balance sheets of the Borrower and its
Consolidated Subsidiaries as of the end of such month and the related
consolidated statements of operations, stockholders' equity and cash flows for
such month and for the portion of the Borrower's fiscal year ending at the end
of such month, setting forth in each case in comparative form the figures for
the corresponding month and the corresponding portion of the Borrower's
previous fiscal year, all certified (subject to normal year-end adjustments) as
to fairness of presentation and consistency in compliance with Section 1.02 by
an Authorized Financial Officer of the Borrower;
(d) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of an
Authorized Financial Officer of the Borrower (i) setting forth in reasonable
detail the calculations required to establish whether the Borrower was in
compliance with the requirements of Sections 5.05, 5.06, 5.07, 5.09, 5.10, 5.11
and 5.13 hereof and Section 5(C) of the Pledge Agreement on the date of such
financial statements, (ii) setting forth in reasonable detail calculations of
the Pricing Ratio as at the date of the balance sheet contained therein and for
the period of four fiscal quarters ending on such date, provided that a
certificate signed by an Authorized Financial Officer of the Borrower setting
forth the information in this clause (ii) will be delivered by February 15,
1997 for the fiscal quarter ending December 31, 1996, and (iii) stating whether
any Default exists on the date of such certificate and, if any Default then
exists, setting forth the details thereof and the action which the Borrower is
taking or proposes to take with respect thereto;
(e) promptly upon the occurrence of any Default, a certificate of
an Authorized Financial Officer of the Borrower setting forth the details
thereof and the action which the Borrower is taking or proposes to take with
respect thereto;
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(f) promptly upon the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents) which the Borrower shall have filed with the Securities and
Exchange Commission;
(h) if and when any member of the ERISA Group (i) provides or is
required to provide notice to the PBGC of any "reportable event" (as defined in
Section 4043 of ERISA) with respect to any Plan which might constitute grounds
for a termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has provided or is required to provide notice of any
such reportable event, a copy of the notice of such reportable event provided
or required to be provided to the PBGC; (ii) receives notice of complete or
partial withdrawal liability under Title IV of ERISA or notice that any
Multiemployer Plan is in reorganization, is insolvent or has been terminated, a
copy of such notice; (iii) receives notice from the PBGC under Title IV of
ERISA of an intent to terminate, impose liability (other than for premiums
under Section 4007 of ERISA) in respect of, or appoint a trustee to administer
any Plan, a copy of such notice; (iv) applies for a waiver of the minimum
funding standards under Section 412 of the Internal Revenue Code with respect
to any Plan, a copy of such application; (v) gives notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and
such other information as is filed with the PBGC in connection therewith; (vi)
gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a
copy of such notice; (vii) receives notice from the PBGC or any plan
administrator of an intent to impose liability on any member of the ERISA Group
with respect to any Other Plan on account of a transaction described in Section
4069 or 4212(c) of ERISA, a copy of such notice; (viii) receives notice from
the PBGC or any plan administrator of an intent to impose liability on any
member of the ERISA Group with respect to any Other Plan on the basis that such
member of the ERISA Group is a member of the "controlled group" with respect to
such Other Plan under Section 412(c)(11) of the Internal Revenue Code or
Section 4001(a)(14) of ERISA, a copy of such notice; or (ix) fails to make any
payment or contribution to any Plan or Multiemployer Plan or makes any
amendment to any Plan which has resulted or could result in the imposition of a
Lien or the posting of a bond or other security under Section 302(f) of ERISA
or Section 401(a)(29) or 412(n) of the Internal Revenue Code, a certificate of
an Authorized Financial Officer of the Borrower setting forth all material and
relevant details as to such occurrence or event and
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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).
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Section 5.04. Inspection of Property, Books and Records. The
Borrower will keep, and will cause each of its Subsidiaries to keep, proper
books of record and account in which full, true and correct entries shall be
made of all dealings and transactions in relation to its business and
activities and will permit, and will cause each such Subsidiary to permit,
representatives of any Bank to visit and inspect any of its properties, to
examine and make abstracts from any of its books and records and to discuss its
affairs, finances and accounts with its officers, employees and independent
public accountants, all at such reasonable times and upon reasonable notice to
the Borrower and as often as may reasonably be desired; provided that (i)
subject to the provisions of Section 9.03(a), the Borrower shall not be
obligated to pay the expenses of the Banks' respective representatives and (ii)
the Borrower will have an opportunity to participate in any discussions that
take place between representatives of any Bank and the Borrower's independent
public accountants.
Section 5.05. Minimum Consolidated Net Worth. Consolidated Net
Worth shall be at least $715,000,000 plus 50% of the aggregate positive
Consolidated Net Income (excluding any consolidated net loss) of the Borrower
and its Consolidated Subsidiaries for each fiscal quarter ending after December
31, 1996.
Section 5.06. Fixed Charge Coverage Ratio. The Fixed Charge Coverage
Ratio at any date shall not be less than the ratio set forth below opposite the
period in which such date falls:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Effective Date through March 30, 1998 . . . . . . . . . . . . . . . . 1.15 to 1.0
March 31, 1998 through March 30, 1999 . . . . . . . . . . . . . . . . 1.25 to 1.0
March 31, 1999 through March 30, 2000 . . . . . . . . . . . . . . . . 1.35 to 1.0
March 31, 2000 through March 30, 2001 . . . . . . . . . . . . . . . . 1.45 to 1.0
March 31, 2001 and thereafter . . . . . . . . . . . . . . . . . . . . 1.50 to 1.0
</TABLE>
Section 5.07. Adjusted Consolidated Debt Ratio. The ratio at any date
of (a) Adjusted Consolidated Debt to (b) Consolidated Net Worth shall not be
more than the ratio set forth below opposite the period in which such date
falls:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Effective Date through December 31, 1997 . . . . . . . . . . . . . . 2.55 to 1.0
January 1, 1998 through December 31, 1998 . . . . . . . . . . . . . . 2.45 to 1.0
January 1, 1999 through December 31, 1999 . . . . . . . . . . . . . . 2.35 to 1.0
January 1, 2000 through December 31, 2000 . . . . . . . . . . . . . . 2.25 to 1.0
January 1, 2001 and thereafter . . . . . . . . . . . . . . . . . . . 2.15 to 1.0
</TABLE>
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Section 5.08. Ownership of Stock of Wholly-Owned Subsidiaries. The
Borrower will at all times maintain, or cause a Wholly-Owned Subsidiary of the
Borrower to maintain, ownership of 100% of each class of voting securities of,
and all other equity securities (except for directors' qualifying shares) in,
each of its Subsidiaries that shall be a Wholly-Owned Subsidiary of the
Borrower on the date hereof and each Person that shall become a Wholly-Owned
Subsidiary of the Borrower after the date hereof, except in each case (i) any
such Wholly-Owned Subsidiary (other than Pharmacy or any of its Subsidiaries)
that shall hereafter be disposed of in its entirety, consolidated or merged
with or into the Borrower or another such Wholly-Owned Subsidiary or liquidated
or (ii) any Subsidiary of Pharmacy that shall hereafter be consolidated or
merged with or into Pharmacy or any Wholly-Owned Subsidiary of Pharmacy or
liquidated, in each case in accordance with the provisions hereof.
Section 5.09. Investments. Neither the Borrower nor any of its
Subsidiaries will make or acquire after the date hereof any Investment in any
Person other than:
(a) Investments in the Borrower or in Persons that are
Subsidiaries of the Borrower on the date hereof;
(b) Investments in Persons that are (i) primarily engaged in the
health-care business and (ii) after the making of such Investment, are
Subsidiaries of the Borrower;
(c) Temporary Cash Investments;
(d) extensions of credit or Guarantees of obligations of one or
more other Persons (other than Encore Nursing Center Partners, Ltd.-85 and
Encore Retirement Partners, Ltd.-85) as an integral part of the financing of
the acquisition, construction, equipping or improving of facilities from which
the Borrower or its Subsidiaries will provide medical or related services;
(e) other miscellaneous Investments related to the acquisition and
financing (in the ordinary course of the Borrower's business) of health-care
facilities through industrial development revenue bonds issued for the benefit
of the Borrower and its Subsidiaries;
(f) capital contributions required to be made by the Borrower to
Beverly Indemnity, Ltd. in accordance with applicable law and insurance
regulations;
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(g) stock, obligations or securities received from nursing home
patients in the ordinary course of business of the Borrower and its
Subsidiaries;
(h) negotiable instruments endorsed for deposit or collection or
similar instruments in the ordinary course of business;
(i) promissory notes and other Investments received as
consideration for facilities sold, provided that the aggregate net book value
of all outstanding Investments permitted by this clause (i) shall not, at any
time, exceed $25,000,000;
(j) Guarantees permitted by Section 5.13;
(k) any Investment made by the Borrower or any of its Subsidiaries
in connection with and as part of a Workout Transaction;
(l) Investments made by the Borrower or any of its Subsidiaries in
one or more Special Purpose Receivables Financing Subsidiaries by means of the
sale of, or the granting of security interests in, Medicare, Medicaid or other
patient accounts receivable owing to the Borrower or such Subsidiary, in either
case to such Special Purpose Receivables Financing Subsidiaries pursuant to a
Receivables Financing Program, provided that the net amount of all uncollected
accounts receivable owing to the Borrower or any of its Subsidiaries that have
been so sold or in which a security interest has been so granted shall not
exceed 200% of the aggregate principal or redemption amount of all Permitted
Receivables Financing Securities then outstanding;
(m) Investments made in Beverly Japan Corporation in an aggregate
amount outstanding at any time not to exceed $10,000,000;
(n) Investments made in Persons that are primarily engaged in the
health-care business, the consideration for which consists exclusively of
common stock of the Borrower or Permitted Preferred Stock; and
(o) any Investment not otherwise permitted by the foregoing
clauses of this Section (other than promissory notes and other Investments
received as consideration for facilities sold) in any Person engaged primarily
in the health-care business if, immediately after such Investment is made or
acquired, the
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aggregate net book value of all such Investments then held by the Borrower or
its Subsidiaries and permitted by this clause (o) does not exceed $75,000,000.
Section 5.10. Restricted Payments on Stock. Neither the Borrower nor
any of its Subsidiaries shall (x) declare or make any dividend payment or other
distribution on any capital stock of the Borrower (other than dividends payable
solely in shares of the Borrower's capital stock) or (y) declare or make any
payment on account of the purchase, redemption, retirement or acquisition of
the Borrower's capital stock; provided that, so long as at the time of and
after giving effect to any such payment no Event of Default shall have occurred
and be continuing,
(i) the Borrower may make any such payment or distribution from
the proceeds of the sale by the Borrower (other than a sale to a Subsidiary of
the Borrower) after the date hereof of its common stock,
(ii) the Borrower may make dividend payments with respect to its
preferred stock (A) from any source in an amount not to exceed $2,500,000 in
any fiscal quarter and (B) from proceeds of the sale by the Borrower (other
than a sale to a Subsidiary of the Borrower) after the date hereof of Permitted
Preferred Stock in any amount,
(iii) the Borrower may make payments on account of the purchase,
redemption, retirement or acquisition of its preferred stock from the proceeds
of the sale by the Borrower (other than a sale to a Subsidiary of the Borrower)
after the date hereof of any Permitted Preferred Stock,
(iv) the Borrower may make odd-lot repurchases of its common stock
for an aggregate consideration not exceeding $10,000 in any calendar year, and
(v) the Borrower may make any such payment or distribution if,
after giving effect thereto, the aggregate amount of all such payments or
distributions made after February 9, 1996 (including, without limitation, any
such payments or distributions permitted under subclause (ii)(A) or clause (iv)
above) does not exceed the sum of $20,000,000 plus 50% of Consolidated Net
Income for the period after December 31, 1995 through the date of such
declaration, payment or distribution.
Nothing in this Section shall prohibit the payment of any dividend or
distribution within 45 days after the declaration thereof if such declaration
was not prohibited by this Section.
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Section 5.11. Negative Pledge. (a) Neither the Borrower nor any of
its Subsidiaries will create, assume or suffer to exist any Lien on any asset
now owned or hereafter acquired by it, except:
(i) Liens existing on the Effective Date securing Debt
and other obligations outstanding on the Effective Date;
(ii) Liens created by the Pledge Agreement;
(iii) any Lien on any asset of any corporation that becomes
a Consolidated Subsidiary of the Borrower after the Effective Date
that exists at the time such corporation becomes such a Consolidated
Subsidiary and (other than in a Workout Transaction) not created in
contemplation thereof;
(iv) any Lien existing on any asset prior to the
acquisition thereof, acquired after the Effective Date by the Borrower
or a Subsidiary of the Borrower and (other than in a Workout
Transaction) not created in contemplation thereof;
(v) any Lien on any asset securing Debt or lease
obligations incurred or assumed for the purpose of financing all or
any part of the cost of acquiring or constructing such asset or
reconstructing substantially all of such asset, provided that such
Lien attaches to such asset concurrently with or within one year after
such acquisition, construction or reconstruction;
(vi) any Lien on any asset securing Debt or lease
obligations incurred or assumed for the purpose of improving or making
any addition to such asset, provided that (A) such Lien attaches to
such asset concurrently with or within one year after the completion
of the improvement thereof or addition thereto and (B) the aggregate
outstanding principal amount of all such Debt incurred after the date
hereof secured by such Liens shall not, at any time, exceed
$30,000,000;
(vii) Liens securing Debt incurred in connection with Lease
Cancellation Payments, provided that the aggregate amount of all such
Debt incurred after the date hereof secured by such Liens shall not,
at any time, exceed $20,000,000;
(viii) Liens securing industrial development revenue bonds
(or securing contingent obligations to issuers of letters of credit
issued to
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support industrial development revenue bonds) arising in connection
with the conversion of the interest rate on such bonds from floating
to long-term fixed rates or from fixed rates to other long-term fixed
rates;
(ix) any Lien arising out of the refinancing, extension,
renewal or refunding of any Debt secured by any Lien permitted by any
of the foregoing clauses of this Section, provided that the principal
amount of such Debt is not increased and such Debt is not secured by
any additional assets other than assets that relate directly to the
facility subject to the original financing;
(x) Liens on Medicare, Medicaid or other patient accounts
receivable of the Borrower or any of its Subsidiaries, or on Permitted
Receivables Financing Securities, granted to secure Permitted
Receivables Financing Securities, provided that the net amount of all
uncollected accounts receivable owing to the Borrower or any of its
Subsidiaries over which such a Lien is granted, together, without
duplication, with the net amount of all uncollected accounts
receivable owing to the Borrower or any of its Subsidiaries that are
assigned to secure such Permitted Receivables Financing Securities,
shall not exceed, at any time, 200% of the aggregate principal or
redemption amount of all Permitted Receivables Financing Securities
then outstanding;
(xi) Liens incidental to the conduct of its business or
the ownership of its assets which (A) do not secure Debt or
Derivatives Obligations and (B) do not in the aggregate materially
detract from the value of its assets or materially impair the use
thereof in the operation of its business;
(xii) Liens on cash and cash equivalents securing
Derivatives Obligations, provided that the aggregate amount of cash
and cash equivalents subject to such Liens may at no time exceed
$10,000,000;
(xiii) Liens on nursing homes and related real estate
improvements and equipment ("Mortgage Assets") given in substitution
for Liens on Mortgage Assets existing on the date hereof or for Liens
on Mortgage Assets incurred pursuant to this clause (xiii) or clause
(xiv) below, provided that the sum of (A) the excess of the Appraised
Value of all Mortgage Assets subjected to Liens pursuant to this
clause (xiii) over the Appraised Value of all such Mortgage Assets
released from Liens on or after the date hereof and (B) all Debt
incurred after the date hereof and
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secured by Liens permitted under clause (xiv) below shall not at any
time exceed $75,000,000; and
(xiv) Liens not otherwise permitted under clauses (i)
through (xiii) of this Section, provided that the sum of the amounts
set forth in subclause (A) of clause (xiii) above and the aggregate
principal amount of all Debt incurred after the date hereof and
secured by Liens permitted under this clause (xiv) shall not at any
time exceed $75,000,000.
(b) The Borrower will not permit Pharmacy or any of its
Subsidiaries to create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it, except (i) Liens permitted by clauses (i),
(ii), (iii), (iv), (ix) (to the extent that it relates to the extension,
renewal or refunding of Debt secured by any such Liens) and (xi) of Section
5.11(a) above, (ii) Liens on telephone, computer or other office equipment
securing indebtedness incurred to finance such equipment, provided that the
aggregate principal amount of Debt secured by Liens permitted under this clause
(ii) shall not exceed $15,000,000, and (iii) Liens not otherwise permitted
under this subsection, provided that the aggregate principal amount of all Debt
secured by Liens permitted under this clause (iii) shall not at any time exceed
$5,000,000.
Section 5.12. Consolidations, Mergers and Sales of Assets. (a)
Neither the Borrower nor any of its Subsidiaries will (i) consolidate or merge
with or into any other Person, unless the Borrower or, except in the case of a
merger or consolidation to which the Borrower is a party, a Wholly-Owned
Subsidiary of the Borrower is the surviving corporation, (ii) sell, lease or
otherwise transfer all or any substantial part of the assets of the Borrower
and its Subsidiaries, taken as a whole, to any other Person or (iii) sell,
lease, transfer or otherwise dispose of any Pledged Stock, provided that (A)
this Section shall not apply to mergers, dissolutions, reorganizations or
liquidations of Subsidiaries of the Borrower that have disposed of all or
substantially all of their assets and (B) the Borrower and its Subsidiaries
(other than Pharmacy or any of its Subsidiaries) may assign or grant security
interests in their Medicare, Medicaid or other patient accounts receivable to a
Special Purpose Receivables Financing Subsidiary to secure Permitted
Receivables Financing Securities (provided that the net amount at any time of
all uncollected accounts receivable owing to the Borrower or any of its
Subsidiaries that are so assigned or in which a security interest is so granted
shall not exceed 200% of the aggregate principal or redemption amount of all
Permitted Receivables Financing Securities then outstanding).
(b) The Borrower will not permit Pharmacy or any of its
Subsidiaries to (i) consolidate or merge with or into any other Person, unless
Pharmacy or, except
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in the case of a merger or consolidation to which Pharmacy is a party, a
Wholly-Owned Subsidiary of Pharmacy is the surviving corporation or (ii) sell,
lease or otherwise transfer all or any substantial part of its assets to any
Person other than Pharmacy or any of its Wholly-Owned Subsidiaries that is an
Issuer (as defined in the Pledge Agreement).
Section 5.13. Incurrence of Debt. (a) The Borrower will not permit
any of its Subsidiaries to incur, assume or suffer to exist any Debt, except:
(i) Debt outstanding on the date hereof and included in
the Base Financials or listed in Schedule III hereto;
(ii) Debt incurred after the date hereof in connection
with Lease Cancellation Payments, provided that the aggregate
principal amount of all such Debt outstanding at any time shall not
exceed $20,000,000;
(iii) Debt secured by a Lien permitted pursuant to clause
(iv) of Section 5.11(a);
(iv) Debt of any corporation that becomes a Consolidated
Subsidiary of the Borrower after the Effective Date that exists at the
time such corporation becomes such a Consolidated Subsidiary and
(other than in a Workout Transaction) not created in contemplation
thereof;
(v) Debt ("Refinancing Debt") incurred to refinance Debt
("Refinanced Debt") permitted under clauses (i) through (iv) above,
provided that (A) the principal amount of such Refinancing Debt shall
not exceed the principal amount of such Refinanced Debt and (B) such
Refinancing Debt shall have a weighted average life of not less than
the remaining weighted average life of such Refinanced Debt or such
Refinancing Debt shall not have any required payments of principal
prior to the first anniversary of the Termination Date;
(vi) Permitted Receivables Financing Securities, provided
that the aggregate principal and redemption amount of all Permitted
Receivables Financing Securities outstanding at any time shall not
exceed $150,000,000;
(vii) Debt incurred under the Financing Documents;
(viii) Guarantees by any Subsidiary of the Borrower of any
obligation of the Borrower or any of its other Subsidiaries that such
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guaranteeing Subsidiary would have been permitted to incur hereunder
as a primary obligation;
(ix) Debt consisting of advances from the Borrower or any
of its Subsidiaries in connection with the normal operation of the
business of the Borrower and its Subsidiaries;
(x) Debt incurred in connection with and as part of a
Workout Transaction;
(xi) Debt incurred or assumed for the purpose of financing
the cost of acquiring, constructing or improving an asset of the
Borrower or any of its Subsidiaries;
(xii) Permitted Preferred Stock; and
(xiii) Debt not otherwise permitted under clauses (i)
through (xii) of this Section, provided that the aggregate principal
amount of all Debt permitted under this clause (xiii) shall not at any
time exceed $75,000,000.
(b) The Borrower will not permit Pharmacy or any of its
Subsidiaries to incur, assume or suffer to exist Debt, except (i) Debt
permitted under clauses (i), (iii), (iv), (v) (to the extent the Refinanced
Debt referred to therein is Debt referred to in clauses (i), (iii) and (iv)),
(vii) and (ix) of subsection 5.13(a) above, (ii) Debt incurred to finance the
acquisition of telephone, computer and other office equipment, provided that
the aggregate outstanding principal amount of all Debt permitted under this
clause (ii) shall not at any time exceed $15,000,000, (iii) Guarantees by
Pharmacy or any of its Subsidiaries of any obligation of the Borrower or any of
its Subsidiaries that Pharmacy or such guaranteeing Subsidiary would have been
permitted to incur as a primary obligation under clause (i) of this subsection
(b), and (iv) Debt not otherwise permitted under this subsection (b), provided
that the aggregate outstanding principal amount of all Debt permitted under
this clause (iv) shall not at any time exceed $5,000,000.
Section 5.14. Use of Proceeds and Letters of Credit. The Letters of
Credit issued (or deemed issued), and the proceeds of the Loans made, under
this Agreement will be used for (i) the repayment or prepayment of loans made
under the Existing Credit Agreement, the Nippon Credit Agreement and the LTCB
Credit Agreement and (ii) general corporate purposes. None of such proceeds
will be used, directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of buying or carrying any "margin stock" within the
meaning of Regulation U.
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Section 5.15. Additional Subsidiary Guarantors. The Borrower agrees
to cause each Person, other than a Special Purpose Receivables Financing
Subsidiary, that shall, at any time after the date hereof, become a
Wholly-Owned Subsidiary of the Borrower to enter into the Subsidiary Guaranty.
Section 5.16. Lease Conversions. The Borrower will not, and will not
permit any of its Subsidiaries to, make any Lease Conversion in any calendar
year unless:
(i) the aggregate consideration paid or to be paid by the
Borrower and its Subsidiaries in connection with the termination of
leases or the acquisition of facilities and related property pursuant
to such Lease Conversion and all other Lease Conversions made during
such calendar year would not exceed $100,000,000; and
(ii) to the extent such Lease Conversion is financed or
will be financed with Debt of the Borrower or any of its Subsidiaries,
such Debt is incurred within one year of such Lease Conversion.
Section 5.17. Transactions with Affiliates. The Borrower will not,
after the date hereof, and will not permit any of its Subsidiaries to, after
the date hereof, enter into any transaction or arrangement with any Affiliate
(including, without limitation, the purchase from, sale to or exchange of
property with, or the rendering of any service by or for, any Affiliate),
except in the ordinary course of and pursuant to the reasonable requirements of
the Borrower's or such Subsidiary's (as the case may be) business and upon fair
and reasonable terms no less favorable to the Borrower or such Subsidiary than
would be obtained in a comparable arm's-length transaction with a Person other
than an Affiliate.
ARTICLE 6.
Defaults
Section 6.01. Events of Defaults. If one or more of the following
events ("Events of Default") shall have occurred and be continuing:
(a) the Borrower shall fail to pay (i) on the date when due any
principal of any Loan or any Reimbursement Obligation or (ii) within five
Domestic Business Days after the date when due any interest on any Loan or
Reimbursement Obligation or any fees, commissions or other amounts payable
hereunder;
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(b) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.05, 5.06, 5.07, 5.10, 5.12, 5.13, 5.14 or 5.16;
(c) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.08, 5.09, 5.11 or 5.15 for 10 days after the Borrower
shall have obtained actual knowledge of such failure or after written notice
thereof has been given to the Borrower by the Agent at the request of any Bank;
(d) the Borrower or any Subsidiary Guarantor shall fail to observe
or perform any covenant or agreement contained herein or in the Subsidiary
Guaranty (other than those covered by clause (a), (b) or (c) above) for 30 days
after written notice thereof has been given to the Borrower by the Agent at the
request of any Bank;
(e) any representation, warranty, certification or statement made
by the Borrower or any of its Subsidiaries in any Financing Document or in any
certificate, financial statement or other document delivered pursuant to any
Financing Document shall prove to have been incorrect in any material respect
when made (or deemed made);
(f) the Borrower or any of its Subsidiaries shall fail to make any
payment in respect of any Material Financial Obligations when due or, if later,
within any applicable grace period;
(g) (i) any event or condition shall occur which results in the
acceleration of the maturity, or requires the early redemption or prepayment,
of any Material Financial Obligations or any event or condition shall occur and
be continuing which enables (or, with the giving of notice or lapse of time or
both, would enable) the holder of any Material Financial Obligations or any
Person acting on such holder's behalf to accelerate the maturity, or require
the early redemption or prepayment, of such Material Financial Obligations
(unless such event or condition shall have been waived and any acceleration or
required redemption or prepayment rescinded), provided that the fact that the
interest paid on any industrial development revenue bonds ceases to be exempt
from federal income taxation shall not constitute an Event of Default under
this subsection (g) unless such industrial development revenue bonds are
accelerated, redeemed or prepaid or the aggregate principal amount of
industrial development revenue bonds subject to acceleration or early
redemption or prepayment as a result of such event or condition shall be at
least $15,000,000 or (ii) any event or condition constituting a default or
event of default under the agreement, instrument or other document relating
thereto shall occur which results in the termination of any
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Material Commitment or any such event or condition shall occur and be
continuing which enables (or with the giving of notice or lapse of time or
both, would enable) the provider of any Material Commitment or any Person
acting on such provider's behalf to require the early termination of such
Material Commitment (unless such event or condition shall have been waived and
any termination rescinded);
(h) the Borrower or any Material Subsidiary (or any combination of
Subsidiaries that, if treated as a single Subsidiary, would at such time
constitute a Material Subsidiary) shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now
or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part
of its property, or shall consent to any such relief or to the appointment of
or taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall take any corporate action to authorize any of the foregoing;
(i) an involuntary case or other proceeding shall be commenced
against the Borrower or any Material Subsidiary (or any combination of
Subsidiaries that, if treated as a single Subsidiary, would at such time
constitute a Material Subsidiary) seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against the Borrower or any Material Subsidiary (or any
combination of Subsidiaries that, if treated as a single Subsidiary, would at
such time constitute a Material Subsidiary) under the federal bankruptcy laws
as now or hereafter in effect;
(j) (i) any member of the ERISA Group shall fail to pay when due
an amount or amounts aggregating in excess of $1,000,000 which it shall have
become liable to pay under Title IV of ERISA; or (ii) notice of intent to
terminate a Material Plan shall be filed under Title IV of ERISA by any member
of the ERISA Group, any plan administrator or any combination of the foregoing;
or (iii) any member of the ERISA Group has been notified in writing that the
PBGC has instituted proceedings under Title IV of ERISA to terminate, to impose
liability (other than for premiums under Section 4007 of ERISA) in respect of,
or to cause a trustee to be appointed to administer any Material Plan; or (iv)
a condition shall
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exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or (v) any of the
events described in clause (iii) above shall occur with respect to any Other
Plan or Other Plans (other than a multiemployer plan within the meaning of
Section 4001(a)(3) of ERISA) (A) that have aggregate Unfunded Liabilities in
excess of $1,000,000 and (B) with respect to which either (1) one or more
members of the ERISA Group have engaged in a transaction or transactions
described in Section 4069 of ERISA or (2) one or more members of the ERISA
Group is a member of the "controlled group" under Section 412(c)(11) of the
Internal Revenue Code or Section 4001(a)(14) of ERISA; or (vi) there shall
occur a complete or partial withdrawal from, or a default, within the meaning
of Section 4219(c)(5) of ERISA, with respect to, one or more (A) multiemployer
plans, within the meaning of Section 4001(a)(3) of ERISA (which plans are not
Multiemployer Plans), with respect to which a member of the ERISA Group shall
have engaged, within the previous five plan years, in a transaction described
in Section 4212(c) of ERISA, or (B) Multiemployer Plans, which could reasonably
be expected to result in the incurrence by one or more members of the ERISA
Group of a current payment obligation in excess of $1,000,000; provided that no
Event of Default shall occur under clause (v) or (vi) if (A) the Unfunded
Liabilities of the Other Plans in respect of which events described in clause
(v) have occurred, together with the current payment obligations that could
reasonably be expected to result from complete or partial withdrawals or
defaults described in clause (vi), shall not exceed $2,500,000 and (B) each
member of the ERISA Group that could reasonably be expected to be liable for
such Unfunded Liabilities or current payment obligations is diligently
contesting, in good faith, by appropriate proceedings, the imposition of such
liabilities or obligations;
(k) the Borrower or any of the Borrower's Subsidiaries party
thereto shall fail to observe or perform any of its obligations under the
Pledge Agreement;
(l) (i) one or more judgments or orders for the payment, in the
aggregate, of money in excess of $20,000,000 shall be rendered against the
Borrower or any of its Subsidiaries and such judgments or orders shall continue
unsatisfied and unstayed for a period of 30 days or (ii) one or more judgments
or orders shall be rendered against the Borrower or any of its Subsidiaries,
which judgments or orders shall be stayed on condition that a bond or
collateral equal to or greater than, in the aggregate, $250,000,000 be posted
or provided, and such judgments or orders shall not be overturned or lifted
within a period of 10 days;
(m) any person or group of persons (within the meaning of Section
13 or 14 of the Securities Exchange Act of 1934, as amended) shall have
acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by
the
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Securities and Exchange Commission under said Act) of 25% or more of the
outstanding shares of common stock of the Borrower; or
(n) the Pledge Agreement shall at any time after the Effective
Date, for any reason (other than solely due to actions taken by the Agent or
any Bank) fail to create perfected Liens in favor of the Secured Parties on the
Collateral, securing all of the Secured Obligations purported to be secured
thereby, subject to no other Liens other than Liens permitted under Section
5.11(a)(xi) as to which the Liens created under the Pledge Agreement have
priority;
then, and in every such event, the Agent shall (i) if requested by Banks having
more than 66 2/3% in aggregate amount of the Commitments, by notice to the
Borrower terminate the Commitments and they shall thereupon terminate, and (ii)
if requested by Banks holding more than 66 2/3% of the sum of (A) the aggregate
principal amount of the Loans and (B) the aggregate Letter of Credit Exposures,
by notice to the Borrower declare the Notes and any Reimbursement Obligations
(together with accrued interest thereon and all fees, commissions and other
amounts payable by the Borrower hereunder) to be, and the same shall thereupon
become, immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Borrower;
provided that in the case of any of the Events of Default specified in clause
(h) or (i) above with respect to the Borrower, without any notice to the
Borrower or any other act by the Agent or the Banks, the Commitments shall
thereupon terminate and the Notes and any Reimbursement Obligations (together
with accrued interest thereon and all fees, commissions and other amounts
payable by the Borrower hereunder) shall become immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Borrower.
Section 6.02. Notice of Default. The Agent shall give notice to the
Borrower under Section 6.01(c) or 6.01(d) promptly upon being requested to do
so by any Bank and shall thereupon notify all the Banks and the Issuing Bank
thereof.
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ARTICLE 7.
The Agent
Section 7.01. Appointment and Authorizations. Each Bank irrevocably
appoints and authorizes the Agent to take such action as agent on its behalf
and to exercise such powers under the Financing Documents as are delegated to
the Agent by the terms thereof, together with all such powers as are reasonably
incidental thereto.
Section 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of
New York shall have the same rights and powers under the Financing Documents as
any other Bank and may exercise or refrain from exercising the same as though
it were not the Agent or the Issuing Bank, and Morgan Guaranty Trust Company of
New York and its affiliates may accept deposits from, lend money to, and
generally engage in any kind of business with the Borrower or any Subsidiary or
affiliate of the Borrower as if it were not the Agent or the Issuing Bank
hereunder.
Section 7.03. Action by Agent. The obligations of the Agent
hereunder are only those expressly set forth herein. Without limiting the
generality of the foregoing, the Agent shall not be required to take any action
with respect to any Default, except as expressly provided in Article 6.
Section 7.04. Consultation with Experts. The Agent may consult with
legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.
Section 7.05. Liability of Agent. Neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken
or not taken by it in connection herewith (a) with the consent or at the
request of the Required Banks or (b) in the absence of its own gross negligence
or willful misconduct. Neither the Agent nor any of its directors, officers,
agents or employees shall be responsible for or have any duty to ascertain,
inquire into or verify (i) any statement, warranty or representation made in
connection with the Financing Documents or any borrowing or letter of credit
hereunder, (ii) the performance or observance of any of the covenants or
agreements of the Borrower or any of its Subsidiaries party to any Financing
Document, (iii) the satisfaction of any condition specified in Article 3,
except receipt of items required to be delivered to the Agent, or (iv) the
validity, effectiveness or genuineness of any Financing Document or any other
instrument or writing furnished in connection therewith. The Agent shall not
incur any liability by acting in reliance upon any
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notice, consent, certificate, statement, or other writing (which may be a bank
wire, telex, facsimile transmission or similar writing) believed by it to be
genuine or to be signed by the proper party or parties.
Section 7.06. Indemnification. Each Bank shall, ratably in
accordance with its Total Exposure, indemnify the Agent (to the extent not
reimbursed by the Borrower) against any cost, expense (including counsel fees
and disbursements), claim, demand, action, loss or liability (except such as
result from the Agent's gross negligence or willful misconduct) that the Agent
may suffer or incur in connection with any Financing Document or any action
taken or omitted by the Agent hereunder or thereunder.
Section 7.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent, the Issuing Bank or any
other Bank, and based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement. Each Bank also acknowledges that it will, independently and without
reliance upon the Agent, the Issuing Bank or any other Bank, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking any action under this
Agreement.
Section 7.08. Successor Agent. The Agent may resign at any time,
effective upon the appointment of a successor Agent and such successor Agent's
acceptance of such appointment, by giving written notice thereof to the Banks,
the Issuing Bank and the Borrower. Upon the giving of any such notice of
resignation, the Required Banks (with, unless an Event of Default shall have
occurred and be continuing, the written consent of the Borrower (which shall
not be unreasonably withheld)) shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Required
Banks, and shall have accepted such appointment, within 30 days after the
retiring Agent gives notice of resignation, then the retiring Agent may, on
behalf of the Banks, appoint a successor Agent, which shall be a commercial
bank organized or licensed under the laws of the United States of America or of
any State thereof and having a combined capital and surplus of at least
$1,000,000,000. Upon the acceptance of its appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After the
effectiveness of any retiring Agent's resignation hereunder as Agent, the
provisions of this Article shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent.
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Section 7.09. Agent's Fee. The Borrower shall pay to the Agent for
its own account fees in the amounts and at the times previously agreed upon
between the Borrower and the Agent.
ARTICLE 8.
Change in Circumstances
Section 8.01. Basis for Determining Interest Rate Inadequate or
Unfair. If on or prior to the first day of any Interest Period for any Fixed
Rate Loan:
(a) the Agent is advised by the Reference Banks that deposits in
dollars (in the applicable amounts) are not being offered to the Reference
Banks in the relevant market for such Interest Period, or
(b) Banks having 50% or more of the aggregate principal amount of
the affected Loans advise the Agent that the Adjusted CD Rate or the Adjusted
London Interbank Offered Rate, as the case may be, as determined by the Agent
will not adequately and fairly reflect the cost to such Banks of funding their
CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period,
the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, (i) the obligations of the Banks to
make CD Loans or Euro-Dollar Loans, as the case may be, or to convert
outstanding Loans into CD Loans or Euro-Dollar Loans shall be suspended and
(ii) each outstanding CD Loan or Euro-Dollar Loan shall be converted into a
Base Rate Loan on the last day of the then current Interest Period applicable
thereto. Unless the Borrower notifies the Agent at least two Domestic Business
Days before the date of any Fixed Rate Borrowing for which a Notice of
Borrowing has previously been given that it elects not to borrow on such date,
such Borrowing shall instead be made as a Base Rate Borrowing.
Section 8.02. Illegality. If, on or after the date of this
Agreement, the adoption of any applicable law, rule or regulation, or any
change therein, or any change in the interpretation or administration thereof
by any governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by any Bank (or its
Euro-Dollar Lending Office) with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar
Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank
shall so notify the Agent, the Agent shall forthwith give notice thereof to the
other Banks and the Borrower,
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whereupon until such Bank notifies the Borrower and the Agent that the
circumstances giving rise to such suspension no longer exist, the obligation of
such Bank to make Euro-Dollar Loans, or to convert outstanding Domestic Loans
into Euro-Dollar Loans, shall be suspended. Before giving any notice to the
Agent pursuant to this Section, such Bank shall designate a different
Euro-Dollar Lending Office if such designation will avoid the need for giving
such notice and will not, in the judgment of such Bank, be otherwise
disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan
of such Bank then outstanding shall be converted to a Base Rate Loan either (a)
on the last day of the then current Interest Period applicable to such
Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such
Loan to such day or (b) immediately if such Bank shall determine that it may
not lawfully continue to maintain and fund such Loan to such day.
Section 8.03. Increased Cost and Reduced Return.
(a) If on or after the date hereof the adoption of any applicable
law, rule or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or its Applicable Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency:
(i) shall subject any Bank (or its Applicable Lending
Office) to any tax, duty or other charge with respect to its Fixed
Rate Loans, its Note or its obligation to make Fixed Rate Loans, or
shall change the basis of taxation of payments to any Bank (or its
Applicable Lending Office) of the principal of or interest on its
Fixed Rate Loans or any other amounts due under this Agreement in
respect of its Fixed Rate Loans or its obligation to make Fixed Rate
Loans (except for changes in the rate of tax on the overall net income
of such Bank or its Applicable Lending Office imposed by the
jurisdiction in which such Bank's principal executive office or
Applicable Lending Office is located); or
(ii) shall impose, modify or deem applicable any reserve,
special deposit or similar requirement (including, without limitation,
any such requirement imposed by the Board of Governors of the Federal
Reserve System, but excluding (A) with respect to any CD Loan any such
requirement included in an applicable Domestic Reserve Percentage or
Assessment Rate and (B) with respect to any Euro-Dollar Loan any such
requirement included in a Euro-Dollar Reserve Percentage) against
assets
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<PAGE> 73
of, deposits with or for the account of, or credit extended by, any
Bank (or its Applicable Lending Office) or shall impose on any Bank
(or its Applicable Lending Office) or on the United States market for
certificates of deposit or the London interbank market any other
condition affecting its Fixed Rate Loans, its Note or its obligation
to make Fixed Rate Loans;
and the result of any of the foregoing is to increase the cost to such Bank (or
its Applicable Lending Office) of making or maintaining any Fixed Rate Loan or
to reduce the amount of any sum received or receivable by such Bank (or its
Applicable Lending Office) under this Agreement or under its Note with respect
thereto, by an amount deemed by such Bank to be material, then, within 15 days
after demand by such Bank (with a copy to the Agent), the Borrower shall pay to
such Bank such additional amount or amounts as will compensate such Bank for
such increased cost or reduction.
(b) If, after the date hereof, the adoption of any applicable law,
rule or regulation, or any change therein, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Issuing Bank or any Bank with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency shall either (i) impose, modify or deem applicable any
reserve, special deposit or similar requirement (including, without limitation,
any such requirement imposed by the Board of Governors of the Federal Reserve
System) against letters of credit issued by the Issuing Bank or participations
in letters of credit by any Bank or (ii) impose on the Issuing Bank or any Bank
any other condition (including, without limitation, any assessment for federal
deposit insurance) regarding any Letter of Credit, the Issuing Bank's
obligation to issue any Letter of Credit or any Bank's obligation to pay the
Issuing Bank its ratable share of any drawing under any Letter of Credit, and
the result of any event referred to in clause (i) or (ii) of this subsection is
to increase the cost to the Issuing Bank or such Bank of issuing or maintaining
any Letter of Credit or participating therein or making any payment under any
Letter of Credit (which increase in cost shall be determined on the basis of
the Issuing Bank's or such Bank's reasonable allocation of the aggregate of
such cost increases resulting from such events), then, within 15 days after
demand by the Issuing Bank or such Bank (with a copy to the Agent), the
Borrower shall pay to the Issuing Bank or such Bank such additional amount or
amounts as will compensate the Issuing Bank or such Bank for such increased
cost.
(c) If any Bank shall have determined that, after the date hereof,
the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change therein, or any change in the interpretation or
administration thereof
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<PAGE> 74
by any governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or any request or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on capital of such Bank (or its Parent) as a
consequence of such Bank's obligations hereunder or under or with respect to
the Letters of Credit (including any participation therein) to a level below
that which such Bank (or its Parent) could have achieved but for such adoption,
change, request or directive (taking into consideration its policies with
respect to capital adequacy) by an amount deemed by such Bank to be material,
then from time to time, within 15 days after demand by such Bank (with a copy
to the Agent), the Borrower shall pay to such Bank such additional amount or
amounts as will compensate such Bank (or its Parent) for such reduction.
(d) Each of the Issuing Bank and the Banks will promptly notify
the Borrower and the Agent of any event of which it has knowledge, occurring
after the date hereof, which will entitle such Bank to compensation pursuant to
this Section. Each Bank will designate a different Applicable Lending Office
if such designation will avoid the need for, or reduce the amount of, such
compensation and will not, in its judgment, be otherwise disadvantageous to it.
A certificate of the Issuing Bank or any Bank claiming compensation under this
Section and setting forth in reasonable detail an explanation of the basis for
requesting such compensation and stating the additional amount or amounts to be
paid to it hereunder shall be conclusive in the absence of manifest error. In
determining such amount, the Issuing Bank or such Bank may use any reasonable
averaging and attribution methods.
Section 8.04. Base Rate Loans Substituted for Affected Fixed Rate
Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans
has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded
compensation under Section 8.03(a) with respect to its CD Loans or Euro-Dollar
Loans or its obligation to make CD Loans or Euro-Dollar Loans and the Borrower
shall, by at least five Euro-Dollar Business Days' prior notice to such Bank
through the Agent, have elected that the provisions of this Section shall apply
to such Bank, then, unless and until such Bank notifies the Borrower that the
circumstances giving rise to such suspension or demand for compensation no
longer apply:
(a) all Loans which would otherwise be made by such Bank as (or
continued as or converted to) CD Loans or Euro-Dollar Loans, as the case may
be, shall instead be made as (or continued as or, effective (i) on the last day
of the then current Interest Period applicable thereto unless clause (b) of the
last
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<PAGE> 75
sentence of Section 8.02 shall apply or (ii) immediately upon the giving of
notice referred to in such sentence if such clause (b) shall apply, converted
to) Base Rate Loans (on which interest and principal shall be payable
contemporaneously with the related Fixed Rate Loans of the other Banks), and
(b) after each of its CD Loans or Euro-Dollar Loans, as the case
may be, has been repaid (or converted to a Base Rate Loan), all payments of
principal which would otherwise be applied to repay such Fixed Rate Loans shall
be applied to repay its Base Rate Loans instead.
If such Bank notifies the Borrower that the circumstances giving rise to such
notice no longer apply, the principal amount of each such Base Rate Loan shall
be converted into a CD Loan or a Euro-Dollar Loan, as the case may be, on the
first day of the next succeeding Interest Period applicable to the related CD
Loans or Euro-Dollar Loans of the other Banks.
ARTICLE 9.
Miscellaneous
Section 9.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including bank wire, telex,
facsimile transmission or similar writing) and shall be given to such party:
(x) in the case of the Borrower, the Issuing Bank or the Agent, at its address
or telex or facsimile transmission number set forth on the signature pages
hereof, (y) in the case of any Bank, at its address or telex or facsimile
transmission number set forth in its Administrative Questionnaire or (z) in the
case of any party, at such other address or telex or facsimile transmission
number as such party may hereafter specify for the purpose by notice to the
Agent and the Borrower. Each such notice, request or other communication shall
be effective (i) if given by telex, when such telex is transmitted to the telex
number specified in or pursuant to this Section and the appropriate answerback
is received, (ii) if given by facsimile transmission, when such facsimile is
transmitted to the facsimile transmission number specified in or pursuant to
this Section and telephonic confirmation of receipt thereof is received, (iii)
if given by mail, 72 hours after such communication is deposited in the mails
with first class postage prepaid, addressed as aforesaid or (iv) if given by
any other means, when delivered at the address specified in or pursuant to this
Section; provided that notices to the Agent or the Issuing Bank under Article 2
or Article 8 shall not be effective until received.
Section 9.02. No Waivers. No failure or delay by the Agent, the
Issuing Bank or any Bank in exercising any right, power or privilege under any
Financing Document shall operate as a waiver thereof nor shall any single or
partial exercise
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thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.
Section 9.03. Expenses; Documentary Taxes; Indemnification. (a) The
Borrower shall pay (i) all out-of-pocket expenses of the Agent and the Issuing
Bank, including reasonable fees and disbursements of any special counsel to the
Agent, in connection with the preparation of the Financing Documents, any
waiver or consent thereunder or any amendment thereof or any Default or alleged
Default thereunder and (ii) if an Event of Default occurs, all out-of-pocket
expenses incurred by the Agent, the Issuing Bank or any Bank, including
reasonable fees and disbursements of counsel, including in-house counsel, in
connection with such Event of Default and collection, bankruptcy, insolvency
and other enforcement proceedings resulting therefrom. The Borrower shall
indemnify each Bank, the Agent and the Issuing Bank against (A) any transfer
taxes, documentary taxes, assessments or charges made by any governmental
authority by reason of the execution and delivery of the Financing Documents
and (B) all costs, expenses and taxes, assessments or other charges incurred in
connection with any filing, registration, recording or perfection of any Lien
contemplated by any of the Financing Documents or any document referred to
therein or the filing or recording of any termination statement with respect to
the release of any Lien on any Collateral.
(b) The Borrower agrees to indemnify the Agent, each Bank and the
Issuing Bank and hold the Agent, each Bank and the Issuing Bank harmless from
and against any and all liabilities, losses, damages, costs and expenses of any
kind, including, without limitation, the reasonable fees and disbursements of
counsel, which may be incurred by the Agent, any Bank or the Issuing Bank in
connection with any investigative, administrative or judicial proceeding
(whether or not the Agent, such Bank or the Issuing Bank shall be designated a
party thereto) relating to or arising out of the Financing Documents or any
actual or proposed use of Letters of Credit or proceeds of Loans hereunder;
provided that neither the Agent nor the Issuing Bank or any Bank shall have the
right to be indemnified hereunder for its own gross negligence or willful
misconduct as determined by a court of competent jurisdiction.
Section 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall,
by exercising any right of set-off or counterclaim or otherwise, receive
payment of a proportion of the aggregate amount of principal and interest due
with respect to any Note held by it and its participation in any Reimbursement
Obligation and interest (if any) thereon (collectively, its "Relevant Debt")
which is greater than the proportion received by any other Bank in respect of
the Relevant Debt of such
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<PAGE> 77
other Bank, the Bank receiving such proportionately greater payment shall
purchase such participations in the Relevant Debt of the other Banks, and such
other adjustments shall be made, as may be required so that all such payments
with respect to the Relevant Debt of the Banks shall be shared by the Banks pro
rata; provided that nothing in this Section shall impair the right of any Bank
to exercise any right of set-off or counterclaim it may have and to apply the
amount subject to such exercise to the payment of indebtedness of the Borrower
other than its Relevant Debt. The Borrower agrees, to the fullest extent it
may effectively do so under applicable law, that any holder of a participation
in a Note or Reimbursement Obligation, whether or not acquired pursuant to the
foregoing arrangements, may exercise rights of set-off or counterclaim and
other rights with respect to such participation as fully as if such holder of a
participation were a direct creditor of the Borrower in the amount of such
participation.
Section 9.05. Amendments and Waivers. Any provision of this Agreement
or the Notes may be amended or waived if, but only if, such amendment or waiver
is in writing and is signed by the Borrower and the Required Banks (and, if the
rights or duties of the Issuing Bank or the Agent are affected thereby, by the
Agent or the Issuing Bank, as the case may be); provided that no such amendment
or waiver shall, unless signed by all the Banks, (i) increase or decrease any
Commitment of any Bank (except for a ratable decrease in the Commitments of all
Banks) or subject any Bank to any additional obligation, (ii) reduce the
principal of or the rate of interest on any Loan or Reimbursement Obligation or
any commissions or fees hereunder, (iii) postpone the date fixed pursuant to
Section 2.05, 2.06, 2.07, 2.08 or 2.10 for any payment of principal of or
interest on any Loan or Reimbursement Obligation or any commissions or fees
hereunder or for the termination of any Commitment, (iv) agree to release all
or substantially all of the Collateral, (v) release any Material Subsidiary
from its obligations under the Subsidiary Guaranty (other than pursuant to the
terms thereof) or (vi) change the percentage of the Commitments, the aggregate
unpaid principal amount of the Notes or the Loans or of the aggregate Letter of
Credit Exposures, or the number of Banks, which shall be required for the Banks
or any of them to take any action under this Section or any other provision of
this Agreement.
Section 9.06. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrower may not
assign or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of all Banks.
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(b) Any Bank may, without the consent of the Borrower, the Agent
or the Issuing Bank, upon notice to the Borrower, the Agent and, if any
participating interest in any Letter of Credit or Commitment is to be so
granted, the Issuing Bank, grant to one or more banks or other institutions
(each a "Participant") participating interests in its Commitments or any or all
of its Loans or its participations in Letters of Credit; provided that each
participating interest shall represent an aggregate interest therein of at
least $1,000,000. In the event of any such grant by a Bank of a participating
interest to a Participant, whether or not upon notice to the Borrower, the
Agent and the Issuing Bank, such Bank shall remain responsible for the
performance of its obligations hereunder, and the Borrower, the Agent and the
Issuing Bank shall continue to deal solely and directly with such Bank in
connection with such Bank's rights and obligations under this Agreement. Any
agreement pursuant to which any Bank may grant such a participating interest
shall provide that such Bank shall retain the sole right and responsibility to
enforce the obligations of the Borrower hereunder including, without
limitation, the right to approve any amendment, modification or waiver of any
provision of this Agreement; provided that such participation agreement may
provide that such Bank will not agree to any modification, amendment or waiver
of this Agreement described in clause (i), (ii) or (iii) of Section 9.05
without the consent of the Participant. The Borrower agrees that each
Participant shall, to the extent provided in its participation agreement, be
entitled to the benefits of Article 8 with respect to its participating
interest. An assignment or other transfer which is not permitted by Section
9.06(c) or (d) below shall be given effect for purposes of this Agreement only
to the extent of a participating interest granted in accordance with this
subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
rights and obligations under this Agreement and the Notes, and such Assignee
shall assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement in substantially the form of Exhibit G hereto executed by
such Assignee and such transferor Bank, with (and subject to) the subscribed
consent of the Borrower, which shall not be unreasonably withheld, the Agent
and, if any participation in any Letter of Credit or Commitment is to be
assigned, the Issuing Bank; provided that if an Assignee is, prior to such
assignment, a Bank or an affiliate of a Bank, no such consent shall be
required; and provided further that, (i) unless the Loans, Commitments and
participations in Letters of Credit assigned shall constitute all Loans,
Commitments and participations in Letters of Credit of such assignor Bank, the
aggregate principal amount of the Loans, Commitments and participations in
Letters of Credit assigned shall not be less than $10,000,000 and (ii) any such
assignment shall include a pro rata portion of the assigning Bank's Commitment,
Loans and participations in Letters of Credit. Upon the
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<PAGE> 79
execution and delivery of such instrument, payment by such Assignee to such
transferor Bank of an amount equal to the purchase price agreed between such
transferor Bank and such Assignee and delivery of notice to the Borrower, such
Assignee shall be a Bank party to this Agreement and shall have all the rights
and obligations of a Bank with Commitments as set forth in such instrument of
assumption, and the transferor Bank shall be released from its obligations
hereunder to a corresponding extent, and no further consent or action by any
party shall be required. Upon the consummation of any assignment pursuant to
this subsection (c), the transferor Bank, the Agent and the Borrower shall make
appropriate arrangements so that, if required, a new Note is issued to the
Assignee. In connection with any such assignment, the transferor Bank shall
pay to the Agent an administrative fee for processing such assignment in the
amount of $2,500; provided that no such fee shall be required if the Assignee
is, prior to any such assignment, an affiliate of such Bank. If the Assignee
is not incorporated under the laws of the United States of America or a state
thereof, it shall, prior to the first date on which interest, fees or
commissions are payable hereunder for its account, deliver to the Borrower and
the Agent (and, in the case of any such Assignee to whom any Letter of Credit
Exposure or Commitment has been assigned, the Issuing Bank) certification as to
exemption from deduction or withholding of any United States federal income
taxes in accordance with Section 2.16.
(d) Any Bank may at any time assign all or any portion of its
rights under this Agreement and its Note to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's
rights shall be entitled to receive any greater payment under Section 8.03 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.02 or 8.03 requiring such
Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
Section 9.07. Margin Stock. Each of the Banks represents to the
Agent, the Issuing Bank and each of the other Banks that it in good faith is
not relying upon any "margin stock" (as defined in Regulation U) as collateral
in the extension or maintenance of the credit provided for in this Agreement.
Section 9.08. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS
AGREEMENT AND EACH NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF
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NEW YORK. THE BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY
NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL
PROCEEDINGS ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED THEREBY. THE BORROWER IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT
AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.
Section 9.09. Consent to Execution and Delivery of Certain Financing
Documents. The Issuing Bank, the Agent and the Banks each consents and agrees
to the terms of the Pledge Agreement and the Subsidiary Guaranty.
Section 9.10. Counterparts; Integration. This Agreement may be
signed in any number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement, the Subsidiary Guaranty and the Pledge Agreement
constitute the entire agreement and understanding among the parties hereto and
supersede any and all prior agreements and understandings, oral or written,
relating to the subject matter hereof.
Section 9.11. Confidentiality. Each Bank agrees not to disclose to
any Person other than the Agent or another Bank any information delivered or
made available by the Borrower or any of its Subsidiaries to it and indicated
in writing as confidential; provided that nothing herein shall prevent any Bank
from disclosing such information (a) to any other Person who is a director,
officer or employee of such Bank or any of its affiliates if reasonably
incidental to the administration of the Loans, (b) upon the order of any court
or administrative agency, (c) upon the request or demand of, or pursuant to any
regulation of, any regulatory agency or authority, (d) which had been publicly
disclosed other than as a result of a disclosure by the Agent or any Bank
prohibited by this Agreement, (e) in connection with any litigation related to
the transactions contemplated by the Financing Documents to which the Agent,
any Bank or its subsidiaries or parent may be a party, (f) to the extent
reasonably required in connection with the exercise of any remedy hereunder,
(g) to such Bank's or Agent's legal counsel or independent auditors, and (h) to
any actual or proposed Assignee or Participant of
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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.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
THE BORROWER
------------
BEVERLY ENTERPRISES
By: /s/ Schuyler Hollingsworth Jr.
---------------------------------
Title: Senior Vice President and Treasurer
5111 Rogers Avenue, Suite 40-A
Fort Smith, Arkansas 72919-0155
Attention: Chief Financial Officer
Telephone number: (501) 452-6712
Facsimile transmission number: (501) 484-8489
BANKS
-----
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
By: /s/ John M. Mikolay
------------------------------------
Title: Vice President
THE CHASE MANHATTAN BANK
By: /s/ Dawn Lee Lum
-----------------------------------
Title: Vice President
BANK OF AMERICA NATIONAL TRUST
& SAVINGS ASSOCIATION
By: /s/ Wyatt R. Ritchie
-------------------------------------
Title: Managing Director
<PAGE> 83
THE BANK OF NEW YORK
By: /s/ Jonathan Rollins
--------------------------------------
Title: Assistant Vice President
THE BANK OF NOVA SCOTIA
By: /s/ Dana Maloney
-------------------------------------
Title: Relationship Manager
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., LOS ANGELES AGENCY
By: /s/ Genichi Imai
---------------------------------------
Title: Joint General Manager
NATIONSBANK OF TEXAS, N.A.
By: /s/ Brad W. Despain
-----------------------------------
Title: Vice President
THE NIPPON CREDIT BANK, LTD.,
LOS ANGELES AGENCY
By: /s/ Bernardo E. Correa-Henschke
--------------------------------
Title: Vice President & Senior Manager
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Karen M. George
-------------------------------------
Title: AVP
<PAGE> 84
BANK OF MONTREAL
By: /s/ Peter W. Steelman
-------------------------------------
Title: Director
BANK OF HAWAII
By: /s/ Kenneth M. Loveless
----------------------------------
Title: Assistant Vice President
BHF - BANK AKTIENGESELLSCHAFT
By: /s/ Paul Travers
------------------------------------------
Title: Vice President
By: /s/ Evon Contos
---------------------------------------
Title: Vice President
UNITED STATES NATIONAL BANK OF
OREGON
By: /s/ Jonathan A. Horton
----------------------------------
Title: Vice President
<PAGE> 85
AGENT
-----
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Agent
By: /s/ John M. Mikolay
------------------------------------
Title: Vice President
60 Wall Street
New York, New York 10260
Attention: Robert M. Osieski
Telephone number: (212) 648-7173
Telex number: 177615
Facsimile transmission number: (212) 648-5014
ISSUING BANK
------------
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Issuing Bank
By: /s/ John M. Mikolay
---------------------------------------
Title: Vice President
c/o J.P. Morgan Services Inc.
P.O. Box 6071
500 Stanton Christiana Road
Newark, Delaware 19713
Attention: International Trade Services Standby Unit
Telephone number: (302) 634-4234
Facsimile transmission number: (302) 634-4061
<PAGE> 86
SCHEDULE I
PRICING SCHEDULE
The "Euro-Dollar Margin", "CD Margin", "Base Rate Margin", "Letter of
Credit Commission Rate" and "Commitment Fee Rate" for any day are the
respective rates per annum set forth below in the applicable row in the column
corresponding to the Pricing Level that applies on such day:
<TABLE>
<CAPTION>
Level I Level II Level III Level IV Level V
<S> <C> <C> <C> <C> <C>
Euro-Dollar Margin 0.500% 0.750% 0.875% 1.125% 1.500%
CD Margin 0.625% 0.875% 1.000% 1.250% 1.625%
Base Rate Margin 0.000% 0.000% 0.000% 0.500% 1.000%
Letter of Credit Commission
Rate 0.500% 0.750% 0.875% 1.125% 1.500%
Commitment Fee Rate 0.175% 0.200% 0.225% 0.275% 0.350%
</TABLE>
For purposes of this Pricing Schedule, the following terms have the
following meanings:
"Pricing Ratio" means the ratio of Consolidated EBITDAR to the sum of
Consolidated Interest Charges and Consolidated Rental Expense.
"Level I Pricing" applies on any day after December 31, 1996 if, as of
the last day of the fiscal quarter of the Borrower most recently ended on or
prior to such day and, except in respect of the fiscal quarter ending December
31, 1996, as to which the Borrower shall have delivered, or been required to
deliver, on or prior to such day a certificate pursuant to Section 5.01(d), the
Pricing Ratio is greater than 2.50 to 1.0.
"Level II Pricing" applies on any day after December 31, 1996 if, as
of the last day of the fiscal quarter of the Borrower most recently ended on or
prior to such day and, except in respect of the fiscal quarter ending December
31, 1996, as to which the Borrower shall have delivered, or been required to
deliver, on or prior to such day a certificate pursuant to Section 5.01(d), (i)
the Pricing Ratio is greater than 2.25 to 1.0 and (ii) Level I Pricing does not
apply.
<PAGE> 87
"Level III Pricing" applies on any day (a) from and including the
Effective Date to and including December 31, 1996 and (b) if, as of the last
day of the fiscal quarter of the Borrower most recently ended on or prior to
such day and, except in respect of the fiscal quarter ending December 31, 1996,
as to which the Borrower shall have delivered, or been required to deliver, on
or prior to such day a certificate pursuant to Section 5.01(d), (i) the Pricing
Ratio is greater than 2.00 to 1.0 and (ii) neither Level I Pricing nor Level II
Pricing applies.
"Level IV Pricing" applies on any day if, as of the last day of the
fiscal quarter of the Borrower most recently ended on or prior to such day and,
except in respect of the fiscal quarter ending December 31, 1996, as to which
the Borrower shall have delivered, or been required to deliver, on or prior to
such day a certificate pursuant to Section 5.01(d), (i) the Pricing Ratio is
greater than 1.75 to 1.0 and (ii) none of Level I Pricing, Level II Pricing or
Level III Pricing applies.
"Level V Pricing" applies on any day if, on such day, no other Pricing
Level applies.
"Pricing Level" means any one of the five pricing levels denominated
Level I Pricing, Level II Pricing, Level III Pricing, Level IV Pricing or Level
V Pricing.
2
<PAGE> 88
SCHEDULE II
COMMITMENT SCHEDULE
<TABLE>
<CAPTION>
Bank Commitments
---- -----------
<S> <C>
Morgan Guaranty Trust Company of New York $40,000,000
The Chase Manhattan Bank $36,400,000
Bank of America National Trust & Savings Association $33,100,000
The Bank of New York $33,100,000
The Bank of Nova Scotia $33,100,000
The Long-Term Credit Bank of Japan, Ltd., Los Angeles
Agency $33,100,000
NationsBank of Texas, N.A. $33,100,000
The Nippon Credit Bank, Ltd., Los Angeles Agency $33,100,000
PNC Bank, National Association $30,000,000
Bank of Montreal $25,000,000
Bank of Hawaii $15,000,000
BHF - BANK Aktiengesellschaft $15,000,000
United States National Bank of Oregon $15,000,000
===========
Total $375,000,000
</TABLE>
<PAGE> 89
SCHEDULE III
EXISTING SUBSIDIARY DEBT(1)
<TABLE>
<CAPTION>
TYPE BALANCE
@ NOVEMBER 30, 1996
<S> <C>
NOTES & MORTGAGES $163,210,500
TAX EXEMPT BONDS $204,125,000
MIFA TAXABLE BONDS $ 25,000,000
9% SENIOR NOTES $180,000,000
MORGAN TERM LOAN - A (2)(2) $ 56,222,000
MORGAN TERM LOAN - B (2) $ 23,000,000
MEDIUM TERM NOTES $ 50,000,000
LTCB TERM LOAN (2) $ 27,000,000
ATRS NOTES $ 22,821,000
BANK UNITED $ 19,872,500
NIPPON TERM LOAN (2) $ 11,250,000
DEPOSIT GUARANTY LOAN $ 10,500,000
7 5/8% CONV. SUBORDINATED DEB. $ 67,924,000
ZERO COUPON NOTES $ 1,164,000
CAPITAL LEASES $ 27,073,000
TOTAL $889,162,000
</TABLE>
__________________________________
(1) Including debt guaranteed by Subsidiaries
(2) (2) indicated loans to be repaid on Closing Date
2
<PAGE> 90
SCHEDULE IV
SUBSIDIARIES OF THE BORROWER
A.B.C. Health Equipment Corp.
AdviNet, Inc.
AGI-Camelot, Inc.
AGI-McDonald County Health Care, Inc.
Alliance Health Services, Inc.
Alliance Home Health Care, Inc.
Amco Medical Service, Inc.
American Transitional Care Centers of Texas, Inc.
American Transitional Care Dallas - Ft. Worth, Inc.
American Transitional Hospitals, Inc.
American Transitional Hospitals of Indiana, Inc.
American Transitional Hospitals of Oklahoma, Inc.
American Transitional Hospitals of Tennessee, Inc.
American Transitional Hospitals -- Texas Medical Center, Inc.
ATH -- Clear Lake, Inc.
ATH Columbus, Inc.
ATH Del Oro, Inc.
ATH Heights, Inc.
ATH Oklahoma City, Inc.
ATH Tucson, Inc.
Beverly - Bella Vista Holding, Inc.
Beverly - Missouri Valley Holding, Inc.
Beverly - Rapid City Holding, Inc.
Beverly Acquisition Corporation
Beverly Assisted Living, Inc.
Beverly Health and Rehabilitation Services, Inc.
Beverly Enterprises - Alabama, Inc.
Beverly Enterprises - Arizona, Inc.
Beverly Enterprises - Arkansas, Inc.
Beverly Enterprises - California, Inc.
Beverly Enterprises - Colorado, Inc.
Beverly Enterprises - Connecticut, Inc.
Beverly Enterprises - Delaware, Inc.
Beverly Enterprises - Distribution Services, Inc.
Beverly Enterprises - District of Columbia, Inc.
Beverly Enterprises - Florida, Inc.
Beverly Enterprises - Garden Terrace, Inc.
Beverly Enterprises - Georgia, Inc.
<PAGE> 91
Beverly Enterprises - Hawaii, Inc.
Beverly Enterprises - Idaho, Inc.
Beverly Enterprises - Illinois, Inc.
Beverly Enterprises - Indiana, Inc.
Beverly Enterprises - Iowa, Inc.
Beverly Enterprises - Kansas, Inc.
Beverly Enterprises - Kentucky, Inc.
Beverly Enterprises - Louisiana, Inc.
Beverly Enterprises - Maine, Inc.
Beverly Enterprises - Maryland, Inc.
Beverly Enterprises - Massachusetts, Inc.
Beverly Enterprises - Michigan, Inc.
Beverly Enterprises - Minnesota, Inc.
Beverly Enterprises - Mississippi, Inc.
Beverly Enterprises - Missouri, Inc.
Beverly Enterprises - Montana, Inc.
Beverly Enterprises - Nebraska, Inc.
Beverly Enterprises - Nevada, Inc.
Beverly Enterprises - New Hampshire, Inc.
Beverly Enterprises - New Jersey, Inc.
Beverly Enterprises - New Mexico, Inc.
Beverly Enterprises - North Carolina, Inc.
Beverly Enterprises - North Dakota, Inc.
Beverly Enterprises - Ohio, Inc.
Beverly Enterprises - Oklahoma, Inc.
Beverly Enterprises - Oregon, Inc.
Beverly Enterprises - Pennsylvania, Inc.
Beverly Enterprises - Rhode Island, Inc.
Beverly Enterprises - South Carolina, Inc.
Beverly Enterprises - Tennessee, Inc.
Beverly Enterprises - Texas, Inc.
Beverly Enterprises - Utah, Inc.
Beverly Enterprises - Vermont, Inc.
Beverly Enterprises - Virginia, Inc.
Beverly Enterprises - Washington, Inc.
Beverly Enterprises - West Virginia, Inc.
Beverly Enterprises - Wisconsin, Inc.
Beverly Enterprises - Wyoming, Inc.
Beverly Enterprises Japan Limited
Beverly Enterprises Medical Equipment Corporation
Beverly Enterprises Rehabilitation Corporation
Beverly Holdings I, Inc.
<PAGE> 92
Beverly Indemnity, Limited
Beverly Real Estate Holdings, Inc.
Beverly REMIC Depositor, Inc.
Beverly Manor Inc. of Hawaii
Beverly Savana Cay Manor, Inc.
Brownstone Pharmacy, Inc.
Columbia-Valley Nursing Home, Inc.
Commercial Management, Inc.
Computran Systems, Inc.
Continental Care Centers of Council Bluffs, Inc.
D.D. Wholesale, Inc.
Dunnington Drug, Inc.
Dunnington Rx Services of Rhode Island, Inc.
Dunnington Rx Services of Massachusetts, Inc.
Forest City Building Ltd.
Hallmark Convalescent Homes, Inc.
Healthcare Prescription Services, Inc.
Home Medical Systems, Inc.
Hospice Preferred Choice, Inc.
Hospital Facilities Corporation
Insta-Care Holdings, Inc.
Insta-Care Pharmacy Services Corporation
Kenwood View Nursing Home, Inc.
Liberty Nursing Home, Incorporated
MATRIX Rehabilitation, Inc.
Medical Arts Health Facility of Lawrenceville, Inc.
Medical Health Industries, Inc.
Moderncare of Lumberton, Inc.
Nebraska City S-C-H, Inc.
Nursing Home Operators, Inc.
Omni Med B, Inc.
Petersen Health Care, Inc.
Pharmacy Corporation of America
Pharmacy Corporation of America - Massachusetts, Inc.
Pharmacy Dynamics Group, Inc.
Phymedsco, Inc.
Salem No. 1, Inc.
South Alabama Nursing Home, Inc.
South Dakota - Beverly Enterprises, Inc.
Spectra Rehab Alliance, Inc.
Synergos, Inc.
Synergos - Scottsdale, Inc.
TMD Disposition Company
Vantage Healthcare Corporation
<PAGE> 93
SCHEDULE V
EXISTING LETTERS OF CREDIT
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
<TABLE>
<CAPTION>
BOND LOCATION BENEFICIARY L/C AMOUNT
@November 30, 1996
<S> <C>
Lincoln County, KY The Bank of New York $ 110,000.00
Wayne County, IN National City Bank $ 1,288,523.96
Tift County , GA The Bank of New York $ 150,000.00
Jefferson County, KY First American National Bank $ 370,000.00
Shelby County, TN Ameristar Investments & Trust $ 320,000.00
Franklin County 1985, PA The Bank of New York $ 325,000.00
Frankling County 1986, PA The Bank of New York $ 65,000.00
Gettysburg The Bank of New York $ 340,000.00
TOTAL FOR 'ON BALANCE SHEET' FACILITIES $ 2,968,523.96
Encore Term Loan The Bank of New York $15,351,110.00
HCPI HCPI $ 5,000,000.00
Monroe County, FL The Bank of New York $ 4,415,250.00
Okaloosa County, FL The Bank of New York $ 2,035,000.00
Chagrin Falls, OH Mellon Bank $ 1,070,000.00
Heber Springs, AR Thad Realty $ 300,000.00
Heber Springs, AR Troy A. Gray $ 100,000.00
Rosemont, IL Phoenix Home Life Ins. Co. $ 72,000.00
TOTAL FOR 'OFF BALANCE SHEET' FACILITIES $28,343,360.00
TOTAL MORGAN L/C'S $31,311,883.96
</TABLE>
<PAGE> 94
SCHEDULE V
P.2
EXISTING LETTERS OF CREDIT
<TABLE>
<CAPTION>
FACILITY PURPOSE BENEFICIARY L/C AMOUNT
@NOV. 30, 1996
<S> <C>
PITTSBURGH NATIONAL BANK
Clarion, PA Meritcare PNC Bank $ 7,240.054.79
Dedham, MA Meritcare State Street Bank & $ 8,466,175.00
Trust
VRT Term Notes Meritcare PNC Bank $23,358,000.00
Total for Meritcare Debt: $39,064,229.79
TORONTO DOMINION BANK
7 Facilities MIFA Bonds State Street Bank & $26,481.640.00
Trust
Total for MIFA Debt: $26,481,640.00
L/C SUMMARY BY GROUP:
Morgan Guaranty: $31,311,883.96
PNC Bank (Meritcare) $39,064,229.79
Toronto Dominion (MIFA Bonds) $26,481,640.00
TOTAL L/C EXPOSURE $96,857,753.75
</TABLE>
<PAGE> 95
EXHIBIT A
NOTE
New York, New York
____________, 1996
For value received, BEVERLY ENTERPRISES, INC., a Delaware corporation
(the "Borrower"), promises to pay to the order of ____________________________
(the "Bank"), for the account of its Applicable Lending Office, the unpaid
principal amount of each Loan made by the Bank to the Borrower pursuant to the
Credit Agreement referred to below on the Termination Date provided for in
the Credit Agreement. The Borrower promises to pay interest on the unpaid
principal amount of each such Loan on the dates and at the rate or rates
provided for in the Credit Agreement. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or other
immediately available funds at the office of Morgan Guaranty Trust Company of
New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the type thereof and all repayments of the
principal thereof shall be recorded by the Bank and, prior to any transfer
hereof, appropriate notations to evidence the foregoing information with
respect to each such Loan then outstanding may be endorsed by the Bank on the
schedule attached hereto, or on a continuation of such schedule attached to and
made a part hereof; provided that the failure of the Bank to make any such
recordation or endorsement shall not affect the obligations of the Borrower
hereunder or under the Credit Agreement.
This note is one of the Notes referred to in the Amended and Restated
Credit Agreement dated as of December __, 1996 among the Borrower, the banks
listed on the signature pages thereof and Morgan Guaranty Trust Company of New
York, as Issuing Bank and Agent (as the same may be amended from time to time,
the "Credit Agreement"). Terms defined in the Credit Agreement are used herein
with the same meanings. Reference is made to the Credit Agreement for
provisions for the mandatory and optional repayment and prepayment hereof and
the acceleration of the maturity hereof.
Payment of principal and interest on this Note is (i) unconditionally
guaranteed, subject to the limitations contained in the Subsidiary Guaranty, by
the Subsidiary Guarantors pursuant to the Subsidiary Guaranty and (ii) secured
by security interests in certain collateral pursuant to the Pledge Agreement.
BEVERLY ENTERPRISES, INC.
By
-------------------------------------------------------
Title:
<PAGE> 96
NOTE (CONT'D)
LOANS AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Amount of Loan Type of Loan Amount of Principal Repaid Notation Made By
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.31
AMENDMENT NO. 1 AND WAIVER TO PARTICIPATION AGREEMENT
This AMENDMENT NO. 1 AND WAIVER TO PARTICIPATION AGREEMENT (this
"Amendment"), is entered into as of May 27, 1997, among BEVERLY ENTERPRISES,
INC., a Delaware corporation, as the Representative, Construction Agent and
Parent Guarantor (in its capacity as Representative, the "Representative"; in
its capacity as Construction Agent, the "Construction Agent"; and, in its
capacity as Parent Guarantor, the "Parent Guarantor") and together with the
Guarantors listed on the signature page to the Guaranty (each a "Guarantor")
and the Structural Guarantors, the "Guarantors"); BMO LEASING (U.S.), INC., a
Delaware corporation, as a Lessor (together with any permitted successors and
assigns thereto, each a "Lessor" and collectively the "Lessors"); BMO LEASING
(U.S.), INC., as Agent Lessor for the Lessors (in such capacity, the "Agent
Lessor"); THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY
("LTCB"), BANK OF MONTREAL, a Canadian banking organization ("BMO"), and the
other various financial institutions as are or may from time to time become
lenders (the "Lenders") under the Loan Agreement; LTCB as Administrative Agent
(in such capacity, the "Administrative Agent") for the Lenders and as Arranger
(in such capacity, the "Arranger"); and BMO, as Co-Arranger and Syndication
Agent (collectively, the "Parties").
R E C I T A L S:
A. The Parties entered into a Participation Agreement dated
as of March 21, 1997 (the "Participation Agreement"); and
B. The Parties desire to amend Section 3.4 and Appendix A to
the Participation Agreement and to waive a provision under Section 6.2(b) of
the Participation Agreement.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the premises made hereunder,
and for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions. Unless otherwise expressly defined herein,
all capitalized terms used herein and defined in Appendix A to the
Participation Agreement shall be used herein as so defined. Unless otherwise
expressly stated herein, all Section and Article references herein shall refer
to Sections and Articles of the Participation Agreement.
2. Amendment to "London Interbank Offered Rate". The term
"London Interbank Offered Rate" as contained in Appendix A of the Participation
Agreement is hereby amended in its entirety as follows:
<PAGE> 2
"London Interbank Offered Rate" means, as applicable to any
Eurodollar Loan, for the Interest Period of such Eurodollar Loan, the
rate per annum determined by the Administrative Agent on the basis of
the offered rate for deposits in Dollars of amounts equal or comparable
to the principal amount of such Eurodollar Loan offered for a term
comparable to such Interest Period, which rates appear on the Reuters
Screen LIBO Page as of 11:00 A.M., London time, two (2) Business Days
prior to the first day of such Interest Period, provided that (i) if
more than one such offered rate appears on the Reuters Screen LIBO Page,
the "London Interbank Offered Rate" will be the arithmetic average
(rounded upwards, if necessary, to the next higher 1/100th of it) of
such offered rates; (ii) if no such offered rates appear on such page,
the "London Interbank Offered Rate" for such Interest Period will be the
rate per annum quoted by the Administrative Agent's London Branch two
(2) Business Days prior to the first day of such Interest Period, for
deposits in Dollars offered to leading banks for a period comparable to
such Interest Period in an amount comparable to the principal amount of
such Eurodollar Loan; and (iii) with respect to an Interest Period of a
duration less than one month, the "London Interbank Offered Rate" for
such Interest Period will be the rate per annum quoted by the
Administrative Agent's London Branch two (2) Business Days prior to the
first day of such Interest Period, for deposits in Dollars offered to
the Administrative Agent for a period comparable to such Interest Period
in an amount comparable to the principal amount of such Eurodollar Loan.
3. Amendment to Section 3.4(a). The third sentence of
Section 3.4(a) of the Participation Agreement is hereby amended in its entirety
as follows:
"Such Loans and Lessor Amounts made with respect to each Advance (i) if
made on a day other than a Scheduled Payment Date or an Acquisition
Date, shall be Base Rate Loans/Lessor Amounts and (ii) if made on a
Scheduled Payment Date or an Acquisition Date, shall be Eurodollar
Loans/Lessor Amounts, and the duration of the initial Interest Period
with respect to such Advance shall begin on the proposed Acquisition
Date or Funding Date and end on the next succeeding Scheduled Payment
Date (the "Initial Interest Period")."
4. Waiver of As-Built Appraisal Delivery Requirement.
Effective as of the Effective Date, each of the Participants hereby waives the
delivery requirements of Section 6.2(b) of the Participation Agreement with
respect to the As-Built Appraisal for the Property located in Cobb County,
Georgia and acquired pursuant to the Operative Documents on May 30, 1997 until
the earlier of (i) 30 days after the Effective Date and (ii) the next
succeeding Funding Date with respect to such Property. The failure to deliver
the As-Built Appraisal as provided in this Section 4 shall constitute a failure
by the Representative to observe and perform a covenant under the Participation
Agreement.
5. Effective Date. This Amendment shall be effective and the
Participation Agreement amended as of May 27, 1997 (the "Effective Date"), as
if entered into on such date.
-2-
<PAGE> 3
6. Effect of Amendment. The Parties agree that, except as
amended hereby or hereafter, the Participation Agreement and any and all other
agreements, documents, certificates and other instruments executed in
connection therewith shall remain in full force and effect in accordance with
their terms. Any reference to the Participation Agreement shall be deemed to
be a reference to the Participation Agreement as amended by this Amendment.
7. Counterparts. This Amendment may be executed in
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one instrument.
8. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the Parties have caused this Amendment to be
duly executed by their respective authorized officers as of the day and year
first above written.
BEVERLY ENTERPRISES, INC., as
Representative, Construction Agent and
Parent Guarantor
By
-------------------------------------------
Name:
Title:
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.,
LOS ANGELES AGENCY, as Arranger,
Administrative Agent
and as a Lender
By
-------------------------------------------
Name:
Title:
BMO LEASING (U.S.),
INC., as Agent Lessor and as a Lessor
By
-------------------------------------------
Name:
Title:
BANK OF MONTREAL, as Co-Arranger and as a
Lender
By
-------------------------------------------
Name:
Title:
-4-
<PAGE> 5
VANTAGE HEALTHCARE CORPORATION, as Lessee
and Structural Guarantor
By
-------------------------------------------
Name:
Title:
PETERSEN HEALTH CARE, INC., as Lessee and
Structural Guarantor
By
-------------------------------------------
Name:
Title:
BEVERLY SAVANA CAY MANOR, INC., as Lessee
and Structural Guarantor
By
-------------------------------------------
Name:
Title:
BEVERLY ENTERPRISES - GEORGIA, INC., as
Lessee and Structural Guarantor
By
-------------------------------------------
Name:
Title:
-5-
<PAGE> 6
BEVERLY ENTERPRISES - CALIFORNIA, INC., as
Lessee and Structural Guarantor
By
-------------------------------------------
Name:
Title:
-6-
<PAGE> 1
EXHIBIT 10.32
AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT
This AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT (this
"Amendment"), is entered into as of August 20, 1997, among BEVERLY ENTERPRISES,
INC., a Delaware corporation ("BEI"), as the Representative, Construction Agent
and Parent Guarantor (in its capacity as Representative, the "Representative";
in its capacity as Construction Agent, the "Construction Agent"; and, in its
capacity as Parent Guarantor, the "Parent Guarantor" and together with the
Guarantors listed on the signature page to the Guaranty (each a "Guarantor")
and the Structural Guarantors, the "Guarantors"); BMO LEASING (U.S.), INC., a
Delaware corporation, as a Lessor (together with any permitted successors and
assigns thereto, each a "Lessor" and collectively the "Lessors"); BMO LEASING
(U.S.), INC., as Agent Lessor for the Lessors (in such capacity, the "Agent
Lessor"); THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY
("LTCB"), BANK OF MONTREAL, a Canadian banking organization ("BMO"), and the
other various financial institutions as are or may from time to time become
lenders (the "Lenders") under the Loan Agreement; LTCB as Administrative Agent
(in such capacity, the "Administrative Agent") for the Lenders and as Arranger
(in such capacity, the "Arranger"); and BMO, as Co-Arranger and Syndication
Agent (collectively, the "Parties").
R E C I T A L S:
A. The Parties entered into a Participation Agreement
dated as of March 21, 1997, as amended as of May 27, 1997 (the "Participation
Agreement").
B. BEI desires to increase the Aggregate Commitment
Amount available to the Lessees from $50,000,000 to an amount sufficient to
fund the aggregate Property Cost of (x) the Properties listed in Schedule A
attached hereto (such Properties, the "Additional Properties") and (y) the
other Properties subject to the Master Lease as of the Amendment Effective
Date.
C. BEI intends to consummate a series of transactions
pursuant to which (i) BEI will form a new Subsidiary (together with its
successors, "New BEI") that will be a Delaware corporation wholly-owned by BEI,
such corporation to be renamed, upon the consummation of the Pharmacy
Divestiture Transaction and the Merger (each as defined below), Beverly
Enterprises, Inc., (ii) Pharmacy and its Subsidiaries will repay in cash to BEI
not less than $250,000,000 of intercompany advances outstanding from BEI to
Pharmacy and its Subsidiaries, (iii) BEI will contribute all of its assets and
liabilities (other than the capital stock of Pharmacy and its Subsidiaries) to
New BEI and New BEI will assume all of such liabilities, (iv) BEI will
distribute pro rata to the holders of its common stock all of the capital stock
of New BEI, and (v) BEI will be merged with and into Capstone Pharmacy
Services, Inc.
D. Subject to the terms and conditions set forth herein,
BEI may increase the Aggregate Commitment Amount and consummate the
transactions in connection with the Pharmacy Divestiture Transaction and the
Merger.
E. The Parties desire to amend the Participation
Agreement as set forth herein.
<PAGE> 2
A G R E E M E N T:
NOW, THEREFORE, in consideration of the premises made
hereunder, and for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Parties hereto, intending to be legally
bound, hereby agree as follows:
1. Defined Terms; References. Unless otherwise
expressly defined herein, all capitalized terms used herein and defined in
Appendix A to the Participation Agreement shall be used herein as so defined.
Unless otherwise expressly stated herein, all Section and Article references
herein shall refer to Sections and Articles of the Participation Agreement.
2. Additional Defined Terms. Appendix A to the
Participation Agreement is hereby amended by adding the new definitions in the
appropriate alphabetical order:
"Additional Property" shall mean any of the Properties listed in
Schedule V to the Participation Agreement, in each case as previously
disclosed to and approved by the Participants.
"Amendment Effective Date" means the date upon which the Amended and
Restated Credit Agreement dated as of August 20, 1997 becomes
effective in accordance with its terms.
"Commitment Increase" has the meaning provided in Section 3.7 of the
Participation Agreement.
"Existing Properties" means all of the Properties subject to the
Master Lease as of the Amendment Effective Date, as described in their
respective Lease Supplements.
"Merger" means the merger of the Representative into Capstone Pharmacy
Services, Inc.
"New Aggregate Commitment Amount" means an amount sufficient to fund
the Property Cost of (i) the Additional Properties and (ii) the
Existing Properties.
"New BEI" means New Beverly Holdings, Inc., a Delaware corporation and
Wholly-Owned Subsidiary of the Representative to be renamed Beverly
Enterprises, Inc. following the consummation of the Pharmacy
Divestiture Transaction and Merger.
"New BEI Spin-Off" means the distribution by the Representative, pro
rata to the holders of the Representative's common stock, of all of
the capital stock of New BEI.
"Non-Pharmacy Asset Contribution" means the contribution by the
Representative of all of its assets and liabilities (other than the
capital stock of Pharmacy and its Subsidiaries) to New BEI and the
assumption by New BEI of all such liabilities.
"Pharmacy Divestiture Transaction" means the Pharmacy Intercompany
Repayment, the Non-Pharmacy Asset Contribution and the New BEI
Spin-Off.
<PAGE> 3
"Pharmacy Intercompany Repayment" means the repayment in cash by
Pharmacy and its Subsidiaries to the Representative of not less than
$250,000,000 of intercompany advances outstanding from the
Representative to Pharmacy and its Subsidiaries.
"Release Date" means the date upon which (i) all of the conditions set
forth in Section 3.03 of the Morgan Credit Agreement shall be
satisfied (or waived in accordance with Section 9.05 of the Morgan
Credit Agreement) and (ii) all of the following conditions shall have
been satisfied to the satisfaction of the Agent Lessor, the
Administrative Agent and each Participant:
(a) The Administrative Agent, the Agent Lessor
and the Participants shall have received an executed counterpart of
the Assumption Agreement attached hereto as Exhibit I duly executed by
New BEI;
(b) New BEI shall have paid the Transaction
Expenses invoiced to New BEI and incurred in connection with the
transactions contemplated with the Pharmacy Divestiture Transaction
and the Merger, and any other costs and fees invoiced to New BEI and
incurred by the Administrative Agent, the Agent Lessor and each
Participant in accordance with the terms of the Operative Documents;
(c) All of the Beverly Entities' covenants,
representations and warranties contained in the Operative Documents
(except as expressly modified by Section 15.18 of the Participation
Agreement) shall remain true and correct and enforceable in all
respects after giving effect to the transactions contemplated by the
Pharmacy Divestiture and the Merger;
(d) No Default, Event of Default, breach or
failure of condition exists, or would exist with notice or lapse of
time or both, under any of the Operative Documents before or after
giving effect to the transactions contemplated by the Pharmacy
Divestiture Transaction and the Merger;
(e) Each of the Participants shall have received
evidence reasonably satisfactory to it that each Lien granted by the
Representative under the Operative Documents has been amended in a
manner sufficient to properly perfect each of their interests therein
(including, without limitation, the filing of appropriately completed
and duly executed Uniform Commercial Code financing statements);
(f) The Administrative Agent, the Agent Lessor
and the Participants shall have received true, correct and complete
copies of the Agreement and Plan of Merger dated as of April 15, 1997
between the Representative and Capstone Pharmacy Services, Inc. and
such other documents, certificates and instruments delivered in
connection with the Pharmacy Divestiture Transaction and the Merger as
any of the Administrative Agent, Agent Lessor or Participants shall
reasonably request;
(g) The Administrative Agent, the Agent Lessor
and the Participants shall have received evidence satisfactory to them
that the Pharmacy Divestiture Transaction shall have been consummated
and New BEI shall be the owner of all the assets theretofore owned by
the Representative other than the capital stock of Pharmacy and its
Subsidiaries;
<PAGE> 4
(h) No legal proceeding shall be pending which in
any manner draws into question the validity of any of the Operative
Documents;
(i) The Administrative Agent, the Agent Lessor
and the Participants shall have received opinions of Weil, Gotshal &
Manges LLP, special New York counsel to New BEI, and the Vice
President and Deputy General Counsel of New BEI, covering those
matters relating to the Assumption Agreement, the Pharmacy Divestiture
Transaction and the Merger as the Administrative Agent, the Agent
Lessor and the Participants may reasonably request;
(j) The Administrative Agent, the Agent Lessor
and the Participants shall have received a certificate signed by the
chief financial officer or treasurer of New BEI to the effect set
forth in clauses (c) and (d) above;
(k) The Administrative Agent, the Agent Lessor
and the Participants shall have received all documents as they may
reasonably request relating to the existence of New BEI and each of
its Subsidiaries party to any Operative Document, the corporate
authority for and the validity of the Operative Documents, and any
other matters relevant thereto, all in form and substance satisfactory
to the Administrative Agent, the Agent Lessor and the Participants;
and
(l) The Administrative Agent, the Agent Lessor
and the Participants shall have received evidence satisfactory to them
that all filings with, and consents and approvals of, any third party
or any governmental body, agency or official necessary or desirable to
permit the Pharmacy Divestiture Transaction or the Merger have been
made or obtained and all waiting periods in respect thereof have
expired or been terminated."
3. Amended Defined Terms. The following defined terms
in Appendix A to the Participation Agreement are hereby amended in their
entirety to read as follows:
"Company" means (i) prior to the Release Date, Beverly Enterprises,
Inc., a Delaware Corporation and (ii) as of and after the Release
Date, New BEI.
"Morgan Credit Agreement" means the Amended and Restated Credit
Agreement dated as of August 20, 1997 amending and restating the
$375,000,000 Amended and Restated Credit Agreement dated as of
December 20, 1996 among the Representative, the Banks listed on the
signature pages thereof, Morgan Guaranty Trust Company of New York, as
Issuing Bank, and Morgan Guaranty Trust Company of New York, as Agent.
"Pledged Stock" means the stock held as collateral from time to time
under the Pledge Agreement.
4. Additional Properties. Schedule A attached hereto is
hereby added as Schedule V to the Participation Agreement.
<PAGE> 5
5. Assumption Agreement. Exhibit I attached hereto is
hereby added as Exhibit I to the Participation Agreement.
6. Increase in Commitment. The Participation Agreement
is hereby amended by adding as a new Section 3.7 of the Participation
Agreement.
"Section 3.7. Increase in Commitment. (a) The
Beverly Entities may, prior to October 31, 1997, arrange an increase
in the Aggregate Commitment Amount to the New Aggregate Commitment
Amount (such increase, the "Commitment Increase") in accordance with
this Section 3.7 by either arranging for (i) an existing Participant
to increase its respective Commitment or (ii) one or more Persons not
a party to the Operative Documents to assume Commitment(s) by becoming
a party to the Operative Documents as Participants; provided that the
aggregate Lender Commitment and aggregate Lessor Commitment shall be
increased pro rata in connection with any Commitment Increase.
Neither the Administrative Agent, the Agent Lessor nor any Participant
is hereby committed to assume any additional Commitment and are not
obligated to do so without their prior written consent.
(b) In the event that either (i) the Beverly Entities
have not obtained written commitments to increase the Aggregate
Commitment Amount to the New Aggregate Commitment Amount by October
31, 1997 pursuant to Section 3.7(a) or (ii) Schedule I to the
Participation Agreement and the other relevant provisions of the
Operative Documents have not been amended to reflect an increase in
the Aggregate Commitment Amount to the New Aggregate Commitment Amount
by November 14, 1997, the Administrative Agent and Agent Lessor may
instruct the Representative to cause any Lessee to purchase any or all
of such Lessee's Additional Properties at a price equal to the
Property Balance with respect thereto, including any accrued and
unpaid Rent and any other amounts payable under the Operative
Documents with respect to such Additional Properties. Within 30 days
after receipt of instructions from the Administrative Agent and Agent
Lessor specifying the Additional Property or Properties to be
purchased, the Representative shall cause each applicable Lessee to
purchase its respective Additional Properties, as specified by the
Administrative Agent and Agent Lessor, in accordance with the previous
sentence. Upon receipt of the Property Balance with respect to each
applicable Additional Property, the Agent Lessor shall transfer to the
applicable Lessee all of Agent Lessor's right, title and interest in
and to each such Additional Property in accordance with the procedures
set forth in Section 21.1(a) of the Master Lease.
(c) The failure of the Representative or any Lessee
of an Applicable Property to satisfy any of their respective
obligations pursuant to Section 3.7(b) shall constitute a Lease Event
of Default as defined under the Master Lease."
7. Amendment of Investments. Subsection 10.2(e)(i) of
the Participation Agreement is hereby deleted in its entirety and replaced with
the following:
"(i) Investments in the Representative or in
Persons that are Subsidiaries of the Representative (including any
other Beverly Entity) on the date hereof (other than, after the
Release Date, Pharmacy and the Subsidiaries of Pharmacy);"
<PAGE> 6
8. Amendment of Restricted Payments on Stock. Section
10.2(f) of the Participation Agreement is hereby amended by deleting the word
"and" at the end of clause (iv) thereof and replacing clause (v) thereof with
the following provisions:
"(v) the Representative may consummate the New BEI
Spin-Off as part of the Pharmacy Divestiture Transaction on the
Release Date, and
(vi) the Representative may make any such payment
or distribution if, after giving effect thereto, the aggregate amount
of all such payments or distributions made after the Amendment
Effective Date (including, without limitation, any such payments or
distributions permitted under subclause (ii)(A) or clause (iv) above)
does not exceed the sum of $75,000,000 plus 50% of Consolidated Net
Income for the period after June 30, 1997 through the date of such
declaration, payment or distribution."
9. Amendment of Negative Pledge. (a) Clauses
10.2(g)(13) and 10.2(g)(15) of the Participation Agreement are hereby amended
to read in their entirety as follows:
"(13) Liens on nursing homes and related real
estate improvements and equipment ("Mortgage Assets") given in
substitution for Liens on Mortgage Assets existing on the date hereof
or for Liens on Mortgage Assets incurred pursuant to this clause (13)
or clause (15) below, provided that the sum of (A) the excess of the
Appraised Value of all Mortgage Assets subjected to Liens pursuant to
this clause (13) on or after the Amendment Effective Date over the
Appraised Value of all such Mortgage Assets released from Liens on or
after the Amendment Effective Date and (B) all Indebtedness incurred
after the Amendment Effective Date and secured by Liens permitted
under clause (15) below shall not at any time exceed $50,000,000;"
"(15) Liens not otherwise permitted under clauses
(1) through (14) of this Section, provided that the sum of the amounts
set forth in subclause (A) of clause (13) above and the aggregate
principal amount of all indebtedness incurred after the date hereof
and secured by Liens permitted under this clause (15) shall not at any
time exceed $50,000,000."
(b) Section 10.2(g) of the Participation
Agreement is hereby amended by adding the following new subsection (iii)
immediately following Subsection 10.2(g)(ii).
"(iii) The Representative will not permit any issuer
of Pledged Stock or any of their respective Subsidiaries to create,
assume or suffer to exist any Lien on any asset now owned or hereafter
acquired by it except (A) Liens permitted by clauses (1) through (11)
of Subsection 10.2(g)(i) above, (B) Liens granted prior to the
Amendment Effective Date and permitted by clauses (13) and (15) of
Section 10.2(g)(i) above, (C) Liens on nursing homes and related real
estate improvements and equipment of issuers of Pledged Stock and
their Subsidiaries ("Pledged Subsidiary Mortgage Assets") given in
substitution for Liens on Pledged Subsidiary Mortgage Assets incurred
pursuant to this clause (C) or clause (D) below, provided that the sum
of (x) the excess of the Appraised Value of all Pledged Subsidiary
Mortgage Assets subjected to Liens pursuant to this clause (C) on or
after the Amendment Effective Date over the Appraised Value of all
such Pledged Subsidiary Mortgage Assets released from Liens on or
after the Amendment
<PAGE> 7
Effective Date and (y) all Indebtedness incurred after the date hereof
and permitted under clause (D) below shall not at any time exceed
$50,000,000 and (D) Liens not otherwise permitted under clauses (A),
(B) and (C) of this Subsection (iii), provided that the sum of the
amounts set forth in subclause (x) of clause (C) above and the
aggregate principal amount of all Indebtedness incurred after the
Amendment Effective Date and secured by Liens permitted under this
clause (D) shall not exceed $50,000,000."
10. Amendment of Consolidations, Mergers and Sales of
Assets Provisions. Section 10.2(h) of the Participation Agreement is hereby
amended by replacing the word "and" that occurs immediately prior to clause
(II) thereof with a comma and inserting the following immediately before the
period which ends such Section:
"and (III) this Section shall not prohibit the consummation of the
Pharmacy Divestiture Transaction or the Merger on the Release Date."
11. Amendment of Incurrence of Debt Provisions. (a)
Subsection 10.2(i)(i)(14) of the Participation Agreement is hereby amended to
read in its entirety as follows:
"(14) Indebtedness not otherwise permitted under
clauses (1) through (13) of this Section, provided that the aggregate
principal amount of all Indebtedness permitted under this clause (14)
that is incurred on or after the Amendment Effective Date shall not at
any time exceed $75,000,000."
(b) Subsection 10.2(i) of the Participation Agreement
is hereby amended by adding the following as a new Subsection "(iii)"
immediately following Subsection 10.2(i)(ii):
"(iii) The Representative will not permit any issuer
of Pledged Stock or any of their respective Subsidiaries to incur,
assume or suffer to exist Indebtedness other than (A) Indebtedness
permitted under clauses (1), (2) (but only to the extent that the
Lease Cancellation Payments relate to a facility operated by any such
issuer or Subsidiary), (3), (4), (5) (to the extent the Refinanced
Debt referred to therein is Indebtedness referred to in clauses (1),
(2) (but only to the extent that the Lease Cancellation Payments
relate to a facility operated by any such issuer or Subsidiary), (3)
and (4)), (6), (7), (8), (9), (10), (11) (but only to the extent that
the assets acquired, constructed or approved with the proceeds of such
Indebtedness are assets of such issuer or such Subsidiary) and (14) of
subsection 10.2(i)(i) above; provided that the aggregate principal
amount of Indebtedness of such issuers and Subsidiaries permitted
under clauses (8) (other than guarantees by an issuer of Pledged Stock
or any of its Subsidiaries of Indebtedness of an issuer of Pledged
Stock or any of its Subsidiaries) and (14) shall not exceed in the
aggregate $50,000,000 and (B) unsecured guarantees of obligations of
Subsidiaries of the Representative, which obligations are permitted
under clause (11) of Section 10.2(i)(i) above and arise under the
Operative Documents, and refinancings, extensions, replacements and
increases thereof, provided that the aggregate principal amount of
indebtedness permitted under this clause (B) may not exceed
$150,000,000."
12. Amendment of Assignment by Beverly. Section 15.18 of
the Participation Agreement is hereby amended to read in its entirety as
follows:
<PAGE> 8
Section 15.18 Assignment by Beverly Enterprises,
Inc. Subject to the conditions set forth in the definition of Release
Date, notwithstanding any other provision herein each party hereto
agrees that Beverly Enterprises, Inc. may transfer all of its assets
(other than the stock of Pharmacy and the Subsidiaries of Pharmacy) to
New BEI, and Beverly Enterprises, Inc. shall cause New BEI to execute
the Assumption Agreement. On the Release Date the terms "Company",
"Representative", "Construction Agent" and "Parent Guarantor" shall
mean New BEI and shall cease to mean Beverly Enterprises, Inc. and
thereupon Beverly Enterprises, Inc. and Pharmacy and its Subsidiaries,
without any further action on behalf of any party hereto, shall be
released from all covenants, liabilities and obligations under the
Operative Documents. Any transfer of assets by Beverly Enterprises,
Inc. as aforesaid to New BEI and any distribution of the stock of New
BEI to shareholders of Beverly Enterprises, Inc. shall not constitute
a Change of Control.
13. Effective Date. Subject to Section 15 below, this
Amendment shall be effective and the Participation Agreement amended as of
August 20, 1997 (the "Effective Date"), as if entered into on such date.
14. Representations and Warranties. To induce the
Administrative Agent, the Agent Lessor and the Participants to execute and
deliver this Amendment (which representations shall survive the execution and
delivery of this Amendment), each of the Beverly Entities that is a party
hereto represents and warrants to each of the Administrative Agent, the Agent
Lessor and the Participants that:
(a) this Amendment has been duly authorized,
executed and delivered by it and this Amendment constitutes the legal,
valid and binding obligation, contract and agreement of such Beverly
Entity enforceable against it in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles relating to or
limiting creditors' rights generally;
(b) the Participation Agreement, as amended by
this Amendment, constitutes the legal, valid and binding obligation,
contract and agreement of such Beverly Entity enforceable against it
in accordance with their respective terms, except as enforcement may
be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws or equitable principles relating to or limiting
creditors' rights generally;
(c) the execution, delivery and performance by
such Beverly Entity of this Amendment (i) has been duly authorized by
all requisite corporate action and, if required, shareholder action,
(ii) does not require the consent or approval of any governmental or
regulatory body or agency, and (iii) will not (A) violate (l) any
provision of law, statute, rule or regulation or its certificate of
incorporation or bylaws, (2) any order of any court or any rule,
regulation or order of any other agency or government binding upon it,
or (3) any provision of any material indenture, agreement or other
instrument to which it is a party or by which its properties or assets
are or may be bound, including, without limitation, the Morgan Credit
Agreement, or (B) result in a breach or constitute (alone or with due
notice or lapse of time or both) a default under any indenture,
agreement or other instrument referred to in clause (iii)(A)(3) of
this Section 14(c);
<PAGE> 9
(d) as of the date hereof and after giving effect
to this Amendment, no Default or Event of Default has occurred which
is continuing; and
(e) all the representations and warranties
contained in Section 8.2 of the Participation Agreement are true and
correct in all material respects with the same force and effect as if
made by such Beverly Entity on and as of the date hereof.
15. Conditions to Effectiveness of this Amendment. This
Amendment shall not become effective until, and shall become effective when,
each and every one of the following conditions shall have been satisfied to the
satisfaction of the Agent Lessor, the Administrative Agent and each Participant
(the conditions precedent are for the benefit of the Agent Lessor, the
Administrative Agent and each Participant only):
(a) The Agent Lessor, the Administrative Agent
and the Participants shall have received executed counterparts of this
Amendment, duly executed by the Beverly Entities party hereto;
(b) The Agent Lessor, the Administrative Agent
and the Participants shall have received evidence satisfactory to them
that the Morgan Credit Agreement has been amended and restated in form
and substance satisfactory to the Administrative Agent, the Agent
Lessor and the Participants;
(c) The representations and warranties of the
Beverly Entities set forth in Section 14 hereof are true and correct
on and with respect to the date hereof; and
(d) The Administrative Agent shall have received
(i) a fee in connection with the Participants' agreement to the terms
of this Amendment equal to $25,000 for the account of the Participants
and (ii) an administrative fee equal to $25,000 for the benefit of the
Agent Lessor.
Upon receipt of all of the foregoing, this Amendment shall become
effective.
16. Payment of Fees and Expenses. The Representative
agrees to pay upon demand, the reasonable fees and expenses of (i) Skadden,
Arps, Slate, Meagher & Flom LLP, counsel to the Lenders, and (ii) Mayer, Brown
& Platt, counsel to the Lessors, in connection with the negotiation,
preparation, approval, execution and delivery of this Amendment.
17. Effect of Amendment. The Parties agree that upon the
effectiveness of this Amendment as provided in Section 15 (a) except as amended
hereby or hereafter, the Participation Agreement and any and all other
agreements, documents, certificates and other instruments executed in
connection therewith shall remain in full force and effect in accordance with
their terms, and (b) any reference to the Participation Agreement shall be
deemed to be a reference to the Participation Agreement as amended by this
Amendment.
18. Counterparts. This Amendment may be executed in
counterparts, each of which shall constitute an original, but all of which when
taken together shall constitute but one instrument.
19. Governing Law. This Amendment shall be governed by
and construed in accordance with the laws of the State of New York.
<PAGE> 10
IN WITNESS WHEREOF, the Parties have caused this Amendment to
be duly executed by their respective authorized officers as of the day and year
first above written.
BEVERLY ENTERPRISES, INC., as
Representative, Construction Agent and
Parent Guarantor
By
------------------------------------
Name:
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., LOS ANGELES AGENCY, as
Arranger, Administrative Agent and
as a Lender
By
------------------------------------
Name:
Title:
BMO LEASING (U.S.),
INC., as Agent Lessor and as a Lessor
By
------------------------------------
Name:
Title:
BANK OF MONTREAL, as Co-Arranger and
as a Lender
By
------------------------------------
Name:
Title:
S - 1
<PAGE> 11
VANTAGE HEALTHCARE CORPORATION,
as Lessee and Structural Guarantor
By
---------------------------------
Name:
Title:
PETERSEN HEALTH CARE, INC., as
Lessee and Structural Guarantor
By
---------------------------------
Name:
Title:
BEVERLY SAVANA CAY MANOR, INC., as
Lessee and Structural Guarantor
By
---------------------------------
Name:
Title:
BEVERLY ENTERPRISES - GEORGIA, INC.,
as Lessee and Structural Guarantor
By
---------------------------------
Name:
Title:
BEVERLY ENTERPRISES - CALIFORNIA,
INC., as Lessee and Structural Guarantor
By
---------------------------------
Name:
Title:
S - 2
<PAGE> 12
Schedule A
Additional Properties
<PAGE> 13
EXHIBIT I
ASSUMPTION AGREEMENT
AGREEMENT dated as of [Release Date], 1997 by NEW BEVERLY HOLDINGS,
INC., a Delaware corporation (with its successors, "New Beverly") for the
benefit of the Administrative Agent, the Agent Lessor and the Participants
under the Participation Agreement and the other Operative Documents (as defined
below).
WITNESSETH
WHEREAS, this Assumption Agreement (the "Agreement") relates to the
Participation Agreement dated as of March 21, 1997 and as amended as of May 27,
1997 and as of August 20, 1997, among BEVERLY ENTERPRISES, INC., a Delaware
corporation ("BEI"), as the Representative, Construction Agent and Parent
Guarantor (in its capacity as Representative, the "Representative"; in its
capacity as Construction Agent, the "Construction Agent"; and, in its capacity
as Parent Guarantor, the "Parent Guarantor") and together with the Guarantors
listed on the signature page to the Guaranty (each a "Guarantor") and the
Structural Guarantors, the "Guarantors"); BMO LEASING (U.S.), INC., a Delaware
corporation, as a Lessor (together with any permitted successors and assigns
thereto, each a "Lessor" and collectively the "Lessors"); BMO LEASING (U.S.),
INC., as Agent Lessor for the Lessors (in such capacity, the "Agent Lessor");
THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY ("LTCB"), BANK OF
MONTREAL, a Canadian banking organization ("BMO"), and the other various
financial institutions as are or may from time to time become lenders (the
"Lenders") under the Loan Agreement; LTCB as Administrative Agent (in such
capacity, the "Administrative Agent") for the Lenders and as Arranger (in such
capacity, the "Arranger"); and BMO, as Co-Arranger and Syndication Agent
(collectively, the "Parties") and the other Operative Documents executed in
connection therewith.
WHEREAS, in order to (i) permit BEI to transfer all of its assets,
other than the stock of Pharmacy Corporation of America, a California
corporation ("Pharmacy") and its Subsidiaries, to New Beverly and (ii) induce
the Administrative Agent, the Agent Lessor and the Participants to release BEI
from its obligations under the Operative Documents (as defined in the
Participation Agreement), New Beverly is willing to enter into this Agreement;
WHEREAS, New Beverly proposes to assume all of the rights and
obligations of BEI under the Operative Documents;
NOW, THEREFORE, in consideration of the foregoing, New Beverly hereby
agrees as follows;
Section 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in Appendix X to the
Participation Agreement.
1
<PAGE> 14
Section 2. Assumption. New Beverly hereby assumes and agrees to
perform, pay and discharge all of the liabilities and obligations of BEI as
Construction Agent, Parent Guarantor and Representative under and pursuant to
the Operative Documents.
Section 3. Representations and Warranties. New Beverly hereby makes,
on and as of the date hereof, each representation and warranty made by BEI as
Construction Agent, Parent Guarantor and Representative in any Operative
Document.
Section 4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
Section 5. Further Assurances. New Beverly hereby agrees to take such
further action and to execute and deliver such further agreements and
undertakings as the Administrative Agent, the Agent Lessor or any Participant
may from time to time request to further carry out the intent of the parties
hereunder.
2
<PAGE> 15
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
executed and delivered by its duly authorized officer as of the date first
above written.
NEW BEVERLY HOLDINGS, INC.
By:
-----------------------------
Name:
Title:
Agreed and accepted as of the
date first written above:
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.,
LOS ANGELES AGENCY, as Arranger, Administrative
Agent and as a Lender
By
-------------------------------
Name:
Title:
BMO LEASING (U.S.),
INC., as Agent Lessor and as a Lessor
By
-------------------------------
Name:
Title:
BANK OF MONTREAL, as Co-Arranger and as a Lender
By
-------------------------------
Name:
Title:
3
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 7, 1997 (except for Note 2, paragraph 3, as
to which the date is March 13, 1997) with respect to the consolidated financial
statements and schedule of Beverly Enterprises, Inc. included in Amendment No. 2
to the Registration Statement (Form S-1 No. 333-28521) and related Prospectus of
New Beverly Holdings, Inc. for the registration of 110,424,677 shares of its
common stock.
We also consent to the reference to our firm under the caption "Experts"
and to the use of our report dated April 18, 1997, with respect to the
consolidated financial statements and schedule of Pharmacy Corporation of
America included in the above mentioned Amendment No. 2 to the Registration
Statement and Prospectus of New Beverly Holdings, Inc.
In addition we consent to the reference to our firm under the caption
"Experts" and to the use of our report dated June 2, 1997, with respect to the
balance sheet of New Beverly Holdings, Inc., included in the above mentioned
Amendment No. 2 to the Registration Statement and Prospectus.
/s/ ERNST & YOUNG LLP
September 17, 1997
Little Rock, Arkansas
