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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1997
REGISTRATION NO. 333-28521
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
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)
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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 JULY 31, 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 6 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.......................................... 1
The Distribution Agreement................................ 2
Certain Tax Considerations................................ 2
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
Risk Involved with Reimbursement by Third Party Payors.... 6
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
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NEW BEVERLY HOLDINGS, INC. PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996
AND THE THREE MONTHS ENDED MARCH 31, 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 MARCH 31, 1997........................ 16
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE
SHEET..................................................... 17
THE DISTRIBUTION............................................ 19
Terms of the Distribution Agreement....................... 19
Restructuring and Contribution of Remaining Healthcare
Business to New Beverly................................ 19
Consummation of the Distribution; Treatment of Beverly
Stock Options, Phantom Shares, Performance Shares and
Shares of Restricted Stock............................. 20
Manner of Effecting the Distribution; Consummation of the
Distribution........................................... 21
Listing of New Beverly Common Stock; Restrictions on
Resale................................................. 22
Treatment of Indebtedness................................. 22
Expenses.................................................. 23
Conditions................................................ 23
Settlement of Intercompany Accounts....................... 23
Indemnification and Insurance............................. 24
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Terms of the Employee Benefit Agreement................... 24
Terms of the Non-competition Agreement.................... 28
Terms of the Interim Services Agreement................... 28
Terms of the Tax Allocation and Indemnification
Agreement.............................................. 28
Preferred Provider Agreement.............................. 30
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................... 31
The Distribution.......................................... 31
The Merger................................................ 32
Possible Future Legislation............................... 33
Back-up Withholding Requirements.......................... 34
TREATMENT OF BEVERLY INDEBTEDNESS........................... 35
General................................................... 35
Existing Credit Facility.................................. 35
9% Senior Notes........................................... 36
Subordinated Debentures................................... 36
Industrial Revenue Bonds.................................. 37
First Mortgage Bonds...................................... 38
8.75% Notes............................................... 38
Medium Term Notes......................................... 38
REIT Promissory Notes..................................... 39
Bank Loans, Mortgages and Notes Payable................... 39
INFORMATION CONCERNING BEVERLY.............................. 40
Selected Historical Consolidated Financial Data........... 40
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 41
General................................................... 41
Operating Results......................................... 42
Liquidity and Capital Resources........................... 48
BUSINESS.................................................... 50
General................................................... 50
Operations................................................ 50
Governmental Regulation and Reimbursement................. 51
Competition............................................... 55
Employees................................................. 55
Properties................................................ 56
Legal Proceedings......................................... 58
Management................................................ 58
Dividend Policy........................................... 60
PRINCIPAL STOCKHOLDERS OF NEW BEVERLY....................... 61
Security Ownership of Certain Beneficial Owners........... 61
Security Ownership of Management.......................... 62
EXECUTIVE AND DIRECTOR COMPENSATION......................... 63
Executive Compensation.................................... 63
Option/SAR Grants in Last Fiscal Year..................... 66
Compensation of Directors and Other Information Concerning
the Board and its Committees........................... 67
The Beverly Non-Employee Director Deferred Compensation
Plan................................................... 68
Compensation Committee Report on Executive Compensation... 69
Compensation Philosophy................................... 69
Competitive Market Evaluation............................. 69
Base Salary............................................... 70
Annual Incentives......................................... 70
Long-term Incentives...................................... 70
Stock Ownership Guideline................................. 71
$1 Million Limit on Compensation.......................... 71
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ii
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Other Matters............................................. 71
Compensation Committee.................................... 71
Compensation Committee Interlocks and Insider
Participation.......................................... 72
Performance Graph......................................... 72
Other Plans............................................... 72
New Beverly 1997 Long-Term Incentive Plan................. 75
New Beverly Non-Employee Directors Stock Option Plan...... 75
Certain Transactions with Management and Others........... 76
DESCRIPTION OF NEW BEVERLY CAPITAL STOCK.................... 76
Authorized Capital Stock.................................. 76
New Beverly Preferred Stock............................... 76
New Beverly Common Stock.................................. 76
New Beverly Common Stock Purchase Rights.................. 77
The Charter and Bylaws of New Beverly..................... 78
SHARES ELIGIBLE FOR FUTURE SALES............................ 79
LEGAL MATTERS............................................... 79
EXPERTS..................................................... 79
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.
iv
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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
incentive stock awards covering an aggregate of approximately 750,000 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 the largest operator 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 March
31, 1997, Beverly operated 627 nursing facilities with 70,623 licensed beds. The
facilities are located in 32 states and the District of Columbia, and range in
capacity from 20 to 355 beds. At March 31, 1997, Beverly also operated 73
pharmacies through PCA, 33 assisted living centers containing 869 units, 11
transitional hospitals containing 578 beds, 34 outpatient therapy clinics, 19
hospices and six home healthcare centers. Beverly's facilities had average
occupancy of 86.6%, 87.4%, 88.1% and 88.5% during the three months ended March
31, 1997 and the years ended December 31, 1996, 1995, and 1994, respectively.
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.
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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.
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
2
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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 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. On , 1997, the New Beverly 1997
Incentive Plan was adopted by the Board of
3
<PAGE> 11
Directors and Compensation Committee of Beverly, and was approved by Beverly as
the sole stockholder of New Beverly prior to the Distribution. In addition, it
is expected that a total of 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 11
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. Approximately shares are expected to be the
subject of options granted to officers and key employees shortly after the date
of the Distribution.
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. On ,
1997, 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. In addition, it
is expected that a total of shares will be reserved for issuance by
New Beverly to current grantees under the corresponding Beverly plan in
connection with 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, phantom shares, restricted shares and
performance shares held by Retained Employees and Transferred Employees,
provided that the employees release Beverly, New Beverly and Capstone from
liability under the current Beverly employee benefit plans and under employment
or severance agreements with certain of those 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 $20 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 three months ended March 31, 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 disposition of Beverly's 49 nursing facilities in Texas and
the use of the net proceeds therefrom; (ii) the Merger; (iii) the
recapitalization/reorganization of Beverly, into New Beverly; and (iv) 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 March 31, 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
THREE MONTHS ENDED AT AND FOR THE
MARCH 31, 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................ $ 816,716 $ 811,047 $3,267,189 $3,228,553 $2,969,239 $2,884,451 $2,607,756
Depreciation and amortization......... 27,081 25,056 105,468 103,581 88,734 82,938 80,226
Interest expense, net................. 19,151 19,685 77,272 70,017 50,214 50,927 56,441
Income (loss) from continuing
operations before income taxes...... 30,772 22,827 125,507 (6,154) 114,795 87,640 6,148
Income (loss) from continuing
operations.......................... 18,463 13,696 52,026 (8,123) 76,913 57,956 1,945
Earnings per share 0.19 0.14 0.52 (0.16) 0.79 0.41 0.01
CONSOLIDATED BALANCE SHEET DATA:
Working capital....................... 327,316 260,701 318,215 243,047 242,712 154,419 137,026
Total assets.......................... 2,582,398 2,510,446 2,525,082 2,506,461 2,322,578 2,000,804 1,859,361
Current portion of long-term
obligations......................... 36,361 37,447 38,826 84,639 60,199 43,125 30,466
Long-term obligations, excluding
current portion..................... 1,119,865 1,083,775 1,106,256 1,066,909 918,018 706,917 712,896
Stockholders' equity.................. 881,327 835,610 861,095 820,333 827,244 742,862 593,505
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
INCOME DATA:
Net operating revenues...................................... $656,025 $2,679,467
Depreciation and amortization............................... 20,822 83,571
Interest expense, net....................................... 11,410 45,130
Income from continuing operations before provision for
income taxes.............................................. 21,240 112,345
Income from continuing operations........................... 12,958 44,815
Earnings per share.......................................... 0.12 0.40
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DATA:
Working capital............................................. $ 262,409
Total assets................................................ 2,056,835
Current portion of long-term obligations.................... 24,023
Long-term obligations, excluding current portion............ 678,671
Stockholders' equity........................................ 856,911
</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 March
31, 1997, Beverly had total indebtedness of approximately $1,156,200,000. In
addition to such indebtedness, Beverly has substantial obligations under
operating leases which will be assumed by New Beverly. For the three months
ended March 31, 1997 and the year ended December 31, 1996, Beverly's rent
expense was approximately $28,800,000 and $116,718,000, 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, which accounted
for approximately $122,400,000, or 15% of net operating revenues for the three
months ended March 31, 1997 (after elimination of intercompany revenue between
PCA and the Remaining Healthcare Business). 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.
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
6
<PAGE> 14
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
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.
7
<PAGE> 15
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 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.
8
<PAGE> 16
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 $67,882,000 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
$30,145,000 to repay certain other notes and mortgages; and (v) the remaining
net proceeds to pay the estimated Transaction costs of $28,000,000, 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.
In addition, in June 1997, Beverly sold its 49 skilled nursing facilities
in Texas for net cash proceeds of approximately $115,700,000. Beverly intends to
use: (i) approximately $1,195,000 of such net proceeds to repay its zero coupon
notes; (ii) approximately $2,387,000 to repay notes payable on certain Texas
facilities; and (iii) the remaining net proceeds to repay Revolver borrowings
under its Existing Credit Facility. Revolver borrowings bear interest at a
floating rate (which was approximately 6.5% at March 31, 1997). See "Treatment
of Beverly Indebtedness."
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 March 31, 1997, and pro forma to reflect receipt
and application of net proceeds of approximately $115,700,000, as well as
recording of the estimated gain, from the sale of Beverly's Texas nursing
facilities, completed in June 1997 and pro forma, as adjusted, to reflect the
Distribution and the Merger:
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA(1) AS ADJUSTED
---------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.......................... $ 64,136 $ 64,136 $ 120,153(2)(3)
========== ========== ==========
Short-term borrowings and current portion of
long-term debt................................... $ 36,361 $ 35,051 $ 24,023(2)(3)
========== ========== ==========
Long-term debt, net of current portion:
Revolver borrowings.............................. $ 180,000 $ 67,882 $ --(3)
Industrial revenue bonds......................... 197,927 197,927 197,927
Notes and mortgages.............................. 219,503 217,231 189,536(3)
First Mortgage Bonds............................. 46,917 46,917 46,917
8.75% Notes...................................... 24,805 24,805 --(3)
9% Senior Notes.................................. 180,000 180,000 180,000
7 5/8% Debentures................................ 54,980 54,980 --(3)
5 1/2% Debentures................................ 150,000 150,000 --(5)
Medium term notes................................ 50,000 50,000 50,000
Capital lease obligations........................ 15,733 15,733 14,291(2)
---------- ---------- ----------
Total long-term debt..................... 1,119,865 1,005,475 678,671
Stockholders' equity:
Preferred stock, 25,000,000 shares authorized.... -- -- --
Common stock, $0.10 par value; 300,000,000 shares
authorized; 104,595,272 shares issued;
99,171,864 shares outstanding; pro forma as
adjusted 110,424,677 shares issued and
outstanding................................... 10,460 10,460 11,042(5)(6)(7)
Additional paid-in capital....................... 776,424 776,424 867,865(5)(6)
Retained earnings (deficit)...................... 152,420 155,598 (21,996)(2)(4)
Treasury stock, at cost; 5,423,408 shares........ (57,977) (57,977) --(6)
---------- ---------- ----------
Total stockholders' equity............... 881,327 884,505 856,911
---------- ---------- ----------
Total capitalization..................... $2,001,192 $1,889,980 $1,535,582
========== ========== ==========
</TABLE>
- ---------------
(1) Reflects repayment of (a) $1,195,000 of Beverly's zero coupon notes due
September 30, 1997, (b) $2,387,000 ($115,000 current and $2,272,000
long-term) of notes payable on certain Texas nursing facilities and (c)
$112,118,000 of Revolver borrowings with the net cash proceeds from the sale
of Beverly's Texas nursing facilities.
(2) Reflects the following adjustments to eliminate PCA's historical amounts (in
thousands):
<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 5,671
Current portion of long-term debt........................... 1,078
Capital leases, net of current portion...................... 1,442
Retained earnings........................................... 95,566
</TABLE>
11
<PAGE> 19
(3) Reflects repayment of approximately $185,312,000 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 $89,688,000
to be used to pay approximately $28,000,000 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.
(4) Reflects the contribution to PCA's capital (after the repayment of
$275,000,000 (See Note 3 above)) of the remaining $51,343,000 of PCA's
intercompany balance, which will not be repaid to Beverly.
(5) Reflects conversion of $150,000,000 principal amount of 5 1/2% Debentures
(as defined) into 11,252,813 shares of Beverly Common Stock. 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, and anticipates that because
the price of Beverly Common Stock is currently more than 3.30% (the
redemption premium) above the conversion price of $13.33, the holders will
be likely to convert their 5 1/2% Debentures to Beverly Common Stock.
(6) 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.
(7) 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 March 31, 1997 and as
adjusted to give effect to (i) the receipt and application of net proceeds of
approximately $115,700,000 from the sale of Beverly's Texas nursing facilities,
completed in June, 1997 and (ii) the Distribution and the Merger, as if all of
such events occurred at March 31, 1997. The accompanying unaudited pro forma
condensed consolidated statements of income for the year ended December 31, 1996
and for the three months ended March 31, 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 sale of the Texas facilities, 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>
TWELVE MONTHS ENDED DECEMBER 31, 1996
-------------------------------------------------------------------
PRO FORMA
TEXAS TRANSACTION NEW
BEVERLY PCA(1) ADJUSTMENTS(2) ADJUSTMENTS BEVERLY
---------- --------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net operating revenues.................... $3,267,189 $(516,400) (153,405) $82,083(3) $2,679,467
Interest income........................... 13,839 (177) (6) -- 13,656
---------- --------- -------- ------- ----------
Total revenues................... 3,281,028 (516,577) (153,411) 82,083 2,693,123
Costs and expenses:
Operating and administrative:
Wages and related..................... 1,819,500 (118,888) (86,697) -- 1,613,915
Other................................. 1,139,442 (346,331) (50,688) 82,083(3) 824,506
Interest................................ 91,111 (11) (9,181) (23,133)(4) 58,786
Depreciation and amortization........... 105,468 (16,392) (5,505) -- 83,571
---------- --------- -------- ------- ----------
Total costs and expenses......... 3,155,521 (481,622) (152,071) 58,950 2,580,778
---------- --------- -------- ------- ----------
Income (loss) from continuing operations
before provision for income taxes....... 125,507 (34,955) (1,340) 23,133 112,345
Provision for income taxes................ 73,481 (14,668) (536) 9,253(5) 67,530
---------- --------- -------- ------- ----------
Income from continuing operations......... $ 52,026 $ (20,287) $ (804) $13,880 $ 44,815
========== ========= ======== ======= ==========
Per share data (primary):
Earnings per share from continuing
operations............................ $ 0.52 $ 0.40
========== ==========
Weighted average shares outstanding..... 99,646 110,899
========== ==========
Per share data (fully diluted):
Earnings per share from continuing
operations............................ $ 0.50 $ 0.40
========== ==========
Weighted average shares outstanding..... 111,002 111,002
========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-------------------------------------------------------------------
PRO FORMA
TEXAS TRANSACTION NEW
BEVERLY PCA(1) ADJUSTMENTS(2) ADJUSTMENTS BEVERLY
---------- --------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net operating revenues.................... $ 816,716 $(147,592) (38,301) $25,202(3) $ 656,025
Interest income........................... 3,565 (47) (2) -- 3,516
---------- --------- -------- ------- ----------
Total revenues................... 820,281 (147,639) (38,303) 25,202 659,541
Costs and expenses:
Operating and administrative:
Wages and related..................... 449,782 (32,033) (20,582) -- 397,167
Other................................. 289,930 (97,283) (12,463) 25,202(3) 205,386
Interest................................ 22,716 (93) (2,154) (5,543)(4) 14,926
Depreciation and amortization........... 27,081 (4,826) (1,433) -- 20,822
---------- --------- -------- ------- ----------
Total costs and expenses......... 789,509 (134,235) (36,632) 19,659 638,301
---------- --------- -------- ------- ----------
Income (loss) from continuing operations
before provision for income taxes....... 30,772 (13,404) (1,671) 5,543 21,240
Provision for income taxes................ 12,309 (5,576) (668) 2,217(5) 8,282
---------- --------- -------- ------- ----------
Income from continuing operations......... $ 18,463 $ (7,828) $ (1,003) $ 3,326 $ 12,958
========== ========= ======== ======= ==========
Per share data (primary):
Earnings per share from continuing
operations.......................... $ 0.19 $ 0.12
========== ==========
Weighted average shares outstanding... 99,411 110,664
========== ==========
Per share data (fully diluted):
Earnings per share from continuing
operations.......................... $ 0.18 $ 0.12
========== ==========
Weighted average shares outstanding... 110,688 110,688
========== ==========
</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 the disposition of 49 Texas nursing facilities and the reduction in
interest expense related to the repayment of certain long-term obligations
with the net cash proceeds from such disposition. See "Use of Proceeds" and
"Capitalization."
(3) Reflects add-back of intercompany revenues and costs of sales of PCA which
are eliminated in Beverly historical amounts.
(4) Reduction of interest expense related to: (i) debt paydowns described in
Note 3 to the Unaudited Pro Forma Condensed Consolidated Balance Sheet; and
(ii) conversion of $150,000,000 principal amount of 5 1/2% Debentures (as
defined) into shares of Beverly Common Stock as described in Note 5 to the
Unaudited Pro Forma Condensed Consolidated Balance Sheet.
(5) Income tax effect of pro forma adjustments using a 40% statutory rate.
- ---------------
Note: Nonrecurring Transaction costs of approximately $26 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
MARCH 31, 1997
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
TEXAS TRANSACTION NEW
BEVERLY PCA(1) ADJUSTMENTS(2) ADJUSTMENTS BEVERLY
---------- --------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............... $ 64,136 $ (5,671) $ -- $ 89,688(3) $ 120,153
(28,000)(4)
Accounts receivable -- patient, less
allowance for doubtful accounts....... 522,415 (100,696) (24,900) -- 396,819
Accounts receivable -- nonpatient, less
allowance for doubtful accounts....... 11,628 (161) -- -- 11,467
Notes receivable........................ 10,572 (1,136) -- -- 9,436
Operating supplies...................... 56,661 (23,682) (2,624) -- 30,355
Deferred income taxes................... 13,320 -- -- -- 13,320
Prepaid expenses........................ 42,505 (424) -- -- 42,081
---------- --------- --------- --------- ----------
Total current assets............. 721,237 (131,770) (27,524) 61,688 623,631
Property and equipment, net............... 1,262,671 (34,579) (84,883) -- 1,143,209
Other assets:
Notes receivable, less allowance for
doubtful notes........................ 29,206 (509) -- -- 28,697
Designated and restricted funds......... 81,346 -- -- -- 81,346
Goodwill, net........................... 372,637 (288,086) (5,915) -- 78,636
Other, net.............................. 115,301 (11,739) (882) (1,364)(3) 101,316
---------- --------- --------- --------- ----------
Total other assets............... 598,490 (300,334) (6,797) (1,364) 289,995
---------- --------- --------- --------- ----------
Total assets..................... $2,582,398 $(466,683) $(119,204) $ 60,324 $2,056,835
========== ========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................ $ 122,467 $ (21,367) $ 600 $ -- $ 101,700
Accrued wages and related liabilities... 136,863 (6,029) -- -- 130,834
Accrued interest........................ 13,714 -- -- -- 13,714
Other accrued liabilities............... 84,516 (5,965) 12,400 -- 90,951
Current portion of long-term
obligations........................... 36,361 (1,078) (1,310) (9,950)(3) 24,023
---------- --------- --------- --------- ----------
Total current liabilities........ 393,921 (34,439) 11,690 (9,950) 361,222
Long-term obligations..................... 1,119,865 (1,442) (114,390) (175,362)(3) 678,671
(150,000)(5)
Deferred income taxes payable............. 87,980 (5,026) (19,682) (546)(3) 60,726
(2,000)(4)
Other liabilities and deferred items...... 99,305 -- -- -- 99,305
Due to Parent............................. -- (326,343) -- 326,343(3) --
Stockholders' equity:
Common stock............................ 10,460 (1) -- 1(6) 11,042(7)
(543)(8)
1,125(5)
Additional paid-in capital.............. 776,424 (3,866) -- 3,866(6) 867,865
148,875(5)
(57,434)(8)
Retained earnings (deficit)............. 152,420 (95,566) 3,178 (51,343)(3) (21,996)
(818)(3)
(3,867)(6)
(26,000)(4)
Treasury stock, at cost................. (57,977) -- -- 57,977(8) --
---------- --------- --------- --------- ----------
Total stockholders' equity....... 881,327 (99,433) 3,178 71,839 856,911
---------- --------- --------- --------- ----------
Total liabilities and
stockholders'
equity......................... $2,582,398 $(466,683) $(119,204) $ 60,324 $2,056,835
========== ========= ========= ========= ==========
</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 the disposition of 49 Texas nursing facilities and the reduction in
long-term obligations with the net cash proceeds. The estimated sales price
for this disposition of approximately $142,500,000, less the net book value
of assets, closing and related costs and estimated tax effect at a 40%
statutory rate, resulted in an after tax gain of approximately $3,178,000.
Such amount has not been reflected in the Unaudited Pro Forma Condensed
Consolidated Statements of Income due to its nonrecurring nature.
(3) Reflects (i) repayment of approximately $185,312,000 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 $185,312,000 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................................... $ -- $ 67,882 $ 67,882
Notes and mortgages................................... 2,450 27,695 30,145
8.75% Notes........................................... -- 24,805 24,805
7 5/8% Debentures..................................... 7,500 54,980 62,480
------- -------- --------
$ 9,950 $175,362 $185,312
======= ======== ========
</TABLE>
(4) 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 $5,000,000
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............... 7,500
Professional fees and other Distribution-related costs.... 2,300
-------
Total estimated Distribution costs................ 20,000
-------
Total estimated Transaction costs................. 28,000
Less: Estimated tax effect at a 40% statutory
rate............................................ (2,000)
-------
$26,000
=======
</TABLE>
(5) Reflects conversion of $150,000,000 principal amount of 5 1/2% Debentures
(as defined) into 11,252,813 shares of Beverly Common Stock. 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, and anticipates that because
the price of Beverly Common Stock is currently more than 3.30% (the
redemption premium) above the conversion price of $13.33, the holders will
be likely to convert their 5 1/2% Debentures to Beverly Common Stock.
17
<PAGE> 25
(6) Reflects add-back of common stock and additional paid-in capital of PCA
which are eliminated in Beverly historical amounts.
(7) 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.
(8) 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.
18
<PAGE> 26
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
19
<PAGE> 27
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
20
<PAGE> 28
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 a consequence of the Distribution, 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 (as defined in the
Distribution Agreement), whether or not exercisable, 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
be assumed by New Beverly in accordance with the Employee Benefit Agreement and
such shares shall be exercisable upon the same terms and conditions 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. See "-- Terms of the Employee Benefit Agreement."
The exercise price and number of shares subject to purchase under each
outstanding Beverly Option shall be adjusted pursuant to the Employee Benefit
Agreement to reflect the Distribution for each holder of such an option who
executes a Consent and Release (as defined in the Employee Benefit Agreement)
approved by Beverly. See "-- Terms of the Employee Benefit Agreement."
As of the Time of Distribution, by virtue of the Distribution and without
any action on the part of the holders thereof, New Beverly shall assume each
unvested Beverly phantom share held by Transferred Employees, and each Beverly
performance share and share of Beverly restricted stock that is outstanding
under the applicable Beverly employee benefit plan immediately prior to the Time
of Distribution, giving effect to the adjustments provided for in the Employee
Benefit Agreement, and shall substitute for each such share, a new unvested
phantom share, performance share or restricted share of New Beverly Common Stock
upon the same terms and conditions, including vesting requirements (as adjusted
to take into account the transactions referred to in the Distribution Agreement,
including the requirement that employment services be performed for New Beverly
or one of its subsidiaries) as applied to the Beverly phantom share, Beverly
performance share or share of Beverly restricted stock for which it has been
substituted. See "-- Terms of the Employee Benefit Agreement."
The number of Beverly shares subject to each outstanding Beverly phantom
share, Beverly performance share and share of Beverly restricted Stock shall be
adjusted pursuant to the Employee Benefit Agreement to reflect the Distribution
for each holder of such share who executes a Consent and Release approved by
Beverly. See "-- Terms of the Employee Benefit Agreement."
Prior to the Effective Time, Beverly shall (i) obtain any consents from
holders of Beverly phantom shares, performance shares or shares of restricted
stock and outstanding options to purchase Beverly Common Stock, granted under
the applicable Beverly employee benefit plans; and (ii) make any amendments to
the terms of the applicable Beverly employee benefit plans or any award granted
thereunder that, in the case of either (i) or (ii), are necessary to give effect
to the transactions contemplated under this caption. See "-- Terms of the
Employee Benefit Agreement."
MANNER OF EFFECTING THE DISTRIBUTION; CONSUMMATION OF 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
in the fourth quarter of 1997. 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
21
<PAGE> 29
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 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
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Indebtedness (as defined in the Distribution Agreement), which borrowing shall
continue after the Effective Time as an obligation of the Surviving Corporation.
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 $28 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 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.
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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.
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 employer benefit matters, including the rights and claims of employees of
the Institutional Pharmacy Business, who will remain with Beverly and become
employees of Capstone after the Merger (and, where appropriate, also covering
former employees and current and former independent contractors of the
Institutional Pharmacy Business who provide or previously provided services
primarily in connection with the Institutional Pharmacy Business) (collectively,
"Retained Employees"), and the rights and claims of employees of the Remaining
Health Care Business, who will transfer to and become employees of New Beverly
(and where appropriate, also covering former employees and current and former
independent contractors of the Remaining Healthcare Business who provide or
previously provided services primarily in connection with the Remaining
Healthcare Business) (collectively, "Transferred Employees"). The Employee
Benefit Agreement allocates such responsibilities and obligations with respect
to salary, wages and
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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-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, restricted shares, performance shares and
phantom shares 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 for those
Transferred Employees who, as applicable, have agreed to release Beverly, New
Beverly and Capstone from any and all liability under the existing Beverly stock
plans, including any liability that would arise by virtue of a change in control
arising under any such plan or under any option or shares granted thereunder in
connection with the Distribution, the Merger or the additional transactions
contemplated thereby, as described more fully below (the "Consent and Release").
For all Retained Employees and Transferred Employees who have executed a
Consent and Release, (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 vested to the extent of 50% of such share. For all Retained
Employees and Transferred Employees who fail to execute and deliver to Beverly a
Consent and Release, no such vesting shall occur.
Effective immediately after the Distribution, New Beverly will substitute
for each outstanding Beverly option held by a Transferred Employee, subject to
the optionee's consent to the extent required, a New
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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, including the vesting schedule, as the Beverly option for which it
is substituted, provided, however, that solely with respect to the Transferred
Employees who have executed and delivered to Beverly a Consent and Release: (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 (which, for
purposes of this determination, shall mean such value of a share of New Beverly
Common Stock, trading on a "when issued" basis, on the Ex-Dividend Date as
defined below) divided by the Fair Market Value of a share of Beverly Common
Stock immediately before the Distribution (which, for purposes of this
determination, means the last trading day before the Ex-Dividend Date) (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, had it been fully vested, immediately prior to the
Distribution, divided by (y) the Distributed Stock Fraction. No such adjustment
to the exercise price and number of New Beverly shares for which the option may
be exercised shall apply to options held by Transferred Employees who have
declined to execute and deliver to Beverly a Consent and Release. The
Ex-Dividend Date means the date on which shares of Beverly Common Stock will
commence trading on the NYSE on an ex-dividend basis (i.e., shares purchased on
or after such date will not entitle the holder to receive shares of New Beverly
Common Stock in the Distribution).
New Beverly will also substitute, with the grantee's consent to the extent
required, (i) for each then outstanding unvested phantom share granted with
respect to Beverly Common Stock and held by a Transferred Employee, new unvested
phantom shares which shall be granted with respect to New Beverly Common Stock,
and (ii) for each then outstanding unvested performance share or restricted
share of Beverly Common Stock held by either (A) a Transferred Employee or (B) a
Retained Employee who declines to execute and deliver to Beverly a Consent and
Release, new unvested performance shares or restricted shares of New Beverly
Common Stock, as the case may be. With respect to a Transferred Employee who has
executed and delivered to Beverly a Consent and Release, the number of New
Beverly phantom or performance shares, as the case may be, substituted for each
phantom or performance share of Beverly Common Stock, shall be equal to the
quotient of one divided by the Distributed Stock Fraction; but no such
adjustment to the number of phantom, performance or restricted shares of New
Beverly Common Stock shall be made with respect to any such shares held by
persons, whether Transferred Employees or Retained Employees, who have declined
to execute and deliver to Beverly a Consent and Release. With respect to a
Retained Employee who has executed and delivered to Beverly a Consent and
Release, no new phantom, performance or restricted shares of New Beverly Common
Stock shall be issued in substitution for outstanding unvested phantom,
performance or restricted shares of Beverly Common Stock. In all other respects,
all such shares shall be subject to the same terms and conditions, including
vesting requirements (as adjusted to take into account the Distribution and all
transactions related thereto, including the requirement that employment services
be provided for New Beverly or its subsidiaries), as the phantom, performance or
restricted share, as the case may be, for which they have been substituted.
For each Retained Employee who has executed and delivered a Consent and
Release, Beverly shall adjust each outstanding Beverly option held by a Retained
Employee so as to preserve the terms and conditions of the Beverly option,
except that (i) the exercise price per share of 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 of a share
of Beverly Common Stock immediately after the Distribution (which, for purposes
of this determination, shall mean such value on the Ex-Dividend Date) divided by
the Fair Market Value of such share immediately before the Distribution (which,
for purposes of this determination, shall mean such value on the last trading
day before the Ex-Dividend Date) (the "Retained Stock Fraction"), and (ii) the
number of shares of Beverly Common Stock for which the option may be exercised
shall be an amount equal to the quotient of (x) the number of shares of Beverly
Common Stock for which the Beverly Option could have been
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exercised, had it been fully vested, immediately prior to the Distribution,
divided by (y) the Retained Stock Fraction. No such adjustment to the exercise
price and number of shares of New Beverly Common Stock for which the option may
be exercised shall apply to options held by Retained Employees who have failed
to execute and deliver to Beverly a Consent and Release.
For each Retained Employee who has executed and delivered a Consent and
Release, the number of shares of Beverly Common Stock represented by each
outstanding unvested performance or phantom share of Beverly Common Stock shall
be equal to the quotient of one divided by the Retained Stock Fraction; but no
such adjustment to the number of unvested restricted, performance or phantom
shares of Beverly Common Stock shall be made with respect to Retained Employees
who have declined to execute and deliver to Beverly a Consent and Release. With
respect to each Transferred Employee who has executed and delivered to Beverly a
Consent and Release, all outstanding unvested phantom, performance and
restricted shares of Beverly Common Stock shall be canceled or forfeited, as the
case may be.
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, except that (i) each such option shall be exercisable for
that number of shares of Capstone Common Stock into which the number of shares
of Beverly Common Stock subject to such option immediately prior to the
Effective Time of the Merger, but after giving effect to the adjustments
described above, would have been converted pursuant to the Merger Agreement if
such option, had it been fully vested, had been exercised immediately prior to
the Effective Time of the Merger and (ii) the exercise price per share of
Capstone Common Stock for which the option may be exercised, determined after
giving effect to the adjustments described above, shall be an amount equal to
the quotient of (x) such adjusted exercise price per share of Beverly Common
Stock for which the option could have been exercised, had it been fully vested,
immediately prior to the Effective Time of the Merger, divided by (y) the
Conversion Number. See "The Merger Agreement" in the Joint Proxy
Statement/Prospectus.
As of the Effective Time of the Merger, Capstone shall assume each
outstanding unvested phantom share granted with respect to Beverly Common Stock
held by a Retained Employee, and each outstanding unvested performance share
and/or restricted share of Beverly Common Stock held by either a Transferred
Employee or Retained Employee, in each instance after giving effect to the
adjustments described above, and shall substitute (i) for each such phantom
share new unvested phantom shares which shall be granted with respect to
Capstone Common Stock, and (ii) for each such performance share or restricted
share, as the case may be, new unvested performance shares or restricted shares
of Capstone Common Stock; provided, however, that, the number of new phantom,
performance or restricted shares of Capstone Common Stock substituted for each
phantom, performance or restricted share of Beverly Common Stock, as the case
may be, shall be equal to the Conversion Number. With respect to each
Transferred Employee who has executed and delivered to Beverly a Consent and
Release, all outstanding unvested phantom, performance and restricted shares of
Beverly Common Stock shall be canceled or forfeited, as the case may be, and no
new phantom, performance or restricted shares of Capstone Common Stock shall be
issued in substitution therefor. In the case of any such assumption and
substitution, in all other respects, all such shares shall be subject to the
same terms and conditions, including vesting requirements (as adjusted to take
into account the Merger and all transactions related thereto, including the
requirement that employment services be provided for Capstone or its
subsidiaries), as the phantom, performance or restricted share, as the case may
be, for which it has been substituted.
Capstone's obligation under the Employee Benefit Agreement to assume
Beverly options, phantom shares, restricted shares and performance shares held
by Retained Employees (the "Retained Benefits"), will not be subject to any
provision of the Merger Agreement limiting to 50 million the maximum number of
shares of Capstone Common Stock which may be issued pursuant to the Merger
Agreement. Capstone's obligation with respect to the Retained Benefits is,
however, limited to up to 900,000 shares of Beverly Common Stock subject to the
adjustments described below. The Retained Benefits will be adjusted (i) after
the Distribution to reflect the change in market value of Beverly following the
Distribution, and (ii) in connection with the Merger to apply the Conversion
Number. As a result, the actual number of shares of
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Capstone Common Stock into which the Retained Benefits will convert cannot be
determined until the Effective Time of the Merger. Assuming the closing prices
of Beverly's Common Stock and Capstone's Common Stock on the applicable
adjustment dates are the same as such prices on May 28, 1997, the companies
estimate that the Retained Benefits will convert into approximately 1.1 million
shares of Capstone Common Stock. New Beverly will indemnify Capstone against
costs incurred as a result of claims relating to such options and phantom shares
in excess of Capstone's obligation described above. To the extent there are any
forfeitures of restricted or performance stock after the date of the
Transactions under the terms of any of the Stock Plans, the forfeited shares
will revert back to the issuer and will not become the property of any other
party to the Transactions.
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 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
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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.
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
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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 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 AGREEMENTS
Beverly and Capstone have agreed to negotiate one or more agreements to
provide for, among other things, the delivery of pharmacy services and products
and ancillary services and products after the Effective Time of the Merger by
Capstone, to currently operated or subsequently acquired New Beverly long-term
healthcare facilities. The parties intend to complete their negotiations prior
to August 15, 1997.
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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.
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 third 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
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(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) 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
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(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,
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.
POSSIBLE FUTURE LEGISLATION
On April 17, 1997 proposed legislation was introduced in the U.S. Congress
which, if enacted in its initial form, would provide that in certain corporate
business transactions where a pre-arranged plan exists 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 enterprise involving a
third party acquiror, the transaction would cease to receive tax-free treatment
under the Code and would result in the imposition of taxable gain at the
corporate level as of the date of the distribution to stockholders. Acquisitions
occurring within the four-year period beginning two years prior to the date of
distribution to stockholders would be presumed to be pursuant to a pre-arranged
plan. Whether a corporation is "acquired" would be determined under rules
similar to those of
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present Section 355(d) of the Code. Thus, an acquisition would occur if a person
acquired more than 50% of the vote or value of the stock of the controlled or
distributing corporation pursuant to a plan or arrangement. As introduced, the
legislation would take effect for distributions occurring after April 16, 1997
unless, among other things, the distribution is made pursuant to a written
agreement which, subject to customary conditions, was binding on such date and
at all times thereafter, or such distribution is described on or before such
date in a public announcement or in a filing with the Securities and Exchange
Commission required solely by reason of the distribution. Capstone and Beverly
believe the Distribution and the Merger are not subject to the provisions of the
proposed legislation described above, since (i) Beverly stockholders are
expected to own more than 50% of the common stock of Capstone after the Merger;
(ii) the Transactions were the subject of a binding contract entered into prior
to April 16, 1997 and (iii) the Transactions were described in public
announcements by Beverly and Capstone on April 16, 1997. There can be no
assurance, however, that the proposed legislation, if enacted, will be enacted
in the form proposed on April 17, 1997, or that the transition rules described
above will not be changed in a manner adverse to the parties engaged in the
Transactions. The proposed legislation referenced above was included in the Ways
and Means Committee bill adopted by the U.S. House of Representatives on June
26, 1997. The proposed legislation was also included in the Senate Finance
Committee bill adopted by the U.S. Senate on June 27, 1997 with a modification
which is not relevant to the transactions between Beverly and Capstone.
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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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
Combined Condensed Financial Statements."
EXISTING CREDIT FACILITY
Beverly currently has in place a letter of credit/revolving credit facility
which permits borrowings of up to $375 million (the "Existing Credit Facility").
As of June 30, 1997, Beverly had approximately $125,759,000 outstanding under
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. 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.
In order to effect the Distribution, Beverly will be required to amend the
Existing Credit Agreement and the Existing Credit Facility (as amended and
described below, the "New Beverly Credit Agreement" and the "New Beverly Credit
Facility", respectively) to provide, among other things: substitution of New
Beverly as the borrower and release of Beverly from its obligations thereunder;
release of the Pledged Stock and substitution therefor of the capital stock of
certain direct or indirect subsidiaries of Beverly engaged in the Remaining
Healthcare Business and having a fair market value substantially equivalent to
the fair market value of the Pledged Stock; release of all Pharmacy Subsidiaries
(as defined in the Distribution Agreement)
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as guarantors; and adjustment of the covenants to reflect the effect of the
Distribution and the Merger. Beverly has initiated informal discussions with the
Existing Credit Facility lenders regarding the foregoing matters, but no binding
commitments have yet been sought or obtained.
9% SENIOR NOTES
As of March 31, 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 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 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 subordinated debentures.
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 March 31, 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 bear interest at a rate of 5 1/2% per annum,
mature August 1, 2018 and are redeemable at a redemption price of 103.85% of
principal amount plus accrued and unpaid interest thereon until August 1, 1997
at which time the redemption price is reduced to 103.30% of principal plus
accrued and unpaid interest. The 5 1/2% Debentures are convertible into Beverly
Common Stock at the option of the holder at any time prior to close of business
on July 31, 2018 but if the 5 1/2% Debentures 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
$13.33 per share.
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The 9% Indenture contains a covenant that restricts Beverly's ability to
redeem or repurchase subordinated debt such as the 5 1/2% 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.
On July 17, 1997, Beverly called the 5 1/2% Debentures for redemption on
August 18, 1997. Beverly has obtained a stand-by commitment for the issuance of
subordinated indebtedness, whose net cash proceeds would qualify under the
restrictive covenant contained in the 9% Indenture to be used to redeem the
5 1/2% Debentures. Beverly anticipates that if the price of the Beverly 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 Beverly Common Stock. The right to convert the 5 1/2% Debentures
into shares of Beverly 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
Beverly Common Stock prior to the Effective Time of the Merger would cause an
increase of approximately 11,250,000 shares of outstanding Beverly Common Stock
and would result in holders of Beverly Common Stock receiving a comparatively
smaller number of shares of Capstone Common Stock in the Merger.
7 5/8% Debentures
As of March 31, 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.
Because redemption of the 7 5/8% Debentures is restricted under the terms
of the 9% Indenture, Beverly intends to proceed with one or more of the
following alternatives: (i) in order to make the redemption of the 7 5/8%
Debentures permissible, seek, 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 or commence an exchange offer with such holders whereby the 9% Senior
Notes would be replaced by New Beverly Notes and once the redemption is
permissible, call the 7 5/8% Debentures for redemption, (ii) solicit the consent
of the holders of the 7 5/8% Debentures to the following matters: (a)
substitution of New Beverly for Beverly; (b) assumption by New Beverly of the
obligations of Beverly and (c) release of Beverly from its obligations under the
7 5/8% Debentures or (iii) commence an exchange offer or other refinancing to
pay off the 7 5/8% Debentures. In the event of a call for redemption, Beverly
does not presently anticipate that the price of Beverly Common Stock will be
above the conversion price of $20.47 to the expected redemption date in late
1997, and therefore Beverly anticipates that all of the 7 5/8% Debentures will
be redeemed.
INDUSTRIAL REVENUE BONDS
As of March 31, 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 $298.3 million (individually an "IRB" and collectively the
"IRBs"). A total of 89 issues with an aggregate principal amount of
approximately $208.6 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 $89.7 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 3.6% 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
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intends to request each IRB Trustee to enter into appropriate assumption,
substitution and release documents 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. While Beverly will seek the assumption, substitution and
release from the IRB Trustees, there can be no assurance given that one or more
IRB Trustees will not require that the holders of the IRBs consent to the
proposed changes. If consents from the 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 March 31, 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 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 March 31, 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. Beverly
intends to call the 8.75% Notes for redemption prior to the Distribution.
MEDIUM TERM NOTES
As of March 31, 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.
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<PAGE> 46
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.
REIT PROMISSORY NOTES
As of March 31, 1997 there was outstanding approximately $42.2 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 9.95% to 11.80% and mature from July 1, 2003 to May 1, 2010.
Health Care Property Investors ("HCPI") holds approximately $34.3 million of the
REIT Promissory Notes, which may not be prepaid until 2005. Nationwide Health
Properties ("NHP") holds approximately $7.9 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 March 31, 1997, there was outstanding approximately $127.5 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 August 7, 1999 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. To the extent Beverly is unable to cause appropriate amendments
to be made in the Miscellaneous Debt Obligations to effect the foregoing,
Beverly expects the Miscellaneous Debt Obligations will be paid off or
refinanced with other lenders.
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<PAGE> 47
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 three months ended and as of March 31, 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 three months ended March 31, 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 THREE
MONTHS ENDED
MARCH 31, 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.......... $ 816,716 $ 811,047 $ 3,267,189 $ 3,228,553 $ 2,969,239 $ 2,884,451 $ 2,607,756
Interest income................. 3,565 3,460 13,839 14,228 14,578 15,269 14,502
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenues.......... 820,281 814,507 3,281,028 3,242,781 2,983,817 2,899,720 2,622,258
Costs and expenses:
Operating and administrative:
Wages and related........... 449,782 449,995 1,819,500 1,736,151 1,600,580 1,593,410 1,486,191
Other....................... 289,930 293,484 1,139,442 1,224,681 1,114,916 1,069,536 921,750
Interest...................... 22,716 23,145 91,111 84,245 64,792 66,196 70,943
Depreciation and
amortization................ 27,081 25,056 105,468 103,581 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.............. 789,509 791,680 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... 30,772 22,827 125,507 (6,154) 114,795 87,640 6,148
Provision for income taxes...... 12,309 9,131 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... 18,463 13,696 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)............... $ 18,463 $ 13,696 $ 50,300 $ (8,123) $ 74,501 $ 55,611 $ (12,344)
=========== =========== =========== =========== =========== =========== ===========
Net income (loss) applicable to
common shares................. $ 18,463 $ 13,696 $ 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....................... $ .19 $ .14 $ .52 $ (.16) $ .79 $ .66 $ .01
Redemption premium on
preferred stock............. -- -- -- -- -- (.25) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Before extraordinary charge
and cumulative effect of
change in accounting for
income taxes................ .19 .14 .52 (.16) .79 .41 .01
Extraordinary charge.......... -- -- (.02) -- (.03) (.03) (.11)
Cumulative effect of change in
accounting for income
taxes....................... -- -- -- -- -- -- (.07)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............. $ .19 $ .14 $ .50 $ (.16) $ .76 $ .38 $ (.17)
=========== =========== =========== =========== =========== =========== ===========
Shares used to compute per share
amounts....................... 99,411,000 99,978,000 99,646,000 92,233,000 87,087,000 81,207,000 77,685,000
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................... $ 2,582,398 $ 2,510,446 $ 2,525,082 $ 2,506,461 $ 2,322,578 $ 2,000,804 $ 1,859,361
Current portion of long-term
obligations................... $ 36,361 $ 37,447 $ 38,826 $ 84,639 $ 60,199 $ 43,125 $ 30,466
Long-term obligations, excluding
current
portion....................... $ 1,119,865 $ 1,083,775 $ 1,106,256 $ 1,066,909 $ 918,018 $ 706,917 $ 712,896
Stockholders' equity............ $ 881,327 $ 835,610 $ 861,095 $ 820,333 $ 827,244 $ 742,862 $ 593,505
OTHER DATA:
Patient days.................... 5,667,000 6,046,000 23,670,000 25,297,000 26,766,000 29,041,000 29,341,000
Average occupancy percentage
(based on licensed beds)...... 86.6% 87.4% 87.4% 88.1% 88.5% 88.5% 88.4%
Number of nursing home beds..... 70,623 73,432 71,204 75,669 78,058 85,001 89,298
</TABLE>
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<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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. This new
legislation is being rolled out in two phases. The initial increase took effect
October 1, 1996, and the final increase is scheduled to take effect September 1,
1997. 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, since 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 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
41
<PAGE> 49
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
First Quarter 1997 Compared to First Quarter 1996
Beverly's net income was $18,463,000 for the first quarter of 1997, as
compared to net income of $13,696,000 for the same period in 1996. Beverly's
income before provision for income taxes was $30,772,000 for the first quarter
of 1997, as compared to $22,827,000 for the same period in 1996. Beverly had an
estimated annual effective tax rate of 40% for the quarters ended March 31, 1997
and 1996. Beverly's estimated annual effective tax rates for 1997 and 1996 were
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 first
quarter of 1997 would have been $10,635,000 as compared to net income of
$7,770,000 for the same period in 1996. Income before provision for income taxes
for the first quarter of 1997, excluding the Institutional Pharmacy Business,
would have been $17,368,000, as compared to $12,617,000 for the same period in
1996. Excluding the Institutional Pharmacy Business, Beverly's estimated annual
effective tax rate for the quarters ended March 31, 1997 and 1996 would have
been 38.8% and 38.4%, respectively.
Beverly's net operating revenues increased approximately $5,700,000 for the
first quarter of 1997, as compared to the same period in 1996. This increase
consisted of the following: increases of approximately $31,400,000 for
facilities which Beverly operated during each of the quarters ended March 31,
1997 and 1996 ("same facility operations"); increases of approximately
$19,600,000 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 of approximately $45,300,000 due to
the disposition of, or lease terminations on, five nursing facilities in 1997
and 83 nursing facilities and Beverly's MedView Services unit ("MedView") in
1996. Beverly's operating and administrative costs decreased approximately
$3,800,000 for the first quarter of 1997, as compared to the same period in
1996. This decrease consists of the following: decreases of approximately
$39,300,000 due to the disposition of, or lease terminations on, certain nursing
facilities and MedView, as mentioned above; partially offset by increases of
approximately $17,900,000 for same facility operations and increases of
approximately $17,600,000 related to the acquisitions mentioned above.
Excluding the Institutional Pharmacy Business, net operating revenues would
have decreased approximately $11,500,000 for the first quarter of 1997, as
compared to the same period in 1996. This decrease consisted of the following: a
decrease of approximately $45,300,000 due to certain dispositions, as noted
above; partially offset by increases of approximately $22,300,000 for same
facility operations and increases of approximately $11,500,000 related to
acquisitions of nursing facilities, hospices and outpatient therapy clinics.
Excluding the Institutional Pharmacy Business, operating and administrative
costs would have decreased approximately $16,600,000 for the first quarter of
1997, as compared to the same period in 1996. This decrease consisted of the
following: decreases of approximately $39,300,000 due to certain dispositions,
as noted above; partially offset by increases of approximately $12,100,000 for
same facility operations and increases of approximately $10,600,000 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 first quarter of 1997, as compared to the same period in
1996, was due to the following: approximately $34,500,000 due primarily to
increases in room and board rates; and approximately $9,600,000 due primarily to
increases in pharmacy-related revenues and various other items. These increases
in Beverly's net operating revenues were partially offset by approximately
$7,100,000 due to a decrease in same facility occupancy to 88.5% for the first
quarter of 1997, as compared to 89.8% for the same period in 1996 based on
operational beds; and approximately $5,600,000 due to one less calendar day for
the first quarter of 1997, as compared to the same period in 1996.
Excluding the Institutional Pharmacy Business, the increase in net
operating revenues for same facility operations for the first quarter of 1997,
as compared to the same period in 1996, was due to the following:
42
<PAGE> 50
approximately $34,500,000 due primarily to increases in room and board rates and
approximately $500,000 due to various other items; partially offset by
approximately $7,100,000 due to a decrease in same facility occupancy, and
approximately $5,600,000 due to one less calendar day for the first quarter of
1997, as compared to the same period in 1996.
The increase in Beverly's operating and administrative costs for same
facility operations for the first quarter of 1997, as compared to the same
period in 1996, was due to the following: approximately $13,900,000 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 $6,600,000 due to increases in
pharmacy-related costs; approximately $2,100,000 due to increases in nursing
supplies and other variable costs; and approximately $6,400,000 due to various
other items. These increases in Beverly's operating and administrative costs
were partially offset by approximately $11,100,000 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 first quarter of
1997, as compared to the same period in 1996, was due to the following:
approximately $13,900,000 due to increased wages and related expenses;
approximately $2,100,000 due to increases in nursing supplies and other variable
costs; and approximately $7,200,000 due to various other items; partially offset
by approximately $11,100,000 due to a decrease in contracted therapy expenses.
Although Beverly's depreciation and amortization expense increased only
$2,000,000 as compared to the same period in 1996, it was affected by the
following: approximately $3,000,000 increase primarily due to capital additions
and improvements, as well as, acquisitions; partially offset by a decrease of
approximately $1,000,000 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 depreciation and amortization for the quarter ended March 31, 1997, as
compared to the same period in 1996.
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 three months ended March 31, 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 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
43
<PAGE> 51
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 operation 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 $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
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<PAGE> 52
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 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 software costs, as well as the $4,000,000
overhead and staff reduction charge, as mentioned above.
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<PAGE> 53
In March 1995, the Financial Accounting Standards Board issued 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.
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
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<PAGE> 54
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.
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
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<PAGE> 55
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 March 31, 1997, Beverly had approximately $64,100,000 in cash and cash
equivalents and net working capital of approximately $327,300,000. Beverly
anticipates that approximately $19,600,000 of its existing cash at March 31,
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 $162,800,000 of unused
commitments under its Existing Credit Facility as of March 31, 1997.
Excluding the Institutional Pharmacy Business, cash and cash equivalents
were approximately $58,500,000 and net working capital was approximately
$230,000,000 as of March 31, 1997.
Net cash provided by operating activities for the first quarter of 1997 was
approximately $42,100,000, an increase of approximately $11,400,000 from the
prior year. Net cash used for investing activities and net cash provided by
financing activities were approximately $58,500,000 and $10,800,000,
respectively, for the first quarter of 1997. Beverly primarily used cash
generated from operations, borrowings under its Existing Credit Facility,
collections on notes receivable and cash on hand to fund capital expenditures
totaling approximately $37,600,000; to fund acquisitions of approximately
$30,800,000; and to repay approximately $16,400,000 of long-term obligations.
Excluding the Institutional Pharmacy Business, net cash provided by
operating activities for the first quarter of 1997 was approximately
$31,700,000, an increase of approximately $5,300,000 from the prior year. Net
cash used for investing activities and net cash provided by financing
activities, excluding the Institutional Pharmacy Business, were approximately
$32,600,000 and $11,100,000, respectively, for the first quarter of 1997.
Excluding the Institutional Pharmacy Business, cash from operations, borrowings
under the Existing Credit Facility, collections on notes receivable and cash on
hand were used to fund capital expenditures totalling approximately $34,400,000;
to fund acquisitions of approximately $8,700,000; and to repay approximately
$16,000,000 of long-term obligations.
In June 1997, Beverly sold 49 of its skilled nursing facilities in the
state of Texas to Complete Care Services, L.P. Beverly anticipates using the net
cash proceeds generated from the sale to repay indebtedness. The operations of
these facilities are immaterial to Beverly's consolidated financial position and
results of operations.
In April 1997, Beverly entered into a definitive agreement with Capstone to
combine PCA with Capstone to create the nation's largest independent
institutional pharmacy company. 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% Senior Notes and to repay certain other notes and mortgages.
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.
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<PAGE> 56
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 $7,500,000 as it relates to
renegotiating or paying certain amounts under various employment agreements. It
is expected that such amounts 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."
Beverly believes that its existing cash and cash equivalents, working
capital from operations, net cash proceeds from the Texas disposition,
borrowings under its banking arrangements, issuance of certain debt securities
and refinancing of certain existing indebtedness will be adequate to repay its
debts due within one year of approximately $36,400,000 (including schedules
sinking fund redemption requirements with respect to Beverly's 7 5/8%
convertible subordinated 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 March 31, 1998.
As of March 31, 1997, Beverly had total indebtedness of approximately
$1,156,200,000 and total stockholders' equity of approximately $881,300,000. On
a pro forma basis, as of March 31, 1997, after giving effect to the Texas
disposition as well as 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 $702,700,000
and stockholders' equity of approximately $856,900,000. 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
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 March 31, 1997, New Beverly would have debts due within one
year of approximately $24,000,000 and normal recurring capital additions and
improvements for the twelve months ending March 31, 1998 of approximately
$118,000,000.
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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, the largest operator of
nursing facilities in the United States. At March 31, 1997, Beverly operated 627
nursing facilities with 70,623 licensed beds. The facilities are located in 32
states and the District of Columbia, and range in capacity from 20 to 355 beds.
At March 31, 1997, Beverly also operated 73 pharmacies, 33 assisted living
centers containing 869 units, 11 transitional hospitals containing 578 beds, 34
outpatient therapy clinics, 19 hospices and six home healthcare centers. It is
expected that New Beverly will operate all of such businesses after the
Transactions, except for the 73 pharmacies. Beverly's facilities had average
occupancy of 86.6% for the three months ended March 31, 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. 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.
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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.
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.
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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>
Three months ended:
March 31, 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 three months ended March 31, 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 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
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<PAGE> 60
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 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
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<PAGE> 61
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.
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.
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<PAGE> 62
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 March 31, 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. This new
legislation is being rolled out in two phases. The initial increase took effect
October 1, 1996, and the final increase is scheduled to take effect September 1,
1997. 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, since 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 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.
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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 March 31, 1997, Beverly operated 627 nursing facilities, 33 assisted
living centers, 11 transitional hospitals, 73 pharmacies, 34 outpatient therapy
clinics, 19 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 73 pharmacies. Most of the 211
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.
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The following is a summary of Beverly's and, after the Transactions,
subject to adjustments for acquisitions, dispositions and construction after
March 31, 1997, New Beverly's nationwide network of nursing facilities, assisted
living centers, transitional hospitals, outpatient therapy clinics and hospices
at March 31, 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 2,680 1 24 -- -- -- --
Arizona.................... 3 480 -- -- 2 78 -- --
Arkansas................... 33 4,083 3 48 -- -- -- 1
California................. 71 7,406 2 113 -- -- -- 5
Colorado................... -- -- -- -- -- -- -- --
Connecticut................ 3 435 -- -- -- -- -- --
District of Columbia....... 1 355 -- -- -- -- -- --
Florida.................... 62 7,782 5 267 -- -- -- --
Georgia.................... 17 2,100 3 48 -- -- 16 1
Hawaii..................... 2 396 -- -- -- -- -- --
Illinois................... 3 275 -- -- -- -- -- --
Indiana.................... 26 3,817 1 16 1 40 -- 1
Kansas..................... 33 2,146 3 39 -- -- -- --
Kentucky................... 8 1,047 -- -- -- -- -- --
Louisiana.................. 1 200 -- -- -- -- -- --
Maryland................... 4 585 1 16 -- -- -- --
Massachusetts.............. 24 2,402 -- -- -- -- -- --
Michigan................... 2 206 -- -- -- -- -- --
Minnesota.................. 36 3,230 2 28 -- -- -- 1
Mississippi................ 21 2,456 -- -- -- -- -- --
Missouri................... 28 2,918 3 101 -- -- -- 1
Nebraska................... 24 2,205 1 16 -- -- -- 2
New Jersey................. 1 120 -- -- -- -- -- --
North Carolina............. 11 1,398 1 16 -- -- -- --
Ohio....................... 12 1,435 -- -- 1 44 3 --
Oklahoma................... -- -- -- -- 2 64 -- --
Pennsylvania............... 42 4,901 3 48 -- -- -- 3
Rhode Island............... -- -- -- -- -- -- -- --
South Carolina............. 3 302 -- -- -- -- -- --
South Dakota............... 17 1,232 -- -- -- -- -- --
Tennessee.................. 7 948 2 57 1 35 -- --
Texas (A).................. 49 6,061 -- -- 4 317 15 3
Virginia................... 16 2,113 2 32 -- -- -- --
Washington................. 11 1,080 -- -- -- -- -- --
West Virginia.............. 3 310 -- -- -- -- -- --
Wisconsin.................. 32 3,519 -- -- -- -- -- 1
--- ------ -- --- -- --- -- --
627 70,623 33 869 11 578 34 19
=== ====== == === == === == ==
CLASSIFICATION
Owned...................... 415 46,224 29 677 1 198 -- --
Leased..................... 211 24,324 4 192 10 380 34 19
Managed.................... 1 75 -- -- -- -- -- --
--- ------ -- --- -- --- -- --
627 70,623 33 869 11 578 34 19
=== ====== == === == === == ==
</TABLE>
- ---------------
(A) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources" for a discussion regarding
the disposition of such nursing facilities.
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<PAGE> 65
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 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 May 29, 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)(2)(3)(5)......... Director 59
James R. Greene(2)(3)(4).................. Director 75
Edith E. Holiday(2)(3)(4)(5).............. Director 45
Jon E. M. Jacoby(1)(2).................... Director 59
Risa J. Lavizzo-Mourey, M.D.(2)(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.
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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 the University of the Ozarks
and 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, Mr. 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.
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Ms. Holiday is an attorney. She served as White House Liaison for the
Cabinet and all federal agencies during the Bush administration. Prior to that,
Ms. Holiday served as General Counsel of the U.S. Treasury Department, as well
as its Assistant Secretary of Treasury for Public Affairs and Public Liaison.
She is a director of Amerada Hess Corporation, Hercules Incorporated and H. J.
Heinz Company and a director or trustee of various investment companies in the
Franklin Templeton Group of Funds. She has been a director of 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.
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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 , 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 March 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) 8.0%
("FMR")
82 Devonshire Street
Boston, MA 02109
Franklin Resources, Inc................................ 8,417,800(2) 8.5%
("Franklin")
777 Mariners Island Blvd.
San Mateo, CA 94404
Loomis, Sayles & Company, L.P.......................... 6,213,650(3) 6.3%
("Loomis")
One Financial Center
Boston, MA 02111
Wellington Management Company.......................... 6,463,419(4) 6.5%
("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.
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<PAGE> 69
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of March 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 COMMON
POWER 60 DAYS OWNERSHIP TOTAL STOCK
----------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Beryl F. Anthony, Jr............. 0 20,000 0 20,000 *
David R. Banks(1)................ 216,656 377,223 8,774(2) 602,653 *
James R. Greene.................. 500 20,000 0 20,500 *
Boyd W. Hendrickson(1)........... 142,153 159,000 0 301,153 *
Edith E. Holiday................. 800 5,000 200(2) 6,000 *
Jon E. M. Jacoby................. 0 20,000 0 20,000 *
Risa J. Lavizzo-Mourey, M.D...... 1,000 5,000 0 6,000 *
William A. Mathies(1)............ 76,373 62,500 2,986(2) 141,859 *
Louis W. Menk(3)................. 0 5,000 0 5,000 *
C. Arnold Renschler, M.D.(4)..... 65,000 10,000 0 75,000 *
Marilyn R. Seymann............... 1,000 5,000 0 6,000 *
Mark D. Wortley(1)............... 66,530 33,750 0 100,280 *
All Directors and Executive
Officers as a Group (17
Persons)(3)(4)................. 1,082,897 1,022,029 19,896 2,124,822 2.1%
</TABLE>
- ---------------
* Percentage of Common Stock owned does not exceed 1%.
(1) Includes shares allocated to the employee through participation in Beverly's
Employee Stock Purchase Plan.
(2) Shares owned by family members.
(3) Mr. Menk retired from the Beverly Board of Directors in May 1997.
(4) 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.
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<PAGE> 70
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.
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<PAGE> 71
(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>
64
<PAGE> 72
(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 $50,000.
(e) The Beverly Enterprises, Inc. Executive Retirement Plan, (the "Executive
Retirement Plan") provides that, depending on the Beverly's profits,
Beverly will match each participant's annual contribution, based on a
sliding scale relating to years of service with the Beverly, up to a
maximum of six percent of a participant's compensation. The Executive
Retirement Plan also provides that Beverly will pay each participant
additional compensation approximately equivalent to the tax liability
such participant shall accrue as a result of the Beverly's contribution.
During 1995 and 1994, Beverly contributed 50 percent and during 1996,
five percent of the maximum match permitted under the Executive
Retirement Plan for each participant. These figures include both the
employer match and the additional compensation for reimbursement of
taxes.
(f) Reimbursement for premiums paid under regular medical and dental
insurance.
65
<PAGE> 73
The following tables set forth certain information at December 31, 1996 and
for the fiscal year then ended with respect to stock options granted to and
exercised by the individuals named in the Summary Compensation Table above. No
stock appreciation rights have been granted and no options have been granted at
an option price below fair market value on the date of the grant.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS GRANT DATE
------------------------------------------------------ VALUE
NUMBER OF % OF TOTAL ----------
SECURITIES OPTIONS/SARS GRANT DATE
UNDERLYING GRANTED TO EXERCISE OR PRESENT
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION VALUE
NAME GRANTED(#) FISCAL YEAR ($/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
66
<PAGE> 74
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.
67
<PAGE> 75
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,
68
<PAGE> 76
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
Our 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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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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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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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 67, 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 percent of the capital
stock of Pharmacy Corporation of America to a person other than Beverly or any
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direct or 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. New Beverly intends to enter into similar agreements with those key
management employees that sign a consent and release.
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").
On , 1997, the Board of Directors, its Compensation Committee and
Beverly, as sole stockholder of New Beverly prior to the Distribution, 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"). On , 1997, the New
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Beverly Directors Option Plan was adopted by the Board of Directors and
Compensation Committee of Beverly, and was 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.
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 are
common stock, par value $.10 per share, and are preferred stock, par
value $1.00 per share ("New Beverly Preferred Stock"). At June 2, 1997, New
Beverly had outstanding 1,000 shares of New Beverly Common Stock all of which
such shares are 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.
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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 ,
1997 (the "Record Date"). 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").
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.
77
<PAGE> 85
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).
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."
78
<PAGE> 86
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Distribution, New Beverly will have an estimated
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 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, 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.
79
<PAGE> 87
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 March 31, 1997
and December 31, 1996................................... F-2
Condensed Consolidated Statements of Income for the three
months ended March 31, 1997 and 1996.................... F-3
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996.............. F-4
Notes to Condensed Consolidated Financial Statements...... F-5
PHARMACY CORPORATION OF AMERICA
Condensed Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996................................... F-7
Condensed Consolidated Statements of Income for the three
months ended March 31, 1997 and 1996.................... F-8
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and 1996.............. F-9
Notes to Condensed Consolidated Financial Statements...... F-10
BEVERLY ENTERPRISES, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-12
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................... F-13
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994........................ F-14
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994............ F-15
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................ F-16
Notes to Consolidated Financial Statements................ F-17
Schedule II -- Valuation and Qualifying Accounts.......... F-35
PHARMACY CORPORATION OF AMERICA
Report of Ernst & Young LLP, Independent Auditors......... F-36
Consolidated Balance Sheets as of December 31, 1996 and
1995.................................................... F-37
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1996, 1995 and 1994.... F-38
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................ F-39
Notes to Consolidated Financial Statements................ F-40
Schedule II -- Valuation and Qualifying Accounts.......... F-50
NEW BEVERLY HOLDINGS, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-51
Balance Sheet as of May 31, 1997.......................... F-52
Note to Balance Sheet..................................... F-53
</TABLE>
F-1
<PAGE> 88
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 64,136 $ 69,761
Accounts receivable -- patient, less allowance for
doubtful accounts:
1997 -- $26,161; 1996 -- $25,618....................... 522,415 491,063
Accounts receivable -- nonpatient, less allowance for
doubtful accounts:
1997 -- $275; 1996 -- $401............................. 11,628 13,480
Notes receivable.......................................... 10,572 10,746
Operating supplies........................................ 56,661 55,348
Deferred income taxes..................................... 13,320 14,543
Prepaid expenses and other................................ 42,505 42,304
---------- ----------
Total current assets.............................. 721,237 697,245
Property and equipment, net of accumulated depreciation and
amortization:
1997 -- $655,785; 1996 -- $643,085..................... 1,262,671 1,248,785
Other assets:
Notes receivable, less allowance for doubtful notes:
1997 -- $5,143; 1996 -- $4,951......................... 29,206 37,306
Designated and restricted funds........................... 81,346 75,848
Goodwill, net............................................. 372,637 356,197
Other, net................................................ 115,301 109,701
---------- ----------
Total other assets................................ 598,490 579,052
---------- ----------
$2,582,398 $2,525,082
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 122,467 $ 99,121
Accrued wages and related liabilities..................... 136,863 131,072
Accrued interest.......................................... 13,714 16,969
Other accrued liabilities................................. 84,516 93,042
Current portion of long-term obligations.................. 36,361 38,826
---------- ----------
Total current liabilities......................... 393,921 379,030
Long-term obligations....................................... 1,119,865 1,106,256
Deferred income taxes payable............................... 87,980 83,610
Other liabilities and deferred items........................ 99,305 95,091
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued:
1997 -- 104,595,272; 1996 -- 104,432,848............... 10,460 10,443
Additional paid-in capital................................ 776,424 774,672
Retained earnings......................................... 152,420 133,957
Treasury stock, at cost: 5,423,408 shares................. (57,977) (57,977)
---------- ----------
Total stockholders' equity........................ 881,327 861,095
---------- ----------
$2,582,398 $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> 89
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net operating revenues...................................... $816,716 $811,047
Interest income............................................. 3,565 3,460
-------- --------
Total revenues.................................... 820,281 814,507
Costs and expenses:
Operating and administrative:
Wages and related...................................... 449,782 449,995
Other.................................................. 289,930 293,484
Interest.................................................. 22,716 23,145
Depreciation and amortization............................. 27,081 25,056
-------- --------
Total costs and expenses.......................... 789,509 791,680
-------- --------
Income before provision for income taxes.................... 30,772 22,827
Provision for income taxes.................................. 12,309 9,131
-------- --------
Net income.................................................. $ 18,463 $ 13,696
======== ========
Net income per share of common stock:
Primary:
Net income per share of common stock................... $ 0.19 $ 0.14
======== ========
Shares used to compute net income per share............ 99,411 99,978
======== ========
Fully diluted:
Net income per share of common stock................... $ 0.18 $ 0.13
======== ========
Shares used to compute net income per share............ 110,688 111,231
======== ========
</TABLE>
Primary earnings per share for the three months ended March 31, 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 months ended March 31, 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 months ended March 31, 1997 and 1996.
See accompanying notes.
F-3
<PAGE> 90
BEVERLY ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 18,463 $ 13,696
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 27,081 25,056
Provision for reserves and discounts on patient, notes
and other receivables, net............................ 6,378 6,550
Amortization of deferred financing costs............... 662 1,893
(Gains) losses on dispositions of facilities and other
assets, net........................................... 1,469 (2,212)
Deferred taxes......................................... 5,740 3,264
Net decrease in insurance related accounts............. (1,364) (7,131)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable -- patient....................... (36,631) (16,211)
Operating supplies................................... (276) 1,610
Prepaid expenses and other receivables............... (950) (1,162)
Accounts payable and other accrued expenses.......... 25,960 (5,166)
Income taxes payable................................. (4,751) 10,509
Other, net........................................... 320 (21)
--------- ---------
Total adjustments................................. 23,638 16,979
--------- ---------
Net cash provided by operating activities......... 42,101 30,675
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (30,829) (10,630)
Proceeds from dispositions of facilities and other
assets................................................. 263 6,692
Collections on notes receivable and REMIC investment...... 8,981 3,006
Capital expenditures...................................... (37,638) (29,206)
Other, net................................................ 742 (4,016)
--------- ---------
Net cash used for investing activities............ (58,481) (34,154)
Cash flows from financing activities:
Revolver borrowings....................................... 387,000 284,000
Repayments of Revolver borrowings......................... (363,000) (333,000)
Proceeds from issuance of long-term obligations........... 3,534 180,000
Repayments of long-term obligations....................... (16,356) (128,673)
Purchase of common stock for treasury..................... (2,397) --
Proceeds from exercise of stock options................... 1,855 361
Deferred financing costs.................................. (320) (5,242)
Dividends paid on preferred stock......................... -- (688)
Proceeds from designated funds, net....................... 439 472
--------- ---------
Net cash provided by (used for) financing
activities...................................... 10,755 (2,770)
--------- ---------
Net decrease in cash and cash equivalents................... (5,625) (6,249)
Cash and cash equivalents at beginning of period............ 69,761 56,303
--------- ---------
Cash and cash equivalents at end of period.................. $ 64,136 $ 50,054
========= =========
Supplemental schedule of cash flow information:
Cash paid (received) during the period for:
Interest (net of amounts capitalized).................. $ 25,309 $ 17,701
========= =========
Income tax payments (refunds), net..................... 11,320 (4,642)
========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 91
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 months ended March
31, 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 months ended March 31, 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 months ended March 31,
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 months ended March 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Federal:
Current................................................... $ 5,298 $4,553
Deferred.................................................. 4,840 2,765
State:
Current................................................... 1,271 1,314
Deferred.................................................. 900 499
------- ------
$12,309 $9,131
======= ======
</TABLE>
(iii) During the three months ended March 31, 1997, the Company purchased
three previously leased nursing facilities (449 beds) and certain other assets
including, among other things, 14 institutional pharmacies and six outpatient
therapy clinics, for approximately $30,500,000 cash and approximately $1,400,000
closing and other costs. Also during such period, the Company terminated the
leases on five nursing facilities (707 beds) and disposed of certain other
assets for cash proceeds of approximately $600,000. The Company recognized net
pre-tax losses during the first quarter of 1997 of approximately $1,500,000 as a
result of these dispositions. The operations of these facilities were immaterial
to the Company's consolidated financial position and results of operations.
In March 1997, the Company 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
F-5
<PAGE> 92
BEVERLY ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indebtedness; and repurchase Common Stock. The operations of these facilities
are immaterial to the Company's consolidated financial position and results of
operations.
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 the nation's largest independent institutional pharmacy
company. 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. In addition, Capstone will issue approximately
50,000,000 shares of its common stock to the Company's shareholders. The
Company's shareholders are expected to receive approximately .44 shares of
Capstone common stock for each share of the Company's Common Stock outstanding,
based on the fully diluted number of shares of the Company's Common Stock
outstanding at March 31, 1997, and will own approximately 57% of the combined
pharmacy company after the combination. The exact conversion ratio of the
Company's Common Stock to Capstone common shares will be determined based on the
total number of shares of the Company's Common Stock outstanding on the
effective date of the Merger. 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 Merger, the Company will transfer all of its non-PCA
assets and liabilities to New Beverly Holdings, Inc. ("NBHI"), in exchange for
the issuance of NBHI common stock. The Company will then distribute (the
"Distribution") such NBHI 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 has not yet determined the impact this will
have on its consolidated financial position, results of operations or cash
flows.
(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.
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 THREE MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1996
------------------ ------------------
<S> <C> <C>
Total revenues................................... $ 670,353 $ 680,273
Total costs and expenses......................... 642,355 658,740
Net income....................................... 16,799 12,920
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Current assets......................................... $ 388,467 $ 369,501
Long-term assets....................................... 1,413,184 1,404,292
Current liabilities.................................... 192,050 184,887
Long-term liabilities.................................. 799,489 795,593
</TABLE>
F-6
<PAGE> 93
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (NOTE)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,671 $ 7,575
Accounts receivable, less allowance for doubtful accounts:
1997 -- $13,429; 1996 -- $13,070....................... 100,696 93,078
Notes and other receivables, less allowance for doubtful
accounts: 1997 -- $823; 1996 -- $820................... 1,297 1,383
Inventory................................................. 23,682 22,025
Prepaid expenses and other................................ 424 335
-------- --------
Total current assets.............................. 131,770 124,396
Property and equipment, net of accumulated depreciation and
amortization: 1997 -- $25,316; 1996 -- $23,263............ 34,579 32,698
Other assets:
Goodwill, net............................................. 288,086 276,430
Systems development, net.................................. 4,891 4,837
Other, net................................................ 7,357 3,215
-------- --------
Total other assets................................ 300,334 284,482
-------- --------
$466,683 $441,576
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 21,367 $ 18,017
Accrued wages and related liabilities..................... 6,029 6,656
Other accrued liabilities................................. 5,965 6,621
Current portion of long-term obligations.................. 1,078 968
-------- --------
Total current liabilities......................... 34,439 32,262
Long-term obligations....................................... 1,442 1,334
Deferred income taxes payable............................... 5,026 3,980
Due to Parent............................................... 326,343 312,395
Commitments and contingencies
Stockholder's equity:
Common stock, 1,000 shares issued......................... 1 1
Additional paid-in capital................................ 3,866 3,866
Retained earnings......................................... 95,566 87,738
-------- --------
Total stockholder's equity........................ 99,433 91,605
-------- --------
$466,683 $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-7
<PAGE> 94
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revenues:
Non-affiliates........................ $122,390 $105,221
Affiliates............................ 25,202 19,155
-------- --------
Total revenues................ 147,592 124,376
Cost of goods sold...................... 80,087 65,672
-------- --------
Gross profit............................ 67,505 58,704
Costs and expenses:
Wages and related..................... 32,033 29,614
Selling, general and administrative... 14,204 12,355
Provision for doubtful accounts....... 2,371 2,189
Depreciation and amortization......... 4,826 3,807
Management fees....................... 667 529
-------- --------
Total costs and expenses...... 54,101 48,494
-------- --------
Income before provision for income
taxes................................. 13,404 10,210
Provision for income taxes.............. 5,576 4,284
-------- --------
Net income.............................. $ 7,828 $ 5,926
======== ========
</TABLE>
See accompanying notes.
F-8
<PAGE> 95
PHARMACY CORPORATION OF AMERICA
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 7,828 5,926
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 4,826 3,807
Provision for reserves on accounts, notes and other
receivables, net...................................... 2,371 2,189
Deferred taxes......................................... 1,046 1,214
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable.................................. (7,349) (3,122)
Inventory............................................ (318) 1,650
Prepaid expenses and other........................... (60) (24)
Accounts payable and other accrued expenses.......... 2,067 (7,435)
-------- -------
Total adjustments................................. 2,583 (1,721)
-------- -------
Net cash provided by operating activities......... 10,411 4,205
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired........... (22,144) (110)
Capital expenditures...................................... (2,809) (1,638)
Systems development....................................... (462) (332)
Other, net................................................ (439) 693
-------- -------
Net cash used for investing activities............ (25,854) (1,387)
Cash flows from financing activities:
Advances (to) from Parent, net............................ 13,852 (5,622)
Repayments of long-term obligations....................... (313) (108)
-------- -------
Net cash provided by (used for) financing
activities....................................... 13,539 (5,730)
-------- -------
Net decrease in cash and cash equivalents................... (1,904) (2,912)
Cash and cash equivalents at beginning of period............ 7,575 3,315
-------- -------
Cash and cash equivalents at end of period.................. $ 5,671 403
======== =======
Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest............................................... $ 93 6
</TABLE>
See accompanying notes.
F-9
<PAGE> 96
PHARMACY CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 months ended March 31, 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 months ended March 31, 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.
Certain prior year amounts have been reclassified to conform with the 1997
presentation.
(ii) The provisions for income taxes for the three months ended March 31,
1997 and 1996 were based on estimated annual effective tax rates of 41.6% 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 months ended
March 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Federal:
Current.................................................. $3,728 $2,527
Deferred................................................. 861 999
State:
Current.................................................. 802 543
Deferred................................................. 185 215
------ ------
$5,576 $4,284
====== ======
</TABLE>
(iii) During the three months ended March 31, 1997, the Company purchased
14 pharmacies, for approximately $22,100,000 cash. The operations of these
pharmacies were immaterial to the Company's consolidated 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 the nation's largest independent institutional pharmacy
company. 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. In addition, Capstone will issue
approximately 50,000,000 shares of its common stock to Beverly's stockholders.
Beverly's stockholders are expected to receive approximately .44 shares of
Capstone common stock for each share of Beverly's Common Stock outstanding,
based on the fully diluted number of shares of Beverly's Common Stock
F-10
<PAGE> 97
PHARMACY CORPORATION OF AMERICA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997
(UNAUDITED)
outstanding at March 31, 1997, and will own approximately 57% of the combined
pharmacy company after the combination. The exact conversion ratio of Beverly's
Common Stock to Capstone common shares will be determined based on the total
number of shares of Beverly's Common Stock outstanding on the effective date of
the Merger. 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 $25,202,000 and $19,155,000 for the three months ended March 31,
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 $24,000,000 and $21,000,000 for
the three months ended March 31, 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 $667,000 and $529,000 for the three months ended March 31, 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-11
<PAGE> 98
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-12
<PAGE> 99
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-13
<PAGE> 100
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-14
<PAGE> 101
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-15
<PAGE> 102
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-16
<PAGE> 103
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-17
<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)
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-18
<PAGE> 105
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-19
<PAGE> 106
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-20
<PAGE> 107
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-21
<PAGE> 108
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-22
<PAGE> 109
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-23
<PAGE> 110
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-24
<PAGE> 111
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-25
<PAGE> 112
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-26
<PAGE> 113
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-27
<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 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-28
<PAGE> 115
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-29
<PAGE> 116
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-30
<PAGE> 117
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-31
<PAGE> 118
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-32
<PAGE> 119
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-33
<PAGE> 120
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>
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-34
<PAGE> 121
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-35
<PAGE> 122
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-36
<PAGE> 123
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-37
<PAGE> 124
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-38
<PAGE> 125
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-39
<PAGE> 126
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-40
<PAGE> 127
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-41
<PAGE> 128
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-42
<PAGE> 129
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-43
<PAGE> 130
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-44
<PAGE> 131
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-45
<PAGE> 132
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-46
<PAGE> 133
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-47
<PAGE> 134
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-48
<PAGE> 135
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. There are currently no required repayment terms for
this account nor do such amounts bear interest.
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 company. Capstone will issue
approximately 50,000,000 shares of its common stock to Beverly stockholders and
Beverly will be repaid approximately $275,000,000 of the Company's "Due to
Parent," with any remaining balance contributed to capital. Beverly stockholders
will own a majority of the combined pharmacy company after the combination;
however, Beverly will not retain any ownership interest. The exact conversion
ratio of Beverly to Capstone shares will be determined based on the total number
of shares of Beverly stock outstanding on the record date of this transaction.
The record date has not yet been set. The transaction is subject to approval by
the stockholders of both Beverly and Capstone, as well as to approvals by
various government agencies. It is expected to close by year-end 1997.
F-49
<PAGE> 136
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-50
<PAGE> 137
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-51
<PAGE> 138
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-52
<PAGE> 139
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-53
<PAGE> 140
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> 141
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> 142
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> 143
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
------- -----------
<S> <C>
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> 144
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.2 -- Indenture dated as of August 1, 1993 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee, with
respect to Beverly Enterprises, Inc.'s 5 1/2% Convertible
Subordinated Debentures due August 1, 2018, issuable upon
exchange of Beverly Enterprises, Inc.'s $2.75 Cumulative
Convertible Exchangeable Preferred Stock (the
"Subordinated Debenture Indenture") (incorporated by
reference to Exhibit 4.10 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 1993)
4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage
Bond Indenture"), among Beverly Enterprises, Inc.,
Delaware Trust Company, as Corporate Trustee, and Richard
N. Smith, as Individual Trustee, with respect to First
Mortgage Bonds (incorporated by reference to Exhibit 4.1
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1993)
4.4 -- First Supplemental Indenture dated as of April 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 3/4%
First Mortgage Bonds due 2008 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993)
4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 5/8%
First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated July 15, 1993) (incorporated by reference to
Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)
4.6 -- 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
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))
4.7 -- 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)
4.8 -- 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)
4.9 -- 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)
</TABLE>
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<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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)
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).
</TABLE>
II-6
<PAGE> 146
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 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)
10.18 -- 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)
10.19 -- 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)
10.20 -- Amended and Restated Credit Agreement, dated as of
December 20, 1996, among Beverly Enterprises, Inc., the
Banks listed therein, and Morgan Guaranty Trust Company
of New York, as Issuing Bank and as Agent (incorporated
by reference to Exhibit 10.44 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996).
10.21 -- 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))
10.22 -- 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))
10.23 -- 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)
10.24 -- Form of Irrevocable Trust Agreement for the Beverly
Enterprises, Inc. Executive Benefits Plan (incorporated
by reference to Exhibit 10.55 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-4 filed on
February 13, 1995 (File No. 33-57663))
</TABLE>
II-7
<PAGE> 147
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 (incorporated by reference to
Exhibit 21.1 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1996).
23.1** -- Consent of Ernst & Young LLP, Independent Auditors
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> 148
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 30th day of July, 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 and Director
David R. Banks July 30, 1997
* President, Chief Operating
- ----------------------------------------------------- Officer and Director
Boyd W. Hendrickson July 30, 1997
* Executive Vice President,
- ----------------------------------------------------- General Counsel, Secretary and
Robert W. Pommerville Director July 30, 1997
* Executive Vice
- ----------------------------------------------------- President -- Asset Management
Bobby W. Stephens and Director July 30, 1997
/s/ SCOTT M. TABAKIN Executive Vice President, Chief
- ----------------------------------------------------- Financial Officer and Director
Scott M. Tabakin July 30, 1997
* Vice President, Controller and
- ----------------------------------------------------- Chief Accounting Officer
Pamela H. Daniels July 30, 1997
/s/ *BELINDA MARCOTTE
- -----------------------------------------------------
As Attorney-in-Fact
</TABLE>
II-9
<PAGE> 149
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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 August 1, 1993 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee,
with respect to Beverly Enterprises, Inc.'s 5 1/2%
Convertible Subordinated Debentures due August 1,
2018, issuable upon exchange of Beverly Enterprises,
Inc.'s $2.75 Cumulative Convertible Exchangeable
Preferred Stock (the "Subordinated Debenture
Indenture") (incorporated by reference to Exhibit
4.10 to Beverly Enterprises, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 1993)
4.3 -- Indenture dated as of April 1, 1993 (the "First
Mortgage Bond Indenture"), among Beverly
Enterprises, Inc., Delaware Trust Company, as
Corporate Trustee, and Richard N. Smith, as
Individual Trustee, with respect to First Mortgage
Bonds (incorporated by reference to Exhibit 4.1 to
Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1993)
4.4 -- First Supplemental Indenture dated as of April 1,
1993 to the First Mortgage Bond Indenture, with
respect to 8 3/4% First Mortgage Bonds due 2008
(incorporated by reference to Exhibit 4.2 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 1993)
4.5 -- Second Supplemental Indenture dated as of July 1,
1993 to the First Mortgage Bond Indenture, with
respect to 8 5/8% First Mortgage Bonds due 2008
(replaces Exhibit 4.1 to Beverly Enterprises, Inc.'s
Current Report on Form 8-K dated July 15, 1993)
(incorporated by reference to Exhibit 4.15 to
Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1993)
4.6 -- 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 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))
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.7 -- 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)
4.8 -- 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)
4.9 -- 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)
</TABLE>
<PAGE> 151
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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)
10.17 -- 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)
10.18 -- 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)
10.19 -- 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)
</TABLE>
<PAGE> 152
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.20 -- Amended and Restated Credit Agreement, dated as of
December 20, 1996, among Beverly Enterprises, Inc., the
Banks listed therein, and Morgan Guaranty Trust Company
of New York, as Issuing Bank and as Agent (incorporated
by reference to Exhibit 10.44 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1996).
10.21 -- 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))
10.22 -- 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))
10.23 -- 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)
10.24 -- Form of Irrevocable Trust Agreement for the Beverly
Enterprises, Inc. Executive Benefits Plan (incorporated
by reference to Exhibit 10.55 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-4 filed on
February 13, 1995 (File No. 33-57663))
11.1 -- Computation of Net Income (Loss) Per Share for the years
ended December 31, 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 (incorporated by reference to
Exhibit 21.1 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1996).
23.1** -- Consent of Ernst & Young LLP, Independent Auditors
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 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. 1
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 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 to the Registration Statement and Prospectus.
/s/ ERNST & YOUNG LLP
July 28, 1997
Little Rock, Arkansas
