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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 1-9550
BEVERLY ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C>
DELAWARE 62-1691861
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 BEVERLY WAY
FORT SMITH, ARKANSAS 72919
(Address of principal executive offices) (Zip Code)
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Registrant's Telephone Number, Including Area Code: (501) 201-2000
Securities Registered Pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, $.10 par value New York Stock Exchange
Pacific Stock Exchange
9% Senior Notes due February 15, 2006 New York Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act: NONE
INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT
WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF
REGISTRANT WAS $266,486,131 AS OF FEBRUARY 29, 2000.
102,495,556
(NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, NET OF TREASURY SHARES, AS OF
FEBRUARY 29, 2000)
PART III IS INCORPORATED BY REFERENCE FROM THE PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 25, 2000.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, and other information provided by the
Company from time to time, contains certain "forward-looking" statements as that
term is defined by the Private Securities Litigation Reform Act of 1995. All
statements regarding the Company's expected future financial position, results
of operations, cash flows, continued performance improvements, ability to
service and refinance its debt obligations, ability to finance growth
opportunities, ability to respond to changes in government regulations, and
similar statements including, without limitation, those containing words such as
"believes," "anticipates," "expects," "intends," "estimates," "plans," and other
similar expressions are forward-looking statements. Forward-looking statements
involve known and unknown risks and uncertainties that may cause the Company's
actual results in future periods to differ materially from those projected or
contemplated in the forward-looking statements as a result of, but not limited
to, the following factors: national and local economic conditions, including
their effect on the availability and cost of labor and materials; the effect of
government regulations and changes in regulations governing the healthcare
industry, including the Company's compliance with such regulations; changes in
Medicare and Medicaid payment levels; liabilities and other claims asserted
against the Company, including patient care liabilities, as well as the
resolution of the Class Action and Derivative Lawsuits (see "Item 3. Legal
Proceedings"); the ability to attract and retain qualified personnel; the
availability and terms of capital to fund acquisitions and capital improvements;
the competitive environment in which the Company operates; the ability to
maintain and increase census levels; and demographic changes. Given these risks
and uncertainties, the Company can give no assurances that these forward-looking
statements will, in fact, transpire and, therefore, cautions investors not to
place undue reliance on them. See "Item 1. Business -- Governmental Regulation
and Reimbursement," "-- Competition" and "-- Employees" for a discussion of
various governmental regulations and other operating factors relating to the
healthcare industry and various risk factors inherent in them.
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PART I
ITEM 1. BUSINESS.
GENERAL
References herein to the Company include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries. The business of the Company consists principally of
providing healthcare services, including the operation of nursing facilities,
assisted living centers, home care centers, outpatient therapy clinics and
rehabilitation therapy services.
The Company is one of the largest operators of nursing facilities in the
United States. At February 29, 2000, the Company operated 559 nursing facilities
with 61,896 licensed beds. The nursing facilities are located in 29 states and
the District of Columbia, and range in capacity from 20 to 355 beds. At February
29, 2000, the Company also operated 37 assisted living centers containing 1,138
units, 180 outpatient therapy clinics, and 63 home care centers. The Company's
nursing facilities had average occupancy of 87.2%, 88.7% and 88.9% during the
years ended December 31, 1999, 1998 and 1997, respectively. See "Item 2.
Properties."
Healthcare service providers, such as the Company, operate in an industry
that is subject to significant changes from business combinations, new strategic
alliances, legislative reform, aggressive marketing practices by competitors and
market pressures. In this environment, the Company is frequently contacted by,
and otherwise engages in discussions with, other healthcare companies and
financial advisors regarding possible strategic alliances, joint ventures,
business combinations and other financial alternatives. Most recently, the
significant reductions in stock prices for publicly-held long-term care
companies, as well as the increasing number of providers filing for bankruptcy
protections, could change the nature of the activity in this area.
OPERATIONS
The Company is currently organized into two operating segments, which
include: (i) Beverly Healthcare, which provides long-term healthcare through the
operation of nursing facilities and assisted living centers; and (ii) Beverly
Care Alliance, which operates outpatient therapy clinics, home care centers and
an inpatient rehabilitation therapy services business. Business in each
operating segment is conducted by one or more corporations headed by a president
who is also a senior officer of the Company. The corporations comprising each of
the two operating segments also have separate boards of directors. See "Part II,
Item 8 -- Note 11 of Notes to Consolidated Financial Statements" for segment
information.
Beverly Healthcare's nursing facilities provide residents with routine
long-term care services, including daily dietary, social and recreational
services and a full range of pharmacy services and medical supplies. Beverly
Healthcare's skilled staff also offers complex and intensive medical services to
patients with higher acuity disorders outside the traditional acute care
hospital setting. In addition, Beverly Healthcare provides assisted living
services. Approximately 91%, 90% and 80% of the Company's total net operating
revenues for the years ended December 31, 1999, 1998 and 1997, respectively,
were derived from services provided by Beverly Healthcare.
Beverly Care Alliance provides outpatient and rehabilitative therapy
services, home care services, and managed care contract services within the
Company's nursing facilities and to other healthcare providers. Approximately
9%, 7% and 2% of the Company's total net operating revenues for the years ended
December 31, 1999, 1998 and 1997, respectively, were derived from services
provided by Beverly Care Alliance.
GOVERNMENTAL REGULATION AND REIMBURSEMENT
The Company's nursing facilities are subject to compliance with various
federal, state and local healthcare statutes and regulations. Compliance with
state licensing requirements imposed upon all healthcare facilities is a
prerequisite for the operation of the facilities and for participation in
government-sponsored healthcare funding programs, such as Medicaid and Medicare.
Medicaid is a medical assistance program for the indigent, operated by
individual states with the financial participation of the federal government.
Medicare
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is a health insurance program for the aged and certain other chronically
disabled individuals, operated by the federal government. Changes in the
reimbursement policies of such funding programs as a result of budget cuts by
federal and state governments or other legislative and regulatory actions could
have a material adverse effect on the Company's consolidated financial position,
results of operations and cash flows.
The Company receives payments for services rendered to patients from (a)
each of the states in which its nursing facilities are located under the
Medicaid program; (b) the federal government under the Medicare program; and (c)
private payors, including commercial insurers, managed care payors and Veterans
Administration ("VA"). The following table sets forth: (i) patient days derived
from the indicated sources of payment as a percentage of total patient days,
(ii) room and board revenues derived from the indicated 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:
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MEDICAID MEDICARE PRIVATE AND VA
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ROOM AND ROOM AND ROOM AND
PATIENT BOARD PATIENT BOARD PATIENT BOARD ANCILLARY AND
DAYS REVENUES DAYS REVENUES DAYS REVENUES OTHER REVENUES
------- -------- ------- -------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended:
December 31, 1999............ 71% 52% 9% 14% 20% 19% 15%
December 31, 1998............ 69% 46% 11% 13% 20% 18% 23%
December 31, 1997............ 68% 40% 12% 12% 20% 16% 32%
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Consistent with the long-term care industry in general, changes in the mix
of the Company's patient population among the Medicaid, Medicare and private
categories can significantly affect revenues and profitability. In most states,
private patients are the most profitable, and Medicaid patients are the least
profitable.
Ancillary revenues are derived from providing services to residents beyond
room, board and custodial care and include occupational, physical, speech,
respiratory and intravenous ("IV") therapy, as well as sales of pharmaceuticals
and other services. Such services are currently provided primarily to Medicare
and private pay patients.
Medicaid programs are currently in existence in all of the states in which
the Company operates nursing facilities. While these programs differ in certain
respects from state to state, they are all subject to federally-imposed
requirements, and at least 50% of the funds available under these programs is
provided by the federal government under a matching program.
The Medicaid and Medicare programs each contain specific requirements which
must be adhered to by healthcare facilities in order to qualify under the
programs. Currently, most state Medicaid programs utilize a cost-based
reimbursement system for nursing facilities which reimburses facilities for the
reasonable direct and indirect allowable costs incurred in providing routine
patient care services (as defined by the programs) plus, in certain states,
efficiency incentives or a return on equity, subject to certain cost ceilings.
These costs normally include allowances for administrative and general costs as
well as the costs of property and equipment (e.g. depreciation and interest,
fair rental allowance or rental expense).
State Medicaid reimbursement programs vary as to the methodology used to
determine the level of allowable costs which are reimbursed to operators. 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. Arizona, Arkansas and
California provide for reimbursement at a flat daily rate, as determined by the
responsible state agency. Several states in which the Company currently operates
have enacted payment mechanisms which are based on patient acuity versus
traditional cost-based methodologies. Many other states are actively developing
similar payment systems based on patient acuity or which may follow a
methodology similar to Medicare's prospective payment system. The Company is
unable to estimate the ultimate impact of these changes in
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payment mechanisms on the Company's future consolidated financial position,
results of operations, or cash flows.
Healthcare system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for both the federal and state governments.
In August 1997, the President signed into law the Balanced Budget Act of 1997
(the "1997 Act") in which Congress included numerous program changes directed at
balancing the federal budget. The legislation changed Medicare and Medicaid
policy in a number of ways, including: (i) the phase in of a Medicare
prospective payment system ("PPS") for skilled nursing facilities effective July
1, 1998 (see below); (ii) establishment of limitations on Part B therapy charges
per beneficiary per year; (iii) a 10% reduction in Part B therapy costs for the
period from January 1, 1998 through July 1, 1998, at which time reimbursement
for these services became based on fee schedules established by the Health Care
Financing Administration ("HCFA") of the Department of Health and Human Services
("HHS"); (iv) development of new Medicare and Medicaid health plan options; (v)
creation of additional safeguards against healthcare fraud and abuse; and (vi)
repeal of the Medicaid "Boren Amendment" payment standard. The legislation also
included new opportunities for providers to focus further on patient outcomes by
creating alternative patient delivery structures.
PPS, which became effective for the Company on January 1, 1999,
significantly changed the manner in which its skilled nursing facilities are
paid for inpatient services provided to Medicare beneficiaries. In year one
(1999 for the Company), Medicare PPS rates were based 75% on 1995
facility-specific Medicare costs (as adjusted for inflation) and 25% was
federally-determined based upon the acuity level (as measured by which one of 44
Resource Utilization Grouping ("RUG") categories a particular patient is
classified) of Medicare patients served in the Company's skilled nursing
facilities. The direct impact of PPS and other provisions of the 1997 Act was a
decrease in the Company's 1999 net operating revenues of approximately
$114,000,000 as compared to 1998. Unless a nursing facility provider chooses to
be reimbursed at 100% of the federally-determined acuity-adjusted rate as
allowed under BBRA 1999 (as discussed below): (i) in year two, Medicare PPS
rates will be based 50% on 1995 facility-specific costs (as adjusted for
inflation) and 50% on the federally-determined acuity-adjusted rate; (ii) in
year three, Medicare PPS rates will be based 25% on 1995 facility-specific costs
(as adjusted for inflation) and 75% on the federally-determined acuity-adjusted
rate; and (iii) in year four and thereafter, Medicare PPS rates will be based
entirely on the federally-determined acuity-adjusted rate.
In November 1999, the President signed into law the Balanced Budget
Refinement Act of 1999 ("BBRA 1999") which refines the 1997 Act and will restore
approximately $2.7 billion in Medicare funding for skilled nursing providers
over the next three years. The provisions of BBRA 1999 include: (i) the option
for a skilled nursing provider to choose between the higher of current law, as
described above, or 100% of the federally-determined acuity-adjusted rate
effective for cost reporting periods starting on or after January 1, 2000; (ii)
a temporary increase of 20% in the federal adjusted per diem rates for 15 RUG
categories covering extensive services, special care, clinically complex, and
high and medium rehabilitation, for the period from April 1, 2000 through
September 30, 2000; at which time, if HCFA has not recalculated the necessary
refinements to the overall RUG-III system, the 20% increase will be extended
until such time as the calculations are completed; (iii) a 4% increase in the
federal adjusted per diem rates for all 44 RUG categories for each of the
periods October 1, 2000 through September 30, 2001 and October 1, 2001 through
September 30, 2002; (iv) a two-year moratorium on implementing the two Part B
$1,500 therapy limitations contained in the 1997 Act, effective January 1, 2000
through January 1, 2002; (v) a retroactive provision that corrects a technical
error in the 1997 Act denying payment of Part B services to skilled nursing
facilities participating in PPS demonstration projects; and (vi) exclusion from
the Medicare PPS rates of ambulance services to and from dialysis, prosthetic
devices, radioisotopes and chemotherapy furnished on or after April 1, 2000. The
Company has elected to move to a 100% federally-determined acuity-adjusted rate
on approximately 300 of its nursing facilities effective January 1, 2000. The
Company currently estimates an increase in its 2000 net operating revenues of
approximately $20,000,000 related to the impact of BBRA 1999. However, no
assurances can be given as to what the actual impact of BBRA 1999 will be on the
Company's consolidated financial position or results of operations. In addition,
future federal budget legislation and federal and state regulatory changes,
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including refinements to the RUG-III system expected from HCFA by October 1,
2000, may negatively impact the Company.
In addition to the requirements to be met by the Company's facilities for
annual licensure renewal, the Company's healthcare facilities are subject to
annual surveys and inspections in order to be certified for participation in the
Medicare and Medicaid programs. In order to maintain their operator's licenses
and their certification for participation in Medicare and Medicaid programs, the
nursing facilities must meet certain statutory and administrative requirements.
These requirements relate to the condition of the facilities and the adequacy
and condition of the equipment used therein, the quality and adequacy of
personnel, and the quality of medical care. Such requirements are subject to
change. There can be no assurance that, in the future, the Company will be able
to maintain such licenses for its facilities or that the Company will not be
required to expend significant capital in order to do so.
HCFA published new survey, certification and enforcement guidelines in July
1999 and December 1999 to implement the Medicare and Medicaid provisions of the
Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987"). The OBRA 1987 statute
authorized HCFA to develop regulations governing survey, certification and
enforcement of the requirements for contract participation by skilled nursing
facilities under Medicare and nursing facilities under Medicaid. Among the
provisions that HCFA has adopted are requirements that (i) surveys focus on
residents' outcomes; (ii) all deviations from the participation requirements
will be considered deficiencies, but all deficiencies will not constitute
noncompliance; and (iii) certain types of deficiencies must result in the
imposition of a sanction. The regulations also identify alternative remedies and
specify the categories of deficiencies for which they will be applied. These
remedies include: temporary management; denial of payment for new admissions;
denial of payment for all residents; civil monetary penalties of $50 to $10,000;
closure of facility and/or transfer of residents in emergencies; directed plans
of correction; and directed in service training. HCFA's most recent enforcement
guidelines established criteria that mandates the immediate application of
remedies before the provider has an opportunity to correct the deficiency; that
impose a "per instance" civil monetary penalty up to $10,000 per day; and that
allow imposition of termination in as few as two days. The Company has
undertaken an analysis of the procedures with respect to its programs and
facilities covered by the revised HCFA regulations. While it is unable to
predict at this time 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
over 96% of the Company's nursing facilities surveyed have been determined to be
in compliance with the HCFA criteria. HCFA has reported that of all non-Company
facilities in the states in which the Company operates, 95% of such facilities
were determined to be similarly in compliance. Furthermore, the average number
of deficiencies cited in the Company's facilities was less than the rest of the
industry, and the Company had more deficiency-free facilities than the rest of
the industry. Although the Company could be adversely affected if a substantial
portion of its programs or facilities were eventually determined not to be in
compliance with the HCFA regulations, the Company believes its programs and
facilities are generally in compliance.
The Company has a Quality Management ("QM") program to help ensure that
high quality care is provided in each of its nursing and outpatient facilities.
The Company's nationwide QM network of healthcare professionals includes
physician medical directors, registered nurses, dieticians, social workers and
other specialists who work in conjunction with regional and facility based QM
professionals. Facility based QM is structured through the Company's Quality
Assessment and Assurance Committee. With a philosophy of quality improvement,
Company-wide clinical indicators are utilized as a database to set goals and
monitor thresholds in critical areas directly related to the delivery of
healthcare related services. These internal evaluations are used by local
quality improvement teams, which include QM advisors, to identify and correct
possible problems.
The Social Security Act and regulations of HHS provide for exclusion of
providers and related persons from participation in the Medicare and Medicaid
programs if they have been convicted of a criminal offense related to the
delivery of an item or service under either of these programs or if they have
been convicted, under state or federal law, of a criminal offense relating to
neglect or abuse of residents in connection with the delivery of a healthcare
item or service. Furthermore, individuals or entities and their affiliates may
be
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excluded from the Medicare and Medicaid programs under certain circumstances
including conviction relating to fraud, license revocation or suspension, or
failure to furnish services of adequate quality.
On February 3, 2000, the Company entered into a series of agreements with
the U.S. Department of Justice and the Office of Inspector General (the "OIG")
of the Department of Health and Human Services, which settled the federal
government investigations of the Company relating to the allocation to the
Medicare Program of certain nursing labor costs in its skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations"). These agreements
finalized the terms of the settlements, which were tentatively announced in July
1999.
The agreements consist of: (i) a Plea Agreement; (ii) a Civil Settlement
Agreement; (iii) a Corporate Integrity Agreement; and (iv) an agreement
concerning the disposition of 10 nursing facilities. Under the Plea Agreement, a
subsidiary of the Company pled guilty to one count of mail fraud and 10 counts
of making false statements to Medicare relating to the submission of certain
Medicare cost reports for 10 separate nursing facilities. The subsidiary paid a
criminal fine of $5,000,000 and, under a separate agreement, is obligated to
dispose of the 10 nursing facilities. The subsidiary will continue to operate
and staff the nursing facilities until new operators are found.
Under the separate Civil Settlement Agreement, the Company will reimburse
the federal government $170,000,000 as follows: (i) $25,000,000, which was paid
during the first quarter of 2000, and (ii) $145,000,000 to be withheld from the
Company's biweekly Medicare periodic interim payments in equal installments over
eight years. Such installments began during the first quarter of 2000. In
addition, the Company agreed to resubmit certain Medicare filings to reflect
reduced labor costs.
The Company also entered into a Corporate Integrity Agreement with the OIG
relating to the monitoring of compliance with requirements of federal healthcare
programs on an ongoing basis. Such agreement addresses the Company's obligations
to ensure that it is in compliance with the requirements for participation in
the federal healthcare programs, and includes the Company's functional and
training obligations, audit and review requirements, recordkeeping and reporting
requirements, as well as penalties for breach/noncompliance of the agreement.
Except as noted above, the Company believes that its facilities are in
substantial compliance with currently applicable Medicaid and Medicare
conditions of participation. In the ordinary course of its business, however,
the Company receives notices of deficiencies for failure to comply with various
regulatory requirements. The Company reviews such notices and takes appropriate
corrective action. In most cases, the Company and the reviewing agency will
agree upon the steps to be taken to bring the facility into compliance with
regulatory requirements. In some cases or upon repeat violations, the reviewing
agency may take a number of adverse actions against a facility. These adverse
actions can include the imposition of fines, temporary suspension of admission
of new patients to the facility, decertification from participation in the
Medicaid or Medicare programs and, in extreme circumstances, revocation of a
facility's license.
The "fraud and abuse" anti-kickback provisions of the Social Security Act
(presently codified in Section 1128B(b) of the Social Security Act, hereinafter
the "Antifraud Amendments") make it a criminal felony offense to knowingly and
willfully offer, pay, solicit or receive remuneration in order to induce
business for which reimbursement is provided under government health programs,
including Medicare and Medicaid. The Antifraud Amendments have been broadly
interpreted to make remuneration of any kind, including many types of business
and financial arrangements among providers, potentially illegal if any purpose
of the remuneration or financial arrangement is to induce a referral.
Accordingly, joint ventures, space and equipment rentals, management and
personal services contracts, and certain investment arrangements among providers
may be suspect.
In 1991 and again in 1999, HHS promulgated regulations which describe, or
clarify, certain arrangements that would not be subject to enforcement action
under the Social Security Act (the "Safe Harbors"). The Safe Harbors described
in the regulations are narrow, leaving unprotected a wide range of economic
relationships that many hospitals, physicians and other healthcare providers
consider to be legitimate business arrangements not prohibited by the Antifraud
Amendments. The regulations do not purport to describe
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comprehensively all lawful relationships between healthcare providers and
referral sources, and clearly provide that arrangements that do not qualify for
Safe Harbor protection are not automatically deemed to violate the Antifraud
Amendments. Thus, skilled nursing facilities and other healthcare providers
having arrangements or relationships that do not fall within a Safe Harbor may
not be required to alter them in order to ensure compliance with the Social
Security Act provisions. Although failure to qualify for a Safe Harbor may
subject a particular arrangement or relationship to increased regulatory
scrutiny, the fact that a particular relationship or arrangement does not fall
within one of the Safe Harbors does not, in and of itself, mean the relationship
or arrangement is unlawful.
In addition to the Antifraud Amendments, Section 1877 of the Social
Security Act (known as the "Stark Law") imposes restrictions on financial
relationships between physicians and certain entities. The Stark Law provides
that if a physician (or an immediate family member of a physician) has a
financial relationship with an entity that furnishes certain designated health
services, the physician may not refer a Medicare or Medicaid patient to the
entity, and the entity may not bill for services provided unless an exception to
the financial relationship exists. Designated health services include certain
services furnished by the Company, such as physical therapy, occupational
therapy, prescription drugs and home health. The types of financial
relationships that can trigger the referral and billing prohibitions are broad
and include ownership or investment interests, as well as compensation
arrangements. Penalties for violating the law are severe, including denial of
payment for services furnished pursuant to prohibited referrals, civil monetary
penalties of $15,000 for each item claimed, assessments equal to 200% of the
dollar value of each such service provided, and exclusion from the Medicare and
Medicaid programs.
On August 14, 1995, final regulations were published interpreting the
original provisions of the Stark Law that became effective January 1, 1992.
These provisions relate to entities that furnish clinical laboratory services,
commonly referred to as "Stark I." Expanded restrictions as applied to the
additional designated health services (referred to as "Stark II") became
effective as of January 1, 1995. Proposed regulations implementing Stark II were
published on January 9, 1998. The Company cannot predict the final form that
such regulations will take or the effect that Stark II or the regulations
promulgated thereunder will have on the Company.
Many states in which the Company operates also have laws that prohibit
payments to physicians for patient referrals with statutory language similar to
the Antifraud Amendments, but with broader effect since they apply regardless of
the source of payment for care. These statutes typically provide criminal and
civil penalties, as well as loss of licensure. Many states also have passed
legislation similar to the Stark Law, but with broader effect, since the
legislation applies regardless of the source of payment for care. The scope of
these state laws is broad and little precedent exists for their interpretation
or enforcement.
On August 21, 1996, President Clinton signed significant new federal health
reform legislation known as the Health Insurance Portability and Accountability
Act of 1996 ("HIPAA"). The new law includes comprehensive and far-reaching
revisions or supplements to the Antifraud Amendments. Under HIPAA, healthcare
fraud, now defined as knowingly and willfully executing or attempting to execute
a "scheme or device" to defraud any healthcare benefit program, is made a
federal criminal offense. In addition, for the first time, federal enforcement
officials will have the ability to exclude from the Medicare and Medicaid
programs any investors, officers and managing employees associated with business
entities that have committed healthcare fraud, even if the investor, officer or
employee had no actual knowledge of the fraud. HIPAA also establishes a new
violation for the payment of inducements to Medicare or Medicaid beneficiaries
in order to influence those beneficiaries to order or receive services from a
particular provider or practitioner. Most of the provisions of HIPAA became
effective January 1, 1997. HIPAA was followed by the 1997 Act. The 1997 Act also
contained a significant number of new fraud and abuse provisions. For example,
civil monetary penalties may now be imposed for violations of the anti-kickback
provisions of the Medicare and Medicaid statute (previously, exclusion or
criminal prosecution were the only actions under the anti-kickback statute), as
well as contracting with an individual or entity that the provider knows or
should know is excluded from a federal healthcare program. The 1997 Act provides
for civil monetary penalties of $50,000 and damages of not more than three times
the amount of remuneration in the prohibited activity.
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In October 1999, under the mandates of HIPAA, HHS released proposed
regulations aimed at protecting the privacy of electronically transmitted health
data. Such regulations are expected to be finalized during the second quarter of
2000. The proposed regulations are designed to set boundaries on the use and
release of health records and establish accountability for inappropriate use and
release of protected health information. Protected health information is
individually identifiable health information that is or has been electronically
transmitted or electronically maintained by a covered entity and includes such
information in any other form. Under the proposed regulations, all health plans
and many healthcare providers, including the Company, as well as healthcare
clearinghouses, fall within the scope of the regulations. The proposed
regulations would: (i) allow health information to be used and shared for
treatment and payment for health care; (ii) allow information to be disclosed
without an individual's authorization for certain national priority purposes,
such as research, public health and oversight, but only under defined
circumstances; (iii) require written authorization for use and disclosure of
health information for other purposes; and (iv) create standards for informing
individuals how their information is used and disclosed, ensure individuals that
they have access to information about themselves, and require health plans and
providers to maintain administrative and physical safeguards to protect the
confidentiality of health information and protect against unauthorized access.
HHS estimates that implementation of the proposed regulations will cost the
healthcare industry approximately $1.8 billion to $6.3 billion over the next
five years. The Company will be required to be in compliance with the proposed
regulations within two years of final issuance of the regulations. The Company
is currently evaluating the impact of compliance with the proposed regulations
but has not completed its analysis or finalized its estimated costs to comply.
There can be no assurances that the final regulations will not have an adverse
affect on the Company's consolidated financial position, results of operations
or cash flows.
In 1976, Congress established the OIG at HHS to identify and eliminate
fraud, abuse and waste in HHS programs and to promote efficiency and economy in
HHS departmental operations. The OIG carries out this mission through a
nationwide program of audits, investigations and inspections. In order to
provide guidance to healthcare providers on ways to engage in legitimate
business practices and avoid scrutiny under the fraud and abuse statutes, the
OIG has from time to time issued "fraud alerts" identifying segments of the
healthcare industry and particular practices that are vulnerable to abuse. The
OIG has issued three fraud alerts targeting the skilled nursing industry: an
August 1995 alert relating to the provision of medical supplies to nursing
facilities, the fraudulent billing for medical supplies and equipment and
fraudulent supplier transactions; a May 1996 alert focusing on the provision of
fraudulent professional services to nursing facility residents; and a March 1998
alert addressing the interrelationship between hospice services and the nursing
home industry, and potentially illegal practices and arrangements. The fraud
alerts encourage persons having information about potentially abusive practices
or transactions to report such information to the OIG.
In addition to laws addressing referral relationships, several federal laws
impose criminal and civil sanctions for fraudulent and abusive billing
practices. The federal False Claims Act imposes sanctions, consisting of
monetary penalties of up to $10,000 for each claim and treble damages, on
entities and persons who knowingly present or cause to be presented a false or
fraudulent claim for payment to the federal government. Section 1128B(a) of the
Social Security Act prohibits the knowing and willful making of a false
statement or misrepresentation of a material fact in relation to the submission
of a claim for payment under government health programs (including the Medicare
and Medicaid programs). Violations of this provision constitute felony offenses
punishable by fines and imprisonment. The new HIPAA provisions establish
criminal penalties for fraud, theft, embezzlement, and the making of false
statements in relation to healthcare benefits programs (which includes private,
as well as government programs). Government prosecutors are increasing their use
of the federal False Claims Act to prosecute quality of care deficiencies in
nursing facilities and other healthcare facilities under the theory that the
submission of reimbursement claims for services provided in a manner which falls
short of quality of care standards can constitute the submission of a false
claim in violation of the federal False Claims Act.
A joint federal/state initiative, Operation Restore Trust, was created in
1995 to apply to nursing homes, home health agencies, and suppliers of medical
equipment in five states: New York, Florida, California, Illinois and Texas. The
program was subsequently expanded to hospices in these states as well. The
program is designed to focus audit and law enforcement efforts on geographic
areas and provider types receiving large
8
<PAGE> 10
concentrations of Medicare and Medicaid funds. According to HHS statistics, the
targeted states account for nearly 40% of all Medicare and Medicaid
beneficiaries. Under Operation Restore Trust, the OIG and HCFA have undertaken a
variety of activities to address fraud and abuse by nursing homes, home health
providers and medical equipment suppliers. These activities include financial
audits, creation of a Fraud and Waste Report Hotline, and increased
investigations and enforcement activity.
On May 20, 1997, HHS announced that Operation Restore Trust would be
expanded during the next two years to include twelve additional states (Arizona,
Colorado, Georgia, Louisiana, Massachusetts, Missouri, New Jersey, Ohio,
Pennsylvania, Tennessee, Virginia and Washington), as well as several other
types of healthcare services. Over the longer term, it is anticipated that
Operation Restore Trust investigative techniques will be used in all 50 states,
and will be applied throughout the Medicare and Medicaid programs.
In addition to increasing the resources devoted to investigating
allegations of fraud and abuse in the Medicare and Medicaid programs, federal
and state regulatory and law enforcement authorities are taking an increasingly
strict view of the requirements imposed on healthcare providers by the Social
Security Act and Medicare and Medicaid regulations.
The Nursing Home Resident Protection Amendments of 1999, which were signed
into law on March 25, 1999 and amend Section 1919(c)(2) of the Social Security
Act, are designed to protect Medicaid patients living in nursing facilities that
decide to withdraw from the Medicaid program. Under the amended version of
Section 1919(c)(2), a nursing facility is required to continue providing care to
residents currently qualifying for assistance under the Medicaid program, as
well as residents who may qualify under Medicaid in the future, even if the
facility decides to withdraw from the Medicaid program.
While federal regulations do not provide states with grounds to curtail
funding of their Medicaid cost reimbursement programs due to state budget
deficiencies, states have nevertheless curtailed funding in such circumstances
in the past. No assurance can be given that states will not do so in the future
or that the future funding of Medicaid programs will remain at levels comparable
to the present levels. The United States Supreme Court ruled in 1990 that
healthcare providers could use the Boren Amendment to require states to comply
with their legal obligation to adequately fund Medicaid programs. The 1997 Act
repeals the Boren Amendment and authorizes states to develop their own standards
for setting payment rates. It requires each state to use a public process for
establishing proposed rates whereby the methodologies and justifications used
for setting such rates are available for public review and comment. This
requires facilities to become more involved in the rate setting process since
failure to do so may interfere with a facility's ability to challenge rates
later.
PATIENT CARE LIABILITIES
General liability and professional liability costs for the long-term care
industry, especially in the state of Florida, have become increasingly expensive
and unpredictable. The Company and most of its competitors have experienced
increases in both the number of claims and the size of the typical claim. This
phenomenon is most evident in the state of Florida, where well-intended patient
rights' statutes tend to be exploited by plaintiffs' attorneys, since the
statutes allow for actual damages, punitive damages and plaintiff attorney fees
to be included in any proven violation. Statistics show that Florida long-term
care providers: (i) incur three times the number of general liability claims as
compared to the rest of the country; (ii) have general liability claims that are
approximately 250% higher in cost than the rest of the country; and (iii) incur
40% of the cost for general liability claims for the country, but only represent
approximately 10% of the total nursing facility beds.
Insurance companies are exiting the state of Florida, or severely
restricting their capacity to write long-term care general liability insurance,
since they cannot provide coverage when faced with the magnitude of losses and
the explosive growth of claims. Although the Company's overall general liability
costs per bed in Florida are lower than the industry average in Florida, these
costs are still severely out of line with the rest of the country and continue
to escalate. The Company's provision for insurance and related items decreased
approximately $65,900,000 for the year ended December 31, 1999, as compared to
the same period in 1998, primarily due to a loss portfolio transfer transaction
that significantly increased insurance costs during the fourth quarter of 1998.
Despite such decrease year over year, the Company, as well as other nursing home
9
<PAGE> 11
providers with significant operations in Florida, are experiencing substantial
increases in patient care and other claims, evidencing the negative trend
surrounding patient care liabilities.
The Company is taking an active role in lobbying efforts to reform tort
laws in the state of Florida. In addition, community outreach programs are being
used to communicate care levels and caregiver dedication in each of its
facilities. There is significant media and legislative attention currently being
placed on these issues, and the Company is hopeful that there will be certain
reforms made in the current statutes. However, there can be no assurances made
that legislative changes will be made, or that any such changes will have a
positive impact on the current trend.
COMPETITION
The long-term care industry is highly competitive. The Company's
competitive position varies from facility to facility, from community to
community and from state to state. Some of the significant competitive factors
for the placing of patients in a nursing facility include quality of care,
reputation, physical appearance of facilities, services offered, family
preferences, location, physician services and price. The Company's operations
compete with services provided by nursing facilities, acute care hospitals,
subacute facilities, transitional hospitals, rehabilitation facilities, hospices
and home healthcare centers. The Company also competes with a number of
tax-exempt nonprofit organizations which can finance acquisitions and capital
expenditures on a tax-exempt basis or receive charitable contributions
unavailable to the Company. Recently, the long-term care industry has
experienced significant changes in its competitive environment. Several large
long-term care providers have filed for protection under the federal bankruptcy
laws. There is no way to predict how this may impact competition for the Company
in the long-term, and there can be no assurance that the Company will not
encounter increased competition which could adversely affect its business,
results of operations or financial condition.
EMPLOYEES
At December 31, 1999, the Company had approximately 67,000 employees. The
Company is subject to both federal minimum wage and applicable federal and state
wage and hour laws. The Company maintains various employee benefit plans.
In recent years, the Company has experienced increases in its labor costs
primarily due to higher wages and greater benefits required to attract and
retain qualified personnel, increased staffing levels in its nursing facilities
due to greater patient acuity and the hiring of therapists on staff. The
Company's ability to control costs, including its wages and related expenses
which continue to rise and represent the largest component of the Company's
operating and administrative expenses, will significantly impact its future
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Operating Results."
Due to nationwide low unemployment rates, the Company is currently
experiencing difficulty attracting and retaining certain nursing home personnel,
such as certified nursing assistants, nurses' aides and other important
personnel, for whom the Company competes with other service industries. Although
the Company's wages and related expenses decreased for the year ended December
31, 1999, as compared to the same period in 1998, the Company's weighted average
wage rate and use of registry personnel increased, both of which underscore the
increased difficulties many of the Company's nursing facilities are having
attracting personnel. The Company is addressing this through several ongoing
programs and training initiatives. No assurance can be given that these programs
and training initiatives will in fact improve the Company's ability to attract
these nursing personnel.
Approximately 100 of the Company's nursing facilities, or 7% of the
Company's employees, are represented by various labor unions. Certain labor
unions have publicly stated that they are concentrating their organizing efforts
within the long-term healthcare industry. The Company, being one of the largest
employers within the long-term healthcare industry, has been the target of a
"corporate campaign" by two AFL-CIO affiliated unions attempting to organize
certain of the Company's facilities. Although the Company has never experienced
any material work stoppages and believes that its relations with its employees
are generally good,
10
<PAGE> 12
the Company cannot predict the effect continued union representation or
organizational activities will have on the Company's future activities. There
can be no assurance that continued union representation and organizational
activities will not result in material work stoppages, which could have a
material adverse effect on the Company's operations.
Excessive litigation is a tactic common to "corporate campaigns" and one
that is being employed against the Company. There are several proceedings
against facilities operated by the Company before the National Labor Relations
Board ("NLRB"). These proceedings consolidate individual cases from separate
facilities, and certain of these proceedings are currently pending before the
NLRB. The Company is vigorously defending these proceedings. The Company
believes, based on advice from its Deputy General Counsel, that many of these
cases are without merit, and further, it is the Company's belief that the
NLRB-related proceedings, individually and in the aggregate, are not material to
the Company's consolidated financial position, results of operations, or cash
flows.
ITEM 2. PROPERTIES.
At February 29, 2000, the Company operated 559 nursing facilities, 37
assisted living centers, 180 outpatient therapy clinics and 63 home care centers
in 34 states and the District of Columbia. Most of the Company's 192 leased
nursing facilities are subject to "net" leases which require the Company to pay
all taxes, insurance and maintenance costs. Most of these leases have original
terms from ten to fifteen years and contain at least one renewal option, which
could extend the original term of the leases by five to fifteen years. Many of
these leases also contain purchase options. The Company considers its physical
properties to be in good operating condition and suitable for the purposes for
which they are being used. Certain of the nursing facilities and assisted living
centers owned by the Company are included in the collateral securing the
obligations under its various debt agreements. See "Part II, Item 8 -- Note 6 of
Notes to Consolidated Financial Statements."
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<PAGE> 13
The following is a summary of the Company's nursing facilities, assisted
living centers, outpatient therapy clinics and home care centers at February 29,
2000:
<TABLE>
<CAPTION>
NURSING FACILITIES ASSISTED LIVING
------------------- CENTERS OUTPATIENT HOME
---------------- THERAPY CARE
TOTAL CLINICS CENTERS
LICENSED TOTAL ---------- -------
LOCATION NUMBER BEDS NUMBER UNITS NUMBER NUMBER
- -------- ------- --------- ------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Alabama.......................... 21 2,743 -- -- -- --
Arizona.......................... 3 480 -- -- -- --
Arkansas......................... 37 4,376 4 80 4 2
California....................... 72 7,744 3 185 37 19
Colorado......................... -- -- -- -- 15 --
Delaware......................... -- -- -- -- 4 --
District of Columbia............. 1 355 -- -- -- --
Florida.......................... 51 6,325 5 311 -- --
Georgia.......................... 17 2,137 4 109 23 3
Hawaii........................... 2 396 -- -- -- --
Illinois......................... 3 275 -- -- -- --
Indiana.......................... 26 3,817 1 16 -- 1
Kansas........................... 31 1,783 2 29 -- --
Kentucky......................... 8 1,039 -- -- -- --
Louisiana........................ -- -- -- -- 1 --
Maryland......................... 4 585 1 16 8 --
Massachusetts.................... 24 2,402 -- -- -- --
Michigan......................... 2 206 -- -- -- --
Minnesota........................ 35 3,032 3 33 -- --
Mississippi...................... 21 2,496 -- -- -- --
Missouri......................... 28 2,908 3 101 -- 1
Nebraska......................... 24 2,146 1 16 -- 4
Nevada........................... -- -- -- -- -- 1
New Jersey....................... 1 120 -- -- -- --
North Carolina................... 11 1,398 1 16 10 24
Ohio............................. 12 1,433 -- -- 4 --
Pennsylvania..................... 42 4,780 3 53 12 5
South Carolina................... 3 302 -- -- 15 --
South Dakota..................... 17 1,228 1 36 -- --
Tennessee........................ 7 948 2 57 -- --
Texas............................ -- -- -- -- 36 2
Virginia......................... 15 1,937 3 80 -- --
Washington....................... 9 904 -- -- 11 --
West Virginia.................... 3 310 -- -- -- --
Wisconsin........................ 29 3,291 -- -- -- 1
--- ------ -- ----- --- --
559 61,896 37 1,138 180 63
=== ====== == ===== === ==
CLASSIFICATION
Owned............................ 365 39,842 32 852 -- --
Leased........................... 192 21,919 5 286 180 63
Managed.......................... 2 135 -- -- -- --
--- ------ -- ----- --- --
559 61,896 37 1,138 180 63
=== ====== == ===== === ==
</TABLE>
12
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS.
On February 3, 2000, the Company entered into a series of agreements with
the U.S. Department of Justice and the Office of Inspector General (the "OIG")
of the Department of Health and Human Services which settled the federal
government investigations of the Company relating to the allocation to the
Medicare Program of certain nursing labor costs in its skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations"). These agreements
finalized the terms of the settlements, which were tentatively announced in July
1999.
The agreements consist of: (i) a Plea Agreement; (ii) a Civil Settlement
Agreement; (iii) a Corporate Integrity Agreement; and (iv) an agreement
concerning the disposition of 10 nursing facilities. Under the Plea Agreement, a
subsidiary of the Company pled guilty to one count of mail fraud and 10 counts
of making false statements to Medicare relating to the submission of certain
Medicare cost reports for 10 separate nursing facilities. The subsidiary paid a
criminal fine of $5,000,000 and, under a separate agreement, is obligated to
dispose of the 10 nursing facilities. The subsidiary will continue to operate
and staff the nursing facilities until new operators are found.
Under the separate Civil Settlement Agreement, the Company will reimburse
the federal government $170,000,000 as follows: (i) $25,000,000, which was paid
during the first quarter of 2000, and (ii) $145,000,000 to be withheld from the
Company's biweekly Medicare periodic interim payments in equal installments over
eight years. Such installments began during the first quarter of 2000. In
addition, the Company agreed to resubmit certain Medicare filings to reflect
reduced labor costs.
The Company also entered into a Corporate Integrity Agreement with the OIG
relating to the monitoring of compliance with requirements of federal healthcare
programs on an ongoing basis. Such agreement addresses the Company's obligations
to ensure that it is in compliance with the requirements for participation in
the federal healthcare programs, and includes the Company's functional and
training obligations, audit and review requirements, recordkeeping and reporting
requirements, as well as penalties for breach/noncompliance of the agreement.
On July 6, 1999, an amended complaint was filed by the plaintiffs in a
previously disclosed purported class action lawsuit pending against the Company
and certain of its officers in the United States District Court for the Eastern
District of Arkansas (the "Class Action"). Plaintiffs filed a second amended
complaint on September 9, 1999 which asserted claims under Section 10(b)
(including Rule 10b-5 promulgated thereunder) and under Section 20 of the
Securities Exchange Act of 1934 arising from practices that were the subject of
the Allocation Investigations. The defendants filed a motion to dismiss that
complaint on October 8, 1999. Due to the preliminary state of the Class Action
and the fact the second amended complaint does not allege damages with any
specificity, the Company is unable at this time to assess the probable outcome
of the Class Action or the materiality of the risk of loss. However, the Company
believes that it acted lawfully with respect to plaintiff investors and will
vigorously defend the Class Action. However, there can be no assurances that the
Company will not experience an adverse effect on its consolidated financial
position, results of operations or cash flows as a result of these proceedings.
In addition, since July 29, 1999, eight derivative lawsuits have been filed
in the state courts of Arkansas, California and Delaware (collectively, the
"Derivative Actions"). Norman M. Lyons v. David R. Banks, et al., Case No.
OT99-4041, was filed in the Chancery Court of Pulaski County, Arkansas (4th
Division) on or about July 29, 1999, and the parties filed an Agreed Motion to
Stay the proceedings on January 17, 2000; Alfred Badger, Jr. v. David R. Banks,
et al., Case No. OT99-4353, was filed in the Chancery Court of Pulaski County,
Arkansas (1st Division) on or about August 17, 1999 and voluntarily dismissed on
November 30, 1999. On November 1, 1999, the defendants filed a motion to dismiss
the Lyons and Badger actions. James L. Laurita v. David R. Banks, et al., Case
No. 17348NC, was filed in the Delaware Chancery Court on or about August 2,
1999; Kenneth Abbey v. David R. Banks, et al., Case No. 17352NC, was filed in
the Delaware Chancery Court on or about August 4, 1999; Alan Friedman v. David
R. Banks, et al., Case No. 17355NC, was filed in the Delaware Chancery Court on
or about August 9, 1999. The Laurita, Abbey and Friedman actions were
subsequently consolidated by order of the Delaware Chancery Court. On or about
October 1, 1999, the defendants moved to dismiss the Laurita, Abbey and Friedman
actions. Elles Trading Company v.
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<PAGE> 15
David R. Banks, et al., was filed in the Superior Court for San Francisco
County, California on or about August 4, 1999, and the plaintiffs filed a notice
of voluntary dismissal on February 3, 2000. Kushner v. David R. Banks, et al.,
Case No. LR-C-98-646, was filed in the United States District Court for the
Eastern District of Arkansas (Western Division) on September 30, 1999.
Richardson v. David R. Banks, et al., Case No. LR-C-99-826, was filed in the
United States District Court for the Eastern District of Arkansas (Western
Division) on November 4, 1999. The Kushner and Richardson actions were ordered
to be consolidated and by agreed motion, plaintiffs have until April 15, 2000 to
file an amended, consolidated complaint. The Derivative Actions each name the
Company's directors as defendants, as well as the Company as a nominal
defendant. The Badger and Lyons actions also name as defendants certain of the
Company's officers. The Derivative Actions each allege breach of fiduciary
duties to the Company and its stockholders arising primarily out of the
Company's alleged exposure to loss due to the Class Action and the Allocation
Investigations. The Lyons, Badger and Richardson actions also assert claims for
abuse of control and constructive fraud arising from the same allegations, and
the Richardson action also claims unjust enrichment. Due to the preliminary
state of the Derivative Actions and the fact the complaints do not allege
damages with any specificity, the Company is unable at this time to assess the
probable outcome of the Derivative Actions or the materiality of the risk of
loss. However, the Company believes that it acted lawfully with respect to the
allegations of the Derivative Actions and will vigorously defend the Derivative
Actions. However, there can be no assurances that the Company will not
experience an adverse effect on its consolidated financial position, results of
operations or cash flows as a result of these proceedings.
There are various other lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages that are generally not covered by insurance. The Company does not
believe that the ultimate resolution of such other matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
14
<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 1999.
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth, as to each executive officer and director of
the Company, such person's name, positions with the Company and age. Each
executive officer and director of the Company holds office until a successor is
elected, or until the earliest of death, resignation or removal. Each executive
officer is elected or appointed by the Board of Directors. The information below
is given as of February 29, 2000.
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
David R. Banks(1)............................... Chairman of the Board, Chief Executive Officer
and Director 63
William A. Mathies.............................. Executive Vice President and
President -- Beverly Healthcare 40
T. Jerald Moore................................. Executive Vice President 59
Bobby W. Stephens............................... Executive Vice President -- Asset Management 55
Scott M. Tabakin................................ Executive Vice President and Chief Financial
Officer 41
Mark D. Wortley................................. Executive Vice President and
President -- Beverly Care Alliance 44
Philip W. Small................................. Executive Vice President -- Strategic Planning
and Operations Support 43
Pamela H. Daniels............................... Senior Vice President, Controller and Chief
Accounting Officer 36
Schuyler Hollingsworth, Jr. .................... Senior Vice President and Treasurer 53
Beryl F. Anthony, Jr.(1)(3)(5).................. Director 62
Carolyne K. Davis, R.N., Ph.D.(1)(4)............ Director 68
James R. Greene(2)(3)(4)........................ Director 78
Edith E. Holiday(2)(4)(5)....................... Director 48
Jon E.M. Jacoby(1)(2)........................... Director 61
Risa J. Lavizzo-Mourey, M.D.(3)(4).............. Director 45
Marilyn R. Seymann(2)(4)(5)..................... Director 57
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit and Compliance Committee.
(3) Member of the Compensation Committee.
(4) Member of the Quality Management Committee.
(5) Member of the Nominating Committee.
Mr. Banks has been a director of the Company since 1979 and has served as
Chief Executive Officer since May 1989 and Chairman of the Board since March
1990. Mr. Banks was President of the Company from 1979 to September 1995. Mr.
Banks is a director of Nationwide Health Properties, Inc., Ralston Purina
Company and Agribrands International, Inc.
Mr. Mathies joined the Company in 1981 as an Administrator in training. He
was an Administrator until 1986 at which time he became a Regional Manager. In
1988, Mr. Mathies was elected Vice President of Operations for the California
region and was elected Executive Vice President of the Company and President of
the corporations within Beverly Healthcare in September 1995.
Mr. Moore joined the Company as Executive Vice President in December 1992
and served as President of the corporations within Beverly Specialty Hospitals
from June 1996 to June 1998. Mr. Moore was employed at Aetna Life and Casualty
from 1963 to 1992 and was elected Senior Vice President in 1990.
15
<PAGE> 17
Mr. Stephens joined the Company as a staff accountant in 1969. He was
elected Assistant Vice President in 1978, Vice President of the Company and
President of the Company's Central Division in 1980, and Executive Vice
President in February 1990. Mr. Stephens is a director of Sparks Regional
Medical Center, City National Bank in Fort Smith, Arkansas, Beverly Japan
Corporation, and Harbortown Properties, Inc.
Mr. Tabakin joined the Company in October 1992 as Vice President,
Controller and Chief Accounting Officer. He was elected Senior Vice President in
May 1995, Acting Chief Financial Officer in September 1995 and Executive Vice
President and Chief Financial Officer in October 1996. From 1980 to 1992, Mr.
Tabakin was with Ernst & Young LLP. Mr. Tabakin is a director of St. Edward
Mercy Medical Center.
Mr. Wortley joined the Company as Senior Vice President and President of
the corporations within Beverly Care Alliance in September 1994 and was elected
Executive Vice President in February 1996. From 1988 to 1994, Mr. Wortley was an
officer of Therapy Management Innovations.
Mr. Small joined the Company in January 1986 as Reimbursement Manager, was
promoted to Division Controller in September 1986 and Director of Finance for
the California Region in 1989. He was elected Vice President -- Reimbursement in
September 1990, Senior Vice President -- Finance in 1995 and Executive Vice
President -- Strategic Planning and Operations Support in August 1998.
Ms. Daniels joined the Company in May 1988 as Audit Coordinator. She was
promoted to Financial Reporting Senior Manager in 1991 and Director of Financial
Reporting in 1992. She was elected Vice President, Controller and Chief
Accounting Officer in October 1996 and Senior Vice President in December 1999.
From 1985 to 1988, Ms. Daniels was with Price Waterhouse LLP.
Mr. Hollingsworth joined the Company in June 1985 as Assistant Treasurer.
He was elected Treasurer in 1988, Vice President in 1990 and Senior Vice
President in March 1992.
Mr. Anthony served as a member of the United States Congress and was
Chairman of the Democratic Congressional Campaign Committee from 1987 through
1990. In 1993, he became a partner in the Winston & Strawn law firm. He has been
a director of the Company since January 1993.
Dr. Davis has been an international health care consultant since 1985. She
is a director of Beckman Coulter, Inc., The Prudential Insurance Company of
America, Inc., MiniMed, Inc. and Merck & Co., Inc. She has been a director of
the Company since December 1997.
Mr. Greene's principal occupation has been that of a director and
consultant to various U.S. and international businesses since 1986. He is a
director of Buck Engineering Company and Bank Leumi. He has been a director of
the Company since January 1991.
Ms. Holiday is an attorney. She served as White House Liaison for the
Cabinet and all federal agencies during the Bush administration. Prior to that,
Ms. Holiday served as General Counsel of the U.S. Treasury Department, as well
as its Assistant Secretary of Treasury for Public Affairs and Public Liaison.
She is a director of Amerada Hess Corporation, Hercules Incorporated, H.J. Heinz
Company and RTI International Metals, Inc. and a director or trustee of various
investment companies in the Franklin Templeton Group of Funds. She has been a
director of the Company since March 1995.
Mr. Jacoby is Executive Vice President, Chief Financial Officer and a
director of Stephens Group, Inc. Mr. Jacoby has held the indicated positions
with Stephens Group, Inc. since 1986, and prior to that time, served as Manager
of the Corporate Finance Department and Assistant to the President of Stephens
Inc. Mr. Jacoby is a director of Power-One, Inc. and Delta and Pine Land
Company, Inc. He has been a director of the Company since February 1987.
Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the
Division of Geriatric Medicine, Associate Executive Vice President for health
policy and Professor of Medicine at the University of Pennsylvania, Ralston-Penn
Center. She is a director of Lifemark, Inc. and Hanger Orthopedic Group, Inc.
She has been a director of the Company since March 1995.
Ms. Seymann is President and Chief Executive Officer of M One, Inc., a
management and information systems consulting firm specializing in the financial
services industry. She is a director of Community First
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<PAGE> 18
Bankshares, Inc., True North Communications, Inc. and NorthWestern Corporation.
She has been a director of the Company since March 1995.
During 1999, there were 17 meetings of the Board of Directors. Each
director attended 75% or more of the meetings of the Board and committees on
which he or she served.
In 1999, directors, other than Mr. Banks, received a retainer fee of
$25,000 for serving on the Board and an additional fee of $1,000 for each Board
or committee meeting attended. The chairperson of each committee received an
additional $1,000 for each committee meeting attended. Such fees can be
deferred, at the option of the director, as provided for under the Non-Employee
Director Deferred Compensation Plan (discussed below). Mr. Banks, the Company's
current Chairman of the Board and Chief Executive Officer received no additional
cash compensation for serving on the Board or its committees.
During 1997, the Beverly Enterprises, Inc. Non-Employee Director Deferred
Compensation Plan was approved. Such plan provides each nonemployee director the
opportunity to receive awards equivalent to shares of Common Stock ("deferred
share units") and to defer receipt of compensation for services rendered to the
Company. There are three types of contributions available under the plan. First,
nonemployee directors can defer all or part of retainer and meeting fees to a
pre-tax deferred compensation account with two investment options. The first
investment option is a cash account which is credited with interest, and the
second investment option is a deferred share unit account, with each unit having
a value equivalent to one share of Common Stock. The second type of contribution
is a Company matching contribution whereby the Company matches 25% of the amount
of fees deferred, to the extent the deferral is in the deferred share unit
account. Third, as a replacement for the prior benefits under the retirement
plan for outside directors, each nonemployee director receives a grant of 675
deferred share units each year which is automatically credited to the deferred
share unit account. Distributions under the plan will commence upon retirement,
termination, death or disability and will be made in shares of Common Stock
unless the Board of Directors approves payment in cash.
During 1997, the New Beverly Non-Employee Directors Stock Option Plan (the
"Non-Employee Directors Stock Option Plan") was approved. Such plan became
effective December 3, 1997 and will remain in effect until December 31, 2007,
subject to early termination by the Board of Directors. Such plan replaced the
Nonemployee Directors' Plan entered into in 1994. There are 300,000 shares of
the Company's $.10 par value common stock ("Common Stock") authorized for
issuance, subject to certain adjustments, under the Non-Employee Directors Stock
Option Plan. The Non-Employee Directors Stock Option Plan was amended by the
Board of Directors on December 11, 1997 to provide that 3,375 stock options be
granted to each nonemployee director on June 1 of each year until the plan is
terminated, subject to the availability of shares. Stock option grants have been
made since 1994 to each of the nonemployee directors. Such stock options are
granted at a purchase price equal to fair market value on the date of grant,
become exercisable one year after date of grant and expire ten years after date
of grant.
17
<PAGE> 19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York and Pacific Stock
Exchanges. The table below sets forth, for the periods indicated, the range of
high and low sales prices of the Common Stock as reported on the New York Stock
Exchange composite tape.
<TABLE>
<CAPTION>
PRICES
--------------------------
HIGH LOW
----------- -----------
<S> <C> <C>
1998
First Quarter............................................. $15 9/16 $12 1/4
Second Quarter............................................ 16 1/4 13 1/2
Third Quarter............................................. 14 13/16 7 3/8
Fourth Quarter............................................ 8 1/8 5 1/4
1999
First Quarter............................................. $ 6 15/16 $ 4 1/2
Second Quarter............................................ 8 3/16 4 5/16
Third Quarter............................................. 8 3 7/8
Fourth Quarter............................................ 5 3/16 3 1/2
2000
First Quarter (through February 29)....................... $ 4 9/16 $ 2 1/2
</TABLE>
The Company is subject to certain restrictions under its long-term debt
agreements related to the payment of cash dividends on its Common Stock. During
1999 and 1998, no cash dividends were paid on the Company's Common Stock and no
future dividends are currently planned.
At February 29, 2000, there were 5,341 record holders of the Common Stock.
EMPLOYEE STOCK PURCHASE PLAN
The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of Common Stock at the current market
price through payroll deductions. The Company makes contributions in the amount
of 30% of the participant's contribution. Each participant specifies the amount
to be withheld from earnings per two-week pay period, subject to certain
limitations. The total charge to the Company's statement of operations for the
year ended December 31, 1999 related to this plan was approximately $1,723,000.
At December 31, 1999, there were approximately 3,400 participants in the plan.
Merrill Lynch & Co., Merrill Lynch World Headquarters, North Tower, World
Financial Center, New York, New York 10281, was appointed broker to open and
maintain an account in each participant's name and to purchase shares of Common
Stock on the New York Stock Exchange for each participant.
18
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA.
The following table of selected financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto for 1999, 1998 and 1997 included elsewhere in this Annual Report
on Form 10-K.
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998(1) 1997(2) 1996 1995
------------ ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net operating revenues........................ $ 2,546,672 $ 2,812,232 $ 3,217,099 $ 3,267,189 $ 3,228,553
Interest income............................... 4,335 10,708 13,201 13,839 14,228
------------ ------------ ------------ ------------ -----------
Total revenues........................ 2,551,007 2,822,940 3,230,300 3,281,028 3,242,781
Costs and expenses:
Operating and administrative................ 2,354,328 2,633,135 2,888,021 2,958,942 2,960,832
Interest.................................... 72,578 65,938 82,713 91,111 84,245
Depreciation and amortization............... 99,160 93,722 107,060 105,468 103,581
Special charges related to settlements of
federal government investigations......... 202,447 1,865 -- -- --
Asset impairments, workforce reductions and
other unusual items....................... 23,818 69,443 44,000 -- 100,277
Year 2000 remediation....................... 12,402 9,719 -- -- --
------------ ------------ ------------ ------------ -----------
Total costs and expenses.............. 2,764,733 2,873,822 3,121,794 3,155,521 3,248,935
------------ ------------ ------------ ------------ -----------
Income (loss) before provision for (benefit
from) income taxes, extraordinary charge and
cumulative effect of change in accounting
for start-up costs.......................... (213,726) (50,882) 108,506 125,507 (6,154)
Provision for (benefit from) income taxes..... (79,079) (25,936) 49,913 73,481 1,969
Extraordinary charge, net of income tax
benefit of $1,057 in 1998 and $1,099 in
1996........................................ -- (1,660) -- (1,726) --
Cumulative effect of change in accounting for
start-up costs, net of income tax benefit of
$2,811...................................... -- (4,415) -- -- --
------------ ------------ ------------ ------------ -----------
Net income (loss)............................. $ (134,647) $ (31,021) $ 58,593 $ 50,300 $ (8,123)
============ ============ ============ ============ ===========
Net income (loss) applicable to common
shares...................................... $ (134,647) $ (31,021) $ 58,593 $ 50,300 $ (14,998)
============ ============ ============ ============ ===========
Diluted income (loss) per share of common
stock:
Before extraordinary charge and cumulative
effect of change in accounting for
start-up costs............................ $ (1.31) $ (.24) $ .57 $ .50 $ (.16)
Extraordinary charge........................ -- (.02) -- (.01) --
Cumulative effect of change in accounting
for start-up costs........................ -- (.04) -- -- --
------------ ------------ ------------ ------------ -----------
Net income (loss)........................... $ (1.31) $ (.30) $ .57 $ .49 $ (.16)
============ ============ ============ ============ ===========
Shares used to compute per share amounts.... 102,491,000 103,762,000 103,422,000 110,726,000 92,233,000
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................................. $ 1,982,880 $ 2,160,511 $ 2,073,469 $ 2,525,082 $ 2,506,461
Current portion of long-term debt............. $ 34,052 $ 27,773 $ 31,551 $ 38,826 $ 84,639
Long-term debt, excluding current portion..... $ 746,164 $ 878,270 $ 686,941 $ 1,106,256 $ 1,066,909
Stockholders' equity.......................... $ 641,124 $ 776,206 $ 862,505 $ 861,095 $ 820,333
OTHER DATA:
Average occupancy percentage(3)............... 87.2% 88.7% 88.9% 87.4% 88.1%
Number of nursing home beds................... 62,217 62,293 63,552 71,204 75,669
</TABLE>
- ---------------
(1) Amounts for 1998 include the operations of American Transitional Hospitals,
Inc. through June 30, 1998.
(2) Amounts for 1997 include the operations of Pharmacy Corporation of America
up until the effective date of the Merger (as discussed herein).
(3) Average occupancy percentage for 1999, 1998 and 1997 was based on
operational beds, and for all periods prior to 1997, such percentage was
based on licensed beds. Average occupancy percentage for 1999, 1998 and 1997
based on licensed beds was 85.3%, 86.9% and 87.1%, respectively.
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
GOVERNMENTAL REGULATION AND REIMBURSEMENT
Healthcare system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for both the federal and state governments.
In August 1997, the President signed into law the Balanced Budget Act of 1997
(the "1997 Act") in which Congress included numerous program changes directed at
balancing the federal budget. The legislation changed Medicare and Medicaid
policy in a number of ways, including: (i) the phase in of a Medicare
prospective payment system ("PPS") for skilled nursing facilities effective July
1, 1998 (see below); (ii) establishment of limitations on Part B therapy charges
per beneficiary per year; (iii) a 10% reduction in Part B therapy costs for the
period from January 1, 1998 through July 1, 1998, at which time reimbursement
for these services became based on fee schedules established by the Health Care
Financing Administration ("HCFA") of the Department of Health and Human Services
("HHS"); (iv) development of new Medicare and Medicaid health plan options; (v)
creation of additional safeguards against healthcare fraud and abuse; and (vi)
repeal of the Medicaid "Boren Amendment" payment standard. The legislation also
included new opportunities for providers to focus further on patient outcomes by
creating alternative patient delivery structures.
PPS, which became effective for the Company on January 1, 1999,
significantly changed the manner in which its skilled nursing facilities are
paid for inpatient services provided to Medicare beneficiaries. In year one
(1999 for the Company), Medicare PPS rates were based 75% on 1995
facility-specific Medicare costs (as adjusted for inflation) and 25% was
federally-determined based upon the acuity level (as measured by which one of 44
Resource Utilization Grouping ("RUG") categories a particular patient is
classified) of Medicare patients served in the Company's skilled nursing
facilities. The direct impact of PPS and other provisions of the 1997 Act was a
decrease in the Company's 1999 net operating revenues of approximately
$114,000,000 as compared to 1998. Unless a nursing facility provider chooses to
be reimbursed at 100% of the federally-determined acuity-adjusted rate as
allowed under BBRA 1999 (as discussed below): (i) in year two, Medicare PPS
rates will be based 50% on 1995 facility-specific costs (as adjusted for
inflation) and 50% on the federally-determined acuity-adjusted rate; (ii) in
year three, Medicare PPS rates will be based 25% on 1995 facility-specific costs
(as adjusted for inflation) and 75% on the federally-determined acuity-adjusted
rate; and (iii) in year four and thereafter, Medicare PPS rates will be based
entirely on the federally-determined acuity-adjusted rate.
In November 1999, the President signed into law the Balanced Budget
Refinement Act of 1999 ("BBRA 1999") which refines the 1997 Act and will restore
approximately $2.7 billion in Medicare funding for skilled nursing providers
over the next three years. The provisions of BBRA 1999 include: (i) the option
for a skilled nursing provider to choose between the higher of current law, as
described above, or 100% of the federally-determined acuity-adjusted rate
effective for cost reporting periods starting on or after January 1, 2000; (ii)
a temporary increase of 20% in the federal adjusted per diem rates for 15 RUG
categories covering extensive services, special care, clinically complex, and
high and medium rehabilitation, for the period from April 1, 2000 through
September 30, 2000; at which time, if HCFA has not recalculated the necessary
refinements to the overall RUG-III system, the 20% increase will be extended
until such time as the calculations are completed; (iii) a 4% increase in the
federal adjusted per diem rates for all 44 RUG categories for each of the
periods October 1, 2000 through September 30, 2001 and October 1, 2001 through
September 30, 2002; (iv) a two-year moratorium on implementing the two Part B
$1,500 therapy limitations contained in the 1997 Act, effective January 1, 2000
through January 1, 2002; (v) a retroactive provision that corrects a technical
error in the 1997 Act denying payment of Part B services to skilled nursing
facilities participating in PPS demonstration projects; and (vi) exclusion from
the Medicare PPS rates of ambulance services to and from dialysis, prosthetic
devices, radioisotopes and chemotherapy furnished on or after April 1, 2000. The
Company has elected to move to a 100% federally-determined acuity-adjusted rate
on approximately 300 of its nursing facilities effective January 1, 2000. The
Company currently estimates an increase in its 2000 net operating revenues of
approximately $20,000,000 related to the impact of BBRA 1999. However, no
assurances can be given as to what the actual impact of BBRA 1999 will be on the
Company's consolidated financial position or
20
<PAGE> 22
results of operations. In addition, future federal budget legislation and
federal and state regulatory changes, including refinements to the RUG-III
system expected from HCFA by October 1, 2000, may negatively impact the Company.
The Company's future operating performance will continue to be affected by
the issues facing the long-term healthcare industry as a whole, including the
maintenance of occupancy, its ability to continue to expand higher margin
businesses, the availability of nursing, therapy and other personnel, the
adequacy of funding of governmental reimbursement programs, the rising cost of
patient care liabilities, the demand for nursing home care and the nature of any
additional healthcare reform measures that may be taken by the federal
government, as well as by any state governments. The Company's ability to
control costs, including its wages and related expenses which continue to rise
and represent the largest component of the Company's operating and
administrative expenses, will also significantly impact its future operating
results.
PATIENT CARE LIABILITIES
General liability and professional liability costs for the long-term care
industry, especially in the state of Florida, have become increasingly expensive
and unpredictable. The Company and most of its competitors have experienced
increases in both the number of claims and the size of the typical claim. This
phenomenon is most evident in the state of Florida, where well-intended patient
rights' statutes tend to be exploited by plaintiffs' attorneys, since the
statutes allow for actual damages, punitive damages and plaintiff attorney fees
to be included in any proven violation. Statistics show that Florida long-term
care providers: (i) incur three times the number of general liability claims as
compared to the rest of the country; (ii) have general liability claims that are
approximately 250% higher in cost than the rest of the country; and (iii) incur
40% of the cost for general liability claims for the country, but only represent
approximately 10% of the total nursing facility beds.
Insurance companies are exiting the state of Florida, or severely
restricting their capacity to write long-term care general liability insurance,
since they cannot provide coverage when faced with the magnitude of losses and
the explosive growth of claims. Although the Company's overall general liability
costs per bed in Florida are lower than the industry average in Florida, these
costs are still severely out of line with the rest of the country and continue
to escalate. The Company's provision for insurance and related items decreased
approximately $65,900,000 for the year ended December 31, 1999, as compared to
the same period in 1998, primarily due to a loss portfolio transfer transaction
that significantly increased insurance costs during the fourth quarter of 1998.
Despite such decrease year over year, the Company, as well as other nursing home
providers with significant operations in Florida, are experiencing substantial
increases in patient care and other claims, evidencing the negative trend
surrounding patient care liabilities.
The Company is taking an active role in lobbying efforts to reform tort
laws in the state of Florida. In addition, community outreach programs are being
used to communicate care levels and caregiver dedication in each of its
facilities. There is significant media and legislative attention currently being
placed on these issues, and the Company is hopeful that there will be certain
reforms made in the current statutes. However, there can be no assurances made
that legislative changes will be made, or that any such changes will have a
positive impact on the current trend.
YEAR 2000 REMEDIATION
In 1996, the Company began a major systems initiative to upgrade or replace
all of its integrated financial application software to facilitate the adoption
of a new standard chart of accounts. As part of that major initiative, the
Company took the necessary steps to upgrade or replace the applications with
year 2000 compliant releases of the software whenever possible. For those
purchased software applications where the year 2000 release was not available,
the upgrades to the compliant releases were addressed as part of the year 2000
project (the "Y2K Project"). The Company utilized both internal and external
resources to reprogram or replace, test, and implement the software and
operating equipment for year 2000 modifications. The total amount expended on
the Y2K Project was approximately $24,700,000 ($22,100,000 expensed and
$2,600,000 capitalized for new systems and equipment). The Company does not
expect to incur material expenditures in the future related to the year 2000
issue.
21
<PAGE> 23
The Company did not experience any disruptions in, or failures of, normal
business activities attributable to the year 2000 issue and does not anticipate
any such disruptions in the future.
OPERATING RESULTS
1999 COMPARED TO 1998
RESULTS OF OPERATIONS
Net loss was $134,647,000 for the year ended December 31, 1999, as compared
to a net loss of $31,021,000 for the year ended December 31, 1998. Net loss for
1999 included a special pre-tax charge of approximately $202,400,000 related to
the separate criminal and civil settlements of the Allocation Investigations (as
discussed below). In addition, net loss for 1999 included a pre-tax charge of
approximately $23,800,000 for impaired long-lived assets, workforce reductions
and other unusual items (as discussed below). Net loss for 1998 included a
pre-tax charge of approximately $69,400,000 for workforce reductions, impaired
long-lived assets and other unusual items (as discussed below). In addition, net
loss for 1998 included a $1,660,000 extraordinary charge, net of income taxes,
related to the write-off of unamortized deferred financing costs associated with
the repayment of certain debt instruments, as well as certain bond refundings,
and a cumulative effect adjustment of $4,415,000, net of income taxes, related
to the adoption of SOP 98-5 (as defined below).
In late July 1999, the Company reached a tentative understanding with the
U.S. Department of Justice to settle the separate civil and criminal aspects of
all investigations by the federal government and its fiscal intermediary into
the allocation of nursing labor hours to the Medicare program from 1990 to 1998
(the "Allocation Investigations"). On February 3, 2000, the Company announced
that it had signed agreements with the Office of Inspector General of the
Department of Health and Human Services and the U.S. Department of Justice
finalizing the tentative settlements. (See "Part I, Item 3. Legal Proceedings").
As a result, during the year ended December 31, 1999, the Company recorded a
special pre-tax charge of approximately $202,400,000 ($127,500,000, net of
income taxes, or $1.24 per share diluted) which includes: (i) provisions
totaling approximately $128,800,000 representing the net present value of the
separate civil and criminal settlements; (ii) impairment losses of approximately
$17,000,000 on 10 nursing facilities that pled guilty of submitting erroneous
cost reports to the Medicare program in conjunction with the criminal
settlement; (iii) approximately $39,000,000 for certain prior year cost report
related items affected by the settlements; (iv) approximately $3,100,000 of debt
issuance and refinancing costs related to various bank debt modifications as a
result of the settlements; and (v) approximately $14,500,000 for other
investigation and settlement related costs.
The final written agreements resolved both civil and criminal matters, and
included a corporate integrity agreement, providing for a reporting and
compliance program to be overseen by the Company and the Office of Inspector
General. The provisions of the settlements were consistent with the Company's
expectations as previously reported and included the planned disposition of 10
nursing facilities operated by a single subsidiary of the Company, which will
continue to operate and staff the nursing facilities until new operators are
found.
Under the Civil Settlement Agreement, the Company will reimburse the
federal government $170,000,000 as follows: (i) $25,000,000, which was paid
during the first quarter of 2000; and (ii) $145,000,000 to be withheld from the
Company's biweekly Medicare periodic interim payments in equal installments over
eight years. Because this obligation does not bear interest, the Company is
required to impute interest over the eight-year period. This imputed interest
expense, along with an increase in interest and rent expense resulting from the
Amendments (as defined below), will adversely impact the Company's future
operating results.
Under the Plea Agreement, the subsidiary operating the 10 nursing
facilities that pled guilty of submitting erroneous cost reports to the Medicare
program paid a fine of $5,000,000 during the first quarter of 2000.
22
<PAGE> 24
If, prior to January 1, 1999, the settlement obligations and related items
had been finalized and recorded, the Company's bank debt had been refinanced and
the Company had closed or sold the facilities that are impacted by the criminal
settlement, the Company's results of operations, on an unaudited pro forma
basis, would have been reduced by approximately $13,200,000, or $.13 per share
diluted, for the year ended December 31, 1999.
During the fourth quarter of 1999, the Company recorded a pre-tax charge of
approximately $23,800,000 related to restructuring of agreements on certain
leased facilities; severance and other workforce reduction expenses; asset
impairments; and other unusual items. The Company negotiated the terminations of
lease agreements on 19 nursing facilities (2,047 beds), which resulted in a
charge of approximately $17,300,000. In addition, the Company accrued
approximately $5,900,000 primarily related to severance agreements associated
with three executives of the Company. Substantially all of the $5,900,000 was
paid during the first quarter of 2000.
INCOME TAXES
The Company had an annual effective tax rate of 37% for the year ended
December 31, 1999, compared to an annual effective tax rate of 51% for the year
ended December 31, 1998. The annual effective tax rate in 1999 was different
than the federal statutory rate primarily due to the impact of state income
taxes. The annual effective tax rate in 1998 was different than the federal
statutory rate primarily due to the impact of the sale of American Transitional
Hospitals, Inc. ("ATH"), which operated as Beverly Specialty Hospitals, the
benefit of certain tax credits and the pre-tax charge of $69,400,000 (as
discussed below) which reduced the Company's pre-tax income to a level where the
impact of permanent tax differences and state income taxes had a more
significant impact on the effective tax rate. At December 31, 1999, the Company
had federal net operating loss carryforwards of $84,259,000 for income tax
purposes which expire in years 2018 through 2019. At December 31, 1999, the
Company had general business tax credit carryforwards of $8,850,000 for income
tax purposes which expire in years 2008 through 2015. For financial reporting
purposes, the federal net operating loss carryforwards and the general business
tax credit carryforwards have been utilized to offset existing net taxable
temporary differences reversing during the carryforward periods. The Company's
net deferred tax assets at December 31, 1999 will be realized primarily through
the reversal of temporary taxable differences and future taxable income.
Accordingly, the Company does not believe that a deferred tax valuation
allowance is necessary at December 31, 1999.
NET OPERATING REVENUES
The Company reported net operating revenues of $2,546,672,000 during the
year ended December 31, 1999 compared to $2,812,232,000 for the same period in
1998. Approximately 91% and 90% of the Company's total net operating revenues
for the years ended December 31, 1999 and 1998, respectively, were derived from
services provided by the Company's Beverly Healthcare segment. The decrease in
net operating revenues of approximately $265,600,000 for the year ended December
31, 1999, as compared to the same period in 1998, consists of the following: a
decrease of approximately $204,000,000 due to the disposition of, or lease
terminations on, 12 nursing facilities, one assisted living center and 17 home
care centers in 1999 and 26 nursing facilities and ATH in 1998; a decrease of
approximately $180,100,000 due to facilities which the Company operated during
each of the years ended December 31, 1999 and 1998 ("same facility operations");
partially offset by an increase of approximately $118,500,000 due to
acquisitions of nursing facilities and outpatient and home care businesses
during 1999 and 1998.
The decrease in net operating revenues of approximately $204,000,000 for
1999, as compared to the same period in 1998, resulting from dispositions and
lease terminations that occurred during the years ended December 31, 1999 and
1998 are as follows. During 1999, the Company sold or terminated the leases on
12 nursing facilities (1,291 beds), one assisted living center (10 units), 17
home care centers and certain other assets. The Company did not operate two of
these nursing facilities (166 beds) which were leased to other nursing home
operators in prior year transactions. The Company recognized net pre-tax losses,
which were included in net operating revenues during the year ended December 31,
1999, of approximately $4,000,000 as a result of these dispositions. During
1998, the Company sold or terminated the leases on 26 nursing facilities
23
<PAGE> 25
(3,203 beds) and certain other assets. The Company did not operate seven of
these nursing facilities (893 beds) which were leased to other nursing home
operators in prior year transactions. The Company recognized net pre-tax gains,
which were included in net operating revenues during the year ended December 31,
1998, of approximately $17,900,000 as a result of these dispositions. The
operations of the disposed facilities and other assets were immaterial to the
Company's consolidated financial position and results of operations.
In June 1998, the Company completed the sale of its ATH subsidiary to
Select Medical Corporation. Prior to the sale, ATH operated 15 transitional
hospitals (743 beds) in eight states which addressed the needs of patients
requiring intense therapy regimens, but not necessarily the breadth of services
provided within traditional acute care hospitals. The Company recognized a
pre-tax gain, which was included in net operating revenues during the year ended
December 31, 1998, of approximately $16,000,000 as a result of this disposition.
During the year ended December 31, 1999, the Company recorded a pre-tax charge
to adjust the sales price of this disposition by approximately $4,500,000, which
was included in net operating revenues. The operations of ATH were immaterial to
the Company's consolidated financial position and results of operations.
The decrease in net operating revenues of approximately $180,100,000 from
same facility operations for the year ended December 31, 1999, as compared to
the same period in 1998, was due to the following: approximately $97,800,000
decrease in ancillary revenues and approximately $48,800,000 decrease in
Medicare rates, both primarily due to the impact of PPS and other provisions of
the 1997 Act; approximately $49,300,000 decrease due to a shift in the Company's
patient mix; approximately $47,200,000 decrease due to a decline in same
facility occupancy; and approximately $15,700,000 due to various other items;
partially offset by an increase of approximately $78,700,000 due primarily to
increases in Medicaid and private rates. The Company's same facility occupancy
was 87.9% for the year ended December 31, 1999, as compared to 89.3% for the
same period in 1998. The Company has implemented a series of initiatives to
improve its occupancy levels and has experienced some initial success; however,
it is too early to determine the long-term effectiveness of these initiatives.
No assurance can be given that these initiatives will in fact improve the
Company's occupancy levels. The Company's Medicare, private and Medicaid census
for same facility operations was 9%, 19% and 71%, respectively, for the year
ended December 31, 1999, as compared to 10%, 20% and 69%, respectively, for the
same period in 1998.
The increase in net operating revenues of approximately $118,500,000 for
1999, as compared to the same period in 1998, resulting from acquisitions which
occurred during the years ended December 31, 1999 and 1998 are described as
follows. During 1999, the Company purchased three outpatient therapy clinics,
two home care centers, two nursing facilities (284 beds), one previously leased
nursing facility (190 beds) and certain other assets. During 1998, the Company
purchased 111 outpatient therapy clinics, 50 home care centers, eight nursing
facilities (823 beds), one assisted living center (48 units), two previously
leased nursing facilities (228 beds) and certain other assets. The acquisitions
of these facilities and other assets were accounted for as purchases. The
operations of these acquired facilities and other assets were immaterial to the
Company's consolidated financial position and results of operations.
OPERATING AND ADMINISTRATIVE EXPENSES
The Company reported operating and administrative expenses of
$2,354,328,000 during the year ended December 31, 1999 compared to
$2,633,135,000 for the same period in 1998. The decrease of approximately
$278,800,000 consists of the following: a decrease of approximately $216,700,000
from same facility operations; a decrease of approximately $172,300,000 due to
dispositions; partially offset by an increase of approximately $110,200,000 due
to acquisitions. (See above for a discussion of dispositions and acquisitions).
Operating and administrative expenses decreased approximately $216,700,000
from same facility operations for the year ended December 31, 1999, as compared
to the same period in 1998. This decrease was due primarily to a shift in the
Company's patient mix, as well as a decline in same facility occupancy, and
consists of the following: approximately $69,500,000 due to a decrease in wages
and related expenses; approximately $50,200,000 due to a decrease in contracted
therapy expenses; and approximately $31,100,000 due primarily to decreases in
purchased ancillary products, nursing supplies and other variable costs. In
addition, the Company's provision for insurance and related items decreased
approximately $65,900,000 for the year ended
24
<PAGE> 26
December 31, 1999, as compared to the same period in 1998, primarily due to a
loss portfolio transfer transaction that significantly increased insurance costs
during the fourth quarter of 1998. Although the Company's wages and related
expenses decreased for the year ended December 31, 1999, as compared to the same
period in 1998, the Company's weighted average wage rate and use of registry
personnel increased, both of which underscore the increased difficulties many of
the Company's nursing facilities are having attracting nursing aides, assistants
and other important personnel. The Company is addressing this challenge through
several ongoing programs and training initiatives. No assurance can be given
that these programs and training initiatives will in fact improve the Company's
ability to attract these nursing and related personnel.
INTEREST EXPENSE, NET
Interest income decreased to $4,335,000 for the year ended December 31,
1999, as compared to $10,708,000 for the same period in 1998 primarily due to
the sale of investment securities in conjunction with a loss portfolio transfer
transaction during the fourth quarter of 1998. Interest expense increased to
$72,578,000 for the year ended December 31, 1999, as compared to $65,938,000 for
the same period in 1998 primarily due to an increase in net borrowings under the
Revolver/Letter of Credit Facility during the year ended December 31, 1999 as
compared to the same period in 1998, imputed interest on the civil settlement of
approximately $4,600,000, and the write-off of deferred financing costs in
conjunction with certain bond refundings.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $99,160,000 for the year
ended December 31, 1999, as compared to $93,722,000 for the same period in 1998.
Such increase was affected by the following: approximately $8,200,000 increase
due to capital additions and improvements, as well as acquisitions; partially
offset by a decrease of approximately $2,800,000 due to dispositions of, or
lease terminations on, certain facilities and ATH.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for the Company during the first
quarter of 2001. The Company has not completed its review of SFAS No. 133 but
does not expect there to be a material effect on its consolidated financial
position or results of operations.
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), provides guidance on the
capitalization and amortization of costs incurred to develop or obtain computer
software for internal use. The Company's adoption of SOP 98-1 during the first
quarter of 1999 did not have a material effect on its consolidated financial
position or results of operations.
1998 COMPARED TO 1997
RESULTS OF OPERATIONS
Operating results for 1997 included the operations of Pharmacy Corporation
of America ("PCA") up until the effective date of the Merger (as discussed
herein). Net loss was $31,021,000 for the year ended December 31, 1998, as
compared to net income of $58,593,000 for the same period in 1997. Net loss for
1998 included a pre-tax charge of approximately $69,400,000 for workforce
reductions, impaired long-lived assets and other unusual items (as discussed
herein). In addition, net loss for 1998 included a $1,660,000 extraordinary
charge, net of income taxes, related to the write-off of unamortized deferred
financing costs associated with the repayment of certain debt instruments, as
well as certain bond refundings, and a cumulative effect adjustment of
$4,415,000, net of income taxes, related to the adoption of SOP 98-5 (as
25
<PAGE> 27
defined below). Net income for 1997 included a pre-tax charge of $44,000,000
relating to the December 3, 1997 Reorganization (as discussed herein).
In preparing for the January 1, 1999 implementation of the new Medicare
prospective payment system ("PPS"), as well as responding to other legislative
and regulatory changes, the Company reorganized its inpatient rehabilitative
operations, analyzed its businesses for impairment issues and implemented new
care-delivery and tracking software. These initiatives, among others, resulted
in a fourth quarter 1998 pre-tax charge of approximately $69,400,000, including
$3,800,000 for workforce reductions, $58,700,000 for asset impairments and
$6,900,000 for various other items.
During the fourth quarter of 1998, the Company reorganized all employed
therapy associates into a newly formed subsidiary, Beverly Rehabilitation, Inc.
("Bev Rehab"), which is part of the Company's Beverly Care Alliance segment, in
order to create a more consolidated, strategic approach to managing the
Company's inpatient rehabilitation business under PPS. The Company accrued
approximately $2,500,000 related to the termination of 835 therapy associates in
conjunction with this reorganization. During 1999, 770 therapy associates were
paid approximately $2,300,000 and left the Company. The Company reversed the
remaining $200,000 during 1999 for changes in its initial accounting estimates.
In addition, the Company's home care and outpatient therapy units underwent
the consolidation and relocation of certain services, including billing and
collections, which resulted in a workforce reduction charge of approximately
$1,300,000 associated with the termination of 236 associates. Of these 236
associates, 74 associates were paid $233,000 and left the Company by December
31, 1998. During 1999, 85 home care and outpatient therapy associates were paid
approximately $600,000 and left the Company. The Company reversed the remaining
$500,000 during 1999 for changes in its initial accounting estimates.
The significant regulatory changes under PPS and other provisions of the
1997 Act were an indicator to management that the carrying values of certain of
its nursing facilities may not be fully recoverable. In addition, there were
certain assets that had 1998 operating losses, and anticipated future operating
losses, which led management to believe that these assets were impaired.
Accordingly, management estimated the undiscounted future cash flows to be
generated by each facility and reduced the carrying value to its estimate of
fair value, resulting in an impairment charge of approximately $9,000,000 in
1998. Management calculated the fair values of the impaired facilities by using
the present value of estimated undiscounted future cash flows, or its best
estimate of what that facility, or similar facilities in that state, would sell
for in the open market. Management believes it has the knowledge to make such
estimates of open market sales prices based on the volume of facilities the
Company has purchased and sold in previous years.
Also during the fourth quarter of 1998, management identified nine nursing
facilities with an aggregate carrying value of approximately $14,000,000 which
needed to be replaced in order to increase operating efficiencies, attract
additional census or upgrade the nursing home environment. Management committed
to a plan to construct new facilities to replace these buildings and reduced the
carrying values of these facilities to their estimated salvage values. These
assets are included in the total assets of the Company's Beverly Healthcare
segment. In addition, management committed to a plan to dispose of 24 home care
centers and nine outpatient therapy clinics which had 1998 and expected future
period operating losses. These businesses had an aggregate carrying value of
approximately $16,500,000 and were written down to their fair value less costs
to sell. These assets generated pre-tax losses for the Company of approximately
$5,100,000 during the year ended December 31, 1998. Substantially all of these
assets were purchased during 1998. The Company disposed of a majority of these
assets during 1999. These assets were included in the total assets of the
Company's Beverly Care Alliance segment. The Company incurred a charge of
approximately $30,300,000 related to these replacements, closings and planned
disposals. These assets were included in the consolidated balance sheet captions
"Property and equipment, net" and "Goodwill, net" at December 31, 1998.
In addition to the workforce reduction and impairment charges, the Company
recorded a fourth quarter 1998 impairment charge for other long-lived assets of
approximately $19,400,000 primarily related to the write-off of software and
software development costs. In conjunction with the implementation of business
process changes, and the need for enhanced data-gathering and reporting required
to operate effectively under
26
<PAGE> 28
PPS, the Company installed new clinical software in each of its nursing
facilities during late-1998, which made obsolete the previously employed
software. In addition, certain of the Company's other ongoing software
development projects were abandoned or written down due to obsolescence,
feasibility or cost recovery issues.
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), provides guidance on the financial reporting of start-up and
organization costs. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Prior to 1998, the Company
capitalized start-up costs in connection with the opening of new facilities and
businesses. The Company adopted the provisions of SOP 98-5 in its financial
statements for the year ended December 31, 1998. The effect of adopting SOP 98-5
was to decrease the Company's pre-tax loss from continuing operations in 1998 by
approximately $1,000,000 and to record a charge for the cumulative effect of an
accounting change, as of January 1, 1998, of $4,415,000, net of income taxes, or
$0.04 per share, to expense costs that had previously been capitalized.
INCOME TAXES
The Company had an annual effective tax rate of 51% for the year ended
December 31, 1998, compared to an annual effective tax rate of 46% for year
ended December 31, 1997. The annual effective tax rate in 1998 was different
than the federal statutory rate primarily due to the impact of the sale of ATH,
the benefit of certain tax credits and the pre-tax charge of $69,400,000 (as
discussed above) which reduced the Company's pre-tax income to a level where the
impact of permanent tax differences and state income taxes had a more
significant impact on the effective tax rate. The annual effective tax rate in
1997 was different than the federal statutory rate primarily due to the impact
of nondeductible transaction costs associated with the Reorganization. At
December 31, 1998, the Company had federal net operating loss carryforwards of
$50,989,000 for income tax purposes which expire in 2018. At December 31, 1998,
the Company had general business tax credit carryforwards of $5,270,000 for
income tax purposes which expire in years 2008 through 2014. For financial
reporting purposes, the federal net operating loss carryforwards and the general
business tax credit carryforwards have been utilized to offset existing net
taxable temporary differences reversing during the carryforward periods.
NET OPERATING REVENUES
The Company reported net operating revenues of $2,812,232,000 during the
year ended December 31, 1998 compared to $3,217,099,000 for the same period in
1997. Approximately 90% and 80% of the Company's total net operating revenues
for the years ended December 31, 1998 and 1997, respectively, were derived from
services provided by the Company's Beverly Healthcare segment. The decrease in
net operating revenues of approximately $404,900,000 for the year ended December
31, 1998, as compared to the same period in 1997, consists of the following: a
decrease of approximately $599,900,000 due to the disposition of, or lease
terminations on, 26 nursing facilities and ATH in 1998 and 68 nursing facilities
and PCA in 1997; partially offset by an increase of approximately $155,100,000
due to the acquisitions of nursing facilities and outpatient, home care and
hospice businesses during 1998 and 1997; and an increase of approximately
$39,900,000 due to facilities which the Company operated during each of the
years ended December 31, 1998 and 1997 ("same facility operations").
The decrease in net operating revenues of approximately $599,900,000 for
1998, as compared to the same period in 1997, resulting from dispositions and
lease terminations that occurred during the year ended December 31, 1997 are as
follows. (See above for discussion of 1998 dispositions). During 1997, the
Company sold or terminated the leases on 68 nursing facilities (8,314 beds) and
certain other assets. The Company recognized net pre-tax gains, which were
included in net operating revenues during the year ended December 31, 1997, of
approximately $19,900,000 as a result of these dispositions. The operations of
these disposed facilities and other assets were immaterial to the Company's
consolidated financial position and results of operations.
On December 3, 1997, the Company completed a tax-free reorganization (the
"Reorganization") in order to facilitate the merger of PCA with Capstone
Pharmacy Services, Inc. (the "Merger"). As a result of the Merger, the Company
received approximately $281,000,000 of cash as partial repayment for PCA's
27
<PAGE> 29
intercompany debt, with a charge to the Company's retained earnings of
approximately $45,100,000 for the remaining intercompany balance which was not
repaid. Pursuant to the Merger, each of the Company's stockholders of record at
the close of business on December 3, 1997 received .4551 shares of PharMerica,
Inc.'s common stock for each share of the Company's Common Stock held. The
conversion ratio was based on a total of 109,873,230 outstanding shares of the
Company's Common Stock at the close of business on December 3, 1997 divided into
the 50,000,000 shares issued by PharMerica, Inc.
In connection with the Reorganization, the Company incurred $44,000,000 of
transaction costs related to the restructuring, repayment or renegotiating of
substantially all of the Company's outstanding debt instruments, as well as the
renegotiating or making of certain payments, primarily in the form of
accelerated vesting of stock-based awards, under various employment agreements
with officers of the Company. Such amounts were funded with a portion of the
$281,000,000 proceeds received as partial repayment of PCA's intercompany debt,
as discussed above. Included in the $44,000,000 of transaction costs were
approximately $18,000,000 of non-cash expenses related to various long-term
incentive agreements.
Total net operating revenues for PCA for the year ended December 31, 1997
were approximately $564,200,000 and represent the operations of PCA prior to the
Merger.
The increase in net operating revenues of approximately $155,100,000 for
1998, as compared to the same period in 1997, resulting from acquisitions which
occurred during the year ended December 31, 1997 are as follows. (See above for
discussion of 1998 acquisitions). During 1997, the Company purchased six
previously leased nursing facilities (758 beds) and certain other assets
including, among other things, 14 institutional pharmacies and 40 outpatient
therapy clinics. The acquisitions of these facilities and other assets were
accounted for as purchases. The operations of these acquired facilities and
other assets were immaterial to the Company's consolidated financial position
and results of operations.
The increase in net operating revenues of approximately $39,900,000 from
same facility operations for the year ended December 31, 1998, as compared to
the same period in 1997, was due to the following: approximately $92,300,000 due
to increases in room and board rates and approximately $6,100,000 due to various
other items; partially offset by approximately $30,400,000 decrease in ancillary
revenues due to a decline in the Company's Medicare census and, to a lesser
extent, as a result of hiring therapists on staff as opposed to contracting for
their services; approximately $19,900,000 due to a decrease in same facility
occupancy to 89.3% for the year ended December 31, 1998, as compared to 90.1%
for the same period in 1997; and approximately $8,200,000 due to a shift in the
Company's patient mix. The Company's Medicare, private and Medicaid census for
same facility operations was 10%, 20% and 69%, respectively, for the year ended
December 31, 1998, as compared to 12%, 19% and 68%, respectively, for the same
period in 1997.
OPERATING AND ADMINISTRATIVE EXPENSES
The Company reported operating and administrative expenses of
$2,633,135,000 during the year ended December 31, 1998 compared to
$2,888,021,000 for the same period in 1997. The decrease of approximately
$254,900,000 consists of the following: a decrease of approximately $534,700,000
due to dispositions; partially offset by an increase of approximately
$141,400,000 due to acquisitions; and an increase of approximately $138,400,000
from same facility operations. (See above for a discussion of dispositions and
acquisitions).
The increase in operating and administrative expenses of approximately
$138,400,000 from same facility operations for the year ended December 31, 1998,
as compared to the same period in 1997, was due to the following: approximately
$66,500,000 due to an increase in the provision for insurance and related items;
approximately $61,400,000 due to increased wages and related expenses
principally due to higher wages and greater benefits required to attract and
retain qualified personnel and the hiring of therapists on staff as opposed to
contracting for their services; approximately $32,900,000 due to increases in
purchased ancillary products, nursing supplies and other variable costs; and
approximately $13,300,000 due to various other items. These increases in
operating and administrative expenses were partially offset by approximately
$35,700,000
28
<PAGE> 30
due to a decrease in contracted therapy expenses as a result of hiring
therapists on staff as opposed to contracting for their services.
On December 31, 1998, Beverly Indemnity, Ltd., a wholly-owned subsidiary of
the Company, completed a risk transfer of substantially all of its pre-May 1998
auto liability, general liability and workers' compensation claims liability to
a third party insurer effected through a loss portfolio transfer valued as of
December 31, 1998. In exchange for a premium of approximately $116,000,000 (paid
primarily from restricted cash and investments), the Company acquired
reinsurance of approximately $180,000,000 to insure such auto liability, general
liability and workers' compensation losses. In addition, in exchange for a
premium of approximately $4,000,000, the Company acquired excess coverage of
approximately $20,000,000 for general liability losses. The Company's provision
for insurance and related items increased approximately $82,200,000 during the
fourth quarter of 1998 primarily as a result of this transaction.
INTEREST EXPENSE, NET
Net interest expense decreased approximately $14,300,000 to $55,230,000 for
the year ended December 31, 1998, as compared to $69,512,000 for the same period
in 1997 primarily due to the conversion of the Company's 5 1/2% convertible
subordinated debentures to Common Stock in the third quarter of 1997, as well as
the repayments of the Company's 7 5/8% convertible subordinated debentures, the
8 3/4% Notes and certain other notes and mortgages during the fourth quarter of
1997 with the proceeds from the Merger.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased approximately $13,300,000
to $93,722,000 for the year ended December 31, 1998, as compared to $107,060,000
for the same period in 1997. Such decrease was affected by the following:
approximately $25,900,000 decrease due to the dispositions of, or lease
terminations on, certain nursing facilities, ATH and PCA; partially offset by an
increase of approximately $12,600,000 due to acquisitions, as well as capital
additions and improvements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had approximately $24,700,000 in cash and
cash equivalents, approximately $105,700,000 of net working capital and
approximately $222,700,000 of unused commitments under its Revolver/Letter of
Credit Facility.
Net cash provided by operating activities for the year ended December 31,
1999 was approximately $189,100,000, an increase of approximately $182,400,000
from the prior year primarily due to a reduction in patient accounts receivable
as a result of the sale of receivables to BFC (as defined below), as well as the
Company's continuing focus on cash collections, and certain income tax refunds
received during the year ended December 31, 1999. Net cash used for investing
and financing activities were approximately $71,500,000 and $110,200,000,
respectively, for the year ended December 31, 1999. The Company received net
cash proceeds of approximately $126,000,000 from the issuance of long-term debt,
approximately $41,900,000 from the dispositions of facilities and other assets
and approximately $22,200,000 from collections on notes receivable. Such net
cash proceeds, along with cash generated from operations, were used to repay
approximately $152,000,000 of net borrowings under the Revolver/Letter of Credit
Facility, to repay approximately $80,600,000 of long-term debt and to fund
capital expenditures totaling approximately $95,400,000.
In January 1999, the Company entered into a $65,000,000 promissory note
with A.I. Credit Corp. at an annual interest rate of 6.50%. The promissory note
is secured by a surety bond. In October 1999, the note was renegotiated to allow
the Company to make an interest-only payment in January 2000 at an annual
interest rate of 6.50%, with the principal balance payable in two equal
installments in January 2001 and in January 2002 at an annual interest rate of
7.00%. The proceeds from this promissory note were used to pay down Revolver
borrowings.
29
<PAGE> 31
During the year ended December 31, 1999, the Company entered into
promissory notes totaling approximately $10,820,000 in conjunction with the
construction of certain nursing facilities and approximately $15,100,000 in
conjunction with the acquisitions of certain facilities. Such debt instruments
bear interest at rates ranging from 7.00% to 8.00%, 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 facilities.
During 1999, the Company refinanced its Medium Term Notes and increased its
borrowings from $40,000,000 to $70,000,000. The Medium Term Notes are
collateralized by patient accounts receivable, which are sold by Beverly Health
and Rehabilitation Services, Inc. ("BHRS") (currently operating as Beverly
Healthcare), a wholly-owned subsidiary of the Company, to Beverly Funding
Corporation ("BFC"), a wholly-owned bankruptcy remote subsidiary of the Company.
As a result of this refinancing, the Company was required by Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," ("SFAS No. 125") to
deconsolidate BFC. SFAS No. 125 provides accounting and reporting standards for
sales, securitizations, and servicing of receivables and other financial assets,
secured borrowing and collateral transactions, and the extinguishments of
liabilities. It requires companies to recognize the financial and servicing
assets it controls and the liabilities it has incurred and to deconsolidate
financial assets when control has been surrendered in accordance with the
criteria provided in SFAS No. 125. Deconsolidation of BFC, which had total
assets of approximately $113,400,000, which cannot be used to satisfy claims of
the Company or any of its subsidiaries, total liabilities of approximately
$75,800,000 and total stockholder's equity of approximately $37,600,000 at
December 31, 1999, caused a reduction in the Company's accounts
receivable-patient and long-term debt. In addition, the Company recorded its
ongoing investment in BFC as an increase in other, net assets. The Company's
Statements of Cash Flows reflect the change in receivables sold to BFC from June
30, 1999 to December 31, 1999 in the caption Accounts receivable -- patient and
the change in the Company's investment in BFC from June 30, 1999 to December 31,
1999 in the caption Other, net -- investing.
The Company has a $125,000,000 financing arrangement available for the
construction of certain facilities. The Company leases the facilities, under
operating leases with the creditor, upon completion of construction. The Company
has the option to purchase these facilities at the end of the initial lease
terms at fair market value. Total construction advances under the financing
arrangement as of December 31, 1999 were approximately $111,200,000.
Effective September 30, 1999, the Company executed an amendment to the
Credit Agreement covering the Company's $375,000,000 Revolver/Letter of Credit
Facility, as well as amendments with certain of its other lenders covering debt
of approximately $199,000,000 (collectively, the "Amendments"). Such Amendments
were required since recording of the special charges related to the Allocation
Investigations, as discussed herein, would have resulted in the Company's
noncompliance with certain financial covenants contained in those debt
agreements. The Amendments modified certain financial covenant levels and
increased the annual interest rates for such debt.
The settlements of the Allocation Investigations require payments totaling
$30,000,000 ($25,000,000 for the first installment of the civil settlement
reimbursement and $5,000,000 for the criminal settlement) within 30 days of
signing the final separate civil and criminal settlement documents, with the
remaining $145,000,000 civil settlement reimbursement to be withheld from the
Company's biweekly Medicare periodic interim payments for a period of eight
years. The Company used borrowings under its Revolver/Letter of Credit Facility
to make the initial $30,000,000 payments during the first quarter of 2000. The
Company anticipates cash flows from operations to decline approximately
$18,100,000 per year as a result of the reduction in Medicare periodic interim
payments and, therefore, may incur additional borrowings under the Revolver/
Letter of Credit Facility to fund ongoing cash needs.
The Company currently anticipates that cash flows from operations and
borrowings under its banking arrangements will be adequate to repay its debts
due within one year of approximately $34,100,000, to fund the settlement
obligations to the federal government, to make normal recurring capital
additions and improvements of approximately $96,000,000, to make selective
acquisitions, including the purchase of previously leased facilities, to
construct new facilities, and to meet working capital requirements for the
twelve
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<PAGE> 32
months ending December 31, 2000. If cash flows from operations or availability
under existing banking arrangements fall below expectations, the Company may be
required to delay capital expenditures, dispose of certain assets, issue
additional debt securities, or consider other alternatives to improve liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to market risk because it utilizes financial
instruments. The market risks inherent in these instruments are represented by
the potential loss due to adverse changes in the general level of U.S. interest
rates. The Company manages its interest rate risk exposure by maintaining a mix
of fixed and variable rates for debt and notes receivable. The following table
provides information regarding the Company's market sensitive financial
instruments and constitutes a forward-looking statement.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATES 2000 2001 2002 2003 2004 THEREAFTER TOTAL
- ----------------------- ------- -------- ------- ------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total long-term debt:
Fixed Rate............ $33,408 $ 61,055 $57,675 $32,402 $40,793 $401,562 $626,895
Average Interest
Rate................ 8.38% 7.43% 7.34% 8.52% 8.01% 8.88%
Variable Rate......... $ 644 $114,762 $23,786 $ 905 $ 1,030 $ 12,194 $153,321
Average Interest
Rate................ 6.54% 8.02% 6.42% 6.54% 6.50% 6.52%
Total notes receivable:
Fixed Rate............ $16,468 $ 949 $ 639 $ 3,992 $ 519 $ 2,051 $ 24,618
Average Interest
Rate................ 9.54% 8.76% 8.70% 9.00% 9.00% 8.73%
Variable Rate......... $ 47 $ 53 $ 56 $ 62 $ 68 $ 873 $ 1,159
Average Interest
Rate................ 8.75% 8.75% 8.75% 8.75% 8.75% 8.75%
<CAPTION>
FAIR VALUE FAIR VALUE
DECEMBER 31, DECEMBER 31,
EXPECTED MATURITY DATES 1999 1998
- ----------------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total long-term debt:
Fixed Rate............ $591,199 $585,394
Average Interest
Rate................
Variable Rate......... $153,321 $344,060
Average Interest
Rate................
Total notes receivable:
Fixed Rate............ $ 19,400 $ 43,600
Average Interest
Rate................
Variable Rate......... $ 1,200 $ 1,300
Average Interest
Rate................
</TABLE>
31
<PAGE> 33
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 33
Consolidated Balance Sheets................................. 34
Consolidated Statements of Operations....................... 35
Consolidated Statements of Stockholders' Equity............. 36
Consolidated Statements of Cash Flows....................... 37
Notes to Consolidated Financial Statements.................. 38
Supplementary Data (Unaudited) -- Quarterly Financial
Data...................................................... 62
</TABLE>
32
<PAGE> 34
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, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 17, 2000
33
<PAGE> 35
BEVERLY ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 24,652 $ 17,278
Accounts receivable -- patient, less allowance for
doubtful accounts:
1999 -- $64,398; 1998 -- $21,764........................ 319,097 463,822
Accounts receivable -- nonpatient, less allowance for
doubtful accounts:
1999 -- $1,057; 1998 -- $441............................ 30,890 85,585
Notes receivable.......................................... 16,930 21,075
Operating supplies........................................ 32,276 32,133
Deferred income taxes..................................... 54,932 56,512
Prepaid expenses and other................................ 15,019 19,565
---------- ----------
Total current assets............................... 493,796 695,970
Property and equipment, net................................. 1,110,065 1,120,315
Other assets:
Notes receivable, less allowance for doubtful notes:
1999 -- $5,604; 1998 -- $2,921.......................... 3,658 21,263
Designated funds.......................................... 3,136 4,029
Goodwill, net............................................. 229,639 217,066
Other, net................................................ 142,586 101,868
---------- ----------
Total other assets................................. 379,019 344,226
---------- ----------
$1,982,880 $2,160,511
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 93,168 $ 85,533
Accrued wages and related liabilities..................... 92,514 96,092
Accrued interest.......................................... 14,138 12,783
Other accrued liabilities................................. 154,182 134,975
Current portion of long-term debt......................... 34,052 27,773
---------- ----------
Total current liabilities.......................... 388,054 357,156
Long-term debt.............................................. 746,164 878,270
Deferred income taxes payable............................... 28,956 114,962
Other liabilities and deferred items........................ 178,582 33,917
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued: 1999 -- 110,382,356;
1998 -- 110,275,714..................................... 11,038 11,028
Additional paid-in capital................................ 875,637 876,383
Accumulated deficit....................................... (139,429) (4,782)
Accumulated other comprehensive income.................... 1,061 760
Treasury stock, at cost: 1999 -- 7,886,800 shares;
1998 -- 7,886,800 shares................................ (107,183) (107,183)
---------- ----------
Total stockholders' equity......................... 641,124 776,206
---------- ----------
$1,982,880 $2,160,511
========== ==========
</TABLE>
See accompanying notes.
34
<PAGE> 36
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net operating revenues................................... $2,546,672 $2,812,232 $3,217,099
Interest income.......................................... 4,335 10,708 13,201
---------- ---------- ----------
Total revenues................................. 2,551,007 2,822,940 3,230,300
Costs and expenses:
Operating and administrative:
Wages and related................................... 1,542,148 1,664,741 1,713,224
Provision for insurance and related items........... 88,377 154,267 87,780
Other............................................... 723,803 814,127 1,087,017
Interest............................................... 72,578 65,938 82,713
Depreciation and amortization.......................... 99,160 93,722 107,060
Special charges related to settlements of federal
government investigations........................... 202,447 1,865 --
Asset impairments, workforce reductions and other
unusual items....................................... 23,818 69,443 44,000
Year 2000 remediation.................................. 12,402 9,719 --
---------- ---------- ----------
Total costs and expenses....................... 2,764,733 2,873,822 3,121,794
---------- ---------- ----------
Income (loss) before provision for (benefit from) income
taxes, extraordinary charge and cumulative effect of
change in accounting for start-up costs................ (213,726) (50,882) 108,506
Provision for (benefit from) income taxes................ (79,079) (25,936) 49,913
---------- ---------- ----------
Income (loss) before extraordinary charge and cumulative
effect of change in accounting for start-up costs...... (134,647) (24,946) 58,593
Extraordinary charge, net of income tax benefit of
$1,057................................................. -- (1,660) --
Cumulative effect of change in accounting for start-up
costs, net of income tax benefit of $2,811............. -- (4,415) --
---------- ---------- ----------
Net income (loss)........................................ $ (134,647) $ (31,021) $ 58,593
========== ========== ==========
Income (loss) per share of common stock:
Basic and diluted:
Before extraordinary charge and cumulative effect of
change in accounting for start-up costs........... $ (1.31) $ (.24) $ .57
Extraordinary charge................................ -- (.02) --
Cumulative effect of change in accounting for
start-up costs.................................... -- (.04) --
---------- ---------- ----------
Net income (loss)................................... $ (1.31) $ (.30) $ .57
========== ========== ==========
Shares used to compute basic per share amounts...... 102,491 103,762 102,060
========== ========== ==========
Shares used to compute diluted per share amounts.... 102,491 103,762 103,422
========== ========== ==========
</TABLE>
See accompanying notes.
35
<PAGE> 37
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER
PREFERRED COMMON PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY
STOCK STOCK CAPITAL DEFICIT) INCOME (LOSS) STOCK TOTAL
--------- ------- ---------- ------------ ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997....... $ -- $10,443 $774,672 $ 133,957 $ -- $ (57,977) $ 861,095
Employee stock transactions,
net........................... -- 54 21,314 -- -- -- 21,368
Purchase of 4,850,700 shares of
common stock for treasury..... -- -- -- -- -- (62,729) (62,729)
Cancellation and retirement of
6,274,108 shares of common
stock held in treasury........ -- (627) (69,689) -- -- 70,316 --
Disposition of PCA.............. -- -- -- (121,230) -- -- (121,230)
Forgiveness of PCA intercompany
balance....................... -- -- -- (45,081) -- -- (45,081)
Conversion of 5 1/2% Debentures
into common stock............. -- 1,119 147,991 -- -- -- 149,110
Conversion of 7 5/8% Debentures
into common stock............. -- -- 47 -- -- -- 47
Comprehensive income:
Unrealized gains on
securities, net of income
taxes of $896............... -- -- -- -- 1,332 -- 1,332
Net income.................... -- -- -- 58,593 -- -- 58,593
---------
Total comprehensive income...... -- -- -- -- -- -- 59,925
---- ------- -------- --------- ------- --------- ---------
Balances at December 31, 1997..... -- 10,989 874,335 26,239 1,332 (50,390) 862,505
Employee stock transactions,
net........................... -- 39 2,048 -- -- -- 2,087
Purchase of 3,886,800 shares of
common stock for treasury..... -- -- -- -- -- (51,120) (51,120)
Settlement of amounts due from
1997 purchase of 4,000,000
shares of common stock for
treasury...................... -- -- -- -- -- (5,673) (5,673)
Comprehensive income (loss):
Unrealized gains on
securities, net of income
taxes of $795............... -- -- -- -- 1,183 -- 1,183
Adjustment to unrealized gains
on securities, net of income
tax benefit of $1,180....... -- -- -- -- (1,755) -- (1,755)
Net loss...................... -- -- -- (31,021) -- -- (31,021)
---------
Total comprehensive loss........ -- -- -- -- -- -- (31,593)
---- ------- -------- --------- ------- --------- ---------
Balances at December 31, 1998..... -- 11,028 876,383 (4,782) 760 (107,183) 776,206
Employee stock transactions,
net........................... -- 10 (746) -- -- -- (736)
Comprehensive income (loss):
Unrealized gains on
securities, net of income
taxes of $202............... -- -- -- -- 301 -- 301
Net loss...................... -- -- -- (134,647) -- -- (134,647)
---------
Total comprehensive loss........ -- -- -- -- -- -- (134,346)
---- ------- -------- --------- ------- --------- ---------
Balances at December 31, 1999..... $ -- $11,038 $875,637 $(139,429) $ 1,061 $(107,183) $ 641,124
==== ======= ======== ========= ======= ========= =========
</TABLE>
See accompanying notes.
36
<PAGE> 38
BEVERLY ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (134,647) $ (31,021) $ 58,593
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 99,160 93,722 107,060
Provision for reserves on patient, notes and other
receivables,
net.................................................. 32,089 25,249 34,341
Amortization of deferred financing costs................ 2,909 2,336 3,163
Special charges related to settlements of federal
government investigations............................ 202,447 1,865 --
Asset impairments, workforce reductions and other
unusual
items................................................ 23,818 69,443 44,000
Extraordinary charge.................................... -- 2,717 --
Cumulative effect of change in accounting for start-up
costs................................................ -- 7,226 --
(Gains) losses on dispositions of facilities and other
assets, net.......................................... 4,004 (33,853) (19,901)
Deferred taxes.......................................... (83,079) (28,105) 20,247
Insurance related accounts.............................. 33,500 39,587 (25,432)
Changes in operating assets and liabilities, net of
acquisitions and dispositions:
Accounts receivable -- patient....................... 901 (132,199) (46,639)
Operating supplies................................... (800) (1,239) (3,911)
Prepaid expenses and other receivables............... 1,121 240 (18,749)
Accounts payable and other accrued expenses.......... (16,536) 23,080 3,377
Income taxes payable................................. 25,175 (27,729) (7,305)
Other, net........................................... (921) (4,530) (4,640)
----------- ----------- -----------
Total adjustments.................................. 323,788 37,810 85,611
----------- ----------- -----------
Net cash provided by operating activities.......... 189,141 6,789 144,204
Cash flows from investing activities:
Capital expenditures...................................... (95,414) (150,451) (133,087)
Payments for acquisitions, net of cash acquired........... (6,985) (162,969) (61,567)
Proceeds from dispositions of facilities and other
assets.................................................. 41,941 82,119 421,412
Collections on notes receivable and REMIC investment...... 22,185 6,089 32,273
Other, net................................................ (33,264) (5,374) (28,178)
----------- ----------- -----------
Net cash provided by (used for) investing
activities....................................... (71,537) (230,586) 230,853
Cash flows from financing activities:
Revolver borrowings....................................... 1,132,000 1,328,000 1,604,000
Repayments of Revolver borrowings......................... (1,284,000) (1,077,000) (1,745,000)
Proceeds from issuance of long-term debt.................. 125,820 9,495 31,137
Repayments of long-term debt.............................. (80,605) (70,878) (166,369)
Purchase of common stock for treasury..................... -- (56,793) (65,126)
Proceeds from exercise of stock options................... 129 3,092 5,401
Deferred financing costs.................................. (3,830) (730) (1,251)
Proceeds from designated funds, net....................... 256 659 (2,380)
----------- ----------- -----------
Net cash provided by (used for) financing
activities....................................... (110,230) 135,845 (339,588)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ 7,374 (87,952) 35,469
Cash and cash equivalents at beginning of year.............. 17,278 105,230 69,761
----------- ----------- -----------
Cash and cash equivalents at end of year.................... $ 24,652 $ 17,278 $ 105,230
=========== =========== ===========
Supplemental schedule of cash flow information:
Cash paid (received) during the year for:
Interest, net of amounts capitalized.................... $ 68,314 $ 65,927 $ 81,411
Income tax payments (refunds), net...................... (21,175) 26,030 36,971
</TABLE>
See accompanying notes.
37
<PAGE> 39
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
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 healthcare services in 34 states and the District of
Columbia. Its operations include nursing facilities, assisted living centers,
home care centers, outpatient therapy clinics and rehabilitation therapy
services. In addition, prior to June 30, 1998, the Company operated acute
long-term transitional hospitals and, prior to the Merger, institutional and
mail service pharmacies. The consolidated financial statements of the Company
include the accounts of the Company and all of its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and certificates of deposit
with original maturities of three months or less.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation or,
where appropriate, the present value of the related capital lease obligations
less accumulated amortization. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the assets.
Intangible Assets
Goodwill (stated at cost less accumulated amortization of $31,196,000 in
1999 and $25,547,000 in 1998) is being amortized over periods not to exceed 40
years using the straight-line method. Operating and leasehold rights and
licenses, which are included in the consolidated balance sheet caption "Other,
net," (stated at cost less accumulated amortization of $18,891,000 in 1999 and
$18,307,000 in 1998) 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,
1999, 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
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
("SFAS No. 121") requires impairment losses to be recognized for long-lived
assets used in operations when indicators of impairment are present and the
38
<PAGE> 40
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
undiscounted cash flows are not sufficient to recover the assets' carrying
amounts. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. In accordance with SFAS No. 121, the Company
assesses the need for an impairment write-down when such indicators of
impairment are present. See Notes 2 and 3.
Insurance
General liability and professional liability costs for the long-term care
industry, especially in the state of Florida, have become increasingly expensive
and unpredictable. The Company and most of its competitors have experienced
increases in both the number of claims and the size of the typical claim. This
phenomenon is most evident in the state of Florida, where well-intended patient
rights' statutes tend to be exploited by plaintiffs' attorneys, since the
statutes allow for actual damages, punitive damages and plaintiff attorney fees
to be included in any proven violation. The Company's provision for insurance
and related items decreased approximately $65,900,000 for the year ended
December 31, 1999, as compared to the same period in 1998, primarily due to the
LPT (as discussed below), which significantly increased insurance costs during
the fourth quarter of 1998. Despite such decrease year over year, the Company,
as well as other nursing home providers with significant operations in Florida,
are experiencing substantial increases in patient care and other claims,
evidencing the negative trend surrounding patient care liabilities.
On December 31, 1998, Beverly Indemnity, Ltd., a wholly-owned subsidiary of
the Company, completed a risk transfer of substantially all of its pre-May 1998
auto liability, general liability and workers' compensation claims liability to
a third party insurer effected through a loss portfolio transfer ("LPT") valued
as of December 31, 1998. In exchange for a premium of approximately $116,000,000
(paid primarily from restricted cash and investments), the Company acquired
reinsurance of approximately $180,000,000 to insure such auto liability, general
liability and workers' compensation losses. In addition, in exchange for a
premium of approximately $4,000,000, the Company acquired excess coverage of
approximately $20,000,000 for general liability losses. As of December 31, 1999,
based upon estimates and analyses by its outside actuaries, the Company expects
the ultimate losses on such transferred general liability losses to reach the
excess layer and to also exceed the total aggregate limits. The liabilities for
the excess co-insurance are approximately $2,000,000, and the liabilities for
those losses exceeding the total aggregate limit are approximately $2,000,000 on
a discounted basis. The Company will be required to cover such excess and
increased its insurance reserves during 1999 to take such expected losses into
consideration. The Company's provision for insurance and related items increased
approximately $82,200,000 during the fourth quarter of 1998 primarily as a
result of this transaction.
Prior to the LPT, and for periods not covered by the LPT, the Company
insures the majority of its auto liability, general liability and workers'
compensation risks through insurance policies with third parties, some of which
are subject to reinsurance agreements between the insurer and Beverly Indemnity,
Ltd. The liabilities for estimated incurred losses not covered by third party
insurance are discounted at 10% to their present value based on expected loss
payment patterns determined by independent actuaries. Had the discount rate been
reduced by one-half of a percentage point, the Company would have incurred a
pre-tax charge of
39
<PAGE> 41
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
approximately $700,000 for the year ended December 31, 1999. The discounted
insurance liabilities are included in the consolidated balance sheet captions as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accrued wages and related liabilities....................... $ 1,310 $ --
Other accrued liabilities................................... 10,000 --
Other liabilities and deferred items........................ 75,224 18,151
------- -------
$86,534 $18,151
======= =======
</TABLE>
On an undiscounted basis, the total insurance liabilities as of December
31, 1999 and 1998 were $99,400,000 and $22,800,000, respectively. As of December
31, 1999, the Company had deposited approximately $600,000 in funds (the
"Beverly Indemnity funds") that are restricted for the payment of insured
claims. In addition, the Company anticipates that approximately $8,600,000 of
its existing cash at December 31, 1999, while not legally restricted, will be
utilized primarily to fund certain workers' compensation and general liability
claims and expenses, and the Company does not expect to use such cash for other
purposes.
The Company purchased traditional indemnity insurance coverage for its
1999, 1998 and 1997 workers' compensation and auto liabilities. During 1997, the
Company transferred a portion of its liabilities for workers' compensation and
general liability related to certain of its sold nursing facilities in the state
of Texas to a third-party indemnity insurance company. As of December 31, 1999,
based upon estimates and analyses by its outside actuaries, the Company expects
the ultimate losses on such transferred liabilities to exceed the aggregate
insurance limit available by approximately $4,000,000. The Company will be
required to cover such excess and increased its insurance reserves during 1999
to take such expected losses into consideration.
Stock Based Awards
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") encourages, but does not require,
companies to recognize compensation expense for stock-based awards based on
their fair value on the date of grant. The Company has elected to continue to
account for its stock-based awards in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for its stock option grants
which are issued at market value on the date of grant. See Note 8 for the pro
forma effects on the Company's reported net income (loss) and diluted earnings
per share assuming the election had been made to recognize compensation expense
on stock-based awards in accordance with SFAS No. 123.
Revenues
The Company's revenues are derived primarily from providing long-term
healthcare services. Approximately 72%, 74% and 74% of the Company's net
operating revenues for 1999, 1998 and 1997, respectively, were derived from
funds under federal and state medical assistance programs, and approximately 42%
and 62% of the Company's net patient accounts receivable at December 31, 1999
and 1998, respectively, are due from such programs. The decrease in net patient
accounts receivable derived from funds under federal and state medical
assistance programs for the year ended December 31, 1999, as compared to 1998,
was primarily due to the deconsolidation of Beverly Funding Corporation (see
Note 6). The Company accrues for revenues when services are provided at standard
charges adjusted to amounts estimated to be received under governmental programs
and other third-party contractual arrangements. These revenues and receivables
are reported at their estimated net realizable amounts and are subject to audit
and retroactive adjustment.
40
<PAGE> 42
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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
a reduction of approximately $2,000,000 in net operating revenues for the year
ended December 31, 1999 and an increase of approximately $10,900,000 and
$8,900,000 in net operating revenues for the years ended December 31, 1998 and
1997, respectively.
Laws and regulations governing the Medicare and Medicaid programs are
complex and subject to interpretation. The Company believes that it is in
compliance with all applicable laws and regulations; however, as disclosed in
Note 7, the Company has been the subject of an investigation involving
allegations of potential wrongdoing, which was settled subsequent to December
31, 1999. Compliance with such laws and regulations is subject to government
review and interpretation, as well as significant regulatory action including
fines, penalties, and exclusion from the Medicare and Medicaid programs.
Concentration of Credit Risk
The Company has significant accounts receivable, notes receivable and other
assets whose collectibility or realizability is dependent upon the performance
of certain governmental programs, primarily Medicare and Medicaid. These
receivables and other assets represent the only concentration of credit risk for
the Company. The Company does not believe there are significant credit risks
associated with these governmental programs. The Company believes that an
adequate provision has been made for the possibility of these receivables and
other assets proving uncollectible and continually monitors and adjusts these
allowances as necessary.
Income Taxes
The Company follows the liability method in accounting for income taxes.
The liability method provides that deferred tax assets and liabilities are
recorded at currently enacted tax rates based on the difference between the tax
basis of assets and liabilities and their carrying amounts for financial
reporting purposes, referred to as temporary differences.
41
<PAGE> 43
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Earnings per Share
The following table sets forth the computation of basic and diluted income
(loss) per share for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
NUMERATOR:
Numerator for basic and diluted income (loss) per
share from continuing operations............... $(134,647) $(24,946) $ 58,593
========= ======== ========
DENOMINATOR:
Denominator for basic income (loss) per
share -- weighted average shares............... 102,491 103,762 102,060
Effect of dilutive securities:
Employee stock options......................... -- -- 1,236
Performance shares............................. -- -- 126
--------- -------- --------
Dilutive potential common shares.................. -- -- 1,362
--------- -------- --------
Denominator for diluted income (loss) per share --
adjusted weighted average shares and assumed
conversions.................................... 102,491 103,762 103,422
========= ======== ========
Basic and diluted income (loss) per share......... $ (1.31) $ (0.24) $ 0.57
========= ======== ========
</TABLE>
Comprehensive Income (Loss)
Comprehensive income (loss) includes net income (loss), as well as charges
and credits directly to stockholders' equity which are excluded from net income
(loss). Accumulated other comprehensive income, net of income taxes, consists of
unrealized gains on available-for-sale securities of approximately $1,061,000
and $760,000 at December 31, 1999 and 1998, respectively.
New Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133 is effective for the Company during the first
quarter of 2001. The Company has not completed its review of SFAS No. 133 but
does not expect there to be a material effect on its consolidated financial
position or results of operations.
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), provides guidance on the financial reporting of start-up and
organization costs. SOP 98-5 requires costs of start-up activities and
organization costs to be expensed as incurred. Prior to 1998, the Company
capitalized start-up costs in connection with the opening of new facilities and
businesses. The Company adopted the provisions of SOP 98-5 in its financial
statements for the year ended December 31, 1998. The effect of adopting SOP 98-5
was to decrease the Company's pre-tax loss from continuing operations in 1998 by
approximately $1,000,000 and to record a charge for the cumulative effect of an
accounting change, as of January 1, 1998, of $4,415,000, net of income taxes, or
$0.04 per share, to expense costs that had previously been capitalized.
42
<PAGE> 44
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), provides guidance on the
capitalization and amortization of costs incurred to develop or obtain computer
software for internal use. The Company's adoption of SOP 98-1 during the first
quarter of 1999 did not have a material effect on its consolidated financial
position or results of operations.
Other
Certain prior year amounts have been reclassified to conform with the 1999
presentation.
2. SPECIAL CHARGES RELATED TO SETTLEMENTS OF FEDERAL GOVERNMENT INVESTIGATIONS
In late July 1999, the Company reached a tentative understanding with the
U.S. Department of Justice to settle the separate civil and criminal aspects of
all investigations by the federal government and its fiscal intermediary into
the allocation of nursing labor hours to the Medicare program from 1990 to 1998
(the "Allocation Investigations"). On February 3, 2000, the Company announced
that it had signed agreements with the Office of Inspector General of the
Department of Health and Human Services and the U.S. Department of Justice
finalizing the tentative settlements. (See Note 7). As a result, during the year
ended December 31, 1999, the Company recorded a special pre-tax charge of
approximately $202,400,000 ($127,500,000, net of income taxes, or $1.24 per
share diluted) which includes: (i) provisions totaling approximately
$128,800,000 representing the net present value of the separate civil and
criminal settlements; (ii) impairment losses of approximately $17,000,000 on 10
nursing facilities that pled guilty of submitting erroneous cost reports to the
Medicare program in conjunction with the criminal settlement; (iii)
approximately $39,000,000 for certain prior year cost report related items
affected by the settlements; (iv) approximately $3,100,000 of debt issuance and
refinancing costs related to various bank debt modifications as a result of the
settlements; and (v) approximately $14,500,000 for other investigation and
settlement related costs.
If, prior to January 1, 1999, the settlement obligations and related items
had been finalized and recorded, the Company's bank debt had been refinanced and
the Company had closed or sold the facilities that are impacted by the criminal
settlement, the Company's results of operations, on an unaudited pro forma
basis, would have been reduced by approximately $13,200,000, or $.13 per share
diluted, for the year ended December 31, 1999.
3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL ITEMS
During the fourth quarter of 1999, the Company recorded a pre-tax charge of
approximately $23,800,000 related to restructuring of agreements on certain
leased facilities; severance and other workforce reduction expenses; asset
impairments; and other unusual items. The Company negotiated the terminations of
lease agreements on 19 nursing facilities (2,047 beds), which resulted in a
charge of approximately $17,300,000. In addition, the Company accrued
approximately $5,900,000 primarily related to severance agreements associated
with three executives of the Company. Substantially all of the $5,900,000 was
paid during the first quarter of 2000.
In preparing for the January 1, 1999 implementation of the new Medicare
prospective payment system ("PPS"), as well as responding to other legislative
and regulatory changes, the Company reorganized its inpatient rehabilitative
operations, analyzed its businesses for impairment issues and implemented new
care-delivery and tracking software. These initiatives, among others, resulted
in a fourth quarter 1998 pre-tax charge of approximately $69,400,000, including
$3,800,000 for workforce reductions, $58,700,000 for asset impairments and
$6,900,000 for various other items.
43
<PAGE> 45
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL
ITEMS -- (CONTINUED)
During the fourth quarter of 1998, the Company reorganized all employed
therapy associates into a newly formed subsidiary, Beverly Rehabilitation, Inc.
("Bev Rehab"), which is part of the Company's Beverly Care Alliance segment, in
order to create a more consolidated, strategic approach to managing the
Company's inpatient rehabilitation business under PPS. The Company accrued
approximately $2,500,000 related to the termination of 835 therapy associates in
conjunction with this reorganization. During 1999, 770 therapy associates were
paid approximately $2,300,000 and left the Company. The Company reversed the
remaining $200,000 during 1999 for changes in its initial accounting estimates.
In addition, the Company's home care and outpatient therapy units underwent
the consolidation and relocation of certain services, including billing and
collections, which resulted in a workforce reduction charge of approximately
$1,300,000 associated with the termination of 236 associates. Of these 236
associates, 74 associates were paid $233,000 and left the Company by December
31, 1998. During 1999, 85 home care and outpatient therapy associates were paid
approximately $600,000 and left the Company. The Company reversed the remaining
$500,000 during 1999 for changes in its initial accounting estimates.
The significant regulatory changes under PPS and other provisions of the
1997 Act were an indicator to management that the carrying values of certain of
its nursing facilities may not be fully recoverable. In addition, there were
certain assets that had 1998 operating losses, and anticipated future operating
losses, which led management to believe that these assets were impaired.
Accordingly, management estimated the undiscounted future cash flows to be
generated by each facility and reduced the carrying value to its estimate of
fair value, resulting in an impairment charge of approximately $9,000,000 in
1998. Management calculated the fair values of the impaired facilities by using
the present value of estimated undiscounted future cash flows, or its best
estimate of what that facility, or similar facilities in that state, would sell
for in the open market. Management believes it has the knowledge to make such
estimates of open market sales prices based on the volume of facilities the
Company has purchased and sold in previous years. There were no material
impairment adjustments recorded during the year ended December 31, 1997.
Also during the fourth quarter of 1998, management identified nine nursing
facilities with an aggregate carrying value of approximately $14,000,000 which
needed to be replaced in order to increase operating efficiencies, attract
additional census or upgrade the nursing home environment. Management committed
to a plan to construct new facilities to replace these buildings and reduced the
carrying values of these facilities to their estimated salvage values. These
assets are included in the total assets of Beverly Healthcare (See Note 11). In
addition, management committed to a plan to dispose of 24 home care centers and
nine outpatient therapy clinics which had 1998 and expected future period
operating losses. These businesses had an aggregate carrying value of
approximately $16,500,000 and were written down to their fair value less costs
to sell. These assets generated pre-tax losses for the Company of approximately
$5,100,000 during the year ended December 31, 1998. Substantially all of these
assets were purchased during 1998. The Company disposed of a majority of these
assets during 1999. These assets were included in the total assets of Beverly
Care Alliance (See Note 11). The Company incurred a fourth quarter 1998 charge
of approximately $30,300,000 related to these replacements, closings and planned
disposals. These assets were included in the consolidated balance sheet captions
"Property and equipment, net" and "Goodwill, net" at December 31, 1998.
In addition to the workforce reduction and impairment charges, the Company
recorded a fourth quarter 1998 impairment charge for other long-lived assets of
approximately $19,400,000 primarily related to the write-off of software and
software development costs. In conjunction with the implementation of business
process changes, and the need for enhanced data-gathering and reporting required
to operate effectively under
44
<PAGE> 46
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. ASSET IMPAIRMENTS, WORKFORCE REDUCTIONS AND OTHER UNUSUAL
ITEMS -- (CONTINUED)
PPS, the Company installed new clinical software in each of its nursing
facilities during late-1998, which made obsolete the previously employed
software. In addition, certain of the Company's other ongoing software
development projects were abandoned or written down due to obsolescence,
feasibility or cost recovery issues.
4. ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1999, the Company purchased three
outpatient therapy clinics, two home care centers, two nursing facilities (284
beds), one previously leased nursing facility (190 beds) and certain other
assets for cash of approximately $6,000,000, acquired debt of approximately
$15,100,000 and closing and other costs of approximately $1,700,000. The
acquisitions of such facilities and other assets were accounted for as purchases
and resulted in the Company recording goodwill of approximately $8,400,000. Also
during such period, the Company sold or terminated the leases on 12 nursing
facilities (1,291 beds), one assisted living center (10 units), 17 home care
centers and certain other assets for cash proceeds of approximately $7,100,000
and notes receivable of approximately $1,000,000. The Company did not operate
two of these nursing facilities (166 beds) which were leased to other nursing
home operators in prior year transactions. The Company recognized net pre-tax
losses,which were included in net operating revenues during the year ended
December 31, 1999, of approximately $4,000,000 as a result of these
dispositions. The operations of these facilities and certain other assets were
immaterial to the Company's consolidated financial position and results of
operations.
During the year ended December 31, 1998, the Company purchased 111
outpatient therapy clinics, 50 home care centers, eight nursing facilities (823
beds), one assisted living center (48 units), two previously leased nursing
facilities (228 beds) and certain other assets for cash of approximately
$163,200,000, acquired debt of approximately $8,000,000 and closing and other
costs of approximately $7,000,000. The acquisitions of such facilities and other
assets were accounted for as purchases and resulted in the Company recording
goodwill of approximately $143,000,000. Also, during such period, the Company
sold or terminated the leases on 26 nursing facilities (3,203 beds) and certain
other assets for cash proceeds of approximately $52,500,000 (approximately
$35,600,000 of which was included in accounts receivable -- nonpatient at
December 31, 1998), notes receivable of approximately $21,300,000, assumed debt
of approximately $4,600,000 and closing and other costs of approximately
$2,300,000. The Company did not operate seven of these nursing facilities (893
beds) which were leased to other nursing home operators in prior year
transactions. The Company recognized net pre-tax gains, which were included in
net operating revenues, during the year ended December 31, 1998 of approximately
$17,900,000 as a result of these dispositions. The operations of these
facilities and certain other assets were immaterial to the Company's
consolidated financial position and results of operations.
In June 1998, the Company completed the sale of American Transitional
Hospitals, Inc. ("ATH"), which operated as Beverly Specialty Hospitals, to
Select Medical Corporation for cash of approximately $65,300,000 and assumed
debt of approximately $2,400,000. Prior to the sale, ATH operated 15
transitional hospitals (743 beds) in eight states which addressed the needs of
patients requiring intense therapy regimens, but not necessarily the breadth of
services provided within traditional acute care hospitals. The Company
recognized a pre-tax gain, which was included in net operating revenues, of
approximately $16,000,000 during the year ended December 31, 1998 as a result of
this disposition. During the year ended December 31, 1999, the Company recorded
a pre-tax charge to adjust the sales price of this disposition by approximately
$4,500,000, which was included in net operating revenues. The operations of ATH
were immaterial to the Company's consolidated financial position and results of
operations.
45
<PAGE> 47
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
4. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
During the year ended December 31, 1997, the Company purchased six
previously leased nursing facilities (758 beds) and certain other assets
including, among other things, 14 institutional pharmacies and 40 outpatient
therapy clinics, for cash of approximately $60,800,000 and closing and other
costs of approximately $9,500,000. The acquisitions of such facilities and other
assets were accounted for as purchases. Also during such period, the Company
sold or terminated the leases on 68 nursing facilities (8,314 beds) and certain
other assets for cash proceeds of approximately $146,800,000. The Company
recognized net pre-tax gains, which were included in net operating revenues,
during the year ended December 31, 1997 of approximately $19,900,000 as a result
of these dispositions. The operations of these facilities and certain other
assets were immaterial to the Company's consolidated financial position and
results of operations.
On December 3, 1997, the Company completed a tax-free reorganization (the
"Reorganization") in order to facilitate the merger of Pharmacy Corporation of
America ("PCA") with Capstone Pharmacy Services, Inc. (the "Merger"). As a
result of the Merger, the Company received approximately $281,000,000 of cash as
partial repayment for PCA's intercompany debt, with a charge to the Company's
retained earnings of approximately $45,100,000 for the remaining intercompany
balance which was not repaid. Pursuant to the Reorganization, each of the
Company's stockholders of record at the close of business on December 3, 1997
received .4551 shares of PharMerica, Inc.'s common stock for each share of the
Company's Common Stock held. The conversion ratio was based on a total of
109,873,230 outstanding shares of the Company's Common Stock at the close of
business on December 3, 1997 divided into the 50,000,000 shares issued by
PharMerica, Inc.
In connection with the Reorganization, the Company incurred $44,000,000 of
transaction costs related to the restructuring, repayment or renegotiating of
substantially all of the Company's outstanding debt instruments, as well as the
renegotiating or making of certain payments, primarily in the form of
accelerated vesting of stock-based awards, under various employment agreements
with officers of the Company. Such amounts were funded with a portion of the
$281,000,000 proceeds received as partial repayment of PCA's intercompany debt,
as discussed above. Included in the $44,000,000 of transaction costs were
approximately $18,000,000 of non-cash expenses related to various long-term
incentive agreements.
At the date of the Merger, PCA had total assets of approximately
$489,200,000, total liabilities of approximately $368,000,000 and total
stockholder's equity of approximately $121,200,000. Total net operating revenues
for PCA for the year ended December 31, 1997 were approximately $564,200,000 and
represent the operations of PCA prior to the Merger.
46
<PAGE> 48
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
5. 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
----------------------- ----------------------- -----------------
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Land, buildings and
improvements............ $1,446,004 $1,433,170 $1,412,715 $1,393,839 $33,289 $39,331
Furniture and equipment... 374,855 350,410 369,388 344,484 5,467 5,926
Construction in
progress................ 32,543 31,057 32,543 31,057 -- --
---------- ---------- ---------- ---------- ------- -------
1,853,402 1,814,637 1,814,646 1,769,380 38,756 45,257
Less accumulated
depreciation and
amortization............ 743,337 694,322 716,228 662,281 27,109 32,041
---------- ---------- ---------- ---------- ------- -------
$1,110,065 $1,120,315 $1,098,418 $1,107,099 $11,647 $13,216
========== ========== ========== ========== ======= =======
</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,
including the amortization of assets under capital lease obligations, for the
years ended December 31, 1999, 1998 and 1997 was $83,328,000, $81,722,000 and
$87,286,000, respectively.
47
<PAGE> 49
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Credit Agreement due December 31, 2001...................... $114,000 $266,000
9% Senior Notes due February 15, 2006, unsecured............ 180,000 180,000
Notes and mortgages, less imputed interest: 1999 -- $67,
1998 -- $92; due in installments through the year 2031, at
effective interest rates of 6.00% to 12.50%, a portion of
which is secured by property, equipment and other assets
with a net book value of $240,154 at December 31, 1999.... 199,831 167,268
Industrial development revenue bonds, less imputed interest:
1999 -- $9, 1998 -- $13; due in installments through the
year 2013, at effective interest rates of 4.81% to 10.72%,
a portion of which is secured by property and other assets
with a net book value of $186,130 at December 31, 1999.... 145,896 169,306
A.I. Credit Corp. Note due January 2002, secured by a surety
bond...................................................... 65,000 --
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 $14,982 at December 31,
1999...................................................... 12,841 14,219
8 5/8% First Mortgage Bonds due October 1, 2008, secured by
first mortgages on 10 nursing facilities with an aggregate
net book value of $26,004 at December 31, 1999............ 20,640 21,540
Series 1995 Bonds due June 2005, at an interest rate of
6.88% with respect to $7,000 and 7.24% with respect to
$18,000, secured by a letter of credit.................... 25,000 25,000
Medium Term Notes due June 15, 2000 (deconsolidated June
1999 as discussed below).................................. -- 40,000
Term Loan under the GE Capital Facility..................... 735 5,471
-------- --------
763,943 888,804
Present value of capital lease obligations, less imputed
interest: 1999 -- $384, 1998 -- $419, at effective
interest rates of 6.00% to 13.00%......................... 16,273 17,239
-------- --------
780,216 906,043
Less amounts due within one year............................ 34,052 27,773
-------- --------
$746,164 $878,270
======== ========
</TABLE>
In January 1999, the Company entered into a $65,000,000 promissory note
with A.I. Credit Corp. at an annual interest rate of 6.50%. The promissory note
is secured by a surety bond. In October 1999, the note was renegotiated to allow
the Company to make an interest-only payment in January 2000 at an annual
interest rate of 6.50%, with the principal balance payable in two equal
installments in January 2001 and in January 2002 at an annual interest rate of
7.00%. The proceeds from this promissory note were used to pay down Revolver
borrowings.
During the year ended December 31, 1999, the Company entered into
promissory notes totaling approximately $10,820,000 in conjunction with the
construction of certain nursing facilities and approximately $15,100,000 in
conjunction with the acquisitions of certain facilities. Such debt instruments
bear interest at rates ranging from 7.00% to 8.00%, 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 facilities.
During June 1999, the Company refinanced its Medium Term Notes and
increased its borrowings from $40,000,000 to $70,000,000. The Medium Term Notes
are collateralized by patient accounts receivable, which
48
<PAGE> 50
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. LONG-TERM DEBT -- (CONTINUED)
are sold by Beverly Health and Rehabilitation Services, Inc. ("BHRS") (currently
operating as Beverly Healthcare), a wholly-owned subsidiary of the Company, to
Beverly Funding Corporation ("BFC"), a wholly-owned bankruptcy remote subsidiary
of the Company. As a result of this refinancing, the Company was required by
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS
No. 125") to deconsolidate BFC. SFAS No. 125 provides accounting and reporting
standards for sales, securitizations, and servicing of receivables and other
financial assets, secured borrowing and collateral transactions, and the
extinguishments of liabilities. It requires companies to recognize the financial
and servicing assets it controls and the liabilities it has incurred and to
deconsolidate financial assets when control has been surrendered in accordance
with the criteria provided in SFAS No. 125. Deconsolidation of BFC, which had
total assets of approximately $113,400,000, which cannot be used to satisfy
claims of the Company or any of its subsidiaries, total liabilities of
approximately $75,800,000 and total stockholder's equity of approximately
$37,600,000 at December 31, 1999, caused a reduction in the Company's accounts
receivable-patient and long-term debt. In addition, the Company recorded its
ongoing investment in BFC as an increase in other, net assets. The Company's
Statement of Cash Flows reflects the change from June 30, 1999 to December 31,
1999 in receivables sold to BFC in the caption Accounts receivable -- patient
and the change from June 30, 1999 to December 31, 1999 in the Company's
investment in BFC in the caption Other, net -- investing.
Effective September 30, 1999, the Company executed an amendment to its
$375,000,000 Credit Agreement (the "Credit Agreement"), as well as amendments
with certain of its other lenders covering debt of approximately $199,000,000
(collectively, the "Amendments"), which modified certain financial covenant
levels and increased the annual interest rates for such debt and added real and
personal property as collateral, including stock of certain of the Company's
subsidiaries. The Amendments were required since recording of the special
charges related to the Allocation Investigations, as discussed herein, would
have resulted in the Company's noncompliance with certain financial covenants
contained in those debt agreements. The Credit Agreement provides for a
Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). At December
31, 1999, the Company had approximately $114,000,000 of outstanding borrowings
and approximately $38,300,000 of outstanding letters of credit under the
Revolver/LOC Facility. Borrowings under the Credit Agreement bear interest at
adjusted LIBOR plus 2.25%, the Base Rate, as defined, plus 1.25% or the adjusted
CD rate, as defined, plus 2.375%, 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 $222,700,000 of unused commitments
under such facility at December 31, 1999. The Credit Agreement is secured by
property, equipment and other assets with a net book value of approximately
$14,600,000 at December 31, 1999, is guaranteed by substantially all of the
Company's present and future subsidiaries (collectively, the "Subsidiary
Guarantors") and imposes on the Company certain financial tests and restrictive
covenants.
The Company has $180,000,000 of 9% Senior Notes due February 15, 2006 (the
"Senior Notes") which were sold through a public offering (the "Senior Notes
offering"). The Senior Notes are unsecured obligations guaranteed by the
Subsidiary Guarantors and impose on the Company certain restrictive covenants.
Separate financial statements of the Subsidiary Guarantors are not considered to
be material to holders of the Senior Notes since the guaranty of each of the
Subsidiary Guarantors is joint and several and full and unconditional (except
that liability thereunder is limited to an aggregate amount equal to the largest
amount that would not render its obligations thereunder subject to avoidance
under Section 548 of the Bankruptcy Code of 1978, as amended, or any comparable
provisions of applicable state law), and Beverly Enterprises, Inc., the parent,
has no operations or assets separate from its investment in its subsidiaries.
49
<PAGE> 51
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. LONG-TERM DEBT -- (CONTINUED)
Maturities and sinking fund requirements of long-term debt, including
capital leases, for the years ended December 31 are as follows (in thousands):
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 THEREAFTER TOTAL
------- -------- ------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Future minimum lease
payments............. $ 2,929 $ 2,742 $ 2,750 $ 2,106 $ 2,206 $ 16,807 $ 29,540
Less interest.......... 1,487 1,363 1,228 1,098 1,009 7,082 13,267
------- -------- ------- ------- ------- -------- --------
Net present value of
future minimum lease
payments............. 1,442 1,379 1,522 1,008 1,197 9,725 16,273
Notes, mortgages and
bonds................ 32,610 174,438 79,939 32,299 40,626 404,031 763,943
------- -------- ------- ------- ------- -------- --------
$34,052 $175,817 $81,461 $33,307 $41,823 $413,756 $780,216
======= ======== ======= ======= ======= ======== ========
</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 1999, 1998, or 1997.
7. 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, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
2000........................................................ $ 87,065
2001........................................................ 76,182
2002........................................................ 63,855
2003........................................................ 44,260
2004........................................................ 29,755
Thereafter.................................................. 61,160
--------
$362,277
========
</TABLE>
Total future minimum rental commitments are net of approximately $4,648,000
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: 1999 -- $115,598,000; 1998 --
$113,762,000; 1997 -- $114,694,000. Sublease rent income was approximately
$7,096,000, $6,772,000 and $5,638,000 for the years ended December 31, 1999,
1998 and 1997, respectively. Contingent rent expense, based primarily on
revenues, was approximately $18,000,000, $17,000,000 and $18,000,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
50
<PAGE> 52
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
The Company has a $125,000,000 financing arrangement available for the
construction of certain facilities. The Company will lease the facilities, under
operating leases with the creditor, upon completion of construction. The Company
will have the option to purchase these facilities at the end of the initial
lease terms. Total construction advances under the financing arrangement as of
December 31, 1999 were approximately $111,200,000.
In 1992, the Company entered into an agreement to outsource its management
information systems functions for a period of seven years, with an option to
renew based on mutual agreement among the parties. Such agreement was
renegotiated during 1997 to allow the Company to bring the programming functions
under its direct control but continue to outsource the data processing functions
and to extend the term of the agreement. The future minimum commitments as of
December 31, 1999 required under such agreement are as follows:
2000 -- $3,944,000; 2001 -- $3,859,000; and 2002 -- $2,849,000. The Company
incurred approximately $6,515,000, $5,673,000 and $4,498,000 under such
agreement during the years ended December 31, 1999, 1998 and 1997, respectively.
The Company is contingently liable for approximately $60,724,000 of
long-term debt maturing on various dates through 2019, as well as annual
interest and letter of credit fees of approximately $5,557,000. 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 $27,574,000 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, as well as
approximately $2,784,000 of loans to certain officers of the Company, which are
collateralized by the Company's Common Stock.
On February 3, 2000, the Company entered into a series of agreements with
the U.S. Department of Justice and the Office of Inspector General (the "OIG")
of the Department of Health and Human Services which settled the federal
government investigations of the Company relating to the allocation to the
Medicare Program of certain nursing labor costs in its skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations"). These agreements
finalized the terms of the settlements, which were tentatively announced in July
1999.
The agreements consist of: (i) a Plea Agreement; (ii) a Civil Settlement
Agreement; (iii) a Corporate Integrity Agreement; and (iv) an agreement
concerning the disposition of 10 nursing facilities. Under the Plea Agreement, a
subsidiary of the Company pled guilty to one count of mail fraud and 10 counts
of making false statements to Medicare relating to the submission of certain
Medicare cost reports for 10 separate nursing facilities. The subsidiary paid a
criminal fine of $5,000,000 and, under a separate agreement, is obligated to
dispose of the 10 nursing facilities. The subsidiary will continue to operate
and staff the nursing facilities until new operators are found.
Under the separate Civil Settlement Agreement, the Company will reimburse
the federal government $170,000,000 as follows: (i) $25,000,000, which was paid
during the first quarter of 2000, and (ii) $145,000,000 to be withheld from the
Company's biweekly Medicare periodic interim payments in equal installments over
eight years. The Company anticipates cash flows from operations to decline
approximately $18,100,000 per year as a result of the reduction in Medicare
periodic interim payments. Such installments began during the first quarter of
2000. In addition, the Company agreed to resubmit certain Medicare filings to
reflect reduced labor costs.
The Company also entered into a Corporate Integrity Agreement with the OIG
relating to the monitoring of compliance with requirements of federal healthcare
programs on an ongoing basis. Such agreement addresses the Company's obligations
to ensure that it is in compliance with the requirements for participation
51
<PAGE> 53
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
7. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
in the federal healthcare programs, and includes the Company's functional and
training obligations, audit and review requirements, recordkeeping and reporting
requirements, as well as penalties for breach/ noncompliance of the agreement.
On July 6, 1999, an amended complaint was filed by the plaintiffs in a
previously disclosed purported class action lawsuit pending against the Company
and certain of its officers in the United States District Court for the Eastern
District of Arkansas (the "Class Action"). Plaintiffs filed a second amended
complaint on September 9, 1999 which asserted claims under Section 10(b)
(including Rule 10b-5 promulgated thereunder) and under Section 20 of the
Securities Exchange Act of 1934 arising from practices that were the subject of
the Allocation Investigations. The defendants filed a motion to dismiss that
complaint on October 8, 1999. Due to the preliminary state of the Class Action
and the fact the second amended complaint does not allege damages with any
specificity, the Company is unable at this time to assess the probable outcome
of the Class Action or the materiality of the risk of loss. However, the Company
believes that it acted lawfully with respect to plaintiff investors and will
vigorously defend the Class Action. However, there can be no assurances that the
Company will not experience an adverse effect on its consolidated financial
position, results of operations or cash flows as a result of these proceedings.
In addition, since July 29, 1999, eight derivative lawsuits have been filed
in the state courts of Arkansas, California and Delaware (collectively, the
"Derivative Actions"). The Derivative Actions each name the Company's directors
as defendants, as well as the Company as a nominal defendant. Some actions also
name as defendants certain of the Company's officers. The Derivative Actions
each allege breach of fiduciary duties to the Company and its stockholders
arising primarily out of the Company's alleged exposure to loss due to the Class
Action and the Allocation Investigations. Due to the preliminary state of the
Derivative Actions and the fact the complaints do not allege damages with any
specificity, the Company is unable at this time to assess the probable outcome
of the Derivative Actions or the materiality of the risk of loss. However, the
Company believes that it acted lawfully with respect to the allegations of the
Derivative Actions and will vigorously defend the Derivative Actions. However,
there can be no assurances that the Company will not experience an adverse
effect on its consolidated financial position, results of operations or cash
flows as a result of these proceedings.
There are various other lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages that are generally not covered by insurance. The Company does not
believe that the ultimate resolution of such other matters will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
8. STOCKHOLDERS' EQUITY
The Company had 300,000,000 shares of authorized $.10 par value common
stock ("Common Stock") at December 31, 1999 and 1998. 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, 1999 and 1998, all of
which remain unissued. The Board of Directors has authority, without further
stockholder action, to set rights, privileges and preferences for any unissued
shares of preferred stock.
In June 1996, the Company announced that its Board of Directors had
authorized a stock repurchase program whereby the Company may repurchase, from
time to time on the open market, up to a total of 10,000,000 shares of its
outstanding Common Stock. In December 1997, the Company repurchased 4,000,000
shares of its Common Stock through an accelerated stock repurchase transaction
at a cost of approximately $56,100,000 (approximately $5,700,000 of which was
paid during 1998). During 1998, the Company
52
<PAGE> 54
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. STOCKHOLDERS' EQUITY -- (CONTINUED)
repurchased 3,000,000 shares of its Common Stock, through a similar transaction,
and approximately 900,000 shares on the open market at a total cost of
approximately $51,100,000. The repurchases were financed primarily through
borrowings under the Company's Revolver/LOC Facility. On June 2, 1998, the
Company announced that its Board of Directors had authorized an increase in its
stock repurchase program. The Company may repurchase from time to time on the
open market, up to an additional 10,000,000 shares of its outstanding Common
Stock. From June 1996 through December 1998, the Company had repurchased
approximately 10,200,000 shares of its outstanding Common Stock under the stock
repurchase program. During the first quarter of 2000, the Company repurchased
approximately 1,000,000 additional shares of its outstanding Common Stock under
the stock repurchase program. The repurchases were financed primarily through
borrowings under the Company's Revolver/LOC Facility. If, prior to January 1,
1999, the Company had repurchased these additional shares, the Company's results
of operations, on an unaudited pro forma basis, would have been a net loss of
approximately $134,816,000, or $1.33 per share diluted, for the year ended
December 31, 1999. The Company is subject to certain restrictions under its
credit arrangements related to the repurchase of its outstanding Common Stock.
During 1997, the New Beverly 1997 Long-Term Incentive Plan was approved
(the "1997 Long-Term Incentive Plan"). Such plan became effective December 3,
1997 and will remain in effect until December 31, 2006, subject to early
termination by the Board of Directors. The Compensation Committee of the Board
of Directors (the "Committee") is responsible for administering the 1997
Long-Term Incentive Plan and has complete discretion in determining the number
of shares or units to be granted, in setting performance goals and in applying
other restrictions to awards, as needed, under the plan. The Company has
10,000,000 shares of Common Stock authorized for issuance, subject to certain
adjustments, under the 1997 Long-Term Incentive Plan in the form of nonqualified
stock options, incentive stock options, stock appreciation rights, restricted
stock, performance awards, bonus stock and other stock unit awards. Except for
options granted upon the assumption of, or in substitution for, options of
another company in which the Company participates in a corporate transaction or
the options affected by the Reorganization (as discussed below), nonqualified
and incentive stock options must be granted at a purchase price equal to the
market price on the date of grant. Options shall be exercisable at such times
and be subject to such restrictions and conditions as the Committee shall
determine and expire no later than 10 years from the grant date. Stock
appreciation rights may be granted alone, in tandem with an option or in
addition to an option. Stock appreciation rights shall be exercisable at such
times and be subject to such restrictions and conditions as the Committee shall
determine and expire no later than 10 years from the grant date. Restricted
stock awards are outright stock grants which have a minimum vesting period of
one year for performance-based awards and three years for other awards.
Performance awards, bonus stock and other stock unit awards may be granted based
on the achievement of certain performance or other goals and will carry certain
restrictions, as defined.
During 1997, the New Beverly Non-Employee Directors Stock Option Plan was
approved (the "Non-Employee Directors Stock Option Plan"). Such plan became
effective December 3, 1997 and will remain in effect until December 31, 2007,
subject to early termination by the Board of Directors. The Company has 300,000
shares of Common Stock authorized for issuance, subject to certain adjustments,
under the Non-Employee Directors Stock Option Plan. The Non-Employee Directors
Stock Option Plan was amended by the Board of Directors on December 11, 1997 to
provide that each nonemployee director be granted an option to purchase 3,375
shares of the Company's Common Stock on June 1 of each year until the plan is
terminated, subject to the availability of shares. Such options are granted at a
purchase price equal to fair market value on the date of grant, become
exercisable one year after date of grant and expire 10 years after date of
grant.
53
<PAGE> 55
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. STOCKHOLDERS' EQUITY -- (CONTINUED)
The following table summarizes stock option, restricted stock and other
stock units data relative to the Company's long-term incentive plans for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning
of year........................... 8,163,565 $9.20 6,561,903 $9.29 4,908,727 $10.55
Changes during the year:
Granted........................... 121,627 6.51 3,341,994 8.81 2,944,522 10.87
Exercised......................... (40,450) 6.44 (428,069) 6.89 (1,047,423) 8.06
Cancelled......................... (937,283) 9.88 (1,312,263) 9.42 (243,923) 14.64
--------- ---------- ----------
Options outstanding at end of
year.............................. 7,307,459 9.08 8,163,565 9.20 6,561,903 9.29
========= ========== ==========
Options exercisable at end of
year.............................. 4,107,067 8.56 3,761,259 8.50 5,073,903 8.23
========= ========== ==========
Options available for grant at end
of year........................... 2,413,967 1,701,426 3,738,097
========= ========== ==========
Restricted stock outstanding at
beginning
of year........................... -- -- 145,200
Changes during the year:
Granted........................... 84,491 -- 10,500
Vested............................ (16,972) -- (134,711)
Forfeited......................... -- -- (20,989)
--------- ---------- ----------
Restricted stock outstanding at end
of year........................... 67,519 -- --
========= ========== ==========
Phantom units outstanding at
beginning of year................. -- -- 76,769
Changes during the year:
Granted........................... -- -- --
Vested............................ -- -- (76,316)
Cancelled......................... -- -- (453)
--------- ---------- ----------
Phantom units outstanding at end of
year.............................. -- -- --
========= ========== ==========
Performance shares outstanding at
beginning of year................. -- -- 992,000
Changes during the year:
Granted........................... -- -- 16,000
Vested............................ -- -- (759,389)
Cancelled......................... -- -- (248,611)
--------- ---------- ----------
Performance shares outstanding at
end of year....................... -- -- --
========= ========== ==========
</TABLE>
On February 16, 2000, the Company granted 2,095,900 stock options to
certain of its officers and employees.
54
<PAGE> 56
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. STOCKHOLDERS' EQUITY -- (CONTINUED)
Exercise prices for options outstanding as of December 31, 1999 ranged from
$3.24 to $16.06. The weighted-average remaining contractual life of these
options is seven years. The following table provides certain information with
respect to stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED- OPTIONS EXERCISABLE
WEIGHTED- AVERAGE ------------------------------
OPTIONS AVERAGE REMAINING OPTIONS WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- ------------------------ ----------- -------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.24 - $ 6.75.................. 3,026,641 $ 5.68 8.73 1,396,768 $ 4.76
$ 7.06 - $10.00.................. 1,768,128 9.09 6.47 1,636,366 9.19
$10.19 - $13.75.................. 1,570,211 12.51 7.69 908,609 12.23
$14.00 - $16.06.................. 942,479 14.26 8.17 165,324 14.28
--------- ---------
$ 3.24 - $16.06.................. 7,307,459 $ 9.08 7.15 4,107,067 $ 8.56
========= =========
</TABLE>
As a result of the Reorganization (as discussed herein), immediately prior
to the Distribution, (i) each option to purchase the Company's Common Stock then
outstanding became fully vested and exercisable, (ii) all restrictions on
outstanding restricted shares lapsed and became fully vested, (iii) each
outstanding award of phantom units became fully vested, and (iv) each
outstanding performance share became fully vested. The Company incurred expenses
of approximately $18,000,000 in 1997 as it related to these stock-based awards,
which was included in the $44,000,000 of transaction costs. In addition, all
options outstanding immediately after the Distribution were cancelled and
replaced with new options issued by the Company under the 1997 Long-Term
Incentive Plan. Such options are exercisable upon the same terms and conditions
(except that all options are 100% vested) as under the applicable option
agreement issued thereunder, except that (i) the number of shares for which such
options may be converted, and (ii) the option exercise price per share of such
options were adjusted to take into account the effect of the Reorganization.
The Company recognizes compensation expense for its restricted stock
grants, performance share grants (when the performance targets are achieved) and
other stock unit awards. The total charges to the Company's consolidated
statements of operations for the years ended December 31, 1999, 1998 and 1997
related to these stock-based awards were approximately $198,000, $0 and
$19,767,000, respectively. The total charges for 1997 included approximately
$18,000,000 related to the impact of the Reorganization on the Company's stock-
based awards (as discussed above).
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 1999, 1998 and 1997 stock option and performance share grants
under the fair value method as prescribed by such statement. The fair value for
stock options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for the years
ended December 31, 1999, 1998 and 1997, respectively: risk-free interest rates
of 6.8%, 5.0% and 5.9%; volatility factors of the expected market price of the
Company's Common Stock of .46, .41 and .35; and weighted-average expected option
lives of 9 years, 10 years and 8 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 1999, 1998 and 1997 of $4.27 per share, $5.35 per share
and $7.84 per share, respectively. The fair value of the performance share
grants was based on the market value of the Company's Common Stock on the date
of grant.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models
55
<PAGE> 57
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. STOCKHOLDERS' EQUITY -- (CONTINUED)
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
stock options and performance shares is amortized to expense over their
respective vesting periods. The pro forma effects on reported net income (loss)
and diluted earnings per share assuming the Company had elected to account for
its stock option and performance share grants in accordance with SFAS No. 123
for the years ended December 31, 1999, 1998 and 1997 would have been a net loss
of $137,015,000 or $1.34 per share, a net loss of $32,202,000 or $.31 per share
and net income of $47,244,000 or $.46 per share, respectively. The pro forma
amounts for 1997 reflect the impact of the Reorganization on the Company's
outstanding stock options (as discussed above). Such pro forma effects are not
necessarily indicative of the effect on future years.
The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of Common Stock at the current market
price through payroll deductions. The Company makes contributions in the amount
of 30% of the participant's contribution. Each participant specifies the amount
to be withheld from earnings per two-week pay period, subject to certain
limitations. The total charges to the Company's consolidated statements of
operations for the years ended December 31, 1999, 1998 and 1997 related to this
plan were approximately $1,723,000, $2,435,000 and $2,449,000, respectively.
9. INCOME TAXES
The provision for (benefit from) taxes on income (loss) before
extraordinary charge and the cumulative effect of change in accounting for
start-up costs (see Note 1) consists of the following for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Federal:
Current............................................. $ -- $ -- $22,997
Deferred............................................ (72,001) (28,227) 20,404
State:
Current............................................. 4,000 2,169 6,669
Deferred............................................ (11,078) 122 (157)
-------- -------- -------
$(79,079) $(25,936) $49,913
======== ======== =======
</TABLE>
The Company had an annual effective tax rate of 37% for the year ended
December 31, 1999, compared to annual effective tax rates of 51% and 46% for the
years ended December 31, 1998 and 1997, respectively. The annual effective tax
rate in 1999 was different than the federal statutory rate primarily due to the
impact of state income taxes. The annual effective tax rate in 1998 was
different than the federal statutory rate primarily due to the impact of the
sale of ATH (see Note 4), the benefit of certain tax credits, and the pre-tax
charge of approximately $69,400,000 (see Note 3) which reduced the Company's
pre-tax income to a level where the impact of permanent tax differences and
state income taxes had a more significant impact on the effective tax rate. The
annual effective tax rate in 1997 was different than the federal statutory rate
primarily due to the impact of nondeductible transaction costs associated with
the Reorganization (see Note 4).
56
<PAGE> 58
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
9. INCOME TAXES -- (CONTINUED)
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>
1999 1998 1997
-------------- -------------- -------------
AMOUNT % AMOUNT % AMOUNT %
-------- --- -------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) at statutory rate....... $(74,804) 35 $(17,809) 35 $37,977 35
General business tax credits.......... (2,470) 1 (2,315) 5 -- --
State tax provision, net.............. (4,601) 2 1,489 (3) 4,233 4
Nondeductible amortization of
intangibles......................... 1,192 -- (74) -- 1,702 2
Sale of ATH........................... -- -- (6,867) 13 -- --
Effect of Reorganization and Merger... -- -- -- -- 5,618 5
Other................................. 1,604 (1) (360) 1 383 --
-------- -- -------- -- ------- --
$(79,079) 37 $(25,936) 51 $49,913 46
======== == ======== == ======= ==
</TABLE>
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, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- --------------------
ASSET LIABILITY ASSET LIABILITY
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Insurance reserves........................ $ 25,512 $ -- $ 11,988 $ --
General business tax credit
carryforwards........................... 8,850 -- 5,270 --
Alternative minimum tax credit
carryforwards........................... 15,772 -- 16,568 --
Provision for dispositions................ 35,454 3,882 37,805 3,152
Provision for Medicare repayment.......... 55,175 -- -- --
Depreciation and amortization............. 6,582 132,863 12,711 136,096
Operating supplies........................ -- 13,004 -- 13,241
Federal net operating loss
carryforwards........................... 29,491 -- 17,846 --
Other..................................... 24,707 25,818 22,728 30,877
-------- -------- -------- --------
$201,543 $175,567 $124,916 $183,366
======== ======== ======== ========
</TABLE>
At December 31, 1999, the Company had federal net operating loss
carryforwards of $84,259,000 for income tax purposes which expire in years 2018
through 2019. At December 31, 1999, the Company had general business tax credit
carryforwards of $8,850,000 for income tax purposes which expire in years 2008
through 2015. For financial reporting purposes, the federal net operating loss
carryforwards and the general business tax credit carryforwards have been
utilized to offset existing net taxable temporary differences reversing during
the carryforward periods. The Company's net deferred tax assets at December 31,
1999 will be realized primarily through the reversal of temporary taxable
differences and future taxable income. Accordingly, the Company does not believe
that a deferred tax valuation allowance is necessary at December 31, 1999.
10. 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
57
<PAGE> 59
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. FAIR VALUES OF FINANCIAL INSTRUMENTS --(CONTINUED)
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company. The following methods and assumptions were used
by the Company in estimating its fair value disclosures for financial
instruments:
Cash and Cash Equivalents
The carrying amount reported in the consolidated balance sheets for cash
and cash equivalents approximates its fair value.
Notes Receivable, Net (Including Current Portion)
For variable-rate notes that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
for fixed-rate notes are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
Beverly Indemnity Funds
The carrying amount reported in the consolidated balance sheets for the
Beverly Indemnity funds approximates its fair value and is included in the
consolidated balance sheet caption "Prepaid expenses and other". During the
fourth quarter of 1998, Beverly Indemnity, Ltd. completed a risk transfer of
substantially all of its pre-May 1998 auto liability, general liability and
workers' compensation claims liability to a third party insurer effected through
a loss portfolio transfer (see Note 1) which resulted in the sale of securities
with a book value of approximately $61,600,000. Also during 1998, various other
securities were sold with a book value of approximately $33,700,000. Beverly
Indemnity, Ltd. received gross proceeds of approximately $98,000,000 from the
sale of these securities and recognized gross gains on the sales of these
securities of approximately $3,000,000. In addition, an adjustment was recorded
to accumulated other comprehensive income for unrealized gains on these
securities of $1,755,000, net of income taxes.
Long-term Debt (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 debt are estimated
using discounted cash flow analyses, based on the Company's incremental
borrowing rates for similar types of borrowing arrangements.
Federal Government Settlements (Including Current Portion)
The carrying amount of the Company's obligations to the federal government
resulting from the settlements of the Allocation Investigations is included in
the consolidated balance sheet captions "Other accrued liabilities" and "Other
liabilities and deferred items." Such obligations are non-interest bearing, and
as such, were imputed at their approximate fair market rate of 9% for accounting
purposes. Therefore, the carrying amount of such obligations should approximate
its fair value.
58
<PAGE> 60
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. FAIR VALUES OF FINANCIAL INSTRUMENTS --(CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents................. $ 24,652 $ 24,652 $ 17,278 $ 17,278
Notes receivable, net (including current
portion)................................ 20,588 20,600 42,338 44,900
Beverly Indemnity funds................... 561 561 1,600 1,600
Long-term debt (including current
portion)................................ 780,216 744,520 906,043 929,454
Federal government settlements (including
current portion)........................ 133,314 133,314 -- --
</TABLE>
During 1999 and 1998, the Company defeased long-term debt with aggregate
carrying values of $8,135,000 and $5,650,000, respectively. The fair values of
such defeased debt were estimated using discounted cash flow analyses, based on
the Company's incremental borrowing rates for similar types of borrowing
arrangements, and were approximately $14,071,000 and $5,819,000 at December 31,
1999 and 1998, respectively.
In order to consummate certain dispositions and other transactions, the
Company has agreed to guarantee the debt assumed or acquired by the purchaser or
the performance under a lease, by the lessor. It is not practicable to estimate
the fair value of the Company's off-balance sheet guarantees (See Note 7). 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. In addition, the Company guarantees approximately $2,784,000 of
loans to certain officers of the Company, which are collateralized by the
Company's Common Stock. The fair values of such loans were estimated using
discounted cash flow analyses, based on the Company's incremental borrowing
rates for similar types of borrowing arrangements, and were approximately
$2,806,000 at December 31, 1999.
11. SEGMENT INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" provides disclosure
guidelines for segments of a company based on a management approach to defining
operating segments.
Description of the Types of Services from which each Operating Segment Derives
its Revenues
At December 31, 1999 and 1998, the Company was organized into two operating
segments, which support the Company's delivery of long-term healthcare services.
These operating segments included: (i) Beverly Healthcare, which provides
long-term healthcare through the operation of nursing facilities and assisted
living centers; and (ii) Beverly Care Alliance, which operates outpatient
therapy clinics, home care centers and a rehabilitation services business.
At December 31, 1997, in addition to the two operating segments mentioned
above, the Company owned Beverly Specialty Hospitals, which operated the
Company's transitional hospitals. In June 1998, the Company
59
<PAGE> 61
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
11. SEGMENT INFORMATION -- (CONTINUED)
completed the sale of this segment to Select Medical Corporation (see Note 4).
In addition to the three operating segments mentioned above, the Company owned
PCA, which operated the Company's institutional and mail service pharmacy
businesses. In December 1997, the Company completed the Merger of PCA with
Capstone Pharmacy Services, Inc. (see Note 4).
Measurement of Segment Income or Loss and Segment Assets
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies (see Note 1). The
Company evaluates performance and allocates resources based on income or loss
from operations before income taxes, excluding any unusual items.
Factors Management Used to Identify the Company's Operating Segments
The Company's operating segments are strategic business units that offer
different services within the long-term healthcare continuum. Business in each
operating segment is conducted by one or more corporations headed by a president
who is also a senior officer of the Company. The corporations comprising each
operating segment also have separate boards of directors.
60
<PAGE> 62
BEVERLY ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
11. SEGMENT INFORMATION -- (CONTINUED)
The following table summarizes certain information for each of the
Company's operating segments (in thousands):
<TABLE>
<CAPTION>
BEVERLY BEVERLY PHARMACY
BEVERLY CARE SPECIALTY CORPORATION
HEALTHCARE ALLIANCE HOSPITALS OF AMERICA ALL OTHER(1) TOTALS
---------- -------- --------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Revenues from external
customers................. $2,305,341 $237,014 $ -- -- $ 4,317 $2,546,672
Intercompany revenues........ -- 140,216 -- -- 11,643 151,859
Interest income.............. 240 88 -- -- 4,007 4,335
Interest expense............. 28,434 425 -- -- 43,719 72,578
Depreciation and
amortization.............. 79,454 13,228 -- -- 6,478 99,160
Pre-tax income (loss)........ 109,884 23,417 -- -- (347,027) (213,726)
Total assets................. 1,501,670 325,771 -- -- 155,439 1,982,880
Capital expenditures......... 73,029 10,518 -- -- 11,867 95,414
Year ended December 31, 1998
Revenues from external
customers................. $2,531,496 $192,627 $61,775 -- $ 26,334 $2,812,232
Intercompany revenues........ -- 13,518 539 -- 10,682 24,739
Interest income.............. 410 160 3 -- 10,135 10,708
Interest expense............. 29,359 108 93 -- 36,378 65,938
Depreciation and
amortization.............. 78,269 8,662 1,578 -- 5,213 93,722
Pre-tax income (loss)........ 165,707 6,878 (670) -- (222,797) (50,882)
Total assets................. 1,526,091 303,913 -- -- 330,507 2,160,511
Capital expenditures......... 87,209 15,149 4,937 -- 43,156 150,451
Year ended December 31, 1997
Revenues from external
customers................. $2,583,758 $ 60,103 $99,783 $472,861 $ 594 $3,217,099
Intercompany revenues........ -- 15,643 1,708 91,338 10,269 118,958
Interest income.............. 302 -- 3 125 12,771 13,201
Interest expense............. 32,264 19 275 14,965 35,190 82,713
Depreciation and
amortization.............. 77,162 3,402 2,517 18,281 5,698 107,060
Pre-tax income (loss)........ 173,363 2,801 819 33,450 (101,927) 108,506
Total assets................. 1,504,437 101,364 48,964 -- 418,704 2,073,469
Capital expenditures......... 90,699 6,468 5,198 11,725 18,997 133,087
</TABLE>
- ---------------
(1) All Other consists of the operations of the Company's corporate headquarters
and related overhead, as well as certain non-operating revenues and
expenses, and unusual items.
61
<PAGE> 63
BEVERLY ENTERPRISES, INC.
SUPPLEMENTARY DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1999
------------------------------------------------------- ------------------------------
1ST 2ND 3RD 4TH TOTAL 1ST 2ND 3RD
-------- --------- -------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues...................... $635,029 $ 633,678 $638,331 $643,969 $2,551,007 $697,427 $717,648 $700,635
======== ========= ======== ======== ========== ======== ======== ========
Income (loss) before provision for
(benefit from) income taxes,
extraordinary charge and cumulative
effect of change in accounting for
start-up costs..................... $ 9,377 $(183,901) $ 12,535 $(51,737) $ (213,726) $ 29,099 $ 31,803 $ 32,822
Provision for (benefit from) income
taxes.............................. 3,470 (68,044) 4,638 (19,143) (79,079) 11,058 10,258 11,487
-------- --------- -------- -------- ---------- -------- -------- --------
Income (loss) before extraordinary
charge and cumulative effect of
change in accounting for start-up
costs.............................. 5,907 (115,857) 7,897 (32,594) (134,647) 18,041 21,545 21,335
Extraordinary charge................ -- -- -- -- -- -- -- --
Cumulative effect of change in
accounting for start-up costs...... -- -- -- -- -- (4,415) -- --
-------- --------- -------- -------- ---------- -------- -------- --------
Net income (loss)................... $ 5,907 $(115,857) $ 7,897 $(32,594) $ (134,647) $ 13,626 $ 21,545 $ 21,335
======== ========= ======== ======== ========== ======== ======== ========
Income (loss) per share of common
stock:
Basic:
Before extraordinary charge and
cumulative effect of change in
accounting for start-up costs.... $ .06 $ (1.13) $ .08 $ (.32) $ (1.31) $ .17 $ .21 $ .21
Extraordinary charge............... -- -- -- -- -- -- -- --
Cumulative effect of change in
accounting for start-up costs.... -- -- -- -- -- (.04) -- --
-------- --------- -------- -------- ---------- -------- -------- --------
Net income (loss).................. $ .06 $ (1.13) $ .08 $ (.32) $ (1.31) $ .13 $ .21 $ .21
======== ========= ======== ======== ========== ======== ======== ========
Shares used to compute per share
amounts.......................... 102,480 102,494 102,495 102,496 102,491 106,006 103,682 103,019
======== ========= ======== ======== ========== ======== ======== ========
Diluted:
Before extraordinary charge and
cumulative effect of change in
accounting for start-up costs.... $ .06 $ (1.13) $ .08 $ (.32) $ (1.31) $ .17 $ .20 $ .21
Extraordinary charge............... -- -- -- -- -- -- -- --
Cumulative effect of change in
accounting for start-up costs.... -- -- -- -- -- (.04) -- --
-------- --------- -------- -------- ---------- -------- -------- --------
Net income (loss).................. $ .06 $ (1.13) $ .08 $ (.32) $ (1.31) $ .13 $ .20 $ .21
======== ========= ======== ======== ========== ======== ======== ========
Shares used to compute per share
amounts.......................... 102,693 102,494 102,715 102,496 102,491 107,479 105,112 103,610
======== ========= ======== ======== ========== ======== ======== ========
Common stock price range:
High............................... $ 6.94 $ 8.19 $ 8.00 $ 5.19 $ 15.56 $ 16.25 $ 14.81
Low................................ $ 4.50 $ 4.31 $ 3.88 $ 3.50 $ 12.25 $ 13.50 $ 7.38
<CAPTION>
1999
----------------------
4TH TOTAL
--------- ----------
<S> <C> <C>
Total revenues...................... $ 707,230 $2,822,940
========= ==========
Income (loss) before provision for
(benefit from) income taxes,
extraordinary charge and cumulative
effect of change in accounting for
start-up costs..................... $(144,606) $ (50,882)
Provision for (benefit from) income
taxes.............................. (58,739) (25,936)
--------- ----------
Income (loss) before extraordinary
charge and cumulative effect of
change in accounting for start-up
costs.............................. (85,867) (24,946)
Extraordinary charge................ (1,660) (1,660)
Cumulative effect of change in
accounting for start-up costs...... -- (4,415)
--------- ----------
Net income (loss)................... $ (87,527) $ (31,021)
========= ==========
Income (loss) per share of common
stock:
Basic:
Before extraordinary charge and
cumulative effect of change in
accounting for start-up costs.... $ (.84) $ (.24)
Extraordinary charge............... (.02) (.02)
Cumulative effect of change in
accounting for start-up costs.... -- (.04)
--------- ----------
Net income (loss).................. $ (.86) $ (.30)
========= ==========
Shares used to compute per share
amounts.......................... 102,389 103,762
========= ==========
Diluted:
Before extraordinary charge and
cumulative effect of change in
accounting for start-up costs.... $ (.84) $ (.24)
Extraordinary charge............... (.02) (.02)
Cumulative effect of change in
accounting for start-up costs.... -- (.04)
--------- ----------
Net income (loss).................. $ (.86) $ (.30)
========= ==========
Shares used to compute per share
amounts.......................... 102,389 103,762
========= ==========
Common stock price range:
High............................... $ 8.13
Low................................ $ 5.25
</TABLE>
- ---------------
The Company had an annual effective tax rate of 37% for the year ended
December 31, 1999 compared to an annual effective tax rate of 51% for the year
ended December 31, 1998. The annual effective tax rate in 1999 was different
than the federal statutory rate primarily due to the impact of state income
taxes. The annual effective tax rate in 1998 was different than the federal
statutory rate primarily due to the impact of the sale of ATH (see Note 4), the
benefit of certain tax credits, and the $69,400,000 pre-tax charge (see Note 3)
which reduced the Company's pre-tax income to a level where the impact of
permanent tax differences and state income taxes had a more significant impact
on the effective tax rate.
62
<PAGE> 64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 25, 2000, to
be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 25, 2000, to
be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 25, 2000, to
be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Jon E.M. Jacoby, a director, serves as Executive Vice President, Chief
Financial Officer and director of Stephens Group, Inc. During the years ended
December 31, 1998 and 1997, the Company used Stephens Group, Inc., or its
affiliates, for investment banking services.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1 and 2. The Consolidated Financial Statements and Consolidated Financial
Statement Schedule
The consolidated financial statements and consolidated financial statement
schedule listed in the accompanying index to consolidated financial statements
and financial statement schedules are filed as part of this annual report.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are incorporated
by reference herein or are filed as part of this annual report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1999.
(c) Exhibits
See the accompanying index to exhibits referenced in Item 14(a)(3) above
for a list of exhibits incorporated herein by reference or filed as part of this
annual report.
(d) Financial Statement Schedule
See the accompanying index to consolidated financial statements and
financial statement schedules referenced in Item 14(a)1 and 2, above.
63
<PAGE> 65
BEVERLY ENTERPRISES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
(ITEM 14(a))
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Consolidated financial statements:
Report of Ernst & Young LLP, Independent Auditors........ 33
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... 34
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1999...... 35
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended December 31,
1999................................................... 36
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1999...... 37
Notes to Consolidated Financial Statements............... 38
Supplementary Data (Unaudited) -- Quarterly Financial
Data................................................... 62
2. Consolidated financial statement schedule for each of the
three years in the period ended December 31, 1999:
II -- Valuation and Qualifying Accounts.................. 65
All other schedules are omitted because they are either
not applicable or the items do not exceed the various
disclosure levels.
</TABLE>
64
<PAGE> 66
BEVERLY ENTERPRISES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED DUE TO
BALANCE AT (CREDITED) ACQUISITIONS BALANCE
BEGINNING TO WRITE-OFFS/ AND AT END
DESCRIPTION OF YEAR OPERATIONS RECOVERIES DEPOSITIONS OTHER OF YEAR
- ----------- ---------- ----------- ----------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Allowance for doubtful
accounts:
Accounts receivable --
patient................. $21,764 $67,400(A) $(26,901) $ 1,901 $ 234 $64,398
Accounts receivable --
nonpatient.............. 677 963 17 -- (234) 1,423*
Notes receivable.......... 2,921 3,733 (1,400) -- 350 5,604
------- ------- -------- ------- ------ -------
$25,362 $72,096 $(28,284) $ 1,901 $ 350 $71,425
======= ======= ======== ======= ====== =======
Year ended December 31, 1998:
Allowance for doubtful
accounts:
Accounts receivable --
patient................. $17,879 $25,549 $(19,807) $(1,857) $ -- $21,764
Accounts receivable --
nonpatient.............. 862 (90) (13) (82) -- 677*
Notes receivable.......... 2,917 (210) (66) -- 280 2,921
------- ------- -------- ------- ------ -------
$21,658 $25,249 $(19,886) $(1,939) $ 280 $25,362
======= ======= ======== ======= ====== =======
Year ended December 31, 1997:
Allowance for doubtful
accounts:
Accounts receivable --
patient................. $25,618 $35,343 $(34,858) $(8,224) $ -- $17,879
Accounts receivable --
nonpatient.............. 637 209 (218) -- 234 862*
Notes receivable.......... 4,951 (1,211) (306) (1,453) 936 2,917
------- ------- -------- ------- ------ -------
$31,206 $34,341 $(35,382) $(9,677) $1,170 $21,658
======= ======= ======== ======= ====== =======
</TABLE>
- ---------------
(A) Includes $39,000,000 for certain prior year cost report related items
affected by the Allocation Investigations, as well as $1,007,000 for
additional accounts receivable-patient reserves required on the 10 nursing
facilities required to be disposed of as a result of the settlements of
such investigations, and are included in the "Special charges related to
settlements of federal government investigations."
* Includes amounts classified in long-term other assets as well as current
assets.
65
<PAGE> 67
BEVERLY ENTERPRISES, INC.
INDEX TO EXHIBITS
(ITEM 14(a)(3))
<TABLE>
<CAPTION>
EXHIBIT NUMBER
- --------------
<C> <S>
3.1 -- Form of Restated Certificate of Incorporation of New
Beverly Holdings, Inc. (incorporated by reference to
Exhibit 3.1 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1997)
3.2 -- Form of Certificate of Amendment of Certificate of
Incorporation of New Beverly Holdings Inc., changing its
name to Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 3.2 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1997)
3.3 -- By-Laws of Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 3.4 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on June 4, 1997
(File No. 333-28521))
4.1 -- Indenture dated as of February 1, 1996 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee, with
respect to Beverly Enterprises, Inc.'s 9% Senior Notes
due February 15, 2006 (the "9% Indenture") (incorporated
by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995)
4.2 -- Form of Supplemental Indenture No. 2 to the 9% Indenture
dated as of November 19, 1997 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on September 8,
1997 (File No. 333-35137))
4.3 -- Indenture dated as of April 1, 1993 (the "First Mortgage
Bond Indenture"), among Beverly Enterprises, Inc.,
Delaware Trust Company, as Corporate Trustee, and Richard
N. Smith, as Individual Trustee, with respect to First
Mortgage Bonds (incorporated by reference to Exhibit 4.1
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1993)
4.4 -- First Supplemental Indenture dated as of April 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 3/4%
First Mortgage Bonds due 2008 (incorporated by reference
to Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993)
4.5 -- Second Supplemental Indenture dated as of July 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 5/8%
First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated July 15, 1993) (incorporated by reference to
Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)
4.6 -- Trust Indenture dated as of December 1, 1994 from Beverly
Funding Corporation, as Issuer, to Chemical Bank, as
Trustee (the "Chemical Indenture") (incorporated by
reference to Exhibit 10.45 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on February 13,
1995 (File No.33-57663))
4.7 -- First Amendment and Restatement, dated as of June 1,
1999, of Trust Indenture, dated as of December 1, 1994,
from Beverly Funding Corporation, as Issuer, to The Chase
Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 10.2 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999)
</TABLE>
66
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT NUMBER
- --------------
<C> <S>
4.8 -- 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))
4.9 -- Series Supplement, dated as of June 1, 1999, by and
between Beverly Funding Corporation and The Chase
Manhattan Bank ("1999-1 Series Supplement") (incorporated
by reference to Exhibit 10.3 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999)
4.10 -- First Amendment, dated as of July 14, 1999, to the 1999-1
Series Supplement (incorporated by reference to Exhibit
10.4 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)
In accordance with item 601(b)(4)(iii) of Regulation S-K,
certain instruments pertaining to Beverly Enterprises,
Inc.'s long-term obligations have not been filed; copies
thereof will be furnished to the Securities and Exchange
Commission upon request.
10.1* -- Beverly Enterprises, Inc. Annual Incentive Plan
(incorporated by reference to Exhibit 10.4 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4
filed on February 13, 1995 (File No. 33-57663))
10.2* -- New Beverly Holdings, Inc. 1997 Long-Term Incentive Plan
(the "1997 LTIP") (incorporated by reference to Exhibit
4.1 to Beverly Enterprises, Inc.'s Registration Statement
on Form S-8 filed on December 8, 1997 (File No.
333-41669))
10.3* -- Amendment No. 1 to the 1997 LTIP dated as of December 3,
1997 (incorporated by reference to Exhibit 10.3 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1997)
10.4* -- New Beverly Holdings, Inc. Non-Employee Directors' Stock
Option Plan (the "Directors' Option Plan") (incorporated
by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-8 filed on
December 12, 1997 (File No. 333-42131))
10.5* -- Amendment No. 1 to the Directors' Option Plan dated as of
December 3, 1997 (incorporated by reference to Exhibit
10.5 to Beverly Enterprises, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1997)
10.6* -- Executive Medical Reimbursement Plan (incorporated by
reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1987)
10.7* -- Amended and Restated Beverly Enterprises, Inc. Executive
Life Insurance Plan and Summary Plan Description (the
"Executive Life Plan") (incorporated by reference to
Exhibit 10.7 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1993)
10.8* -- Amendment No. 1, effective September 29, 1994, to the
Executive Life Plan (incorporated by reference to Exhibit
10.10 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
10.9* -- Executive Physicals Policy (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)
10.10* -- Amended and Restated Deferred Compensation Plan effective
July 18, 1991 (incorporated by reference to Exhibit 10.6
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991)
</TABLE>
67
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT NUMBER
- --------------
<C> <S>
10.11* -- Amendment No. 1, effective September 29, 1994, to the
Deferred Compensation Plan (incorporated by reference to
Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))
10.12* -- Executive Retirement Plan (incorporated by reference to
Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1987)
10.13* -- Amendment No. 1, effective as of July 1, 1991, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1991)
10.14* -- Amendment No. 2, effective as of December 12, 1991, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1991)
10.15* -- Amendment No. 3, effective as of July 31, 1992, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1992)
10.16* -- Amendment No. 4, effective as of January 1, 1993, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.17* -- Amendment No. 5, effective as of September 29, 1994, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994)
10.18* -- Amendment No. 6, effective as of January 1, 1996, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
10.19* -- Amendment No. 7, effective as of September 1, 1997, to
the Executive Retirement Plan (incorporated by reference
to Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
10.20* -- Amendment No. 8, dated as of December 11, 1997, to the
Executive Retirement Plan, changing its name to the
"Executive SavingsPlus Plan" (incorporated by reference
to Exhibit 10.20 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997)
10.21* -- Beverly Enterprises, Inc.'s Supplemental Executive
Retirement Plan effective as of January 1, 1998
(incorporated by reference to Exhibit 10.21 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1997)
10.22* -- Beverly Enterprises, Inc.'s Executive Deferred
Compensation Plan (incorporated by reference to Exhibit
4.1 to Beverly Enterprises, Inc.'s Registration Statement
on Form S-8 filed on December 5, 1997 (File No.
333-41673))
10.23* -- Amendment No. 1 to the Executive Deferred Compensation
Plan made as of December 11, 1997 (incorporated by
reference to Exhibit 10.23 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1997)
10.24* -- Amendment No. 2 to the Executive Deferred Compensation
Plan made as of December 11, 1997 (incorporated by
reference to Exhibit 10.24 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1997)
</TABLE>
68
<PAGE> 70
<TABLE>
<CAPTION>
EXHIBIT NUMBER
- --------------
<C> <S>
10.25* -- Beverly Enterprises, Inc. Non-Employee Director Deferred
Compensation Plan (the "Directors' Plan") (incorporated
by reference to Exhibit 10.1 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997)
10.26* -- Amendment No. 1, effective as of December 3, 1997, to the
Directors' Plan (incorporated by reference to Exhibit
10.26 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1997)
10.27* -- Beverly Enterprises, Inc.'s Supplemental Long-Term
Disability Plan (incorporated by reference to Exhibit
10.24 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996)
10.28* -- Form of Indemnification Agreement between Beverly
Enterprises, Inc. and its officers, directors and certain
of its employees (incorporated by reference to Exhibit
19.14 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1987)
10.29* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or directors relating to indemnification
rights (incorporated by reference to Exhibit 19.5 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.30* -- Form of request by Beverly Enterprises, Inc. to certain
of its officers or employees relating to indemnification
rights (incorporated by reference to Exhibit 19.6 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1987)
10.31* -- Agreement dated December 29, 1986 between Beverly
Enterprises, Inc. and Stephens Inc. (incorporated by
reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on January 18,
1990 (File No. 33-33052))
10.32* -- Employment Contract, made as of August 22, 1997, between
New Beverly Holdings, Inc. and David R. Banks
(incorporated by reference to Exhibit 10.17 to Amendment
No. 2 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-1 filed on September 22, 1997 (File
No. 333-28521))
10.33* -- Form of Employment Contract, made as of August 22, 1997,
between New Beverly Holdings, Inc. and certain of its
officers (incorporated by reference to Exhibit 10.20 to
Amendment No. 2 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on September 22,
1997 (File No. 333-28521))
10.34* -- Executive Stock Option Agreement, effective as of
February 19, 1998, between Beverly Enterprises, Inc. and
David R. Banks (incorporated by reference to Exhibit 10.1
to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended March 31, 1998)
10.35 -- Master Lease Document -- General Terms and Conditions
dated December 30, 1985 for Leases between Beverly
California Corporation and various subsidiaries thereof
as lessees and Beverly Investment Properties, Inc. as
lessor (incorporated by reference to Exhibit 10.12 to
Beverly California Corporation's Annual Report on Form
10-K for the year ended December 31, 1985)
</TABLE>
69
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT NUMBER
- --------------
<C> <S>
10.36 -- Agreement dated as of December 29, 1986 among Beverly
California Corporation, Beverly Enterprises -- Texas,
Inc., Stephens Inc. and Real Properties, Inc. (incor-
porated by reference to Exhibit 28 to Beverly California
Corporation's Current Report on Form 8-K dated December
30, 1986) and letter agreement dated as of July 31, 1987
among Beverly Enterprises, Inc., Beverly California
Corporation, Beverly Enterprises -- Texas, Inc. and
Stephens Inc. with reference thereto (incorporated by
reference to Exhibit 19.13 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June
30, 1987)
10.37 -- Participation Agreement, dated as of August 28, 1998,
among Vantage Healthcare Corporation, Petersen Health
Care, Inc., Beverly Savana Cay Manor, Inc., Beverly
Enterprises -- Georgia, Inc., Beverly
Enterprises -- California, Inc., Beverly Health and
Rehabilitation Services, Inc., Beverly
Enterprises -- Arkansas, Inc., Beverly
Enterprises -- Florida, Inc. and Beverly
Enterprises -- Washington, Inc. as Lessees and Structural
Guarantors; Beverly Enterprises, Inc. as Representative,
Construction Agent and Parent Guarantor; Bank of Montreal
Global Capital Solutions, Inc. as Agent Lessor and
Lessor; The Long-Term Credit Bank of Japan, LTD., Los
Angeles Agency, Bank of America National Trust and
Savings Association and Bank of Montreal, as Lenders; The
Long-Term Credit Bank of Japan, LTD., Los Angeles Agency
as Arranger; and Bank of Montreal as Co-Arranger and
Syndication Agent and Administrative Agent for the
Lenders with respect to the Lease Financing of New
Headquarters for Beverly Enterprises, Inc., Assisted
Living and Nursing Facilities for Beverly Enterprises,
Inc. (incorporated by reference to Exhibit 10.37 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1998)
10.38 -- Master Amendment No. 1 to Amended and Restated
Participation Agreement and Amended and Restated Master
Lease and Open-End Mortgage, entered into as of September
30, 1999, among Beverly Enterprises, Inc. as
Representative, Construction Agent, Parent Guarantor and
Lessee; Bank of Montreal Global Capital Solutions, Inc.,
as Lessor and Agent Lessor; and Bank of Montreal, as
Administrative Agent, Arranger and Syndication Agent
(incorporated by reference to Exhibit 10.5 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999)
10.39 -- Amended and Restated Credit Agreement, dated as of April
30, 1998, among Beverly Enterprises, Inc., the Banks
listed therein and Morgan Guaranty Trust Company of New
York, as Issuing Bank and Agent (incorporated by
reference to Exhibit 10.38 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1998)
10.40 -- Amendment No. 1 to Amended and Restated Credit Agreement,
dated as of September 30, 1999, among Beverly
Enterprises, Inc., the Banks listed therein and Morgan
Guaranty Trust Company of New York, as Issuing Bank and
Agent (incorporated by reference to Exhibit 10.1 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended September 30, 1999)
10.41 -- Master Services Agreement, dated as of September 18,
1997, by and between Alltel Information Services, Inc.
and Beverly Enterprises, Inc.
10.42 -- Form of Irrevocable Trust Agreement for the Beverly
Enterprises, Inc. Executive Benefits Plan (incorporated
by reference to Exhibit 10.55 to Beverly Enterprises,
Inc.'s Registration Statement of Form S-4 filed on
February 13, 1995 (File No. 33-57663))
</TABLE>
70
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT NUMBER
- --------------
<C> <S>
10.43 -- Corporate Integrity Agreement between the Office of
Inspector General of the Department of Health and Human
Services and Beverly Enterprises, Inc.
10.44 -- Plea Agreement
10.45 -- Addendum to Plea Agreement
10.46 -- Settlement Agreement between the United States of
America, Beverly Enterprises, Inc. and Domenic Todarello
10.47 -- Agreement Regarding the Operations of Beverly
Enterprises -- California, Inc.
21.1 -- Subsidiaries of Registrant
23.1 -- Consent of Ernst & Young LLP, Independent Auditors
27.1 -- Financial Data Schedule for the year ended December 31,
1999
</TABLE>
- ---------------
* Exhibits 10.1 through 10.34 are the management contracts, compensatory plans,
contracts and arrangements in which any director or named executive officer
participates.
71
<PAGE> 73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BEVERLY ENTERPRISES, INC.
Registrant
Dated: March 29, 2000 By: /s/ DAVID R. BANKS
----------------------------------
David R. Banks
Chairman of the Board, Chief
Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant
and in the capacities and on the dates indicated:
<TABLE>
<C> <S> <C>
/s/ DAVID R. BANKS Chairman of the Board, March 29, 2000
- ----------------------------------------------------- Chief Executive Officer
David R. Banks and Director
/s/ SCOTT M. TABAKIN Executive Vice President March 29, 2000
- ----------------------------------------------------- and Chief Financial
Scott M. Tabakin Officer
/s/ PAMELA H. DANIELS Senior Vice President, March 29, 2000
- ----------------------------------------------------- Controller and Chief
Pamela H. Daniels Accounting Officer
/s/ BERYL F. ANTHONY, JR. Director March 29, 2000
- -----------------------------------------------------
Beryl F. Anthony, Jr.
/s/ CAROLYNE K. DAVIS Director March 29, 2000
- -----------------------------------------------------
Carolyne K. Davis
/s/ JAMES R. GREENE Director March 29, 2000
- -----------------------------------------------------
James R. Greene
/s/ EDITH E. HOLIDAY Director March 29, 2000
- -----------------------------------------------------
Edith E. Holiday
/s/ JON E.M. JACOBY Director March 29, 2000
- -----------------------------------------------------
Jon E. M. Jacoby
/s/ RISA J. LAVIZZO-MOUREY Director March 29, 2000
- -----------------------------------------------------
Risa J. Lavizzo-Mourey
/s/ MARILYN R. SEYMANN Director March 29, 2000
- -----------------------------------------------------
Marilyn R. Seymann
</TABLE>
72
<PAGE> 1
EXHIBIT 10.41
MASTER SERVICES AGREEMENT
BETWEEN
ALLTEL INFORMATION SERVICES, INC.
AND
BEVERLY ENTERPRISES, INC.
- --------------------------------------------------------------------------------
DATED AS OF: __________1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS....................................................................................................1
1.1 DEFINITIONS................................................................................................1
2. SERVICES.......................................................................................................2
2.1 SERVICES...................................................................................................2
2.2 ATTACHMENT.................................................................................................2
2.3 PROCESSING SCHEDULE........................................................................................3
3. FEES AND PAYMENT ARRANGEMENTS..................................................................................3
3.1 SERVICE FEES...............................................................................................3
3.2 PAYMENTS BY CLIENT.........................................................................................4
4. TERM...........................................................................................................4
4.1 TERM.......................................................................................................4
4.2 CLIENT RENEWAL OPTION......................................................................................5
5. EDUCATION......................................................................................................5
5.1 ALLTEL STANDARD CORPORATE TRAINING.........................................................................5
5.2 THIRD PARTY APPLICATION TRAINING...........................................................................5
6. DATA PROCESSING, PREMISES AND SECURITY.........................................................................5
6.1 DATA PROCESSING............................................................................................5
6.2 CLIENT PROCESSING PREMISES.................................................................................5
6.2.1 ALLTEL TECHNOLOGY CENTER.................................................................................6
6.2.2 ALLTEL TECHNOLOGY CENTER RELOCATION......................................................................6
6.3 SECURITY STANDARDS.........................................................................................6
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
7. CLIENT RESOURCES...............................................................................................6
7.1 CLIENT RESOURCES...........................................................................................6
7.2 REQUIRED CONSENTS.........................................................................................6
8. EQUIPMENT......................................................................................................7
8.1 HARDWARE...................................................................................................7
8.2 TERMINALS/WORKSTATIONS/NETWORK EQUIPMENT...................................................................7
8.3 SUPPLIES AND FORMS.........................................................................................7
8.4 CONFIDENTIALITY OF CLIENT DATA.............................................................................7
8.5 DELIVERY...................................................................................................8
9. SOFTWARE.......................................................................................................8
9.1 CLIENT SOFTWARE............................................................................................8
9.2 THIRD PARTY SOFTWARE AND MAINTENANCE......................................................................8
9.3 INSTALLATION OF NEW RELEASES, UPDATES AND ENHANCEMENTS.....................................................9
10. PERSONNEL AND COMMITTEES......................................................................................9
10.1 ALLTEL ACCOUNT RELATIONSHIP EXECUTIVE.....................................................................9
10.2 LIAISON MANAGER..........................................................................................9
10.3 ALLTEL BASE STAFF........................................................................................10
10.4 TEMPORARY RESOURCE.......................................................................................10
10.5 MUTUAL PLANNING..........................................................................................10
11. FILES AND PROGRAMS, STORAGE, AND DISASTER RECOVERY...........................................................12
11.1 FILES AND PROGRAMS.......................................................................................12
11.2 STORAGE..................................................................................................12
11.3 DISASTER RECOVERY.......................................................................................12
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
12. CHANGE ORDERS................................................................................................13
13. INTELLECTUAL PROPERTY RIGHTS.................................................................................13
13.1 MODIFICATIONS TO CLIENT SOFTWARE.........................................................................13
13.2 OWNERSHIP OF ALLTEL SOFTWARE.............................................................................14
13.3 MODIFICATIONS TO ALLTEL SOFTWARE.........................................................................14
14. AUDITS.......................................................................................................14
14.1 CLIENT'S REGULATORY AUDIT................................................................................14
14.2 EXCLUDED MATERIALS.......................................................................................15
15. DISPUTE RESOLUTION...........................................................................................15
15.1 DISPUTE RESOLUTION PROCEDURES............................................................................15
15.2 CLAIMS PROCEDURES........................................................................................15
15.3 ESCALATION PROCEDURES....................................................................................16
16. LIMITATION OF LIABILITY......................................................................................17
17. INDEMNIFICATION..............................................................................................17
17.1 PERSONAL INJURY AND PROPERTY DAMAGE......................................................................17
17.2 INFRINGEMENT OF ALLTEL SOFTWARE OR ALLTEL PROVIDED THIRD PARTY SOFTWARE.................................17
17.3 INFRINGEMENTS OF CLIENT SOFTWARE OR CLIENT PROVIDED THIRD PARTY SOFTWARE................................18
17.4 PREVIOUS LIABILITIES.....................................................................................19
17.5 DISPUTE RESOLUTION.......................................................................................19
18. FORCE MAJEURE, TIME OF PERFORMANCE AND INCREASED COSTS AND ERROR CORRECTION..................................19
18.1 FORCE MAJEURE............................................................................................19
18.2 TIME OF PERFORMANCE AND INCREASED COSTS..................................................................21
18.3 ERROR CORRECTION.........................................................................................21
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
19. NOTICES......................................................................................................21
19.1 NOTICES..................................................................................................21
19.2 CHANGE OF ADDRESS........................................................................................22
20. TERMINATION..................................................................................................22
20.1 TERMINATION..............................................................................................22
20.2 TERMINATION UPON ALLTEL'S MATERIAL BREACH................................................................23
20.3 TERMINATION UPON CLIENT'S MATERIAL BREACH................................................................24
20.4 OPERATIONS DURING THE TERMINATION PERIOD.................................................................25
20.5 TRANSITIONAL COOPERATION.................................................................................26
20.6 SURVIVAL UPON EXPIRATION OR TERMINATION..................................................................26
20.7 TERMINATION FOR CONVENIENCE..............................................................................26
21. CONFIDENTIALITY..............................................................................................27
21.1 CONFIDENTIALITY OBLIGATION...............................................................................27
21.2 NON-DISCLOSURE COVENANT..................................................................................27
21.3 EXCEPTIONS...............................................................................................27
21.4 CONFIDENTIALITY OF THIS AGREEMENT; PROTECTIVE ARRANGEMENTS...............................................28
22. OTHER REPRESENTATIONS, WARRANTIES AND COVENANTS..............................................................28
22.1 LICENSES AND PERMITS AND COMPLIANCE WITH LAWS............................................................28
22.2 NO INTERFERENCE WITH CONTRACTUAL RELATIONSHIP............................................................29
22.3 COVENANT OF GOOD FAITH...................................................................................29
22.4 NO INFRINGEMENT..........................................................................................29
22.5 AUTHORIZATION AND EFFECT.................................................................................30
22.6 NO ADDITIONAL REPRESENTATIONS OR WARRANTIES..............................................................30
</TABLE>
iv
<PAGE> 6
<TABLE>
<S> <C>
23. MISCELLANEOUS................................................................................................31
23.1 INDEPENDENT CONTRACTOR...................................................................................31
23.2 OMNIBUS RECONCILIATION ACT COMPLIANCE....................................................................31
23.3 ASSIGNMENT...............................................................................................32
23.4 SEVERABILITY.............................................................................................32
23.5 THIRD PARTY BENEFICIARIES................................................................................32
23.6 GOVERNING LAW............................................................................................32
23.7 EXECUTED IN COUNTERPARTS.................................................................................32
23.8 CONSTRUCTION.............................................................................................33
23.9 ENTIRE AGREEMENT........................................................................................33
23.10 AMENDMENTS AND WAIVERS..................................................................................33
23.11 REMEDIES CUMULATIVE.....................................................................................33
23.12 PRESS RELEASES..........................................................................................33
23.13 TAXES...................................................................................................34
</TABLE>
v
<PAGE> 7
EXHIBITS
Exhibit A Service Schedules
Exhibit B Processing Schedule
Exhibit C Software Lists
Exhibit D Equipment
Exhibit E Pricing
Exhibit F Staff Roles and Responsibilities
Exhibit G (Intentionally left blank)
Exhibit H Disaster Recovery
Exhibit I * Standard Operating Procedures
Exhibit J Client's Information Technology Environment
* From time to time, procedures in Exhibit I will be modified and mutually
agreed upon except for Exhibit I Attachment 2, Exhibit I Attachment 3, and
Exhibit I Attachment 6, which are proprietary to ALLTEL. Furthermore, it
is recognized that all exhibits may be more fully developed, or amended,
from time to time.
vi
<PAGE> 8
MASTER SERVICES AGREEMENT
This is an Agreement (the "Agreement"), dated as of the ____day of _______1997
("Effective Date"), by and between ALLTEL INFORMATION SERVICES, INC., a Delaware
corporation, 4001 Rodney Parham Road, Little Rock, Arkansas 72212-2496
("ALLTEL") and BEVERLY ENTERPRISES, INC. located at 1200 South Waldron Road,
Suite 155, Fort Smith, Arkansas 72913-3324 (the "Client").
NOW, THEREFORE, the parties agree as follows.
1. DEFINITIONS
1.1 DEFINITIONS. AS USED IN THIS AGREEMENT:
(a) "Affiliate" shall mean any wholly-owned direct or indirect
subsidiary of ALLTEL Corporation, and with respect to Client
shall mean any wholly owned direct or indirect subsidiary of
Client.
(b) "ALLTEL Software" shall mean any program as described in
Exhibit C, or part of such program as described in Exhibit C,
which is owned or developed by ALLTEL or any ALLTEL Affiliate
and all modifications, upgrades or enhancements to any such
program provided under this Agreement.
(c) "Client Resources" shall mean those assets, services, and
rights, if any, leased, contracted for, licensed, or owned by
Client, including Client Software and Client provided Third
Party Software to be made available to ALLTEL by Client to
facilitate ALLTEL in providing the Services.
(d) "Client Software" shall mean any program or part of a program,
(or any modifications, updates or enhancements to such Client
Software developed in accordance with the terms of this
Agreement) which is owned or developed by Client which is made
available by Client to ALLTEL and which is necessary for
ALLTEL to provide the Services. Under no circumstances shall
the ALLTEL Software and ALLTEL Work constitute Client Software
for purposes of the Agreement.
(e) "Expiration Date" shall mean the earliest of (i) the later to
occur of the five (5) year anniversary of the Start Date or
the date to which this Agreement is extended in accordance
with Section 4, or (ii) the date this Agreement is terminated
in accordance with Section 20.
1
<PAGE> 9
(f) "Required Consents" shall mean the consents required to permit
the transfer to ALLTEL of the right to use any Client
Resources.
(g) "Start Date" shall mean, 1997.
(h) "Third Party Software" shall mean any program, or part of a
program which is licensed or sub-licensed to Client or ALLTEL
by a third party that has the right to provide that license or
sub-license, including, without limitation, those programs
described in Exhibit C.
(i) "ALLTEL Network" shall mean that equipment, network components
and telephone leased lines between Client's Fort Smith
facility and ALLTEL's Technology Center at Little Rock.
Specifically included are the channel extenders, DS1 circuits
between Client's Fort Smith facility and ALLTEL Technology
Center in Little Rock, including CSU's required to support
circuits and equipment attached to and including the Front End
Processor located at the ALLTEL Technology Center in Little
Rock.
(j) "Client Network" shall mean all communication equipment,
network components, leased and dial data circuits which
terminate on Client's premises in Fort Smith. Specifically
included are all LAN attached equipment, VSAT equipment, and
any remaining 3X74 or 3172 equipment located in Fort Smith.
2. SERVICES
2.1 SERVICES. This Agreement sets forth the terms and conditions for the
provision by ALLTEL to Client of the information systems management
services, production control, operations services, technical support
and consulting services during the term hereof, as described in the
Service Attachment attached hereto as Exhibit A (individually and
collectively the "Services"). ALLTEL, on behalf of Client, also
agrees to provide certain specifically identified Services as set
forth on Exhibit A to Client Affiliates. Client agrees to notify
ALLTEL of new opportunities to provide similar or related Services
to Client, including, without limitation, providing new outsourcing
services, and to include such services within the scope of this
Agreement, by written amendment to Exhibit A in situations that are
mutually beneficial to Client and ALLTEL. This section in no way
obligates Client to select ALLTEL to provide the above described
additional services.
2.2 ATTACHMENT. All applicable terms, conditions, responsibilities and
delivery schedules which apply to a particular Service (as opposed
to those which apply generally to all Services and which are set
forth elsewhere in this Agreement and in the other exhibits attached
hereto) are identified in Exhibit A. The Service-specific terms,
conditions, responsibilities and delivery schedules shall govern the
provision of the relevant Service. Any new terms, conditions,
responsibilities or delivery
2
<PAGE> 10
schedules which may be specifically applicable to any particular
Service, as they are negotiated through the course of business,
shall be set forth in writing and executed by the parties and added
to this Agreement as an amendment. Such action shall not constitute
a modification or change of any provision of this Agreement or of
any other provision of any other Exhibit, unless expressly stated in
such written agreement. Unless otherwise agreed to by the parties
hereunder, the Services to be rendered by ALLTEL to Client and the
Service Beneficiaries are limited to those Services which are
described in this Agreement and the Exhibits.
2.3 PROCESSING SCHEDULE. ALLTEL will process and update Client's data in
accordance with Exhibit B.
3. FEES AND PAYMENT ARRANGEMENTS
3.1 SERVICE FEES. Attached hereto as Exhibit E is a schedule of fees
chargeable by ALLTEL to Client for performing the Services,
including, without limitation, the monthly base fee (the "Monthly
Base Fee"), monthly variable fee (the "Monthly Variable Fee"), a
mechanism for adjusting the Monthly Base Fee for changes in Client's
volume type or quantity of Services, penalties or incentives
(annually), a mechanism for changing the Monthly Variable Fee for
changes in Staff, a mechanism for changing the Monthly Base Fee and
Monthly Variable Fee for changes in inflation, a mechanism for
changing the Monthly Base Fee for changes in the cost of hardware
and software maintenance (collectively, as from time-to-time
adjusted, the "Service Fees"), as well as certain out-of-pocket
expenses paid to third parties by ALLTEL (the "Pass-Through
Expenses"): The Monthly Base Fee set forth in Exhibit E is expressly
conditioned on Client being and continuing in full compliance with
ALLTEL's standard operating procedures as further defined in Exhibit
I(as of and after, 6 months after the Effective Date), including,
without limitation, weekly maintenance windows, operating system and
hardware upgrade schedules and problem and change procedures. In the
event Client fails to so comply, Client shall pay to ALLTEL a
penalty in the amount of 2% of the Monthly Base Fee retroactive to
the Start Date until Client comes into compliance with ALLTEL's
operating procedures as described above. In the event ALLTEL is the
sole cause of Client's failure to be compliant within 6 months,
Client shall not pay the 2% penalty and ALLTEL will continue to
invoice Client at the leveraged rate until Client is compliant.
Client agrees to make best efforts to become compliant.
3
<PAGE> 11
3.2 PAYMENTS BY CLIENT
(a) INVOICING REQUIREMENTS. Client agrees and acknowledges that
depending on the underlying reason for a change in the amount
of the Monthly Base Fee or Monthly Variable Fee, in accordance
with Exhibit E, ALLTEL shall reflect such change either as a
permanent recalculation to the Monthly Base Fee and/or Monthly
Variable Fee (after prior notice to Client) or as a separately
delineated temporary increase to the Monthly Base Fee and/or
Monthly Variable Fee. ALLTEL shall invoice Client monthly by
no later than the 15th calendar day of each month for the
Service Fees for the upcoming calendar month, as well as for
any known Pass-Through Expenses and any other applicable
charges for the immediately preceding month and other
preceding months. ALLTEL's invoice shall be in such format and
contain such detail and supporting backup as may be agreed
upon by the parties.
(b) PAYMENT TERMS. Client shall pay by method satisfactory to
ALLTEL and Client, the monthly invoiced amount in full,
including any amounts or portions thereof in dispute, on or
prior to the first day of the month immediately following the
month in which the invoice is dated. Any amount not received
by the 30th day after the date that the payment was due, shall
be subject to interest on the balance overdue at a rate equal
to 12% per annum prorated to the date of payment. Should
Client dispute in good faith all or any portion of the amount
due on any invoice or require any adjustment to an invoiced
amount, Client shall notify ALLTEL in writing, prior to the
due date of that invoice, of the nature and basis of the
dispute and/or adjustment as soon as possible using the
dispute resolution procedures set forth in Section 15 of this
Agreement. The parties each shall use its best efforts to
resolve the dispute prior to the payment due date. If the
parties, however, are unable to resolve the dispute prior to
the payment due date, Client shall nevertheless pay the entire
amount to ALLTEL by the due date. If it is ultimately
determined that such amount should not have been paid by
Client to ALLTEL, ALLTEL shall credit this amount, plus
interest, in accordance with Section 15.1 of this Agreement on
Client's next invoice.
4. TERM
4.1 TERM. The term of this Agreement shall begin on the Effective Date
and end on the Expiration Date. At least twelve(12) months prior to
the Expiration Date, ALLTEL shall submit to Client a written
proposal for renewal of this Agreement for an additional term as
specified in such proposal. Client shall respond to such proposal
within one hundred twenty (120) days following receipt thereof.
4
<PAGE> 12
4.2 CLIENT RENEWAL OPTION. In lieu of responding to ALLTEL's written
proposal described in Section 4.1, Client shall have the right and
option, exercisable at any time during the 90 day period immediately
preceding the date that is six (6) months prior to the Expiration
Date, to notify ALLTEL that Client elects to extend such initial
term for a two year extension. Client shall have the further right
and option, exercisable during the 90 day period immediately
preceding the date that is six (6) months prior to the expiration of
the initial two year extension to extend the Agreement for an
additional two year term. The parties shall agree on any extensions
to the term of the Agreement beyond the two, two year extensions.
5. EDUCATION
5.1 ALLTEL STANDARD CORPORATE TRAINING. In addition to the corporately
provided ALLTEL classroom education services, ALLTEL will make
available to Client personnel its standard application software
training courses, which are generally held in Little Rock, Arkansas,
in accordance with ALLTEL's Education and Training Department
schedule, a current copy of which will be provided quarterly to
Client upon request. Client personnel may attend such courses, and
any other standard courses generally offered by ALLTEL to its other
customers, upon payment of ALLTEL's then current published course
fee, subject to normal space availability requirements and
compliance with ALLTEL's standard registration and enrollment
deadlines and procedure. Client will pay all of its travel and
lodging expenses while attending ALLTEL courses.
5.2 THIRD PARTY APPLICATION TRAINING. Client will pay for any third
party end user training associated with the implementation of third
party application software. ALLTEL will work with Client to
supplement and customize such training as reasonably practicable in
light of the ALLTEL resources available.
6. DATA PROCESSING, PREMISES AND SECURITY.
6.1 DATA PROCESSING. ALLTEL shall provide the operation of Client's data
processing systems at ALLTEL's Technology Center defined below.
6.2 CLIENT PROCESSING PREMISES. Client agrees to provide ALLTEL with
adequate premises located in Fort Smith, Arkansas, in good repair,
to perform its responsibilities under this Agreement (hereinafter
the "Data Center"). Without limiting the generality of the
foregoing, Client agrees to supply water, sewage, heat, lights,
telephone lines and equipment, air conditioning, electricity, daily
janitorial services, cafeteria privileges office equipment and
furniture, and parking spaces for ALLTEL employees under the same
conditions provided to employees of Client. ALLTEL is not
responsible for any injury or damage to property or persons which
occurs in or around the Data Center unless it is caused by the
negligence or willful misconduct of ALLTEL. Client will provide
telephone instruments and telephone service for ALLTEL to
communicate with the
5
<PAGE> 13
employees of Client and as required by ALLTEL to operate the Data
Center. In the event Client desires to move the Data Center after
the Effective Date, Client shall provide ALLTEL prior notice of such
move and pay ALLTEL for any costs incurred by ALLTEL because of such
move.
6.2.1 ALLTEL TECHNOLOGY CENTER. Throughout the term of this
Agreement, ALLTEL will provide sufficient facilities to
support the required mainframe equipment and operations
(hereinafter the "ALLTEL Technology Center"). Throughout the
term of this Agreement, ALLTEL will notify Client of any
material changes in the ALLTEL Technology Center operating
environment that might affect Client's operations or
obligations under this Agreement.
6.2.2 ALLTEL TECHNOLOGY CENTER RELOCATION. ALLTEL may relocate the
ALLTEL Technology Center by providing Client with reasonable
notice of such relocation. ALLTEL will bear all costs
associated with such relocation and Client shall not incur any
additional costs due to such relocation.
6.3 SECURITY STANDARDS ALLTEL will adhere to such security standards
with respect to Client's data mutually agreed upon by the parties.
Client will reimburse ALLTEL for its actual costs incurred as a
Pass-Through Expense if adherence is above the normal accepted
industry security processes requested or required by Client
increases ALLTEL's costs of operation.
7. CLIENT RESOURCES
7.1 CLIENT RESOURCES During the term of this Agreement, and except as
otherwise described in this Agreement, Client will provide for
ALLTEL's use in providing the Services, the Client Resources as
described on 1.1.c..
7.2 REQUIRED CONSENTS
(a) COOPERATION. Client shall be required to obtain all Required
Consents. Upon Client's request, ALLTEL shall assist Client in
obtaining the Required Consents. Once each such Required
Consent has been obtained, Client shall provide a copy of it
to ALLTEL. Until such time as the Required Consent has been
obtained by Client, any right to use the affected Client
Resource shall not be deemed to have been transferred to
ALLTEL, and the parties shall cooperate with each other in
achieving a reasonable alternative arrangement for the use of
the affected Client Resources. Client shall provide any and
all consents for the use by ALLTEL of the Client provided
Third Party Software listed in the Client column of Exhibit
C-2.
6
<PAGE> 14
(b) COSTS. Any cost incurred by ALLTEL at Client's request in
obtaining a Required Consent shall be separately charged by
ALLTEL to Client as a Pass-Through Expense.
(c) TRAINING. The Base Staff shall provide training to Client's
designated training staff located at Ft. Smith on all changes
to the host system requiring training of Client's staff.
Client shall be responsible for supplying resources for and
paying the cost of end-user training.
8. EQUIPMENT
8.1 HARDWARE. Client shall pay all costs of purchasing, leasing,
installing, utilizing and owning all hardware at Client facilities
as required for the operation of Client's application systems and
for the testing and training of such systems. A list of Client's
hardware as of the Effective Date is set forth in Exhibit D. Client
will also provide, at no cost to ALLTEL, all specialized
workstations, printers and other hardware and software required by
ALLTEL to support the Client application systems.
8.2 TERMINALS/WORKSTATIONS/NETWORK EQUIPMENT. Client will pay all costs
associated with Client Network, including, without limitation, all
hardware maintenance fees and software license and maintenance fees,
of purchasing, leasing, installing, utilizing and owning personal
computers, terminals, workstations and controllers used by Client's
personnel, as well as all network equipment, including, without
limitation, all communication or telephone lines, data service
units, modems, hubs, routers, and LAN operating system software.
8.3 SUPPLIES AND FORMS. Client will be responsible for all cost
associated with the addition of new magnetic tapes and tape
cartridges above the base capacity outlined in Exhibit E required to
perform ALLTEL's processing responsibilities during the term of this
agreement. Client is responsible for furnishing and cost for all
printer-related consumables. Client will provide all supplies for
office equipment and personal computers for ALLTEL's Base Staff at
all client facilities necessary to perform Client related
activities.
8.4 CONFIDENTIALITY OF CLIENT DATA. ALLTEL shall make best efforts to
cause all information concerning Client, its business or customers
submitted to ALLTEL pursuant to this Agreement to be held in
confidence by ALLTEL and not be disclosed. No person or entity,
other than those employees and contractors with a need to know,
shall be permitted to have access to Client's data without the
written authorization of Client. All of Client's data shall be
available for examination by Client, at any time during regular
business hours, without notice. If ALLTEL receives any legal process
requiring it to produce Client's data or that of any of its
customers, ALLTEL shall notify Client promptly, and deliver copies
of such orders to Client, immediately and prior to compliance with
such process.
7
<PAGE> 15
8.5 DELIVERY. Client, or its designee, is responsible for delivery of
all input and output data to and from the Fort Smith Data Center and
for all costs of delivery of output from the ALLTEL Technology
Center.
9. SOFTWARE.
9.1 CLIENT SOFTWARE. ALLTEL will use all Client Software for the
exclusive use by Client and the Service Beneficiaries in connection
with providing the Services to Client and the Service Beneficiaries.
Additional use of Client Software by ALLTEL shall require the
written consent of Client. ALLTEL reserves the right in advance of
any processing or use of Client Software to assure compatibility
with equipment and consistency with other processing requirements,
techniques and standards. ALLTEL's use of any, new or not supported
by vendor, Client Software may result in an increase to the Service
Fees.
9.2 THIRD PARTY SOFTWARE AND MAINTENANCE.
(a) THIRD PARTY SOFTWARE. Exhibit C sets forth a list of all
Client provided Third Party Software and ALLTEL provided Third
Party Software. ALLTEL will use all Client provided Third
Party Software for the exclusive use by Client in connection
with the Services to Client. For any Client provided Third
Party Software that is not listed on Exhibit C, ALLTEL
reserves the right in advance of any processing or use of any
Client provided Third Party Software to assure compatibility
with equipment and consistency with other processing
requirement, techniques, and standards including year 2000
compliance. Client will procure all consents and pay any
reasonable expenses necessary to allow ALLTEL to use any
Client provided Third Party Software. If a defect occurs in
the Client provided Third Party Software (including
noncompliance with year 2000 standards) or if such Client
provided Third Party Software does not function in accordance
with its specifications during the Term of the Agreement,
Client shall cooperate fully with ALLTEL to cause such third
party to promptly correct such defect to the extent required
under the applicable agreement. To the extent that any Third
Party Software or necessary part thereof is not made available
to ALLTEL or if a defect in any Third Party Software or
necessary part thereof inhibits ALLTEL's provision of the
Services, ALLTEL shall be excused from providing such Services
until at least the Third Party Software is made available or
the defect remedied. ALLTEL agrees to reasonably contact and
negotiate with Third Party Software vendors in an effort to
accomplish the elimination of any problems. If a defect occurs
in any ALLTEL provided Third Party Software or such ALLTEL
provided Third Party Software does not function in accordance
with its specifications, ALLTEL shall use its best
8
<PAGE> 16
efforts to cause such third party to promptly correct such
defect to the extent required under the applicable agreement.
(b) THIRD PARTY SOFTWARE MAINTENANCE. Client will pay for all
Third Party Software maintenance fees for the Client provided
Third Party Software listed in Exhibit C. ALLTEL will provide
as part of the Monthly Base Fee all third party software
maintenance for the ALLTEL provided Third Party Software
listed in Exhibit C.
9.3 INSTALLATION OF NEW RELEASES, UPDATES AND ENHANCEMENTS. All changes
to the ALLTEL Software and ALLTEL provided Third Party Software,
being used by Client including the installation of enhancements,
updates, new releases and replacements of the ALLTEL Software and
ALLTEL provided Third Party Software, shall be made only with the
prior written approval of Client, which shall not be unreasonably
withheld, both parties agree to provide all necessary approvals in
order to ensure that the version of the ALLTEL Software and ALLTEL
provided Third Party Software in production with Client shall not be
more than two major releases behind that version of the ALLTEL
Software and ALLTEL provided Third Party Software then generally
available to the public. Similarly, for all Client Software and
Client provided Third Party Software, Client agrees, upon
notification by ALLTEL, and unless mutually agreed otherwise, to
take all necessary steps in order to ensure that the version of the
Client Software and Client provided Third Party Software in
production with Client is not more than two major releases behind
the version of the Client Software or Third Party Software then
generally available to the public. If Client refuses to approve
replacements of the ALLTEL Software or ALLTEL provided Third Party
Software, Client shall pay for any reasonable and actual costs
incurred by ALLTEL for supporting and maintaining the replaced
software.
10. PERSONNEL AND COMMITTEES.
10.1 ALLTEL ACCOUNT RELATIONSHIP EXECUTIVE. ALLTEL will assign an
individual (the "ALLTEL Account Relationship Executive") who will
oversee and manage the Services and serve as ALLTEL's primary point
of contact with Client with respect to the Services and will be
located at the Technology Center. Prior to the selection of any
replacement ALLTEL Account Relationship Executive, ALLTEL shall give
prior written notice to Client of such change, will provide Client a
resume of the proposed ALLTEL Account Relationship Executive and
shall give Client an opportunity to interview such proposed ALLTEL
Account Relationship Executive.
10.2 LIAISON MANAGER. Client will assign a mutually agreeable individual
(the "Liaison Manager") who will serve as Client's primary point of
contact for all communications with ALLTEL with respect to this
Agreement. As of the date hereof, Client's Chief Information Officer
or such officer's designee shall serve as
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the initial Liaison Manager. Prior to the selection of the initial
or any replacement Liaison Manager, Client shall give written notice
to ALLTEL of such selection or change.
10.3 ALLTEL BASE STAFF. ALLTEL shall have responsibility for providing
the human resources as required to provide the Services described in
Exhibit A. ALLTEL can draw upon its own employees (at the Client's
facility or elsewhere), as well as the employees of the ALLTEL
Affiliates and subcontractors in order to bring together the Base
Staff and to perform the Services. ALLTEL shall have the right to
transfer or substitute members of the Base Staff as ALLTEL may
reasonably determine after six (6) months from Start Date.
10.4 TEMPORARY RESOURCE. Client may request ALLTEL to provide additional
resources or hours on a temporary basis and ALLTEL will provide such
resources or hours on an as-available basis at ALLTEL's prices for
such resources as set forth in Exhibit E. ALLTEL will promptly
respond with a quotation for such resource. If Client wishes to
utilize ALLTEL services quoted, Client will notify ALLTEL in
writing, authorizing ALLTEL to provide such services.
10.5 MUTUAL PLANNING COMMITTEE.
(a) MUTUAL PLANNING COMMITTEE. ALLTEL and Client agree that
effective planning and communication are necessary to provide
overall direction for the Services and that each will work to
promote a free and open exchange of information. To that end,
ALLTEL's Account Relationship Executive and Client
executives(CIO and senior level or higher employees of Client)
will endeavor to meet at least quarterly, but no less than
annually, for the duration of this Agreement to discuss
matters of mutual importance. Some of the matters to be
discussed are:
(i) review and approve the strategic technology plan of
Client and all annual updates thereto;
(ii) review and approve systems design, development and
implementation project recommendations of ALLTEL
concerning the Services, including, without limitation,
providing human resources, utilizing available ALLTEL
Software, procuring Third Party Software, providing
equipment, increasing or decreasing ALLTEL supplied
processing to support the Services, and forwarding
recommendations for major authorizations to the Client
management committee for approval;
(iii) review ALLTEL's performance of the Services during the
previous calendar quarter, including, without
limitation, the milestones that have been completed;
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(iv) review the status of the current Services that ALLTEL is
performing;
(v) identify any problems relating to the Services and suggest
corrective actions to solve such problems, including,
without limitation, the cost to Client to correct such
problems;
(vi) review and approve the Services that are scheduled to be
provided by ALLTEL for the upcoming calendar quarter(s),
including, without limitation, the scope of the Services
and of any applicable performance standards, and
deliverables.
(vii) review, approve and establish information technology
standards, policies and procedures as recommended by
ALLTEL, including, without limitation, delegation of
certain review and approval authority to specific Client
managers and the Mutual Planning Committee;
(viii) review and approve requests for major system modifications
and enhancements that may be submitted by end-users;
(ix) prioritize and allocate Staff resources on all systems
design, development and implementation projects;
(x) review and approve any ALLTEL's bids and related scope of
Services and deliverables for new work;
(xi) review and approve ALLTEL requests for Staff resources and
changes;
(xii) periodically review information provided by ALLTEL on new
products and services available from ALLTEL and other key
third party providers;
(xiii) review at least annually the composition of the Base Staff
and any planned or suggested changes;
(xiv) review any other aspect of the information processing and
technology requirements or desires of Client.
Either party may request that this meeting may be held more
or less frequently than quarterly. The Chief Information
Officer of Client or his or her designee (who is a senior
level or higher employee of Client) shall be the Chairman
of the Mutual Planning Committee, and shall be responsible
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for communicating, on behalf of the Mutual Planning
Committee, to ALLTEL. All meetings shall have a published
agenda issued by the ALLTEL Account Relationship Executive
(as approved by the Chairman of the Mutual Planning
Committee) at least five business days in advance of the
meeting to allow the committee members a reasonable
opportunity to prepare for the meeting. Meeting minutes
will be issued by the ALLTEL Account Relationship Executive
to members of the Mutual Planning Committee within five
business days after the meeting. Following review by such
members, the ALLTEL Account Relationship Executive will
incorporate into final meeting minutes the members'
accurate and reasonable comments and revisions, which shall
constitute the final meeting minutes.
From time to time as requested by Client ALLTEL shall
submit to the Mutual Planning Committee in writing a
performance report, in a form and with content mutually
established by the parties, that documents ALLTEL's
performance of the Services. In addition, ALLTEL will
provide the Mutual Planning Committee with such
documentation and other information as may be reasonably
requested by the Mutual Planning Committee.
11. FILES AND PROGRAMS, STORAGE, AND DISASTER RECOVERY
11.1 FILES AND PROGRAMS. After such time as the ALLTEL employees
receive and operate Client's data on appropriate media in
electronic format, ALLTEL will provide and maintain reasonable
backup files as required by Client.
11.2 STORAGE. ALLTEL is not responsible for off-site storage and
transportation for all backup data files and programs produced at
Client's facilities.
11.3 DISASTER RECOVERY. Disaster Recovery shall be provided pursuant to
the terms and conditions defined in Exhibit H.
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12. CHANGE ORDERS.
Client may, at any time, in writing to ALLTEL, request changes to the
scope or quantity of Services listed in Exhibits A, B, C, D, F or H. Such
a request will be considered a "Change Order".. The parties agree and
acknowledge that Client shall not request a Change Order that has the
effect of terminating one or more of the Services in violation of the
term of the Agreement. If any Change Order results in an increase or
decrease in the cost of or time required for ALLTEL's performance of any
of the Services, an equitable adjustment to the cost or delivery schedule
or both shall be negotiated by the parties, and the Agreement and
appropriate Exhibits shall be deemed amended to reflect such approved
Change Order. ALLTEL may, but is not obligated to, begin work on the
Change Order before such time as Client and ALLTEL shall have reached an
equitable adjustment to the cost and delivery schedule
13. INTELLECTUAL PROPERTY RIGHTS.
13.1 MODIFICATIONS TO CLIENT SOFTWARE. Any writing or work of
authorship, regardless of medium, comprising Client Software or
Client-provided Third Party Software created by ALLTEL at Client's
request in the course of performing the Services under this
Agreement (including but not limited to software, source code,
blueprints, diagrams, flow charts, specifications or functional
descriptions, and specifically including any modifications,
enhancements, interfaces (other than interfaces to the ALLTEL
Software) (individually, a "Client Work") shall be deemed a "work
for hire", and the sole and exclusive property of Client (except,
no such writing or work of authorship relating to the
Client-provided Third Party Software shall be a Client Work if the
license agreement governing the Third Party Software prohibits the
granting of such right by ALLTEL). The term "Client Work" shall
not include the ALLTEL Software, or any modifications thereto, as
well as any writing or work of authorship, regardless of medium,
relating to or evidencing the ALLTEL Software. To the extent any
Client Work is not deemed a "work for hire" under applicable law,
ALLTEL hereby irrevocably assigns, transfers and conveys to Client
all of its right, title and interest in such Client Work,
including but not limited to, all rights of patent, copyright,
trade secret, know-how and other proprietary and associated rights
in such Client Work. ALLTEL agrees to execute such other documents
or take such other actions as Client may reasonably request to
perfect Client's ownership of any Client Work of which Client is
granted ownership under this Section 13.1. The parties acknowledge
that Client's ownership of any such Client Work shall not preclude
ALLTEL from developing for other ALLTEL customers any work or
works which are the same or substantially similar to a Client Work
or Client Works, in whole or in part if such work or works are
developed independently from Client Work or Client Works and if
such work or works do not violate Client's intellectual property
rights.
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13.2 OWNERSHIP OF ALLTEL SOFTWARE. As of the date hereof, and at all
times hereafter, ALLTEL shall be the sole and exclusive owner of
all right, title, and interest in and to the ALLTEL Software,
including, without limitation, all intellectual property and other
rights with respect to the ALLTEL Software. The parties
acknowledge that this Agreement in no way limits or restricts
ALLTEL and the ALLTEL Affiliates from developing or marketing on
their own or for any third party in the United States or
internationally the ALLTEL Software as from time to time
constituted (including, but not limited to, any modification,
enhancement, interface, upgrade, change and all software, source
code, blueprints, diagrams, flow charts, specifications,
functional descriptions or training materials relating thereto)
without payment of any compensation to Client, or any notice to
Client.
13.3 MODIFICATIONS TO ALLTEL SOFTWARE. Any writing or work of
authorship, regardless of medium, created or developed by ALLTEL
or Client in the course of performing the Services under this
Agreement and relating to the ALLTEL Software (including but not
limited to, any modification, enhancement, interface, upgrade,
change to the ALLTEL Software or ALLTEL-provided Third Party
Software and all software, source code, blueprints, diagrams, flow
charts, specifications, functional descriptions or training
materials relating thereto) (individually an "ALLTEL Work") shall
not be deemed a "work for hire" but shall be owned solely and
exclusively by ALLTEL. To the extent any ALLTEL Work for any
reason is determined not to be owned by ALLTEL, Client hereby
irrevocably assigns, transfers and conveys to ALLTEL all of
Client's right, title, and interest in such ALLTEL Work,
including, but not limited to, all rights of patent, copyright,
trade secret, know-how, and or other proprietary and associated
rights in such ALLTEL Work. Client agrees to execute such
documents and take such other actions as ALLTEL may reasonably
request to perfect ALLTEL's ownership of any such ALLTEL Work.
14. AUDITS
14.1 CLIENT'S REGULATORY AUDIT. As reasonably requested by Client,
ALLTEL shall cooperate with Client and its internal or external
auditors for the purpose of Client's regulatory compliance at
Client's facilities. Promptly following any such regulatory audit,
whether conducted by Client's internal or external auditors,
Client will instruct its auditors to conduct an exit conference
with ALLTEL and to provide ALLTEL as soon thereafter as reasonably
possible a copy of each report prepared as a result of such audit
examination relating to data processing whether in draft or final
form. In addition, Client will provide and instruct its external
auditors to provide ALLTEL with a copy of that portion of each
written report containing comments concerning ALLTEL or the
Services performed by ALLTEL pursuant to this Agreement. ALLTEL
shall make reasonable efforts to make changes required or
recommended by the audit. Client shall reimburse ALLTEL as a
Pass-Through Expense for any costs incurred by ALLTEL in
cooperating with Client in connection with Client's audit except
where ALLTEL's efforts are
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necessary to achieve audit compliance for exceptions that are
considered generally accepted practices of the outsourcing
industry.
14.2 EXCLUDED MATERIALS. Nothing in this Section 14 shall be construed
to require ALLTEL to provide Client with access to any records of
whatever kind which contain information pertaining to any person
or entity other than Client. In the event that the records contain
commingled information relating to Client and a person or entity
other than Client, ALLTEL shall mask or take other appropriate
steps to maintain the confidentiality of the information relating
to such other person or entity.
15. DISPUTE RESOLUTION.
15.1 DISPUTE RESOLUTION PROCEDURES. In the event a dispute arises
between ALLTEL and Client with respect to the terms and conditions
of this Agreement, or any subject matter governed by this
Agreement, other than disputes regarding a party's compliance with
the provisions of Section 21 (Confidentiality), such dispute shall
be settled as set forth in this Section 15. At such time as the
dispute is resolved, interest at a rate equal to the lesser of
prime rate plus two percent per annum as announced from time to
time by Boatmen's National Bank of Arkansas or five (5) percentage
points above the federal discount rate as in effect from time to
time for the period of dispute shall be paid to the party entitled
to receive the disputed monies to compensate for the lapsed time
between the date such disputed amount originally was to have been
paid (or was paid) through the date monies are paid (or credited)
in settlement of the dispute.
15.2 CLAIMS PROCEDURES. If any party shall have any dispute with
respect to the terms and conditions of this Agreement, or any
subject matter referred to in or governed by this Agreement, that
party (through the ALLTEL Account Relationship Executive of ALLTEL
or the Liaison Manager of Client, as the case may be) shall
provide written notification to the other party (through the
ALLTEL Account Relationship Executive of ALLTEL or the Liaison
Manager of Client, as the case may be) in the form of a claim
identifying the issue or amount disputed and including a detailed
reason for the claim. The party against whom the claim is made
shall respond in writing to the claim within 30 days from the date
of receipt of the claim document. The party filing the claim shall
have an additional 30 days after the receipt of the response to
either accept the resolution offered by the other party or request
implementation of the procedures set forth in Section 15.3 (the
"Escalation Procedures"). Failure to meet the time limitations set
forth in this Section may result in the implementation of the
Escalation Procedures.
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15.3 ESCALATION PROCEDURES.
(a) Each of the parties agrees to negotiate, in good faith, any
claim or dispute that has not been satisfactorily resolved
following the claim resolution procedures described in
Section 15.2. To this end, each party agrees to escalate
any and all unresolved disputes or claims in accordance
with Section 15.3(b) and (c) before taking further action.
(b) If the negotiations conducted pursuant to Section 15.2 do
not lead to resolution of the underlying dispute or claim
to the satisfaction of a party involved in such
negotiations, then either party may notify the other in
writing that he desires to elevate the dispute or claim to
the Senior Vice President and General Manager of Technology
Center of ALLTEL and the Chief Information Officer of
Client for resolution. Upon receipt by the other party of
such written notice, the dispute or claim shall be so
elevated and the Senior Vice President and General Manager
of Technology Center of ALLTEL and the Chief Information
Officer of Client shall negotiate in good faith and each
use its reasonable best efforts to resolve such dispute or
claim. The location, format, frequency, duration and
conclusion of these elevated discussions shall be left to
the discretion of the representatives involved. Upon
agreement, the representatives may utilize other
alternative dispute resolution procedures to assist in the
negotiations. Discussions and correspondence among the
representatives for purposes of these negotiations shall be
treated as confidential information developed for purposes
of settlement, exempt from discovery and production, which
shall not be admissible in subsequent proceedings between
the parties. Documents identified in or provided with such
communications, which are not prepared for purposes of the
negotiations, are not so exempted and may, if otherwise
admissible, be admitted in evidence in such subsequent
proceeding.
(c) If the negotiations conducted pursuant to Section 15.3(b)
do not lead to resolution of the underlying dispute or
claim to the satisfaction of a party involved in such
negotiations, then either party may notify the other in
writing that he desires to elevate the dispute or claim to
the President of Technology Services of ALLTEL and the
Chief Executive Officer of Client for resolution. Upon
receipt by the other party of such written notice, the
dispute or claim shall be so elevated and the President of
Technology Services of ALLTEL and the Chief Executive
Officer of Client shall negotiate in good faith and each
use its reasonable best efforts to resolve such dispute or
claim. The location, format, frequency, duration and
conclusion of these elevated discussions shall be left to
the discretion of the representatives involved. Upon mutual
agreement, the dispute may be mediated before either party
may resort to litigation. Upon agreement, the
representatives may utilize other alternative dispute
resolution procedures to assist in the negotiations.
Discussions and correspondence among the representatives
for purposes of these negotiations shall be treated as
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confidential information developed for purposes of
settlement, exempt from discovery and production, which
shall not be admissible in any subsequent proceedings
between the parties. Documents identified in or provided
with such communications, which are not prepared for
purposes of the negotiations, are not so exempted and may,
if otherwise admissible, be admitted in evidence in such
subsequent proceeding.
16. LIMITATION OF LIABILITY.
(a) Except for liability arising out of Section 17.2 herein,
ALLTEL's liability for any claims or causes of action
arising out of or related to this Agreement shall be
limited to Client's direct damages, actually incurred,
which under no circumstances shall exceed, in the
aggregate, the amount paid by Client to ALLTEL under this
Agreement for the twelve month period immediately
preceeding the date of the breach. In no event shall ALLTEL
be liable for indirect, special, punitive, incidental or
consequential damages of any kind whatsoever including
claims arising out of Section 17.2 herein or the claims or
demands made by any third parties.
(b) ALLTEL shall have no liability, express or implied, whether
arising under contract, tort or otherwise which results
directly or indirectly from the internal operations and
performance of any Client Software and/or Client provided
Third Party Software or any enhancement, development or
maintenance of any such Client Software and/or Client
provided Third Party Software.
17. INDEMNIFICATION.
17.1 PERSONAL INJURY AND PROPERTY DAMAGE. Each party agrees to
indemnify, defend and hold harmless the other and its officers,
directors, employees, affiliates (including, where applicable, the
ALLTEL Affiliates and Client Affiliates), and agents from any and
all liabilities, losses, costs, damages and expenses (including
reasonable attorneys' fees) arising from or in connection with the
damage, loss (including theft) or destruction of any real property
or tangible personal property of the indemnified party resulting
from the actions of any employee, agent or subcontractor of the
indemnifying party insofar as such damage arises out of or in the
course of fulfilling its obligations under this Agreement and to
the extent such damage is due to any negligence, breach of
statutory duty, omission or default of the indemnifying party, its
employees, agents or subcontractors.
17.2 INFRINGEMENT OF ALLTEL SOFTWARE OR ALLTEL PROVIDED THIRD PARTY
SOFTWARE. ALLTEL agrees to defend at its own expense, any claim or
action brought by any third party against Client and its officers,
directors, employees, Client Affiliates, and agents for actual or
alleged infringement of any patent, copyright or similar
intellectual property right (including, but not limited to,
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misappropriation of trade secrets) based upon the ALLTEL Software
or ALLTEL provided Third Party Software furnished hereunder by
ALLTEL. ALLTEL further agrees to indemnify and hold Client and the
Client Affiliates harmless from and against any and all
liabilities, losses, costs, damages, and expenses (including
reasonable attorneys' fees) associated with any such claim or
action incurred by Client and the Client Affiliates. ALLTEL shall
have the sole right to conduct the defense of any such claim or
action and all negotiations for its settlement or compromise,
unless otherwise mutually agreed to in writing between the parties
hereto. ALLTEL agrees to give Client, and Client agrees to give
ALLTEL, as appropriate, prompt written notice of any written
threat, warning or notice of any such claim or action against
ALLTEL or Client, as appropriate, or any other user or any
supplier of components of the ALLTEL Software or ALLTEL provided
Third Party Software covered hereunder, which could have an
adverse impact on Client's use of same, provided ALLTEL or Client,
as appropriate, knows of such claim or action. If in any such suit
so defended, all or any part of the ALLTEL Software (or any
component thereof) or the ALLTEL provided Third Party Software (or
any component thereof) is held to constitute an infringement or
violation of any other party's intellectual property rights and is
enjoined, or if in respect of any claim of infringement, ALLTEL
deems it advisable to do so, ALLTEL shall at its sole option take
one or more of the following actions at no additional cost to
Client: (a) procure the right to continue the use of the same
without material interruption for Client; (b) replace the same
with non-infringing software that meets the specifications
identified in the Service Attachment; (c) modify said ALLTEL
Software or ALLTEL provided Third Party Software (to the extent
permitted by such third party) so as to be non-infringing,
provided that the ALLTEL Software or ALLTEL provided Third Party
Software as modified meets all of the specifications; or, (d) take
back the infringing the ALLTEL Software or ALLTEL provided Third
Party Software and credit Client with an amount equal to its list
price less straight line depreciation over five (5) years.
17.3 INFRINGEMENTS OF CLIENT SOFTWARE OR CLIENT PROVIDED THIRD PARTY
SOFTWARE. Client agrees to defend at its own expense, any claim or
action brought by any third party against ALLTEL and its officers,
directors, employees, ALLTEL Affiliates, and agents for actual or
alleged infringement of any patent, copyright or similar
intellectual property right (including, but not limited to,
misappropriation of trade secrets) based upon the Client Software
or Client provided Third Party Software furnished hereunder by
Client. Client further agrees to indemnify and hold ALLTEL and the
ALLTEL Affiliates harmless from and against any and all
liabilities, losses, costs, damages, and expenses (including
reasonable attorneys' fees) associated with any such claim or
action incurred by ALLTEL and the ALLTEL Affiliates. Client shall
have the sole right to conduct the defense of any such claim or
action and all negotiations for its settlement or compromise,
unless otherwise mutually agreed to in writing between the parties
hereto. Client agrees to give ALLTEL, and ALLTEL agrees to give
Client, as appropriate, prompt written notice of any written
threat, warning or notice of any such claim or action
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against ALLTEL or Client, as appropriate, or any other user or any
supplier of components of Client Software or Client provided Third
Party Software covered hereunder, which could have an adverse
impact on ALLTEL's use of same, provided ALLTEL or Client, as
appropriate, knows of such claim or action. If in any such suit so
defended, all or any part of Client Software (or any component
thereof) or the Client provided Third Party Software (or any
component thereof) is held to constitute an infringement or
violation of any other party's intellectual property rights and is
enjoined, or if in respect of any claim of infringement, Client
deems it advisable to do so, Client shall at is sole option take
one or more of the following actions at no additional cost to
ALLTEL: (a) procure the right to continue the use of the same
without material interruption for ALLTEL; (b) replace the same
with non-infringing software that meets the specifications
identified in the Service Attachment; (c) modify said Client
Software or Client provided Third Party Software (to the extent
permitted by such third party) so as to be non-infringing,
provided that Client Software as modified meets all of the
specifications; or (d) relieve ALLTEL of its obligation to use
such software to perform the applicable Services hereunder.
17.4 PREVIOUS LIABILITIES. The parties hereto agree to indemnify the
other and hold the other and its officers, directors, employees,
affiliates (including, where applicable, the ALLTEL Affiliates and
Client Affiliates) and agents harmless against any liabilities,
losses, costs, damages, and expenses (including reasonable
attorneys' fees) arising out of any claims or lawsuits filed or
subsequently filed as a result of the acts of the other party
which occurred prior to the Effective Date of this Agreement.
17.5 DISPUTE RESOLUTION. The provisions of Section 15 shall apply with
respect to the submission of any claim for indemnification under
this Agreement and the resolution of any disputes relating to such
claim.
18. FORCE MAJEURE, TIME OF PERFORMANCE AND INCREASED COSTS AND ERROR
CORRECTION.
18.1 FORCE MAJEURE. Neither party shall be held liable for any delay or
failure in performance of all or a portion of the Services of any
part of this Agreement from any cause beyond its reasonable
control and without its fault or negligence, including, but not
limited to, acts of God, acts of civil or military authority,
government regulations, embargoes, epidemics, war, terrorist acts,
riots, insurrections, fires, explosions, earthquakes, nuclear
accidents, floods, power
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blackouts affecting facilities other than facilities of a kind
commonly protected by redundant power systems, unless such
redundant power systems are also affected by any Force Majeure
condition, unusually severe weather conditions, inability to
secure products or services of other persons or transportation
facilities, or acts or omissions of transportation common carriers
(the "Affected Performance"). Upon the occurrence of a condition
described in this Section 18.1, the party whose performance is
affected shall give written notice to the other party describing
the Affected Performance, and the parties shall promptly confer,
in good faith, to agree upon equitable, reasonable action to
minimize the impact, on both parties, of such condition,
including, without limitation, implementing the disaster recovery
services. The parties agree that the party whose performance is
affected shall use commercially reasonable efforts to minimize the
delay caused by the force majeure events and recommence the
Affected Performance. In the event the delay caused by the force
majeure event lasts for a period of more than 30 days, the parties
shall negotiate an equitable modification to this Agreement with
respect to the Affected Performance. If the parties are unable to
agree upon an equitable modification within 15 days after such 30
day period has expired, then either party shall be entitled to
serve 30 days notice of termination on the other party with
respect to only such Affected Performance. If the force majeure
event for such Affected Performance is continuing upon the
expiration of such 30 day notice period the portion of this
Agreement relating to the Affected Performance shall automatically
terminate. The remaining portion of the Agreement that does not
involve the Affected Performance shall continue in full force and
effect. In such event ALLTEL shall be entitled to be paid for that
portion of the Affected Performance for which it has completed or
in the process of completing through the termination date. In the
event that the affected performance substantially diminishes the
services provides hereunder and materially affects the business
operations of Client, Client shall be entitled to serve 30 days
notice of termination to ALLTEL. If the Force Majeure event for
such Affected Performance is continuing upon the expiration of
such 30 day notice period the Agreement shall terminate without
penalty to Client. In such event, ALLTEL shall be entitled to be
paid for the Services which it has performed through the
termination date.
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18.2 TIME OF PERFORMANCE AND INCREASED COSTS. ALLTEL's time of
performance with respect to Services performed under this
Agreement shall be enlarged, and its obligations under Exhibit A-2
shall be suspended, if and only to the extent, any of the
following causes, in whole or in part, the necessity for such
enlargement or suspension: (a) Client substantially fails to
submit data or materials in the prescribed form or in accordance
with the requirements of this Agreement, (b) Client substantially
fails to perform on a timely basis or provide adequate resources
to perform the tasks, functions or other responsibilities of
Client described in this Agreement, (c) there occurs a Force
Majeure condition described in Section 18.1 hereof which prevents
timely performance, (d) Client or any governmental agency
authorized to regulate or supervise Client makes any special
request which substantially affects ALLTEL's normal performance
schedule, (e) Client substantially fails to provide Client
Resources called for by this Agreement, (f) Client substantially
changes the priorities or decreases the number of the Staff, or
(g) Client provided Third Party Software or the Client Software
does not substantially perform in accordance with its
specifications and, in each case, the same is necessary for
ALLTEL's performance hereunder. In addition, if any of the above
events occur, and such event will result in an increased cost to
ALLTEL for providing the affected Service, ALLTEL shall so advise
Client and Client may either pay any and all of such increased
costs to ALLTEL or relieve ALLTEL of its responsibilities
hereunder.
18.3 ERROR CORRECTION. Client will carefully review and inspect all
reports prepared by ALLTEL, to balance promptly to the appropriate
control totals and within a reasonable time after any error or
out-of-balance control totals should be detectable. Client agrees
to notify ALLTEL of any erroneous processing. If Client fails to
so notify ALLTEL within 60 days after Client's receipt of the
report containing such erroneous processing, Client shall be
deemed to have waived its rights in respect of such error and to
have assumed all risks in respect thereof, provided however, that
ALLTEL shall not be relieved of its obligations to correct such
error, once notified, for on-going processing.
19. NOTICES.
19.1 NOTICES. Except as otherwise provided under this Agreement or in
the Exhibits, all notices, demands or requests which may be given
by any party to the other party shall be in writing and shall be
deemed to have been duly given on the date delivered in person, or
sent via telefax, overnight mail, electronic mail with return
receipt, or on the date of the third business day after deposit,
postage prepaid, in the United States Mail via Certified Mail
return receipt requested, and addressed as set forth below:
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If to Client, to:
Beverly Enterprises Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919
Attn: Chief Information Officer
With a copy to:
Beverly Enterprises Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919
Attn: General Counsel
If to ALLTEL, to:
ALLTEL Information Services, Inc.
4001 Rodney Parham Road
Little Rock, Arkansas 72212-2496
Attn.: Vice President and General Manager of Technology
Center
With a copy to:
ALLTEL Information Services, Inc.
4001 Rodney Parham Road
Little Rock, Arkansas 72212
Attn.: General Counsel
19.2 CHANGE OF ADDRESS. The address to which such notices, demands,
requests, elections or other communications are to be given by
either party may be changed by written notice given by such party
to the other party pursuant to this Section.
20. TERMINATION.
20.1 TERMINATION. This Agreement, except as otherwise provided herein,
will continue in effect until the Expiration Date. This Agreement,
including all Exhibits may be terminated by the permitted party
giving written notice to the other party in accordance with
Section 19.1 and the provisions of the following sentence in this
Section 20.1 or the provisions of Sections 20.2, 20.3 or 20.4
hereof, as applicable.
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The effective date of any such termination shall be the
Termination Completion Date (as defined and determined in
accordance with the provisions of Section 20.5, and such date
shall be the Expiration Date in the event this Agreement is so
terminated.
20.2 TERMINATION UPON ALLTEL'S MATERIAL BREACH. In the event of the
material breach by ALLTEL of any provision of this Agreement,
Client shall give ALLTEL written notice, and:
(a) If such breach is for ALLTEL's breach of its obligations
under Section 21 with respect to Client's Proprietary
Information, ALLTEL shall cure the breach within 15
calendar days after receipt of such notice. If ALLTEL does
not cure such breach by such date (or is not working
diligently in good faith to cure such breach in cases where
a breach cannot reasonably be expected to be cured within
15 days), Client may, at its sole option, elect to
terminate this Agreement by giving written notice of such
election to ALLTEL (the "Client Termination Election
Date"). In such case, within 30 days after the Termination
Completion Date, ALLTEL shall pay the Client Damages (as
such term is defined below) to Client.
(b) If such breach is for any failure by ALLTEL to perform in
accordance with this Agreement which, in the reasonable
judgment of Client, materially adversely affects Client,
Client may give notice of the breach and ALLTEL shall cure
such breach within 90 days after the date of such notice.
If ALLTEL does not cure such breach within such period (or
within 150 days after the date of such notice, if ALLTEL is
working diligently in good faith to cure such breach in
cases where a breach cannot reasonably be expected to be
cured within 90 days), then Client may, at its sole option,
elect to terminate this Agreement without penalty by giving
written notice of such election to ALLTEL which date shall
constitute Client Termination Election Date. In such case,
within 30 days after the Termination Completion Date,
ALLTEL shall pay the Client Damages (as such term is
defined below) to Client.
(c) For the purpose of this Agreement, Client Damages, subject
to Section 16 hereof, shall consist solely of Client's
direct out-of-pocket damages actually incurred, for
obtaining replacement Services of a substantially similar
scope and nature to the Services being provided by ALLTEL
hereunder in excess of what Client would have otherwise
paid ALLTEL hereunder (the "Client Damages").
(d) The failure of Client to exercise any right to elect to
terminate this Agreement shall not constitute a waiver of
the rights granted herein with respect to any subsequent
default.
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20.3 TERMINATION UPON CLIENT'S MATERIAL BREACH. In the event of the
material breach by Client of any provision of this Agreement,
ALLTEL shall give Client written notice, and:
(a) If such breach is for Client's non-payment of amounts due
under this Agreement, Client shall cure such breach within
45 calendar days after receipt of such notice, or if for
Client's breach of its obligations under Section 21 with
respect to ALLTEL's Proprietary Information, Client shall
cure the breach within 15 calendar days after receipt of
such notice. If Client does not cure such breach by such
date (or in the case of a breach under Section 21 with
respect to ALLTEL's Proprietary Information is not working
diligently in good faith to cure such breach in cases where
a breach cannot reasonably be expected to be cured within
15 days), ALLTEL may, at its sole option, elect to
terminate this Agreement by giving written notice of such
election to Client (the "ALLTEL Termination Election
Date"). In such case, within 30 days after the ALLTEL
Termination Election Date, Client shall pay ALLTEL the
ALLTEL Damages (as such term is defined below). Client's
payment of or agreement to pay interest on any amount past
due shall in no way limit or prohibit ALLTEL's right to
terminate this Agreement in accordance with this Section
20.3(a).
(b) If such breach is for any failure by Client to perform in
accordance with this Agreement which, in the reasonable
judgment of ALLTEL, materially adversely affects ALLTEL,
ALLTEL may give notice of the breach and Client shall cure
such breach within 90 days after the date of such notice.
If Client does not cure such breach within such period (or
is not working diligently in good faith to cure such breach
in cases where a breach cannot reasonably be expected to be
cured within 90 days), then ALLTEL may, at its sole option,
elect to terminate this Agreement by giving written notice
of such election to Client which date shall constitute the
ALLTEL Termination Election Date. In such case, within 30
days after the ALLTEL Termination Election Date, Client
shall pay ALLTEL the ALLTEL Damages (as such term is
defined below).
(c) For the purposes of this Agreement, the ALLTEL Damages
solely shall consist of the following: (i) all unpaid
amounts due and owing to ALLTEL under the Agreement from
the date hereof up to and including the ALLTEL Termination
Election Date, (ii) a fee equal to the present value (using
a discount rate equal to the applicable U.S. Treasury bill
or note rate of an equivalent maturity) of fees due under
this Agreement from the day immediately following the
ALLTEL Termination Election Date through the end of the
Term had the termination not occurred multiplied by [.40,]
(iii) an amount equal to reasonable travel expenses,
relocation and severance expenses (in accordance with
ALLTEL's then current policy), and
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incentive payments to provide for the continued services of
ALLTEL's staff located at Client's facilities, (iv) an
amount equal to the undepreciated equipment and unamortized
software used to provide the Services under this Agreement,
and (v) an amount equal to any other shut-down expenses,
including, without limitation, relating to canceling
leases, licenses, and subcontractor agreements
(collectively the "ALLTEL Damages".
(d) The failure of ALLTEL to exercise any right to elect to
terminate this Agreement shall not constitute a waiver of
the rights granted herein with respect to any subsequent
default.
20.4 OPERATIONS DURING THE TERMINATION PERIOD. If either party properly
elects to terminate this Agreement in accordance with Sections
20.1, 20.2, 20.3 or 20.4 then Client shall have at least six
months from and after the date of the requisite ALLTEL Termination
Election Date or Client Termination Election Date to make
arrangements with respect to the conversion of all of Client's
data then resident on ALLTEL systems to the non-ALLTEL systems.
The date when all of Client's data have been substantially
converted to the non-ALLTEL Systems shall hereinafter be referred
to as the "Termination Completion Date" and shall be the effective
date of termination of this Agreement in such events. The
Termination Completion Date shall occur no sooner than six months,
and no later than twelve months, after the date of the requisite
ALLTEL Termination Election Date or Client Termination Election
Date. Provided that Client is current in all amounts due and owing
to ALLTEL, at the time of the ALLTEL Termination Election Date or
Client Termination Election Date, as well as during the period
between the ALLTEL Termination Election Date or Client Termination
Election Date (as appropriate) and the Termination Completion
Date, ALLTEL shall continue to render the Services to Client, with
such changes as Client and ALLTEL may agree upon, together with
such additional Services relating to such conversion as Client and
ALLTEL may agree. Client shall keep ALLTEL reasonably informed of
Client's decisions and activities with respect to such conversion.
Client also shall give ALLTEL written notice of Client estimated
Termination Completion Date promptly after a reasonably definitive
projected Termination Completion Date is known by Client, and
shall give written notice to ALLTEL promptly after any change in
such estimated Termination Completion Date.
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20.5 TRANSITIONAL COOPERATION.
(a) OFFER OF EMPLOYMENT. Client and ALLTEL agree not to solicit
or offer employment, directly or indirectly (including,
without limitation, through the use of any third party) to
any employee of the other without the prior written consent
of the other, except for clerical positions. The sole and
exclusive remedy for breach of this provision by either
party is for the breaching party to pay the non-breaching
party on amount equal to two (2) times the annual salary of
the subject employee.
(d) TRANSITION. ALLTEL will cooperate with Client to cause an
orderly and efficient transition. Without limiting the
generality of the foregoing, ALLTEL shall be obligated to
provide Client with data reasonably necessary for Client to
convert to or implement ALLTEL Systems, procedures, and
practices. ALLTEL's obligation shall be limited to: (i) the
provision of data or information in the format of, and
reasonably available to, ALLTEL; (ii) one test copy of such
data and one final conversion copy, and (iii) parallel
testing not exceeding one month, including parallel data
feeds.
(c) RETURN OF MATERIAL. Within 30 days after the Termination
Completion Date, ALLTEL, at Client's sole cost and expense,
will return all material and property owned by Client and
the Client affiliates as well as all material and property
of a proprietary nature involving Client and the Client
affiliates. In addition, upon Client's request, ALLTEL
agrees to provide to Client copies of Client data files,
records and programs on magnetic media, or to destroy
Client's data files, records and programs in its possession
and to certify promptly to Client as to the completed
destruction of these materials.
20.6 SURVIVAL UPON EXPIRATION OR TERMINATION. The provisions of
Sections 15 (Dispute Resolution), 16 (Limitation of Liability), 17
(Indemnification), 19 (Notices), 21 (Confidentiality), 23.2
(Omnibus Reconciliation Act Compliance), 23.6 (Governing Law),
23.12 (Press Release), and 23.13 (Taxes), shall survive the
Termination Completion Date of this Agreement, unless otherwise
agreed to in writing by both parties.
20.7 TERMINATION FOR CONVENIENCE. Client may terminate this Agreement
for convenience and without cause effective as of any date after
the third anniversary of the Start Date provided that Client is
not in default of any of its obligations under this Agreement by
(i) giving ALLTEL at least nine (9) months prior written notice
designating the termination date and (ii) paying ALLTEL an amount
computed as follows: One hundred eighteen thousand five hundred
dollars($118,500) multiplied by the number of months remaining
through 60
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months from the Start Date or in the alternative, times any months
remaining in any extension to the Agreement.
21. CONFIDENTIALITY.
21.1 CONFIDENTIALITY OBLIGATION. All information disclosed by Client or
ALLTEL to the other during the negotiations and the term of this
Agreement ("Proprietary Information") (i) shall be deemed the
property of the disclosing party, (ii) shall be used solely for
the purposes of administering and otherwise implementing the terms
of this Agreement and (iii) shall be protected by the receiving
party in accordance with the terms of this Section 21.
21.2 NON-DISCLOSURE COVENANT. The parties agree that they shall not
disclose any Proprietary Information of any other party in whole
or in part, including derivations, to any third party. If the
parties agree to a specific nondisclosure period for a specific
document, the disclosing party shall mark the document with that
nondisclosure period. Proprietary Information shall be held in
confidence by the receiving party and its employees, contractors
or agents and shall be disclosed to only those of the receiving
party's employees, contractors or agents who have a need for it in
connection with the administration and implementation of this
Agreement. The receiving party shall cause such contractors and
agents to execute confidentiality agreements in a form acceptable
to the disclosing party. The receiving party agrees to give the
disclosing party copies of any such confidentiality covenants
promptly upon request by the disclosing party
21.3 EXCEPTIONS. Proprietary Information shall not be deemed
proprietary and the receiving party shall have no obligation with
respect to any such information which:
(a) is or becomes publicly known through no wrongful act, fault
or negligence of the receiving party;
(b) was known by the receiving party prior to disclosure and
the receiving party was not under a duty of non-disclosure;
(c) was disclosed to the receiving party by a third party who
was free of obligations of confidentiality to the party
providing the information; (d) is approved for release by
written authorization of the disclosing party;
(e) is publicly disclosed pursuant to a requirement or request
of a governmental agency or disclosure is required by
operation of law; or
(f) is furnished to a third party by the disclosing party
owning the Proprietary Information without a similar
restriction on the third party's rights.
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The parties acknowledge that without in any way lessening the
proprietary nature of a party's Proprietary Information, either
party in accordance with the terms and conditions of this
Agreement shall be free at any time to develop the same or similar
Proprietary Information independently of disclosure by the
transmitting party.
21.4 CONFIDENTIALITY OF THIS AGREEMENT; PROTECTIVE ARRANGEMENTS.
(a) The parties acknowledge that this Agreement contains
confidential information that may be considered proprietary
by one or both of the parties, and agree to limit
distribution of this Agreement to those individuals in
their respective companies with a need to know the contents
of this Agreement. In no event may this Agreement be
reproduced or copies shown to any third parties by Client
or ALLTEL without the prior written consent of the other
party, except as may be necessary by reason of legal,
accounting or regulatory requirements beyond the reasonable
control of Client or ALLTEL as the case may be, in which
event Client and ALLTEL agree to exercise diligence in
limiting such disclosure to the minimum necessary under the
particular circumstances. The parties further agree to seek
commercial confidential status for this Agreement with any
regulatory commission with which this Agreement must be
filed, to the extent such a designation can be secured.
(b) In addition, each party agrees to give notice to the other
parties of any demands to disclose or provide Proprietary
Information received from the other or any third party
under lawful process prior to disclosing or furnishing
Proprietary Information, and agrees to cooperate in seeking
reasonable protective arrangements requested by the other
party. In addition, any party may disclose or provide
Proprietary Information of the other party requested by a
government agency having jurisdiction over the party;
provided that the party uses its best efforts to obtain
protective arrangements satisfactory to the party owning
the Proprietary Information. The party owning the
Proprietary Information may not unreasonably withhold
approval of protective arrangements.
22. OTHER REPRESENTATIONS, WARRANTIES AND COVENANTS.
22.1 LICENSES AND PERMITS AND COMPLIANCE WITH LAWS.
(a) LICENSES AND PERMITS. ALLTEL and Client shall each secure
and maintain in force all licenses and permits required of
it and its employees in the performance of this Agreement,
and shall conduct its business in full compliance with all
laws, ordinances and regulations applicable to its business
or applicable to the other party's business to the extent
that the
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other party has notified ALLTEL or Client, as the case may
be, of the specific laws, ordinances or regulations with
which the other party must comply.
(b) COMPLIANCE WITH LAWS. ALLTEL and Client shall each shall
comply, at its own expense, with the provisions of all
applicable municipal requirements and those state and
federal laws which may be applicable to each party in the
performance of their respective obligations under this
Agreement.
22.2 NO INTERFERENCE WITH CONTRACTUAL RELATIONSHIP. Each party warrants
that, as of the date hereof, it is not subject to any contractual
obligation that would prevent it from entering into this
Agreement. Client and ALLTEL each further warrant to the other
that entering into this Agreement shall not cause or induce it to
breach any of its other contractual obligations.
22.3 COVENANT OF GOOD FAITH. Each of the parties agree that, in its
respective dealings with each other party arising out of or
related to this Agreement, it shall act fairly and in good faith.
22.4 NO INFRINGEMENT.
(a) ALLTEL SOFTWARE. ALLTEL warrants to Client that (i) ALLTEL
has the right to furnish the Services provided to Client
hereunder free of all liens, claims, encumbrances and other
restrictions, and (ii) Client shall quietly and peacefully
possess the ALLTEL Software, ALLTEL provided Third Party
Software, documentation and other materials provided to
Client hereunder, subject to and in accordance with the
provisions of this Agreement. Each of ALLTEL warranties set
forth above, as well as the patent and trademark indemnity
provisions of Section 17.2 hereof, shall apply to the
Services and to all enhancements, modifications or changes
thereto.
(b) CLIENT SOFTWARE. Client warrants to ALLTEL that (i) Client
has the right to furnish Client Resources (including,
without limitation, Client Software, Client provided Third
Party Software, documentation and other materials) provided
to ALLTEL hereunder and ALLTEL has the right to use the
Client Resources (including, without limitation, Client
Software, Client provided Third Party Software,
documentation and other materials), in each case, free of
all liens, claims, encumbrances and other restrictions,
and (ii) ALLTEL shall quietly and peacefully possess Client
Software, Client provided Third Party Software,
documentation and other materials provided to ALLTEL
hereunder, subject to and in accordance with the
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provisions of this Agreement. Each of Client's warranties
set forth above, as well as the patent and trademark
indemnity provision of Section 17.3 hereof, shall apply to
the Services and to all enhancements, modifications or
changes thereto.
22.5 AUTHORIZATION AND EFFECT.
(a) The execution and delivery by ALLTEL of its obligations
under this Agreement have been duly authorized by all
necessary corporate action on the part of ALLTEL. This
Agreement has been duly executed and delivered by ALLTEL
and, assuming the due execution and delivery of this
Agreement by Client, constitutes a valid and binding
obligation of ALLTEL, except as the same maybe limited by
bankruptcy, insolvency, reorganization, moratorium or
similar laws relating to or affecting the enforcement of
creditor's rights generally, and subject to the
qualification that general equitable principles may limit
the enforcement of certain remedies, including the remedy
of specific performance.
(b) The execution and delivery by Client of this Agreement and
the fulfillment of its obligations under this Agreement
have been duly authorized by all necessary corporate action
on the part of Client. This Agreement has been duly
executed and delivered by Client and, assuming the due
execution and delivery of this Agreement by ALLTEL,
constitutes a valid and binding obligation of Client,
except as the same may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws
relating to or affecting the enforcement of creditor's
rights generally, and subject to the qualification that
general equitable principles may limit the enforcement of
certain remedies, including the remedy of specific
performance.
22.6 NO ADDITIONAL REPRESENTATIONS OR WARRANTIES. Except as provided in
this Agreement, ALLTEL IS MAKING NO representation or warranty of
any kind, express, implied or statutory, including but not limited
to the implied warranties of merchantability and fitness for a
particular purpose, and CLIENT AGREES THAT all such other
representations and warranties that are not provided in this
agreement are hereby excluded and disclaimed.
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23. MISCELLANEOUS.
23.1 INDEPENDENT CONTRACTOR. It is agreed that ALLTEL is an independent
contractor and that:
(a) CLIENT SUPERVISOR POWERS. Client has no power to supervise,
give directions or otherwise regulate ALLTEL's operations
or its employees, except as herein provided for security of
Client's data and detection of errors in processing.
(b) ALLTEL'S EMPLOYEES. ALLTEL shall be solely responsible for
payment of compensation to its personnel and for any injury
to them in the course of their employment. ALLTEL shall
assume full responsibility for payment of all federal,
state and local taxes or contributions imposed or required
under unemployment insurance, social security and income
tax laws with respect to such persons.
(c) RELATIONSHIP. The parties declare and agree that each party
is engaged in a business which is independent from that of
the other party and each party shall perform its
obligations as an independent contractor. Neither party is
an agent of the other party and has no authority to
represent the other party as to any matters, except as
authorized herein.
23.2 OMNIBUS RECONCILIATION ACT COMPLIANCE. As applicable under the
Omnibus Reconciliation Act of 1980, until the expiration of 4
years after the furnishing of Services under this Agreement,
ALLTEL shall, upon receipt of written request, and if then
required to make such information available under the
then-existing law, make available to the Secretary of the United
States Department of Health and Human Services, the Comptroller
General, or any of their duly authorized representatives, this
Agreement, books, documents, and/or records of ALLTEL that are
necessary to certify the nature and extent of products and
services delivered under this Agreement and costs associated
therewith. In addition, if ALLTEL carries out any of the duties of
this Agreement through a subcontract with a value or cost of
$10,000.00 or more over a 12 month period, such subcontract will
contain a clause to the effect that, until the expiration of 4
years after the furnishing of such services under such
subcontract, the subcontractor shall, upon receipt of written
request and if then required to make such information available
under the then-existing law, make available to the Secretary of
the United States Department of Health and Human Services,
Comptroller General, or any of their duly authorized
representatives, the subcontract, books, documents, and/or records
of such subcontractor that are necessary to verify the nature and
extent of such costs.
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23.3 ASSIGNMENT. Neither party shall assign, delegate, or otherwise
convey or transfer (the "Assignment") its rights, interests or
obligations under this Agreement to any person or entity without
the prior written consent of the other party which consent shall
not be unreasonably denied, delayed or limited. All obligations
and duties of any party under this Agreement shall be binding on
all successors in interest and permitted assigns of such party. If
the other party consents to the Assignment, the proposed assignee
or transferee shall, upon completion of the Assignment,
automatically succeed to the corresponding rights, interests, and
obligations of the assigning and transferring party and shall be a
successor of such party for purposes of this Agreement. ALLTEL
recognizes that Client anticipates temporarily transferring
substantially all of its assets to a new entity, New Beverly
Holding, Inc. then back to Client for the purpose of divesting its
pharmacy operations. ALLTEL hereby consents to such transfer.
23.4 SEVERABILITY. In the event that any one or more of the provisions
contained herein shall for any reason be held to be unenforceable
in any respect under law, such unenforceability shall not affect
any other provision of this Agreement, but this Agreement shall be
construed as if such unenforceable provision or provisions had
never been contained herein, provided that the removal of such
offending term or provision does not materially alter the burdens
or benefits of either of the parties under this Agreement or any
Service Attachment.
23.5 THIRD PARTY BENEFICIARIES. The provisions of this Agreement are
for the benefit of the parties and not for any other person.
However, should any third party institute proceedings, this
Agreement shall not provide any such person with any remedy,
claim, liability, reimbursement, cause of action, or other right.
23.6 GOVERNING LAW. Except as otherwise expressly provided in this
Agreement and Exhibits, this Agreement shall be deemed to be a
contract made under the laws of the State of Arkansas and the
construction, interpretation, and performance of this Agreement
and Exhibits and all transactions hereunder shall be governed by
the substantive law of such State. All judicial proceedings to be
brought with respect to this Agreement shall be brought in the
appropriate federal or state court in the state of Arkansas (the
"Courts") and by execution and delivery of this Agreement, Client
and ALLTEL each accepts general and unconditionally the exclusive
jurisdiction of the Courts. Client and ALLTEL also each
irrevocably waives any objection (including, without limitation,
any objection of the laying of venue based on the grounds of forum
non-conveniens) which Client or ALLTEL may now have or hereafter
may have to the bringing of any new action or proceeding with
respect to this Agreement in the Courts.
23.7 EXECUTED IN COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be an original, but such
counterparts shall together constitute but one and the same
document.
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23.8 CONSTRUCTION. The headings and numbering of sections in this
Agreement are for convenience only and shall not be construed to
define or limit any of the terms or affect the scope, meaning or
interpretation of this Agreement or the particular section to
which they relate. This Agreement and the provisions contained
herein shall not be construed or interpreted for or against any
party because that party drafted or caused its legal
representative to draft any of its provisions.
23.9 ENTIRE AGREEMENT. This Agreement, including the Exhibits attached
hereto and the agreements referenced herein constitute the entire
Agreement between the parties, and supersedes all prior oral or
written agreements, representations, statements, negotiations,
understandings, proposals and undertakings, with respect to the
services to be provided by ALLTEL to Client.
23.10 AMENDMENTS AND WAIVERS. This Agreement may be amended only by
written agreement signed by duly authorized representatives of
each party. No waiver of any provisions of this Agreement and no
consent to any default under this Agreement shall be effective
unless the same shall be in writing and signed by or on behalf of
the party against whom such waiver or consent is claimed. No
course of dealing or failure of any party to strictly enforce any
term, right or condition of this Agreement shall be construed as a
waiver of such term, right or condition. Waiver by either party of
any default by the other party shall not be deemed a waiver of any
other default.
23.11 REMEDIES CUMULATIVE. Unless otherwise provided for under this
Agreement, all rights of termination or cancellation, or other
remedies set forth in this Agreement, are cumulative and are not
intended to be exclusive of other remedies to which the injured
party may be entitled by law or equity in case of any breach or
threatened breach by the other party of any provision in this
Agreement. Use of one or more remedies shall not bar use of any
other remedy for the purpose of enforcing any provision of this
Agreement.
23.12 PRESS RELEASES. The parties shall consult with each other in
preparing any press release, public announcement, news media
response or other form of release of information concerning this
Agreement or the transactions contemplated hereby that is intended
to provide such information to the news media or the public (a
"Press Release"). Neither party shall issue or cause the
publication of any such Press Release without the prior written
consent of the other party; except that nothing herein will
prohibit either party from issuing or causing publication of any
such Press Release to the extent that such action is required by
applicable law or the rules of any national stock exchange
applicable to such party or its affiliates, in which case the
party wishing to make such disclosure will, if practicable under
the circumstances, notify the other party of the proposed time of
issuance of such Press Release and consult with and allow the
other party reasonable time to comment on such Press Release in
advance of its issuance.
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23.13 TAXES. All charges and fees to be paid by Client are exclusive of
any applicable sales, use, excise or services tax which may be
assessed on the provision of the Services. In the event that a
sales, use, excise or services tax is assessed on the provision of
any of the Services provided to Client under this Agreement,
Client will pay directly or reimburse ALLTEL for such taxes. The
parties will cooperate with each other in determining the extent
to which any tax is due and owing under the circumstances, and
shall provide and make available to each other any resale
certificates, information regarding out-of-state use of materials,
services or sale, and other exemption certificates or information
reasonably requested by either party. The parties also agree to
work together to segregate all payments under this Agreement into
three payment streams, those for taxable services, those for
non-taxable services, and those in which ALLTEL functions as a
payment agent for Client in receiving goods, supplies or services
(including leasing and licensing arrangements) that otherwise are
nontaxable or have previously been subject to tax.
IN WITNESS WHEREOF, the parties, acting through their authorized officers, have
caused this Agreement to be duly executed and delivered as of the date first
above written.
ALLTEL INFORMATION BEVERLY ENTERPRISES,
SERVICES, INC. INC.
By: By:
-------------------------------- -----------------------------------
Name: Name:
------------------------------ ---------------------------------
Title: Title:
----------------------------- --------------------------------
Date: Date:
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EXHIBIT 10.43
CORPORATE INTEGRITY AGREEMENT
BETWEEN THE
OFFICE OF INSPECTOR GENERAL
OF THE
DEPARTMENT OF HEALTH AND HUMAN SERVICES
AND
BEVERLY ENTERPRISES, INC.
A. PREAMBLE
Beverly Enterprises, Inc., hereby enters into this Corporate Integrity
Agreement ("CIA") with the Office of Inspector General ("OIG") of the United
States Department of Health and Human Services ("HHS") to ensure compliance by
Beverly Enterprises, Inc. and the subsidiaries and affiliates through which it
operates (these entities are collectively referred to hereinafter as "Beverly"),
and Beverly's officers, directors and employees with the requirements of
Medicare, Medicaid and all other Federal health care programs (as defined in 42
U.S.C. Section 1320a-7b(f)) (hereinafter collectively referred to as the
"Federal health care programs.") Beverly's compliance with the terms and
conditions in this CIA shall constitute an element of Beverly's present
responsibility with regard to participation in the Federal health care programs.
Contemporaneously with this CIA, Beverly is entering into a Settlement Agreement
with the United States, and this CIA is incorporated by reference into the
Settlement Agreement.
II. TERM OF THE CIA
The period of the compliance obligations assumed by Beverly under this
CIA shall be nine years from the effective date of this CIA, or for the period
of time Beverly remains obligated by the payment terms of the Settlement
Agreement, whichever is shorter, but in any event for not less than five years.
The effective date of this CIA will be the date on which the final signatory of
this CIA executes this CIA.
II. CORPORATE INTEGRITY OBLIGATIONS
Beverly currently operates a Compliance Program. Beverly agrees that
during the term of this CIA, its Compliance Program will be operated in a manner
that meets the requirements of this CIA.
A. Compliance Officers and Committees. Beverly shall maintain or
establish the following positions and committees during the term of this CIA. If
Beverly changes its structure in a way that affects these positions and
committees, Beverly shall ensure that under the new structure Beverly devotes at
least equal resources to its Compliance Program as are devoted under the
structure described in this section.
1. Audit and Compliance Committee of the Board of Directors.
Beverly currently has an Audit Committee and a Litigation/Compliance Committee
of the
<PAGE> 2
Board of Directors and will maintain during the term of this CIA an Audit and
Compliance Committee of the Board of Directors (the "Board Committee") comprised
of four or more outside directors of Beverly Enterprises, Inc. The Board
Committee shall be responsible for the review of matters related to the
Compliance Program, this CIA, and compliance with requirements of Federal health
care programs. The Board Committee shall meet at least semi-annually. When new
members of the Board Committee are appointed or the responsibilities or
authorities of the Board Committee are substantially changed, Beverly shall
notify the OIG, in writing, within 15 days of such a change.
2. Compliance Officer. Beverly has appointed a Compliance
Officer, who is and shall be responsible for developing and implementing
policies, procedures, and practices designed to ensure compliance with the
requirements of Federal health care programs and the obligations set forth in
this CIA. The Compliance Officer shall be a member of senior management of
Beverly (i.e., not subordinate to Beverly's general counsel or CFO) with
unrestricted access to the Board Committee, who shall make regular (at least
semi-annual) reports regarding compliance matters directly to the CEO and the
Board Committee, and who shall be authorized to report to the Board Committee at
any time. The Compliance Officer is and shall remain responsible for monitoring
the day-to-day activities engaged in by Beverly to further its compliance
objectives as well as for any reporting obligations created under this CIA. The
Compliance Officer, or his or her designees who have been directed to bring all
issues concerning Beverly's compliance with Federal health care program
requirements to the attention of the Compliance Officer, shall also review the
portions of all Beverly internal audit reports that relate to Federal health
care program compliance and take all reasonable steps to ensure that problems
identified by the Compliance Program or internal audits are appropriately
addressed through corrective action plans. In the event a new Compliance Officer
is appointed during the term of this CIA, Beverly shall notify the OIG, in
writing, within 15 days of such a change. Should it become necessary to pursue
employment of a new Compliance Officer, Beverly shall appoint an acting
Compliance Officer who shall be granted authority equal to that of the
Compliance Officer.
3. Compliance Committee. Beverly has appointed a Compliance
Working Group ("Compliance Committee"). The Compliance Committee includes and
shall continue to include the Compliance Officer and other appropriate officers
and/or department heads as necessary to meet the requirements of this CIA within
Beverly's corporate structure (e.g., representatives of each major function,
such as internal audit, quality management, labor relations, Medicare coverage
and compliance group, prospective payment group, and regulatory review group).
The Compliance Officer shall chair the Compliance Committee and the Committee
shall support the Compliance Officer in fulfilling his/her responsibilities.
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4. Compliance Liaisons. Beverly has designated its Group Vice
Presidents as Compliance Liaisons. During the term of this CIA, Group Vice
Presidents (or their compliance equivalent within Beverly) shall perform the
role of Compliance Liaisons. Compliance Liaisons are and shall continue to be
responsible for monitoring and ensuring execution of the Compliance Program and
the relevant requirements of this CIA at their operational level and at the
groups and Beverly facilities for which the Compliance Liaison is responsible.
Compliance Liaisons are and shall remain responsible for: providing leadership
and support regarding compliance issues at the group and facility levels;
developing and distributing written compliance-related materials; ensuring the
provision of appropriate training and the proper documentation of such training;
ensuring the appropriate distribution of internal and external audit reports and
monitoring of corrective action related to such reports or other identified
compliance-related issues; ensuring proper reporting and responses to
compliance-related issues; and monitoring facilities' Executive Directors and
group-level staff in the execution of their compliance- related functions.
Compliance Liaisons shall be responsible for supervising staff at each group
level who will assist the Compliance Liaison in fulfilling his or her compliance
functions. Group level compliance functions are currently performed by Group
Vice Presidents, group HR managers, group business office consultants and group
clinical managers/nurse consultants. If these group functions change, Beverly
shall devote equal resources to the group-level compliance functions. Compliance
Liaisons shall certify annually that all plans of correction related to
identified problems in facilities or Beverly operations for which they are
responsible have been implemented and that all Compliance Program concerns have
been reported. Such certifications shall be maintained by the Compliance Officer
and shall be available to the OIG upon request. False certifications by the
Compliance Liaison shall be grounds for immediate termination, and proper
execution of Compliance Liaison duties shall be a major component of the
performance evaluations of Group Vice Presidents (or the Compliance Liaison
equivalent within Beverly).
5. Executive Directors. Each Beverly facility is managed by an
Executive Director. The Executive Directors will continue to be responsible for
compliance in their facilities. Execution of compliance duties shall be a major
component of the performance evaluations of Executive Directors. Should it
become necessary to pursue employment of a new Executive Director, Beverly shall
appoint an acting Executive Director who shall be granted authority equal to
that of the Executive Director to carry out all required duties, including those
with respect to Beverly's Compliance Program.
A. Written Standards.
1. Code of Conduct. Beverly has established a Code of Conduct
and Business Ethics ("Code of Conduct").
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a. CONTENTS. The Code of Conduct includes and shall
continue to include the following:
1) Beverly's commitment to full compliance with all
statutes, regulations, and guidelines applicable to
Federal health care programs, including its
commitment to prepare and submit accurate billings
and reports consistent with Federal health care
program statutes, regulations, procedures and
instructions otherwise communicated by appropriate
regulatory agencies, e.g., the Health Care Financing
Administration ("HCFA"), and/or fiscal intermediaries
or carriers;
2) Beverly's requirement that all of its covered
persons shall be expected to comply with all
statutes, regulations, and guidelines applicable to
Federal health care programs and with Beverly's own
Policies and Procedures (including the requirements
of this CIA);
3) the requirement that all of Beverly's covered
persons shall be expected to report suspected
violations of any statute, regulation, or guideline
applicable to Federal health care programs or of
Beverly's own Policies and Procedures;
4) the possible consequences to both Beverly and
covered persons of failure to comply with all
statutes, regulations, and guidelines applicable to
Federal health care programs and with Beverly's own
Policies and Procedures or of failure to report such
non-compliance; and
5) the right of all covered persons to use the
Confidential Disclosure Program, as well as Beverly's
commitment to confidentiality and non-retaliation
with respect to disclosures.
b. DEFINITIONS. For the purposes of this CIA, a
"covered person" is any of Beverly's officers, directors or employees who
provide patient-care to Federal health care program beneficiaries or who are
involved in Beverly's billings or related submissions to Federal health care
programs.
c. DISTRIBUTION AND CERTIFICATION. Beverly currently
requires the Code of Conduct to be distributed to all employees during each
employee's orientation and thereafter, as revisions occur or replacement copies
are needed. Within 90 days of the effective date of this CIA, Beverly shall
distribute the Code of Conduct to all covered persons who have not already
received a copy of the current Code of Conduct. Within 90 days of the effective
date of the CIA, each covered person shall certify, in writing, that he or she
has received, read, understands, and will abide by Beverly's Code of Conduct.
New covered persons shall continue to receive the Code of
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Conduct during orientation and shall complete the required certification within
30 days after becoming a covered person or within 90 days of the effective date
of the CIA, whichever is later. The certifications required by this section
shall be made available to the OIG upon request. The promotion of, and adherence
to, the Code of Conduct is and shall continue to be an element in evaluating the
performance of all covered persons. Beverly will annually review the Code of
Conduct and will revise or supplement it as necessary. Beverly shall distribute
revisions and supplements to the Code of Conduct to covered persons within 30
days of such changes being completed. Covered persons shall certify on an annual
basis that they have received, read, understand and will abide by the Code of
Conduct.
d. COVERED CONTRACTOR REQUIREMENTS. For each of its
Covered Contractors, Beverly shall: (1) require in its contract with the Covered
Contractor that the Covered Contractor acknowledges Beverly's Compliance Program
and Code of Conduct; (2) ensure that the Code of Conduct is provided (either by
Beverly or the Covered Contractor) to all Covered Contractors; (3) require in
the contract with the Covered Contractor that the Covered Contractor obtain and
retain (subject to review by Beverly and/or the OIG) signed certification from
all of its employees who provide patient care to Federal health care program
beneficiaries at Beverly facilities that they have received, read, and
understand the Code of Conduct and agree to abide by the requirements of the
Compliance Program. Beverly shall require future contracts with Covered
Contractors to include the above-described provisions. Within 90 days of the
execution of this CIA, Beverly shall attempt in good faith to reform contracts
with its then-current Covered Contractors to include a provision pursuant to
which the contractors will provide assurance satisfactory to Beverly that these
requirements will be met. For the purposes of this CIA, a "Covered Contractor"
is an entity (or individual) that, although not a covered person, nevertheless
provides patient care to Federal health care program beneficiaries in Beverly
facilities or participates in Beverly's billings or related submissions to
Federal health care programs for Beverly on a regular basis (i.e., more often
than two weeks over a 52-week period).
2. Policies and Procedures. Beverly has developed written
Policies and Procedures regarding its Compliance Program and its compliance with
relevant Federal and state health care statutes, regulations, and guidelines,
including the requirements of the Federal health care programs. Beverly shall
continue to assess and update as necessary the Policies and Procedures at least
annually and more frequently, as appropriate. The Policies and Procedures will
be available to OIG upon request. Beverly shall continue to ensure that relevant
portions of the Policies and Procedures are distributed to the appropriate
covered persons. Compliance staff or supervisors are and
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shall continue to be available to explain any and all Policies and Procedures.
At a minimum, the Policies and Procedures shall specifically address:
a. measures intended to ensure that Beverly fully
complies with the particular provisions of Titles XVIII and XIX of the Social
Security Act, 42 U.S.C. Sections 1395-1395ggg (1999) and 1396-1396v (1997), and
all regulations (including but not limited to 42 C.F.R. Parts 442 and 483) and
guidelines promulgated pursuant to these statutes, including:
1) consistent with the provisions of 42
C.F.R. Part 483, policies requiring use of a coordinated interdisciplinary
approach to providing care to patients, including, but not limited to, policies
addressing resident assessment and care planning; nutrition, diabetes care and
wound care; infection control; abuse and neglect policies and reporting
procedures; appropriate drug therapies; appropriate mental health services;
provision of basic care needs; incontinence care; resident rights and restraint
use; activities of daily living (ADL) care; therapy services; quality of life,
including accommodation of needs and activities; and assessment of patient
competence to make treatment decisions; and
2) policies addressing compliance with the
requirements applicable to Medicare's Prospective Payment System ("PPS") for
skilled nursing facilities, including, but not limited to, billing and cost
report preparation policies and procedures;
b. measures designed to ensure that compliance issues
identified internally (e.g., through reports to supervisors, internal audits) or
externally (e.g., audits performed by Beverly's audit or accounting firm(s) or
any other externally performed reviews) are promptly and appropriately
investigated and, if the investigation substantiates compliance issues, Beverly
implements appropriate corrective action plans and monitors compliance with such
plans;
c. non-retaliation policies and methods for employees
to make disclosures or otherwise report on compliance issues to Beverly
management through the Confidential Disclosure Program required by section
III.E; and
d. disciplinary policies designed to ensure that
individuals whose conduct has contributed to a violation of Beverly's Compliance
Program or of Federal health care program requirements are retrained, and/or
disciplined, and/or terminated, as appropriate.
C. Training and Education. Beverly shall continue to conduct
semi-annual training programs and shall ensure that the training meets the
following requirements. The training requirements are cumulative (not exclusive)
so that one person may be required to attend training in both general and
substantive areas. Persons providing the training must continue to be
knowledgeable about the relevant subject area. All training
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requirements set forth below shall become effective within 90 days of the
effective date of this CIA and shall be repeated annually during the term of the
CIA.
1. General Training. Beverly shall continue to conduct and
document training regarding its Compliance Program and Code of Conduct for each
covered person. As part of its first semi-annual training program conducted
following implementation of this CIA, Beverly will provide general training to
each covered person. Beverly shall provide at least two hours of general
training to each covered person during each year while the CIA is in effect.
This general training shall explain Beverly's:
a. Corporate Integrity Agreement requirements;
b. Compliance Program (including the Policies and
Procedures as they pertain to general compliance issues); and
c. Code of Conduct.
2. Specific Training. Each covered person who is involved
directly in the delivery of patient care or in the preparation or submission of
information (including claims, bills, and reports) to any Federal health care
program will continue to receive specific training pertinent to his or her
responsibilities (as described below) in addition to the general training
provided above. At least annually, two hours of specific training to covered
persons who are involved directly in the delivery of patient care or in the
preparation or submission of information (including claims, bills, and reports)
to any Federal health care program will include a discussion of:
a. the submission of accurate information, e.g.,
Minimum Data Set ("MDS"), to Federal health care programs, if
relevant to the person's duties;
b. policies, procedures and other requirements
applicable to the documentation of medical records, if
relevant to the person's duties;
c. the personal obligation of each individual
involved in the patient care, documentation, or reimbursement
processes to ensure that such information provided is
accurate;
d. applicable statutes, regulations, program
requirements and directives relevant to the person's duties;
e. the legal sanctions for improper submissions to
Federal health care programs; and
f. examples of relevant billing practices found to
have been improper.
3. New Covered Persons. New covered persons shall be cycled
into Beverly's training programs and shall participate in the next training
cycle after they become a covered person. New covered persons involved directly
in the delivery of patient care or in the preparation or submission of
information (including claims, bills,
<PAGE> 8
and reports) to any Federal health care program shall be supervised by trained
covered persons until they have completed the specific training relevant to
their delivery of patient care and/or their preparation or submission of
information to Federal health care programs. New covered persons involved
directly in the delivery of patient care or in the preparation or submission of
information (including claims, bills, and reports) to any Federal health care
program shall have begun to receive specific training within 30 days of
employment, and shall have completed specific training within 90 days of
employment.
4. Certifications and Retention. An attendance log shall
document the attendance of each person who is required to attend training. The
Executive Director, Compliance Liaison or other person providing the training
shall certify the accuracy of the attendance log. The attendance log shall
specify the type of training received and the date received. The Compliance
Officer shall retain the attendance logs and certifications as well as the
specific course materials and make all of these logs, certifications and
materials available to OIG upon request.
D. Review Procedures. Beverly performs certain reviews as part of its
Compliance Program and its ongoing operations. Beverly will continue these
reviews and modify them as necessary to comply with certain additional reviews
required by this CIA. The review procedures described in this section shall be
performed on an annual basis for each calendar year during the term of this CIA.
The Annual Reports required by this CIA will include reports on the findings and
results of all of the review procedures required by this section during the year
covered by that Annual Report.
1. Statistical Sampling and Appraisal Method. All matters
related to this CIA that involve statistical sampling or appraisal shall be
conducted using the OIG's Office of Audit Services Statistical Sampling
Software, also known as "RAT-STATS," available on the Internet at
www.hhs.gov/oas/ratstat.html. Wherever the CIA requires the use of a random
sample, the sample shall be selected and appraised using RAT-STATS and Beverly
shall retain all of the supporting documentation related to the selection and
appraisal of the samples.
2. Beverly Quality Reviews. Beverly currently performs Quality
Reviews under its "Beverly Quality System." The Quality Reviews (including
Quality Review Follow-ups) are described in a June 1999 notebook, which Beverly
has furnished to the OIG. Beverly shall continue to conduct its Quality Reviews
in the manner described in the June 1999 notebook or in a manner that devotes at
least equal resources to performing the function of quality review at Beverly
Facilities. Beverly shall notify the OIG within 15 days of any material changes
to the form, manner, or frequency of these Quality Reviews.
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3. Independent Review Organization. Beverly shall retain an
entity, such as an accounting, auditing or consulting firm (hereinafter
"Independent Review Organization" or "IRO"), to perform review procedures to
assist Beverly and the OIG in assessing the adequacy of Beverly's submissions to
Federal health care programs and its compliance with this CIA. The IRO must be
independent from Beverly and must have expertise in the billing, reporting and
other requirements of the Federal health care programs from which Beverly seeks
reimbursement. The IRO must be retained to conduct the review of the first year
(2000) within 120 days of the effective date of this CIA. The IRO shall produce
a separate report for each engagement. The IRO will conduct two separate types
of engagements. One will be an analysis of Beverly's claims submissions to the
Federal health care programs to assist Beverly and OIG in determining compliance
with all applicable statutes, regulations, and directives/guidance ("submissions
engagement"). The submissions engagement will assess, in part, Beverly's
internal audits, which are described below. The second engagement will determine
whether Beverly is in compliance with this CIA ("compliance engagement").
4. Beverly's MDS (Minimum Data Set) Audit. Beverly's Internal
Audit Department ("Internal Audit") shall implement and oversee an MDS Audit,
which will review Medicare (Part A) claims and will focus on the minimum data
set ("MDS"). Beverly shall ensure that the MDS Audit is conducted by qualified
individuals (including, but not limited to, clinical and medical personnel). To
the extent any facility personnel are involved in the MDS Audits, Beverly shall
ensure that the individual who was involved in preparing the original claim
(including through input in the entries on the MDS) on behalf of a Beverly
facility is not involved in the review of that particular facility's claims
submissions to Federal health care programs. In order to ensure the integrity of
the MDS Audit process, Beverly will issue a policy emphasizing the importance of
accurately completing the reviews discussed below, and the possible
consequences, up to and including termination, for failure to comply with this
policy. The MDS Audit shall consist of a variable appraisal (dollar amount in
error) sample. Because this engagement is designed as a variable appraisal, for
the purposes of determining dollar amounts associated with errors, the final
sampling unit will be a single claim (UB-92) and each associated MDS.
The MDS Audit shall consist of a two-stage process of claim reviews.
The first stage shall be conducted using a random sample of a minimum of 15% of
Beverly's facilities, but in no event less than seventy-five (75) facilities.
Beverly shall retain copies of all of its work papers compiled with respect to
its internal audits, which work papers shall be available to the OIG upon
request.
a. FIRST STAGE. The first stage of the MDS Audit
shall consist of a probe sample of thirty (30) claims at each facility selected
as part of the random sample.
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The Compliance Officer, or his or her designee, shall select a stratified random
sample of paid Medicare claims (UB-92) throughout the year for each of the
facilities previously selected by the Compliance Officer. The probe sample
cannot be used as part of any full sample reviewed during the second stage of
the MDS Audit. The probe sample will be used to identify facilities that have
exceeded a designated financial error rate and to determine the appropriate
sample sizes for expanded sample reviews of the designated facilities in
accordance with specified RAT-STATS parameters.
b. SELECTION OF FACILITIES FOR SECOND STAGE. The
second stage of the MDS Audit will be performed for each individual facility
selected as part of the probe sample for which the financial error rate (i.e., a
downward change in a Resource Utilization Group ("RUG") assignment that would
result in an over-payment) in the first stage was greater than 5%. Nothing in
this section shall relieve Beverly of its responsibility to correct inaccuracies
noted in its probe sample. (The 5% financial error threshold only applies to
criteria for sample expansion, not for extrapolation of an error rate.)
c. SECOND STAGE. The second stage shall be a full
sample of Medicare paid claims (UB-92) (randomly selected by Internal Audit
using the RAT-STATS software referenced above) during the annual reporting
period by each applicable facility. This sample shall be selected at the end of
each year. The full sample must contain a sufficient number of sample units to
generate sample results that provide, at a minimum, a 90% confidence interval
and a maximum precision (relative precision, i.e., semi-width of the confidence
interval) of plus or minus 25% of the point estimate (i.e., the upper and lower
bounds of the 90% confidence interval shall not exceed 125% and shall not fall
below 75% of the midpoint of the confidence interval, respectively).
d. CLAIM REVIEWS. For each claim selected in the
first and second stage, the associated MDS and the medical record documentation
supporting the MDS will be reviewed. The review process shall entail an
evaluation of the MDS and verification that each entry that affects the RUG code
outcome for the MDS is supported by the medical record for the corresponding
period of time consistent with the assessment reference date ("ARD") specified
on the MDS. In addition, data from the MDS will be re-entered into Beverly's
Grouper (MDS data entry software program) to verify that the correct RUG code
assignment was properly assigned on the UB-92. A financial error will be logged
if there is insufficient support for an MDS data point(s) that results in a
downward change in RUG assignment that would result in an overpayment.
5. Ongoing Internal Audits. If Beverly becomes aware that any
facilities (including those not selected to be included as part of an annual MDS
Audit) are potentially experiencing noncompliance with the Federal health care
program requirements for claims submissions, Beverly shall, after reasonably
determining further
<PAGE> 11
review is warranted, in addition to its other CIA obligations, conduct an
internal audit to review the situation. If warranted, Internal Audit shall
obtain a plan of correction and conduct appropriate follow-up to ensure that any
inappropriate or improper practice related to claims submission identified is
appropriately addressed, and shall report all such instances to the OIG, as
specified in this CIA.
6. Submissions Engagement. The Submissions Engagement shall be
performed by the aforementioned Independent Review Organization. As part of the
Submissions Engagement, the IRO shall review Beverly's performance of the MDS
Audit. The IRO shall review and evaluate the processes and controls used by
Internal Audit in the MDS Audit. In addition, the IRO shall conduct its own
analysis of a random sample of 10% of the claims reviewed in the MDS Audit. The
reviews conducted by the IRO will follow the same standards set forth above with
respect to the manner in which Internal Audit is to implement and oversee its
review process, including, but not limited to, an evaluation of the MDS and
verification that each entry that affects the RUG code outcome for the MDS is
supported by the medical record. With respect to the entry of MDS data, the
Independent Review Organization shall use its own MDS data entry software
program to compare resulting outputs (i.e., RUGs).
The results of the reviews performed by Internal Audit and the
reviews performed by the IRO will be communicated to the OIG in the annual
report. Each annual Submission Engagement analysis shall include the following
components in its methodology:
1. Submissions Engagement Objective: a clear statement of the
objective intended to be achieved by the submissions engagement and the
procedure or combination of procedures that will be applied to achieve
the objective.
2. Submissions Engagement Population: the identity of the
population, which is the group about which information is needed and an
explanation of the methodology used to develop the population and
provide the basis for this determination.
3. Sources of Data: a full description of the source of the
information upon which the submissions engagement conclusions will be
based, including the legal or other standards applied, documents relied
upon, payment data, and/or any contractual obligations.
4. Sampling Unit: a definition of the sampling unit (submitted
claim), which is any of the designated elements that comprise the
population of interest.
5. Sampling Frame: the identity of the sampling frame, which
is the totality of the sampling units from which the sample will be
selected.
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The Submissions Engagement shall provide:
a. findings regarding Beverly's documentation, billing, and
reporting (e.g., reporting of MDS and other information
relevant to RUG) operations (including, but not limited to,
the operation of the reporting system, strengths and
weaknesses of this system, internal controls, effectiveness of
the system);
b. findings regarding whether Beverly is submitting accurate
claims and resident assessments (MDS);
c. findings regarding Beverly's procedures and adequacy of
controls to correct inaccurate claims and resident assessments
(MDS);
d. findings regarding whether Beverly has complied with its
obligations under the Settlement Agreement: (1) not to
resubmit to any Federal health care program payers any
previously denied claims related to the conduct addressed in
the Settlement Agreement, and its obligations not to appeal
any such denials of claims for any reason associated with the
conduct addressed in the Settlement Agreement; and (2) not to
charge to, or otherwise seek payment from, Federal payers for
unallowable costs (as defined in the Settlement Agreement) and
its obligations to identify and adjust any past charges of
unallowable costs; and
e. findings regarding the steps Beverly is taking and adequacy of
controls to bring its operations into compliance or to correct
problems (including whether Beverly has effectively
implemented corrective action plans to address such problems)
identified by these engagements, internal or external audits,
or fiscal intermediary audits.
The OIG may obtain documentation from Beverly regarding the work Beverly has
performed on these reviews, to assist the OIG in determining the appropriateness
of the filings.
7. Cost Reports. Beverly's Internal Audit will continue its
practice of testing Medicaid cost report processes and data in connection with
its facility audits performed at 10% of Beverly's facilities on an annual basis.
These facility audits include tests of square footage statistics, payroll costs,
other operating costs and the proper classification of costs as reported in the
facilities' general ledgers. In addition, Internal Audit randomly selects five
Medicaid cost reports of facilities in states where the cost report has an
effect upon Medicaid reimbursement. For these cost reports, Internal Audit tests
the classification of costs from the general ledgers to the cost report. The IRO
will continue its practice of reviewing the results of Internal Audit's facility
audits and tests of Medicaid cost reports. The IRO will review and test 10% of
Internal Audit's work for reliance in its financial statement audit of Beverly.
If there is any change in this Internal Audit procedure, based upon a change in
the manner in which Beverly is reimbursed by
<PAGE> 13
the Federal health care programs, Beverly will notify the OIG within two (2)
weeks of making any such change.
As part of the IRO's submissions engagement, the IRO shall perform
agreed-upon-procedures on selected Medicaid cost reports, designed to assist the
parties in determining that the expenses as reported in the facility's financial
statements are accurately summarized in cost reports and that the cost reports
are filed in accordance with Federal health care program requirements. The IRO
shall randomly select for audit at least five cost reports submitted to states
in which the cost report has an effect on Medicaid reimbursement. These five
randomly selected cost reports by the IRO will not necessarily be the same cost
reports as those randomly selected for review by Beverly's Internal Audit, as
set forth in the preceding paragraph.
Beverly shall report the findings of all of the audits described above
as part of its Annual Report. The OIG may obtain documentation from Beverly
regarding the work Beverly has performed on these reviews, to assist the OIG in
determining the appropriateness of the filings.
8. Compliance Engagement. An Independent Review Organization
shall also conduct a compliance engagement, under which it shall perform
agreed-upon-procedures designed to assist the parties in determining whether
Beverly's program, policies, procedures, and operations comply with the terms of
this CIA. This engagement shall include section by section findings regarding
the requirements of this CIA. Beverly shall report the findings of the IRO's
compliance engagement in its Annual Report to the OIG.
9. Verification/Validation. In the event that the OIG has
reason to believe that Beverly's Submissions Engagement or Compliance Engagement
fails to conform to its obligations under the CIA or indicates improper
submissions not otherwise adequately addressed in the audit report, and thus
determines that it is necessary to conduct an independent review to determine
whether or the extent to which Beverly is complying with its obligations under
this CIA, Beverly agrees to pay for the reasonable cost of any such review or
engagement by the OIG or any of its designated agents.
E. Confidential Disclosure Program. Beverly operates a Confidential
Disclosure Program, which includes a toll-free telephone Hotline. The
Confidential Disclosure Program enables covered persons and other individuals to
disclose, to the Compliance Officer or some other person who is not in the
disclosing individual's chain of command, any identified issues or questions
associated with Beverly's policies, practices or procedures with respect to a
Federal health care program, believed by the individual to be inappropriate.
Beverly shall continue to publicize the existence of the hotline (e.g., in
training, e-mail, intranet, newsletters to employees).
<PAGE> 14
The Confidential Disclosure Program shall continue to emphasize a
non-retribution, non-retaliation policy, and include a reporting mechanism for
anonymous, confidential communication. Upon receipt of a disclosure, the
Compliance Officer (or designee) shall gather the information in such a way as
to elicit all relevant information from the disclosing individual. The
Compliance Officer (or designee) shall make a preliminary good faith inquiry
into the allegations set forth in every disclosure to ensure that he or she has
obtained all of the information necessary to determine whether a further review
should be conducted. For any disclosure that is sufficiently specific so that
the Compliance Officer or his or her designee reasonably determines further
review is warranted, the Compliance Officer shall conduct such further review of
the allegations and ensure that appropriate follow-up is conducted and that any
inappropriate or improper practice identified is appropriately addressed.
The Compliance Officer shall continue to maintain a confidential
disclosure log, which shall continue to include a record and summary of each
allegation received, the status of the respective investigations, and any
corrective action taken in response to the investigation. In its Annual Reports,
Beverly shall provide: (1) its Monthly Customer Response Report Summaries; and
(2) the more detailed Customer Response Report Log Entries for all calls
categorized as "Quality Management" or "Billing" or any other calls that relate
to Federal health care program billings or requests for reimbursement that
relate to the period of the Annual Report. Beverly shall maintain and make
available to the OIG upon request any other documents related to confidential
disclosures (including their investigation and resolution) for at least two
years after the reporting year in which the matter was resolved.
F. Ineligible Persons and Criminal Background Checks.
1. Definition of Ineligible Person. For purposes of this CIA,
an "Ineligible Person" shall be any individual or entity who: (i) is currently
excluded, suspended, debarred or otherwise ineligible to participate in the
Federal health care programs; or (ii) has been convicted of a criminal offense
related to the provision of health care items or services (unless that person
has been reinstated in the Federal health care programs after a period of
exclusion, suspension, debarment, or ineligibility).
2. Screening Requirements. Beverly currently has policies and
procedures as part of its hiring process regarding the screening of prospective
employees and contractors to prevent the hiring of, or contracting with, any
Ineligible Person. Beverly shall continue to screen all employees and
prospective contractors prior to engaging their services by: (i) requiring
applicants to disclose whether they are Ineligible Persons; and (ii) reviewing
the General Services Administration's List of Parties Excluded from Federal
Programs (available through the Internet at http://www.arnet.gov/epls) and the
HHS/OIG List of Excluded Individuals/Entities (available through the Internet at
<PAGE> 15
http://www.hhs.gov/oig) (these lists will hereinafter be referred to as the
"Exclusion Lists").
3. Review and Removal Requirement. Within 120 days of the
effective date of this CIA, Beverly will review its list of current employees
and contractors against the Exclusion Lists. (For purposes of this paragraph, a
contractor is a person or entity that Beverly pays directly.) Thereafter,
Beverly will review the list semi-annually. If Beverly has notice that an
employee or contractor has become an Ineligible Person, Beverly will remove such
person from responsibility for, or involvement with, Beverly's business
operations related to the Federal health care programs and shall remove such
person from any position for which the person's salary or the items or services
rendered, ordered, or prescribed by the person are paid in whole or part,
directly or indirectly, by Federal health care programs or otherwise with
Federal funds at least until such time as the person is reinstated into
participation in the Federal health care programs. This paragraph does not
impose any requirement on Beverly with respect to the screening of individual
physicians who have no employment or contractual relationship with Beverly, even
if such physicians provide services to residents of Beverly Nursing Facilities.
4. Pending Charges and Proposed Exclusions. If Beverly has
notice that an employee or contractor is charged with a criminal offense related
to any Federal health care program, or is proposed for exclusion during his or
her employment or contract, Beverly shall take all appropriate actions to ensure
that the responsibilities of that employee or contractor do not adversely affect
the quality of care rendered to any patient or resident, or the accuracy of any
claims submitted to any Federal health care program.
5. Criminal Background Checks. Beverly conducts criminal
background checks of potential employees pursuant to its Compliance Program.
Beverly shall ensure that it: (a) complies with all Federal and state
requirements regarding criminal background checks for covered persons; and (b)
performs and completes a timely criminal background check on all individuals
offered employment in a position that involves direct care of patients (and the
offer of employment must be conditioned upon the results of the check). For the
purposes of this CIA: (1) in states where Beverly or a vendor performs the
background check, a timely criminal background check means a check completed
within 15 days of the offer of employment to the individual; or (2) in states
where Beverly or its vendor must use a state agency to conduct the criminal
background check, a timely criminal background check means a check conducted and
completed as soon as reasonably possible (including providing the relevant
information to the state agency prior to the offer of employment).
G. Notification of Proceedings. Within 30 days of discovery, Beverly
shall notify OIG, in writing, of any ongoing investigation or legal proceeding
conducted or brought by a governmental entity or its agents involving an
allegation that Beverly has committed
<PAGE> 16
a crime or has engaged in fraudulent activities. This notification shall include
a description of the allegation, the identity of the investigating or
prosecuting agency, and the status of such investigation or legal proceeding.
Beverly shall also provide written notice to OIG within 30 days of the
resolution of the matter, and shall provide OIG with a description of the
findings and/or results of the proceedings, if any.
H. Reporting.
1. Reporting of Overpayments. Beverly shall continue to review
its quarterly and annual costs reports and PIP requests as well as its internal
and external audit reports. If, during any of its reviews or by any other means,
Beverly identifies or learns of any billing, reporting, or other policies,
procedures and/or practices that have resulted in an overpayment, Beverly shall
continue its practice of correcting the overpayment by revising the next
quarterly PIP request or filing an amended cost report, as appropriate and
unless otherwise instructed by the payor, and shall take appropriate action to
prevent the underlying problem and the overpayments from recurring. Within 30
days of each quarterly PIP request, Beverly shall continue to file with its
fiscal intermediary a Quarterly Adjustment Report setting forth the existence of
any billing errors, overpayments, or other technical, process, or documentation
errors related to the reimbursement process. If an overpayment cannot be
addressed in a Quarterly Adjustment Report, Beverly shall notify the payor
within 30 days of discovering the overpayment and take remedial steps within 60
days of discovery (or such additional time as may be agreed to by the payor) to
repay the overpayment and correct the problem, including preventing the
underlying problem and the overpayments from recurring.
2. Reporting of Material Deficiencies. If Beverly determines
that there is a material deficiency, Beverly shall notify the OIG within 30 days
of discovering the material deficiency. The notification to the OIG shall
include: (a) a complete description of the material deficiency (including the
relevant facts, persons involved, and legal and program authorities); (b) the
amount of overpayment (if any) due to the material deficiency; (c) Beverly's
actions (and future plans of action) to correct the material deficiency and to
prevent such material deficiency from recurring; (d) the payor's name, address,
and contact person where the overpayment (if any) was sent; and (e) the date of
the check and identification number (or electronic transaction number) on which
the overpayment (if any) was repaid.
3. Definition of "Overpayment." For purposes of this CIA, an
"overpayment" shall mean the amount of money Beverly has received in excess of
the amount due and payable under the Federal health care programs' statutes,
regulations or program directives, including carrier and intermediary
instructions.
4. Definition of "Material Deficiency." For purposes of this
CIA, a "material deficiency" means: (i) a substantial overpayment from any
Federal health care
<PAGE> 17
program; (ii) a matter that a reasonable person would consider a potential
violation of 42 U.S.C. Sections 1320a-7, 1320a-7a or 1320a-7b, or another
criminal or civil law applicable to any Federal health care program (even though
not reported under subsection (i) as a substantial overpayment); or (iii) a
violation of the obligation to provide items or services of a quality that meets
professionally recognized standards of health care where such violation has
occurred in one or more instances that presents an imminent danger to the
health, safety or well-being of a Federal health care program beneficiary or
places the beneficiary unnecessarily in high-risk situations. A material
deficiency may be the result of an isolated event or a series of occurrences.
IV. NEW BUSINESS UNITS OR LOCATIONS
A. Notice of New Business Units or Locations. Prior to purchasing,
establishing, selling, or divesting a facility, Beverly shall notify the OIG in
writing of the proposed action. This notification shall include the location of
the existing or new operation(s), phone number, fax number, Federal health care
program provider number(s) (if any), and the corresponding payor(s) (contractor
specific) that has issued each provider number. Beverly shall further notify the
OIG in writing once such proposed purchase, establishment, sale, or divestiture
has been completed.
B. Obligations of New Business Units and Locations. Once a new business
unit or location has been established, all covered persons at such locations
shall be subject to the requirements in this CIA that apply to new covered
persons (e.g., completing certifications and undergoing training).
V. IMPLEMENTATION AND ANNUAL REPORTS
A. Implementation Report. Within 150 days after the effective date of
this CIA, Beverly shall submit a written report to OIG summarizing the status of
its implementation of the requirements of this CIA. This Implementation Report
shall include:
1. the name, address, phone number and position description of
all of the individuals in positions described in section III.A;
2. a copy of Beverly's Code of Conduct required by section
III.B.1;
3. the summary of the Policies and Procedures required by
section III.B.2;
4. a description of the training programs required by section
III.C, including a description of the targeted audiences and a schedule of when
the training sessions were held;
5. a certification by the Compliance Officer that, to the best
of his or her knowledge:
a. the Policies and Procedures required by section
III.B have been developed, are being implemented, and have been distributed to
all pertinent covered persons;
<PAGE> 18
b. all covered persons have completed the Code of
Conduct certification required by section III.B.1; and
c. all covered persons have completed the training
and executed the certification required by section III.C.
6. a description of the confidential disclosure program
required by section III.E;
7. the identity of the Independent Review Organization(s) and
the proposed start and completion date of the engagements for the first year;
8. a summary of personnel actions taken pursuant to section
III.F; and
9. a list of all of Beverly's locations (including mailing
addresses), the corresponding name under which each location is doing business,
the corresponding phone numbers and fax numbers, each location's Federal health
care program provider identification number(s), and the name, address, and
telephone number of the payor (specific contractor) that issued each provider
identification number.
B. Annual Reports. Beverly shall submit to OIG Annual Reports with
respect to the status and findings of Beverly's compliance activities for each
of the calendar years for which this CIA has been in effect, starting with
calendar year 2000. Each Annual Report shall be due on March 31 of the year
following the calendar year covered in the Annual Report (e.g., the Annual
Report for year 2000 shall be due on March 31, 2001). Each Annual Report shall
include:
1. any change in the identity or position description of
individuals in positions described in section III.A;
2. a certification by the Compliance Officer that, to the best
of his or her knowledge:
a. all covered persons have completed the annual Code
of Conduct certification required by section III.B.1;
b. all covered persons have completed the training
and executed the certification required by section III.C; and
c. Beverly has complied with its obligations under
the Settlement Agreement: (i) not to resubmit to any Federal health care program
payors any previously denied claims related to the conduct addressed in the
Settlement Agreement, and its obligation not to appeal any such denials of
claims; and (ii) not to charge to or otherwise seek payment from Federal or
state payors for unallowable costs (as defined in the Settlement Agreement) and
its obligation to identify and adjust any past charges of unallowable costs; and
d. Beverly has effectively implemented all plans of
correction related to problems identified under this CIA, Beverly's Compliance
Program, or internal audits;
<PAGE> 19
3. notification (including the actual change or a detailed
description of the change) of any changes or amendments to the Policies and
Procedures required by section III.B and the reasons for such changes (e.g.,
change in contractor policy);
4. a complete copy of the original reports prepared pursuant
to the Independent Review Organization's submissions and compliance engagements,
including all of the information required in section III.D;
5. Beverly's response/corrective action plan to any issues
raised by the Independent Review Organization;
6. a summary of material deficiencies identified and reported
pursuant to section III.H and the corresponding corrective action plans;
7. a report of the aggregate overpayments that have been
returned to the Federal health care programs that were discovered as a direct or
indirect result of implementing this CIA and a summary of the corrective actions
taken to address such overpayments. Overpayment amounts shall be broken down
into the following categories: Medicare, Medicaid (report each applicable state
separately) and other Federal health care programs;
8. a copy of the (1) Monthly Customer Response Report
Summaries; and (2) the Customer Response Report Log Entries for all calls
categorized as "Quality Management" or "Billing" or any other calls that relate
to the quality of care provided to patients or to billing or requests for
reimbursement, as required by section III.E;
9. a description of any personnel actions (other than hiring)
taken by Beverly as a result of the obligations in section III.F, and the name,
title, and responsibilities of any person that falls within the ambit of section
III.F.4, and the actions taken in response to the obligations set forth in that
section;
10. a summary describing any ongoing investigation or legal
proceeding conducted or brought by a governmental entity involving an allegation
that Beverly has committed a crime or has engaged in fraudulent activities,
which was required to have been reported pursuant to section III.G. The
statement shall include a description of the allegation, the identity of the
investigating or prosecuting agency, and the status of such investigation, legal
proceeding or requests for information; and
11. a description of all changes to the most recently provided
list (as updated) of Beverly's locations (including mailing addresses), the
corresponding name under which each location is doing business, the
corresponding phone numbers and fax numbers, each location's Federal health care
program provider identification number(s) and the payor (specific contractor)
that issued each provider identification number.
C. Certifications. The Implementation Report and Annual Reports shall
include a certification by the Compliance Officer, under penalty of perjury,
that: (1) Beverly is in compliance with all of the requirements of this CIA
(unless the non-compliance is clearly
<PAGE> 20
and explicitly described in the Annual Report), to the best of his or her
knowledge; and (2) the Compliance Officer has reviewed the Report and has made
reasonable inquiry regarding its content and believes that, upon such inquiry,
the information is accurate and truthful.
VI. NOTIFICATIONS AND SUBMISSION OF REPORTS
Unless otherwise stated in writing subsequent to the effective date of
this CIA, all notifications and reports required under this CIA shall be
submitted to the entities listed below:
OIG:
Civil Recoveries Branch - Compliance Unit
Office of Counsel to the Inspector General
Office of Inspector General
U.S. Department of Health and Human Services
Cohen Building, Room 5527
330 Independence Avenue, SW
Washington, DC 20201
Phone 202.619.2078
Fax 202.205.0604
Beverly:
Cletus Hess
Compliance Officer
Beverly Enterprises, Inc.
5111 Rogers Avenue, Suite 40-A
Fort Smith, AR 72919
Phone 877.823.8375
Direct 501.201.4813
Fax 501.201.4801; 4802
VII. OIG INSPECTION, AUDIT AND REVIEW RIGHTS
In addition to any other rights OIG may have by statute, regulation, or
contract, OIG or its duly authorized representative(s), may examine Beverly's
books, records, and other documents and supporting materials and/or conduct an
on-site review of any of Beverly's locations for the purpose of verifying and
evaluating: (a) Beverly's compliance with the terms of this CIA; and (b)
Beverly's compliance with the requirements of the Federal health care programs
in which it participates. The documentation described above shall be made
available by Beverly to OIG or its duly authorized representative(s) at all
reasonable times for inspection, audit or reproduction. Furthermore, for
purposes of this provision, OIG or its duly authorized representative(s) may
interview any of Beverly's employees, contractors, or agents who consent to be
interviewed at the individual's place of business during normal business hours
or at such other place and
<PAGE> 21
time as may be mutually agreed upon between the individual and OIG. Beverly
agrees to assist OIG in contacting and arranging interviews with such
individuals upon OIG's request. Beverly's employees may elect to be interviewed
with or without a representative of Beverly present.
VIII. DOCUMENT AND RECORD RETENTION
Beverly shall maintain for inspection all documents and records: (1)
related to reimbursement from the Federal health care programs for at least
seven years after the submission of the request for reimbursement; and (2)
necessary to establishing Beverly's compliance with this CIA for at least three
years following the submission of the Annual Report covering the relevant year.
IX. DISCLOSURES
Subject to HHS's Freedom of Information Act ("FOIA") procedures, set
forth in 45 C.F.R. Part 5, the OIG shall make a reasonable effort to notify
Beverly prior to any release by OIG of information submitted by Beverly pursuant
to its obligations under this CIA and identified upon submission by Beverly as
trade secrets, commercial or financial information and privileged and
confidential under the FOIA rules. With respect to the disclosure of such
information, Beverly shall have all the rights set forth in 45 C.F.R. Section
5.65(d). Beverly shall refrain from identifying any information as trade
secrets, commercial or financial information and privileged and confidential
that does not meet the criteria for exemption from disclosure under FOIA.
Nothing in this CIA, or any communication or report made pursuant to
this CIA, shall constitute or be construed as any waiver by Beverly of Beverly's
attorney-client, work product or other applicable privileges. Notwithstanding
that fact, the existence of any such privilege does not affect Beverly's
obligation to comply with the provisions of this CIA.
X. BREACH AND DEFAULT PROVISIONS
Beverly is expected to fully and timely comply with all of the
obligations herein throughout the term of this CIA or other time frames herein
agreed to.
A. Stipulated Penalties for Failure to Comply with Certain Obligations.
As a contractual remedy, Beverly and OIG hereby agree that failure to comply
with certain obligations set forth in this CIA may lead to the imposition of the
following monetary penalties (hereinafter referred to as "Stipulated Penalties")
in accordance with the following provisions.
1. A Stipulated Penalty of $2,500 (which shall begin to accrue
on the day after the date the obligation became due) for each day, beginning 90
days after the effective date of this CIA and concluding at the end of the term
of this CIA, Beverly fails to have in place any of the following:
a. a Compliance Officer (or functional equivalent);
<PAGE> 22
b. Audit and Compliance Committee of the Board of
Directors (or its functional equivalent);
c. Compliance Liaisons at the Group Vice President
level (or functional equivalents);
d. a Compliance Committee;
e. a written Code of Conduct;
f. written Policies and Procedures;
g. a training program; and
h. a Confidential Disclosure Program.
2. A Stipulated Penalty of $2,500 (which shall begin to accrue
on the day after the date the obligation became due) for each day Beverly fails
meet any of the deadlines to submit the Implementation Report or the Annual
Reports to the OIG.
3. A Stipulated Penalty of $2,000 (which shall begin to accrue
on the date the failure to comply began) for each day Beverly:
a. hires or enters into a contract with an Ineligible
Person after that person has been listed by a federal agency as excluded,
debarred, suspended or otherwise ineligible for participation in the Medicare,
Medicaid or any other Federal health care program (as defined in 42 U.S.C.
Section 1320a-7b(f)) (this Stipulated Penalty shall not be demanded for any time
period during which Beverly can demonstrate that it did not discover the
person's exclusion or other ineligibility after making a reasonable inquiry (as
described in section III.F) as to the status of the person); or
b. employs or contracts with an Ineligible Person and
that person: (i) has responsibility for, or involvement with, Beverly's business
operations related to the Federal health care programs; or (ii) is in a position
for which the person's salary or the items or services rendered, ordered, or
prescribed by the person are paid in whole or part, directly or indirectly, by
Federal health care programs or otherwise with Federal funds (this Stipulated
Penalty shall not be demanded for any time period during which Beverly can
demonstrate that it did not discover the person's exclusion or other
ineligibility after making a reasonable inquiry (as described in section III.F)
as to the status of the person).
4. A Stipulated Penalty of $1,500 (which shall begin to accrue
on the date Beverly fails to grant access) for each day Beverly fails to grant
access to the information or documentation as required in section VII of this
CIA.
5. A Stipulated Penalty of $1,000 (which shall begin to accrue
10 days after the date that OIG provides notice to Beverly of the failure to
comply) for each day Beverly fails to comply fully and adequately with any
obligation of this CIA. In its notice to Beverly, the OIG shall state the
specific grounds for its determination that Beverly has failed to comply fully
and adequately with the CIA obligation(s) at issue and
<PAGE> 23
a basis for Beverly to cure noncompliance before accrual of any penalty that
will be deemed acceptable to the OIG.
B. Payment of Stipulated Penalties.
1. Demand Letter. Upon a finding that Beverly has failed to
comply with any of the obligations described in section X.A and determining that
Stipulated Penalties are appropriate, OIG shall notify Beverly by personal
service or certified mail of: (a) Beverly's failure to comply; and (b) the OIG's
exercise of its contractual right to demand payment of the Stipulated Penalties
(this notification is hereinafter referred to as the "Demand Letter").
Within 10 business days of receiving the Demand Letter, Beverly shall
either: (a) cure the breach to the OIG's satisfaction and pay the applicable
stipulated penalties if any have accrued; or (b) request a hearing before an HHS
administrative law judge ("ALJ") to dispute the OIG's determination of
noncompliance, pursuant to the agreed upon provisions set forth below in section
X.D. In the event Beverly elects to request an ALJ hearing, the Stipulated
Penalties shall continue to accrue until Beverly cures, to the OIG's
satisfaction, the alleged breach in dispute. Failure to respond to the Demand
Letter in one of these two manners within the allowed time period shall be
considered a material breach of this CIA and shall be grounds for exclusion
under section X.C.
2. Timely Written Requests for Extensions. The OIG will
reasonably consider any timely written request by Beverly for an extension of
time to perform any act or file any notification or report required by this CIA.
Notwithstanding any other provision in this section, if OIG grants the timely
written request with respect to an act, notification, or report, Stipulated
Penalties for failure to perform the act or file the notification or report
shall not begin to accrue until one day after Beverly fails to meet the revised
deadline set by OIG. Notwithstanding any other provision in this section, if OIG
denies such a timely written request, Stipulated Penalties for failure to
perform the act or file the notification or report shall not begin to accrue
until two (2) business days after Beverly receives OIG's written denial of such
request. A "timely written request" is defined as a request in writing received
by OIG at least five (5) business days prior to the date by which any act is due
to be performed or any notification or report is due to be filed.
3. Form of Payment. Payment of the Stipulated Penalties shall
be made by certified or cashier's check, payable to "Secretary of the Department
of Health and Human Services," and submitted to OIG at the address set forth in
section VI.
4. Independence from Material Breach Determination. Except as
otherwise noted, these provisions for payment of Stipulated Penalties shall not
affect or otherwise set a standard for the OIG's decision that Beverly has
materially breached this CIA, which
<PAGE> 24
decision shall be made at the OIG's discretion and governed by the provisions in
section X.C, below.
C. Exclusion for Material Breach of this CIA
1. Notice of Material Breach and Intent to Exclude. Upon a
determination by OIG that Beverly has materially breached this CIA and that
exclusion should be imposed, the OIG shall notify Beverly by certified mail of:
(a) Beverly's material breach; and (b) OIG's intent to exercise its contractual
right to impose exclusion (this notification is hereinafter referred to as the
"Notice of Material Breach and Intent to Exclude").
2. Opportunity to Cure. Beverly shall have 30 days from the
date it receives the Notice of Material Breach and Intent to Exclude to
demonstrate to the OIG's satisfaction that:
a. Beverly is in full compliance with this CIA;
b. the alleged material breach has been cured; or
c. the alleged material breach cannot be cured
within the 35-day period, but that: (i) Beverly has begun to take action to cure
the material breach; (ii) Beverly is pursuing such action with due diligence;
and (iii) Beverly has provided to OIG a reasonable timetable for curing the
material breach.
3. Exclusion Letter. If at the conclusion of the 30-day
period, Beverly fails to satisfy the requirements of section X.C.2, OIG may
exclude Beverly from participation in the Federal health care programs. OIG will
notify Beverly in writing of its determination to exclude Beverly (this letter
shall be referred to hereinafter as the "Exclusion Letter"). Subject to the
Dispute Resolution provisions in section X.D, below, the exclusion shall go into
effect 30 days after the date of the Exclusion Letter. The exclusion shall have
national effect and shall also apply to all other federal procurement and
non-procurement programs. If Beverly is excluded under the provisions of this
CIA, Beverly may seek reinstatement pursuant to the provisions at 42 C.F.R.
Sections 1001.3001-.3004.
4. Material Breach. A material breach of this CIA means:
a. a failure by Beverly to report a material
deficiency, take corrective action and pay the appropriate refunds, as provided
in section III.H;
b. repeated or flagrant violations of the obligations
under this CIA that have not been cured in a timely fashion, including, but not
limited to, the obligations addressed in section X.A of this CIA;
c. a failure to respond to a Demand Letter concerning
the payment of Stipulated Penalties in accordance with section X.B above; or
d. a failure to retain and use an Independent Review
Organization for review purposes in accordance with section III.D.
<PAGE> 25
D. Dispute Resolution
1. Review Rights. Upon the OIG's delivery to Beverly of its
Demand Letter or of its Exclusion Letter, and as an agreed-upon contractual
remedy for the resolution of disputes arising under the obligation of this CIA,
Beverly shall be afforded certain review rights comparable to the ones that are
provided in 42 U.S.C. Section 1320a-7(f) and 42 C.F.R. Part 1005 as if they
applied to the Stipulated Penalties or exclusion sought pursuant to this CIA.
Specifically, the OIG's determination to demand payment of Stipulated Penalties
or to seek exclusion shall be subject to review by an ALJ and, in the event of
an appeal, the Departmental Appeals Board ("DAB"), in a manner consistent with
the provisions in 42 C.F.R. Sections 1005.2-1005.21. Notwithstanding the
language in 42 C.F.R. Section 1005.2(c), the request for a hearing involving
stipulated penalties shall be made within 10 business days after receiving the
Demand Letter and the request for a hearing involving exclusion shall be made
within 30 days after receiving the Exclusion Letter.
2. Stipulated Penalties Review. Notwithstanding any provision
of Title 42 of the United States Code or Chapter 42 of the Code of Federal
Regulations, the only issues in a proceeding for stipulated penalties under this
CIA shall be: (a) whether Beverly was in full and timely compliance with the
obligations of this CIA for which the OIG demands payment; and (b) the period of
noncompliance. Beverly shall have the burden of proving its full and timely
compliance and the steps taken to cure the noncompliance, if any. If the ALJ
finds for the OIG with regard to a finding of a breach of this CIA and orders
Beverly to pay Stipulated Penalties, such Stipulated Penalties shall become due
and payable 20 days after the ALJ issues such a decision notwithstanding that
Beverly may request review of the ALJ decision by the DAB.
3. Exclusion Review. Notwithstanding any provision of Title 42
of the United States Code or Chapter 42 of the Code of Federal Regulations, the
only issues in a proceeding for exclusion based on a material breach of this CIA
shall be: (a) whether Beverly was in material breach of this CIA; (b) whether
such breach was continuing on the date of the Exclusion Letter; and (c) whether
the alleged material breach could not have been cured within the 30-day period,
but that (i) Beverly had begun to take action to cure the material breach within
that period, (ii) Beverly has pursued and is pursuing such action with due
diligence, and (iii) Beverly provided to OIG within that period a reasonable
timetable for curing the material breach. For purposes of the exclusion herein,
exclusion shall take effect only after an ALJ decision that is favorable to the
OIG. Beverly's election of its contractual right to appeal to the DAB shall not
abrogate the OIG's authority to exclude Beverly upon the issuance of the ALJ's
decision. If the ALJ sustains the determination of the OIG and determines that
exclusion is authorized, such exclusion shall take effect 20 days after the ALJ
issues such a decision, notwithstanding that Beverly may request review of the
ALJ decision by the DAB.
<PAGE> 26
4. Finality of Decision. The parties to this CIA agree that
the DAB's decision (or the ALJ's decision if not appealed) shall be considered
final for purposes of stipulated penalties imposed under this CIA and Beverly
agrees to waive any right it may have to appeal the decision to impose
stipulated penalties administratively, judicially or otherwise seek review by
any court or other adjudicative forum.
5. Reviews Independent of this CIA. Nothing in this agreement
shall affect the right of the Health Care Financing Administration or any other
Federal or State agency to enforce any statutory or regulatory authorities with
respect to Beverly's compliance with applicable Federal and State health care
program requirements or Beverly's rights to pursue its statutory, regulatory or
other legal remedies with respect to such actions.
XI. EFFECTIVE AND BINDING AGREEMENT
Consistent with the provisions in the Settlement Agreement pursuant to
which this CIA is entered, and into which this CIA is incorporated, Beverly and
OIG agree as follows:
A. This CIA shall be binding on the successors, assigns, and
transferees of Beverly (except that the obligations of this CIA shall not apply
to facilities that Beverly or a Beverly successor does not own or operate);
B. This CIA shall become final and binding on the date the final
signature is obtained on the CIA and shall supersede and replace any other
Corporate Integrity Agreements obligating Beverly or any of its facilities at
the time of execution of this CIA;
C. Any modifications to this CIA shall be made with the prior written
consent of the parties to this CIA; and
D. The undersigned Beverly signatories represent and warrant that they
are authorized to execute this CIA. The undersigned OIG signatory represents
that he is signing this CIA in his official capacity and that he is authorized
to execute this CIA.
ON BEHALF OF BEVERLY
- ------------------------------------- -----------------------
David Banks DATE
Chief Executive Officer
Beverly Enterprises, Inc.
<PAGE> 27
- ------------------------------------- -----------------------
Mark Biros, Esq. DATE
Proskauer Rose LLP
1233 20th Street, NW
Suite 800
Washington, DC 20036-2396
ON BEHALF OF THE OFFICE OF INSPECTOR GENERAL
OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES
- ------------------------------------- -----------------------
LEWIS MORRIS DATE
Assistant Inspector General for Legal Affairs
Office of Inspector General
U. S. Department of Health and Human Services
<PAGE> 1
EXHIBIT 10.44
ROBERT S. MUELLER, III (CSBN 59775)
United States Attorney
DAVID SHAPIRO (NYSBN )
Chief, Criminal Division
GEORGE D. HARDY (CSBN 86037)
Special Assistant U.S. Attorney
Attorneys for Plaintiff
UNITED STATES OF AMERICA
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
UNITED STATES OF AMERICA, ) NO. CR.
)
Plaintiff, ) PLEA AGREEMENT
)
v. )
)
BEVERLY ENTERPRISES-CALIFORNIA, INC. )
)
Defendant. )
- ----------------------------------------- )
Defendant BEVERLY ENTERPRISES--CALIFORNIA, INC. ("BEVERLY-CALIFORNIA"), a
California corporation, by and through its counsel of record, as ratified by its
Board of Directors, enters into this Plea Agreement with the United States
Department of Justice, by the United States Attorney's Office for the Northern
District of California (the "United States"), pursuant to Rule 11(e)(1)(C) of
the Federal Rules of Criminal Procedure. This Agreement binds only the United
States, as defined herein, not any state or local prosecuting authorities.
DEFENDANT'S PLEA
1. BEVERLY-CALIFORNIA agrees to waive indictment and plead guilty to an
information charging it with one count of wire fraud, in violation of 18
U.S.C. Section 1343, and ten counts of making false statements to Medicare, in
violation of 18 U.S.C. Section 1001.
1
<PAGE> 2
THE NATURE OF THE OFFENSES
2. BEVERLY-CALIFORNIA understands that at any trial the government would be
required to prove the following elements of the offenses to which it is pleading
guilty:
A. Wire Fraud-Count One
B. a. BEVERLY-CALIFORNIA devised and intended to devise a scheme to defraud
the United States and to obtain money from the Medicare program by means of
false and fraudulent pretenses and representations.
C. b. It was a part of the scheme that BEVERLY-CALIFORNIA would and did
defraud the United States of its right to have the Medicare program administered
honestly and free from deceit and fraud and to have the federal funds therein
disbursed in accordance with the laws of the United States.
D. c. It was a further part of the scheme that BEVERLY-CALIFORNIA would and
did submit Medicare cost reports to its fiscal intermediary for the Medicare
program that contained false and fictitious statements relating to nursing
service costs.
E. d. For the purpose of executing the scheme and artifice to defraud and to
obtain money by means of false and fraudulent pretenses and representations,
BEVERLY-CALIFORNIA did transmit and cause to be transmitted by means of wire
communication in interstate commerce, cost reports for nursing homes, which
contained false and fictitious statements relating to nursing service costs.
F. False Statements to Government-Counts Two through Eleven
G. a. BEVERLY-CALIFORNIA knowingly created and used documents, namely,
Medicare cost reports, knowing that those reports contained materially false,
fictitious, and fraudulent statements and entries relating to nursing service
costs.
H. b. On or about May 27, 1997, BEVERLY-CALIFORNIA submitted ten such cost
reports to its fiscal intermediary for the purpose of obtaining payment of those
costs by Medicare.
I. c. BEVERLY-CALIFORNIA's claim for payment from Medicare was a matter within
the jurisdiction of the executive branch of the Government of the United States.
2
<PAGE> 3
J. THE MAXIMUM STATUTORY PENALTIES
K. 3. BEVERLY-CALIFORNIA understands that the maximum statutory penalties for
each count to which it is pleading guilty are:
B. Wire Fraud
a. Five years' probation;
b. Fine of the greater of $500,000 or twice the pecuniary gain from
the offense;
c. Mandatory special assessment of $400 per count, which is to be
paid at the time of sentencing;
d. Restitution as ordered by the Court.
B. False Statements to Government
a. Five years' probation;
b. Fine of the greater of $500,000 or twice the pecuniary gain from
the offense;
c. Mandatory special assessment of $400 per count, which is to be
paid at the time of sentencing;
d. Restitution as ordered by the Court.
FACTUAL BASIS
4. BEVERLY-CALIFORNIA is guilty of the offenses to which it will plead
guilty, including all of the elements as set forth in Paragraph 2 above.
BEVERLY-CALIFORNIA agrees that the following facts are true:
a. BEVERLY-CALIFORNIA is a wholly-owned subsidiary of Beverly Health
and Rehabilitation Services, Inc., which is itself a subsidiary of Beverly
Enterprises, Inc., a Delaware corporation headquartered in Ft. Smith, Arkansas
("Beverly Enterprises"). Beverly Enterprises is the largest nursing home chain
in the United States and through various subsidiaries owns and operates homes in
32 states. BEVERLY-CALIFORNIA is one such subsidiary.
b. Nursing homes provide a variety of nursing, therapeutic and
custodial services, typically to patients who because of their physical
conditions are unable to remain at their homes or in acute care hospitals.
Nursing homes are compensated for providing these services in a variety of ways,
including cash, private insurance, and public insurance, such as the Medicare
Program.
c. Nursing homes employ Registered Nurses, Licensed Vocational
Nurses, and Certified Nurses Aides, among other personnel, in providing services
to patients. Salaries paid to these nurses represent the single most expensive
cost of operating a nursing home.
3
<PAGE> 4
THE MEDICARE PROGRAM
d. The Social Security Act (Title 42, United States Code, Section
1395, et seq.), which established the Medicare Program, provides that
participating nursing home operators can be reimbursed certain costs. Medicare
is not designed, however, to pay for the long-term care of nursing home
patients. Rather, it is intended for Medicare-eligible patients who need
follow-up skilled nursing care following a hospital stay. The benefits last for
a maximum of 100 days. If a nursing home patient requires nursing care for more
than 100 days and is unable to pay, reimbursement generally is made by Medicaid,
a joint federal-state insurance program. The reimbursement rates paid by
Medicaid are significantly less than those paid by Medicare.
e. Many nursing homes care for Medicare, Medicaid and other
patients. A facility seeking reimbursement from the Medicare program must
demonstrate that the system it employs for recording and accumulating the number
of hours of nursing services is capable of audit and equitably allocates the
nursing service costs between the Medicare part and non-Medicare parts of the
facility.
f. There are two generally accepted methods for allocating nursing
service costs between the Medicare and non-Medicare parts of a facility. One is
the "actual time basis," under which the actual number of hours of nursing
service provided for each part of the facility is the basis for allocation of
nursing service costs. The other is the "average cost per diem basis," under
which total nursing service costs for the entire facility are divided by the
total patient days for the entire facility to arrive at an average nursing
service cost per diem. This average nursing service cost per diem is then
multiplied by the number of patient days in the Medicare part of the facility to
determine the nursing service costs that may be allocated to the Medicare
program.
COST REPORTING
g. Medicare funds generally are distributed to nursing homes through
"fiscal intermediaries"; that is, private insurance companies that have a
contract with the government to administer a Medicare program. At all times
pertinent, the "fiscal intermediary" for BEVERLY-CALIFORNIA was Aetna Insurance
Company (Aetna) or Blue Cross of California (Blue Cross).
h. Nursing homes participating in the Medicare program generally are
required to submit annual
<PAGE> 5
Medicare cost reports describing costs relating to health care services rendered
to Medicare beneficiaries. In the meantime, in order to maintain its operations
during the year, the nursing home bills the Medicare program through the fiscal
intermediary. The fiscal intermediary processes the bills and makes interim
payments to the nursing home that are calculated to approximate costs. At the
end of the nursing home's accounting year, the interim payments received by the
nursing home are compared to the costs reported in the annual cost report. If
the nursing home has incurred costs greater than the total of the interim
payments, then it receives the difference from the fiscal intermediary. If the
nursing home has incurred costs less than the total of the interim payments,
then the nursing home is required to pay the difference to the fiscal
intermediary.
SCHEME TO DEFRAUD
i. Beginning in approximately 1992 and continuing through 1998, the
defendant BEVERLY-CALIFORNIA participated in a scheme to defraud the Medicare
program and to obtain money by means of false and fraudulent representations,
that is, by filing annual Medicare cost reports that contained fabricated
nursing services costs. Specifically, BEVERLY-CALIFORNIA calculated its Medicare
nursing costs based not on actual time or average per diem Medicare nursing
costs, but according to prescribed ratios or other calculations designed to
enable BEVERLY-CALIFORNIA to approach or surpass targeted revenue levels and
budgeted profit.
j. In order to conceal the fraudulent nature of its Medicare cost
reports, and to create "back-up" documentation for the fabricated costs,
BEVERLY-CALIFORNIA manufactured and altered documents to make it appear that
nurses were devoting significantly more time to Medicare patients than they
actually were. Among the fabricated documents were phony nursing "sign-in
sheets" that purported to record hours worked by particular nurses on particular
dates and times.
k. For the purpose of executing the scheme and artifice to defraud
and to obtain money by means of false and fraudulent pretenses and
representations, on or about May 27, 1997, defendant BEVERLY-CALIFORNIA did
transmit and cause to be transmitted by means of wire communication in
interstate commerce Medicare cost reports containing fabricated and inflated
costs for direct nursing services provided at BEVERLY-CALIFORNIA nursing homes.
l. On or about May 27, 1997, BEVERLY-CALIFORNIA submitted ten cost
reports for the
<PAGE> 6
purpose of obtaining payment of those costs by Medicare, knowing that those
cost reports contained materially false statements and entries, a matter within
the jurisdiction of the executive branch of the Government of the United States.
WAIVER OF RIGHTS
5. BEVERLY-CALIFORNIA understands and agrees that by pleading guilty
it is giving up the following rights which it would have if the case went to
trial:
a. the rights to plead not guilty, to be presumed innocent, and
to require the government to prove all of the elements of the crimes beyond a
reasonable doubt;
b. the right to a speedy and public jury trial with the
assistance of an attorney;
c. the right to a unanimous jury verdict;
d. the right to confront and cross-examine government
witnesses;
e. the right to present evidence and/or witnesses on its own
behalf, and to compulsory process;
f. the right not to present evidence or have adverse inferences
drawn if it did not do so;
g. the rights to pursue any affirmative defenses, Fourth or
Fifth Amendment claims, or any other claims presented or that could be presented
in any pretrial or post-trial motion;
h. the rights to both appeal and collaterally attack, the
guilty plea, the judgment of guilt, orders of the Court, and any part of the
sentence imposed by the Court;
i. the right to be indicted by a grand jury for the felony
charge to which it is pleading guilty; and
j. the right to challenge venue in the Northern District of
California.
SENTENCING PROCEDURES AND FACTORS
6. If acceptable to the Court, the parties agree that sentence should be
imposed on the date of the plea and without a presentence investigation and
report, in accordance with Rule 32(b)(1)(A) of the Federal Rules of Criminal
Procedure.
7. BEVERLY-CALIFORNIA understands that, notwithstanding Paragraph 6 and
Paragraph 9 below, its sentencing is governed by the United States Sentencing
Guidelines.
8. The parties agree to the following Sentencing Guideline calculations
(pursuant to the November 1, 1998
<PAGE> 7
revision of the Sentencing Guidelines):
a. Pursuant to U.S.S.G. Sections 8C2.1 and 8C2.4(a)(2), and
U.S.S.G. Section 2F1.1, the base offense level is 21.
b. Pursuant to U.S.S.G. Sections 8C2.1 and 8C2.4(a)(2), and
U.S.S.G. Section 2F1.1, since the offense involved more than minimal planning,
the adjusted offense level is 23.
c. Pursuant to U.S.S.G. Section 8C2.5(a), and (b)(3), the
culpability score is 8.
d. Pursuant to U.S.S.G. Section 8C2.5(g)(3), the final culpability
score is 7.
e. Pursuant to U.S.S.G. Section 8C2.6, the minimum multiplier is
1.40 and the maximum multiplier is 2.80.
f. Pursuant to U.S.S.G. Section 8C2.7, the Guidelines fine range
falls between a minimum of $2,240,000 and a maximum of $4,480,000.
9. Pursuant to Rule 11(e)(1)(C) of the Federal Rules of Criminal
Procedure, the parties agree that an appropriate disposition of this case is
that BEVERLY-CALIFORNIA receive the following sentence:
a. BEVERLY-CALIFORNIA will not be placed on probation.
b. BEVERLY-CALIFORNIA will pay a criminal fine of $5,000,000.
BEVERLY-CALIFORNIA recognizes that this amount represents an upward departure
from the applicable guidelines range. BEVERLY-CALIFORNIA consents to the upward
departure.
c. BEVERLY-CALIFORNIA will pay a special assessment of $4400.
d. BEVERLY-CALIFORNIA will not be required to pay restitution as
part of its criminal sentence.
10. BEVERLY-CALIFORNIA understands that both the United States and
BEVERLY-CALIFORNIA retain the right to withdraw from the Agreement, and this
Agreement will be null and void, if the Court rejects the Agreement and refuses
to be bound by the sentence agreed to in Paragraph 9. In addition, the United
States retains the right to withdraw from this Agreement if Beverly Enterprises
fails to execute the agreements set forth in paragraphs 12 and 13 within 30 days
of the date this agreement is executed.
11. The amount listed in Paragraph 9(b) shall be paid to the Financial
Litigation Unit, United States
<PAGE> 8
<PAGE> 9
Attorney's Office, Northern District of California, by FEDWIRE. Payment shall be
made on or before the next business day following the date of sentence.
12. Beverly Enterprises will execute a civil settlement agreement with the
United States relating to this and additional conduct. Under the terms of that
agreement, Beverly Enterprises will pay the United States the amount of
$170,000,000.
13. Beverly Enterprises will enter a corporate compliance agreement with
the Department of Health and Human Services, Office of Inspector General.
14. BEVERLY-CALIFORNIA understands and agrees that, should it withdraw its
plea in accordance with Paragraph 10, it may thereafter be prosecuted for any
criminal violation of which the government has knowledge, notwithstanding the
expiration of any applicable statute of limitations following the signing of
this agreement. BEVERLY-CALIFORNIA agrees that it will not raise the expiration
of any statute of limitations as a defense to any such prosecution.
15. BEVERLY-CALIFORNIA understands that this agreement does not bind the
Internal Revenue Service ("IRS"). Further, BEVERLY-CALIFORNIA understands that
the United States takes no position as to the proper tax treatment of any of the
payments made by BEVERLY-CALIFORNIA pursuant to this Plea Agreement, or payments
by Beverly Enterprises pursuant to the Civil Settlement Agreement.
THE UNITED STATES' COMMITMENT
16. In exchange for BEVERLY-CALIFORNIA's guilty plea and its performance
of its other obligations under this Agreement as set forth above, as well as
Beverly Enterprises' execution of the Civil Settlement Agreement and the
Corporate Compliance Agreement, the United States agrees to do the following:
a. It will not file any other criminal charges against
BEVERLY-CALIFORNIA, its parent corporation, or any affiliated
corporations, including Beverly Enterprises, for offenses
relating to the allocation of direct nursing service costs in
Medicare cost reports filed for the years 1992 to 1998; and,
b. It will agree, pursuant to Rule 11(e)(1)(C), to the sentence set
forth in Paragraph 9 above.
MODIFICATION OF PLEA AGREEMENT
17. This Agreement sets forth all the terms of the plea agreement between
BEVERLY-CALIFORNIA and
<PAGE> 10
the United States. BEVERLY-CALIFORNIA understands that no modifications of or
additions to this Agreement shall be valid unless they are in writing and signed
by the United States, BEVERLY-CALIFORNIA's attorney, and a duly authorized
representative of BEVERLY-CALIFORNIA.
STATEMENT BY BEVERLY-CALIFORNIA -- KNOWING AND VOLUNTARY PLEA This
Agreement has been authorized, following consultation with counsel, by the
BEVERLY-CALIFORNIA Board of Directors, by corporate resolution dated October
___, 1999. A certified copy of the corporate resolution is attached as Exhibit A
to this agreement and incorporated herein. Except as set forth in this plea
agreement, BEVERLY-CALIFORNIA has received no promises or inducements to enter
its guilty plea, nor has anyone threatened BEVERLY-CALIFORNIA or any other
person to cause it to enter its guilty plea.
Dated: October ___, 1999
David Banks
- ------------------------------------------
On behalf of BEVERLY-CALIFORNIA
DEFENSE COUNSEL AFFIRMATION -- KNOWING AND VOLUNTARY PLEA
We have discussed with and fully explained to BEVERLY-CALIFORNIA: the facts
and circumstances of the case; all rights with respect to the offense charged in
the Information; possible defenses to the offense charged in the Information;
all rights with respect to the Sentencing Guidelines; and all of the
consequences of entering into this plea agreement and entering guilty pleas. We
have reviewed the entire plea agreement with our client, through its authorized
representatives. In our judgment, BEVERLY-CALIFORNIA, through its authorized
representatives, understands the terms and conditions of the plea agreement, and
we believe BEVERLY-CALIFORNIA's decision to sign the agreement is knowing and
voluntary. BEVERLY-CALIFORNIA's execution of and entry into the plea agreement
is done with our consent.
DATED: October ___, 1999
---------------------------
Mark J. Biros
PROSKAUER ROSE, LLP
<PAGE> 11
DATED: October ___, 1999
Griffin B. Bell
Joseph Sedwick Sollers, III
KING & SPALDING
Counsel for Defendant
BEVERLY-CALIFORNIA
<PAGE> 12
UNITED STATES' SIGNATURE
DATED: October ___, 1999 ROBERT S. MUELLER, III
United States Attorney
-------------------------------
GEORGE D. HARDY
Special Assistant U.S. Attorney
<PAGE> 1
EXHIBIT 10.45
ROBERT S. MUELLER, III (CSBN 59775)
United States Attorney
DAVID SHAPIRO (NYSBN )
Chief, Criminal Division
GEORGE D. HARDY (CSBN )
Special Assistant U.S. Attorney
Attorneys for Plaintiff
UNITED STATES OF AMERICA
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
UNITED STATES OF AMERICA, ) NO. CR.
)
Plaintiff, ) ADDENDUM TO PLEA AGREEMENT
)
v. )
)
BEVERLY ENTERPRISES-CALIFORNIA, INC. )
)
Defendant. )
_____________________________________ )
Defendant BEVERLY ENTERPRISES--CALIFORNIA, INC. ("BEVERLY-CALIFORNIA"),
a California corporation, by and through its counsel of record, as ratified by
corporate resolution, and the United States Department of Justice, by the United
States Attorney's Office for the Northern District of California (the "United
States"), agree to the following addendum (the "Addendum") to the Plea Agreement
previously signed by all parties. This Addendum modifies the terms of the Plea
Agreement as set forth below. The Addendum binds only the United States, as
defined herein, not any state or local prosecuting authorities.
1. Paragraph 1 is amended to substitute "one count of fraud by
interstate carrier" for "one count of wire fraud", and to substitute "18
U.S.C. Section 1341" for "18 U.S.C. Section 1343".
2. The heading of Paragraph 2(A) is amended to read as follows: "Fraud
by Interstate Carrier-Count One".
<PAGE> 2
3. Paragraph 2 (A)(d) is amended to read as follows:
"For the purpose of executing the scheme and artifice to defraud and to
obtain money by means of false and fraudulent pretenses and representations,
BEVERLY-CALIFORNIA did cause to be deposited for delivery by private and
commercial interstate carrier cost reports for nursing homes, which contained
false and fictitious statements relating to nursing service costs."
4. Paragraph 2(B)(b) is amended to read as follows:
"In or about May 1996, BEVERLY-CALIFORNIA submitted one such cost
report to its fiscal intermediary for the purpose of obtaining payment of those
costs by Medicare. On or about June 5, 1997, BEVERLY-CALIFORNIA submitted nine
additional such cost reports for the purpose of obtaining payment of those costs
by Medicare."
5. The heading of Paragraph 3(A) is amended to read "Fraud by
Interstate Carrier."
6. Paragraph 4(k) is amended to read as follows:
"For the purpose of executing the scheme and artifice to
defraud and to obtain money by means of false and fraudulent pretenses and
representations, in or about May 1996, BEVERLY-CALIFORNIA did cause to be
deposited for delivery by private and commercial interstate carrier a Medicare
cost report containing fabricated and inflated costs for direct nursing services
provided at a BEVERLY-CALIFORNIA nursing homes, namely, Pinewood Terrace,
located in Colvill, Washington."
7. Paragraph 4(l) is amended to read as follows:
"In or about May 1996, and on or about June 5, 1997,
BEVERLY-CALIFORNIA submitted a total of ten cost reports for the purpose of
obtaining payment of those costs by Medicare, knowing that those cost reports
contained materially false statements and entries, a matter within the
jurisdiction of the executive branch of the Government of the United States."
11. The Plea Agreement and Addendum set forth all the terms of the plea
agreement (the "Agreement") between BEVERLY-CALIFORNIA and the United States.
BEVERLY-CALIFORNIA understands that no further modifications of or additions to
the Agreement shall be valid unless they are in writing and signed by the United
States,
<PAGE> 3
BEVERLY-CALIFORNIA's attorney, and a duly authorized representative of
BEVERLY-CALIFORNIA.
DATED: January , 2000
--------------------------------------
Mark J.
Biros
PROSKAUER ROSE, LLP
DATED: January , 2000
-------------------------------------
Griffin B. Bell
Joseph Sedwick Sollers, III
KING & SPALDING
Counsel for Defendant BEVERLY-CALIFORNIA
UNITED STATES' SIGNATURE
DATED: January , 2000 ROBERT S. MUELLER, III
United States Attorney
-------------------------------------
LESLIE R. CALDWELL
Chief, Economic Crime
<PAGE> 1
EXHIBIT 10.46
SETTLEMENT AGREEMENT
I. PARTIES
This Settlement Agreement ("Agreement") is entered into between the
United States of America, acting through the United States Department of Justice
and on behalf of the Office of Inspector General ("OIG-HHS") of the Department
of Health and Human Services ("HHS") (collectively the "United States"); Beverly
Enterprises, Inc. ("Beverly Enterprises"), and Domenic Todarello ("Relator")
(collectively, "the Parties"), through their authorized representatives.
II. PREAMBLE
As a preamble to this Agreement the Parties agree to the
following:
A. Beverly Enterprises is a corporation organized pursuant to the laws
of the State of Delaware, with its principal place of business in Fort Smith,
Arkansas. Beverly Enterprises operates, through its subsidiaries, a chain of
nursing homes and is a provider under the Medicare program, administered by the
Health Care Financing Administration ("HCFA").
B. Relator is an individual resident of the State of Arizona. On
October 18, 1995, Relator filed a qui tam action in the United States District
Court for the District of Arizona, styled United States ex rel Todarello v.
Beverly Enterprises, CIV 95-2248 PHX RCB, which was transferred to the North
District of California on or about September 27, 1996, and has been styled
United States ex rel Todarello v. Beverly Enterprises, C96-3697 TEH (N.D. Cal.)
(the "Civil Action").
C. The United States and Relator contend that Beverly Enterprises
submitted or caused to be submitted claims for payment to the Medicare Program
("Medicare"), Title XVII of the Social Security Act, 42 U.S.C. Sections
1395-1395ddd (1997).
D. The United States and Relator contend that they have certain civil
claims against Beverly Enterprises under the False Claims Act, 31 U.S.C.
Sections 3729-3733, and the United States also contends it has certain civil
claims against Beverly Enterprises under other federal statutes and/or common
law doctrines, in the amount of four hundred sixty million ($460,000,000), for
<PAGE> 2
2
engaging in the following conduct during the period from 1992 through 1998:
submitting Medicare skilled nursing facility cost reports, for cost report years
1992-1998, that overstated the costs reimbursable to the facilities' Medicare
certified units by mis-allocating labor hours to the Medicare units (the
"Covered Conduct").
E. The United States also contends that it has certain administrative
claims against Beverly Enterprises under the provisions for permissive exclusion
from the Medicare, Medicaid and other federal health care programs, 42 U.S.C.
Section 1320a-7(b), and the provisions for civil monetary penalties, 42 U.S.C.
Section 1320a-7a, for the Covered Conduct.
F. Except as so expressly admitted in the plea agreement executed by
Beverly Enterprises - California, Inc., in connection with the criminal action,
United States v. Beverly Enterprises - California, Inc. (N.D. Calif.), Beverly
Enterprises does not admit the contentions of the United States or the Relator
as set forth in Paragraphs D and E, above.
G. In order to avoid the delay, uncertainty, inconvenience and expense
of protracted litigation of these claims, the Parties have reached a full and
final settlement as set forth below.
III. TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the mutual promises, covenants, and
obligations set forth below, and for good and valuable consideration as stated
herein, the Parties agree as follows:
1. Beverly Enterprises agree to pay to the United States One Hundred Seventy
Million Dollars ($170,000,000) (the "Settlement Amount"), which Settlement
Amount shall be a debt, arising out of a compromise of claims for an alleged
overpayment under the Medicare Provider Agreements held by Beverly Enterprises'
skilled nursing facilities, immediately due and owing to the United States on
the date of execution of this Agreement, as follows:
a. Beverly Enterprises shall pay Twenty-Five Million Dollars ($25,000,000)
within thirty days of the effective date of this Agreement. Beverly Enterprises
shall satisfy this obligation by Fedwire electronic funds transfer to the
"Department of Justice," as arranged through the
<PAGE> 3
3
Financial Litigation Unit, United States Attorney's Office, Northern District of
California.
b. In addition to the payment described in Paragraph a, the balance of the
Settlement Amount shall be paid by Beverly Enterprises by accepting a reduction
to its periodic payment from the Medicare program, beginning with the first
payment on or after January 1, 2000, and extending for a period of eight years
thereafter, by an equal pro-rata amount sufficient to total One Hundred Forty
Five Million Dollars ($145,000,000) (without interest). These payments shall be
in the form of a reduction, or withhold, to be implemented by the Medicare
program by means of a recoupment imposed pursuant to 42 C.F.R. Section
405.370-.375, and Beverly Enterprises waives all notice provisions in connection
with such recoupment. The Medicare program will withhold $18,124,999.98 per year
(under current HCFA payment methodologies, this will be accomplished by
withholding $697,115.38 from each of the twenty-six interim payments to Beverly
Enterprises each year). Beverly Enterprises agrees that it will elect to use a
single, national Fiscal Intermediary with respect to each cost reporting year or
period from the effective date of this Agreement until the full Settlement
Amount has been paid. Beverly Enterprises agrees to notify its Fiscal
Intermediary in writing if Beverly Enterprises intends to sell, close or
otherwise dispose of facilities where such sale or disposition will result in a
reduction of the interim payment to Beverly Enterprises below $697,115.38.
(Nothing in this Agreement affects HCFA's right to deny any request for a change
of Fiscal Intermediary consistent with 42 C.F.R. Part 421). If any interim
payment equals less than $697,115.38, Beverly Enterprises must, within five days
of the receipt of notice of the interim payment, pay the difference to the
United States, through electronic funds transfer to "Department of Justice," as
arranged through the Financial Litigation Unit, United States Attorney's Office,
Northern District of California. In the event that HCFA payment mechanisms
change, Beverly agrees to maintain the same repayment schedule so that
recoupment is completed within eight years.
2. Subject to the exceptions in Paragraph 4 below, in consideration of the
obligations of Beverly Enterprises set forth in this Agreement, and conditioned
upon Beverly Enterprises's payment in full of the Settlement Amount, and subject
to Paragraphs 22 and 23 below
<PAGE> 4
4
(concerning bankruptcy proceedings commenced within 91 days of any payment (or
reduction in any HCFA payment) under this Agreement), the United States (on
behalf of itself, its officers, agents, agencies and departments) agrees to
release Beverly Enterprises and its subsidiaries, directors, officers,
employees, agents and shareholders from any civil or administrative monetary
claim the United States has under the False Claims Act, 31 U.S.C. Sections
3729-3733; the Civil Monetary Penalties Law, 42 U.S.C. Section 1320a-7a; the
Program Fraud Civil Remedies Act, 31 U.S.C. Sections 3801-3812; or the common
law theories of payment by mistake, unjust enrichment, breach of contract and
fraud, for the Covered Conduct. No individuals are released by this Paragraph.
3. In consideration of the obligations of Beverly Enterprises set forth in this
Agreement and the Corporate Integrity Agreement incorporated by reference,
conditioned upon Beverly Enterprises's payment in full of the Settlement Amount,
and subject to Paragraphs 22 and 23, below (concerning bankruptcy proceedings
commenced within 91 days of any payment (or reduction in the periodic interim
payment) under this Agreement), the OIG-HHS agrees to release and refrain from
instituting, directing or maintaining any administrative claim or any action
seeking exclusion from the Medicare, Medicaid or any other federal health care
program (as defined in 42 U.S.C. Section 1320a-7b(f)) against Beverly
Enterprises, or its subsidiaries, directors, officers, employees, agents and
shareholders, under 42 U.S.C. Section 1320a-7a (Civil Monetary Penalties Law),
or 42 U.S.C. Section 1320a-7(b) (permissive exclusion), for the Covered Conduct,
except as reserved in Paragraph 4, below, and as reserved in this Paragraph.
Nothing in this Paragraph precludes the OIG-HHS from taking action against
entities or persons, or for conduct and practices, for which civil claims have
been reserved in Paragraph 4, below. No individuals are released by this
Paragraph.
4. Notwithstanding any term of this Agreement, specifically reserved and
excluded from the scope and terms of this Agreement as to any entity or person
(including Beverly Enterprises) are any and all of the following.
5. (1) Any civil, criminal or administrative claims arising under Title 26, U.S.
Code (Internal Revenue Code);
<PAGE> 5
5
6. (2) Any criminal liability;
7. (3) Except at explicitly stated in this Agreement, any administrative
liability, including mandatory exclusion from Federal health care programs;
8. (4) Any liability to the United States (or its agencies) for any conduct
other than the Covered Conduct;
9. (5) Any claims based upon such obligations as are created by this Agreement;
10. (6) Any express or implied warranty claims or other claims, to the extent
such claims may otherwise exist at law, for defective or deficient products or
services, including quality of goods and services, provided by Beverly
Enterprises.
11. (7) Except as provided with respect to Relator, any civil or administrative
claims against individuals, including current or former directors, officers,
employees, agents or shareholders of defendant Beverly Enterprises.
12. Beverly Enterprises has entered into a Corporate Integrity Agreement with
HHS, attached as Exhibit A, which is incorporated into this Agreement by
reference. Beverly Enterprises will immediately, upon execution of this
Agreement, commence the implementation of its obligations under the Corporate
Integrity Agreement.
13. The United States
has obtained statements publicly filed by Beverly Enterprises with the
Securities and Exchange Commission (collectively, the "Financial Statements").
The United States has relied on the accuracy and completeness of the Financial
Statements in reaching this Agreement. Beverly Enterprises and its subsidiaries
represent that each of the Financial Statements (including the related notes)
presents fairly, in all material respects, the consolidated financial position
and consolidated results of operations and cash flows of Beverly Enterprises and
its subsidiaries as of the respective dates for the respective periods set forth
therein, all in conformity with generally accepted accounting principles
consistently applied during the periods involved except as noted therein, and
subject, in the case of the unaudited interim financial statements, to normal
and recurring year-end audit adjustments that have not been and are not
<PAGE> 6
6
expected to be material in amount. As such, Beverly Enterprises and its
subsidiaries further warrant that they do not own or have an interest in any
assets which are not accounted for by the Financial Statements.
14. a. Beverly Enterprises represents that Financial Statements did not contain
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
15. b. In the event the United States learns that the Financial Statements
contained any untrue statement of a material fact or omitted to state a material
fact required to make the statement not misleading with respect to the existence
of asset(s) in which Beverly Enterprises and/or its subsidiaries had an interest
at the time of this Agreement, and in the event such nondisclosure or
misrepresentation changes the estimated net worth of Beverly Enterprises set
forth on the Financial Statements by one million dollars ($1,000,000) or more,
the United States may at its option: (1) rescind this Agreement and file suit
upon the underlying claims described in paragraphs D and E (with Relator
retaining all rights and interests under 31 U.S.C. Section 3730); or (2) let the
Agreement stand and collect from Beverly Enterprises the full Settlement Amount
plus one hundred percent (100%) of the value of the previously undisclosed net
worth of Beverly Enterprises. Beverly Enterprises agrees not to contest in any
judicial or administrative forum any collection action undertaken by the United
States pursuant to this provision.
16. In the event that the United States, pursuant to Paragraph 6(b), above, opts
to rescind this Agreement, Beverly Enterprises expressly waives and agrees not
to plead, argue or otherwise raise any defenses under the theories of statute of
limitations, laches, estoppel or similar theories, based on the passage of time,
to any civil or administrative claims which (1) are filed by the United States
within thirty calendar days of written notification to Beverly Enterprises and
Relator that this Agreement has been rescinded, and (2) relate to the Covered
Conduct, except to the extent these defenses were available on October 18, 1995.
<PAGE> 7
7
17. With the exception of administrative claims regarding Routine Cost Limit
Exceptions ("RCLEs") which are separately addressed in Paragraphs 10 and 11 of
this Agreement, any administrative claims which HCFA may assert regarding
Beverly Enterprises' 1996, 1997 and 1998 cost reports other than those relating
to the Covered Conduct will be handled in the normal administrative process set
out in the pertinent federal regulations covering the Medicare program. Pending
Routine Cost Limit (RCLE) requests for cost years 1996-1998 will be handled as
provided for in Paragraphs 9 and 10, below.
18. With respect to the 1995 cost reports used as a basis for Skilled Nursing
Facilities Prospective Payment System reimbursement during the transition
period, HCFA reserves its right, if any, to reopen 1995 cost reports and, in
accordance with applicable Medicare law, regulations and manual provisions,
including, but not limited to, Beverly Enterprises' rights to appeal any
determination regarding any adjustment as a result of any reopening, to
recalculate the facility specific rate for Beverly Enterprises' facilities based
on the direct nursing labor allocation issue, but HCFA agrees that the payment
effect of any adjustments will not exceed Thirty Seven Million Dollars
($37,000,000) in the aggregate over the relevant three-year reimbursement period
(1999-2001).
19. Beverly Enterprises agrees that the RCLEs previously submitted for the year
1996 will be denied. However, within one year of the effective date of this
Agreement, Beverly Enterprises may submit to the fiscal intermediary revised
RCLEs for the year 1996. Beverly Enterprises agrees that as part of its
resubmission of 1996 RCLEs as described above, it will reduce the total direct
labor cost in the facility certified unit by 13%. HCFA will adjudicate any
administrative claims regarding the 1996 RCLEs in the normal administrative
claims process set out in the pertinent federal regulations covering the
Medicare program.
20. HCFA shall complete a statistically valid sample audit of Covered Conduct
for cost reports filed for the limited purpose of calculating an average
percentage adjustment, if any, to be applied to the direct labor cost component
of the pending RCLEs for the years 1997 and 1998. Any sample audit conducted by
HCFA with respect to the Covered Conduct shall include at least 10% of the
facilities, randomly selected, and shall employ a statistically valid sampling
<PAGE> 8
8
methodology and generally accepted auditing standards including adjustment
methodology. HCFA will adjudicate any administrative claims regarding the
sampling methodology selected, the audit methodology and protocols applied and
the method of extrapolating the sampled results with respect to the 1997 and
1998 direct labor component of the RCLEs in the normal administrative process
set out in pertinent federal regulations covering the Medicare program. In the
event that the audits contemplated under this Paragraph result in the reduction
of amounts claimed by Beverly, the recoupment by HCFA of any amounts paid to
Beverly with respect to the 1997 and 1998 RCLEs shall be limited to an annual
recoupment of no more than $7 million in principal, plus accrued interest per
annum, until such recoupment amounts have been fully liquidated. Nothing in this
section shall limit HCFA's right to audit non-Covered Conduct costs with respect
to the years 1997 and 1998.
21. The United States and the Relator agree that the Relator is entitled,
pursuant to 31 U.S.C. Section 3730(d)(1), to a share equal to 17 percent (17%)
of the United States' recovery of the Settlement Amount under Paragraphs 1.a.
and 1.b. and that Relator is not entitled to any share of any future reduction
by HCFA as described in Paragraphs 9, 10, and 11 of this Agreement. The United
States agrees that, within a reasonable time after it receives or effects a
reduction or withhold that results in any payment of the Settlement Amount or a
payment pursuant to Paragraph 6 of the Agreement from Beverly Enterprises, it
will pay Relator an amount equal to 17 percent (17%) of the payment. All
payments to Relator under this Agreement shall be made by electronic funds
transfer in accordance with the written instructions of Relator's counsel.
22. The Relator and Beverly Enterprises agree that pursuant to 31 U.S.C. Section
3730(d)(1), the Relator is entitled to his necessary expenses, reasonable costs
and attorneys' fees from Beverly Enterprises in the amount of $103,000.00.
Beverly Enterprises shall pay this amount by electronic funds transfer to the
Relator within five days of the effective date of this Agreement.
23. Pursuant to 31 U.S.C. Section 3730(c)(2)(B), the Relator agrees that
the settlement of claims in the Civil Action is fair, adequate and reasonable
under all the circumstances. Further, in consideration of the obligations of
Beverly Enterprises set forth in this Agreement, conditioned
<PAGE> 9
9
upon Beverly Enterprises's payment in full of the Settlement Amount, and subject
to Paragraphs 22 and 23, below (concerning bankruptcy proceedings (or reduction
in any HCFA payment) under this Agreement), on the effective date of this
Agreement, the Relator, for himself, his heirs, representatives, successors and
assigns, releases and forever discharges:
a. Beverly Enterprises, and its present or former officers, directors,
employees, shareholders, and agents from claims the Relator has or may have
arising from or relating to the Covered Conduct or relating to the Civil Action;
and
b. The United States from any claims arising from or relating to the filing of
the Civil Action, or, pursuant to 31 U.S.C. Section 3730(d)(1), for a share of
any recoveries relating to or arising out of the Civil Action beyond that
specified in Paragraph 11 of this Agreement.
24. Beverly Enterprises waives and will not assert any defenses Beverly
Enterprises may have to any criminal prosecution or administrative action
relating to the Covered Conduct, based in whole or in part on a contention that,
under the Double Jeopardy Clause in the Fifth Amendment of the Constitution, or
under the Excessive Fines Clause in the Eighth Amendment of the Constitution,
this Settlement bars a remedy sought in such criminal prosecution or
administrative action. Beverly Enterprises agrees that this Agreement is not
punitive in purpose or effect. Nothing in this Paragraph or any other provision
of this Agreement constitutes an agreement by the United States concerning the
characterization of the Settlement Amount for purposes of the Internal Revenue
Laws, Title 26 of the United States Code.
25. Beverly Enterprises fully and finally releases the Relator and his
attorneys, the United States, its agencies, employees, servants, and agents from
any claims (including attorneys' fees, costs, and expenses of every kind and
however denominated) which Beverly Enterprises has asserted, could have
asserted, or may assert in the future against the Relator and his attorneys, the
United States, its agencies, employees, servants, and agents, related to the
Covered Conduct or the United States', Relator's and Relator's counsel's
investigation and prosecution of the Civil Action.
<PAGE> 10
10
26. Beverly Enterprises agrees that all costs (as defined in the Federal
Acquisition Regulations ("FAR") Section 31.205-47 and in Titles XVIII and XIX of
the Social Security Act, 42 U.S.C. Sections 1395-1395ddd (1997) and
1396-1396v(1997), and the regulations promulgated thereunder) incurred by or on
behalf of Beverly Enterprises, its subsidiaries and its present or former
officers, directors, employees, shareholders, and agents, in connection with:
(1) the matters covered by this Agreement, (2) the Government's audit(s) and the
civil and criminal investigation(s) of the matters covered by this Agreement,
(3) Beverly Enterprises' investigation, defense, and corrective actions
undertaken in response to the Government's audit(s) and the civil and criminal
investigations in connection with the matters covered by this Agreement
(including attorneys' fees), including any new obligations undertaken pursuant
to the Corporate Integrity Agreement incorporated in this Settlement Agreement,
(4) the negotiation of this Agreement, the Corporate Integrity Agreement and any
plea agreement, and (5) the payment made pursuant to this Agreement, are
unallowable costs on Government contracts and under the Medicare Program,
Medicaid Program, TRICARE Program, Veterans Affairs (VA) Program, and the
Federal Employees Health Benefits program (FEHBP) (hereafter, "unallowable
costs"). These unallowable costs will be separately estimated and accounted for
by Beverly Enterprises, and Beverly Enterprises and its subsidiaries will not
charge such unallowable costs directly or indirectly to any contracts with the
United States, or seek payment for such unallowable costs through any cost
report, cost statement, information statement or payment request submitted by
Beverly Enterprises or any of its subsidiaries to the Medicare, Medicaid,
TRICARE, VA or FEHBP programs.
27. Beverly Enterprises further agrees that within 120 days of the effective
date of this Agreement, it will identify to applicable Medicare and TRICARE
intermediaries, carriers and/or contractors, and Medicaid, VA, and FEHBP fiscal
agents, any unallowable costs (as defined in this Paragraph) included in
payments previously sought from the United States or any State Medicaid Program,
including, but not limited to, payments sought in any cost reports, cost
statements,
<PAGE> 11
11
information reports, or payment requests already submitted by Beverly
Enterprises or any of its subsidiaries, and will request, and agree, that such
cost reports, cost statements, information reports or payment requests, even if
already settled, be adjusted to account for the effect of the inclusion of the
unallowable costs. Beverly Enterprises agrees that the United States will be
entitled to recoup from Beverly Enterprises any overpayment as a result of the
inclusion of such unallowable costs on previously-submitted cost reports,
information reports, cost statements or requests for payment. Any payments due
after the adjustments have been made shall be paid to the United States pursuant
to the direction of the Department of Justice, and/or the affected agencies. The
United States reserves its rights to disagree with any calculations submitted by
Beverly Enterprises or any of its subsidiaries on the effect of inclusion of
unallowable costs (as defined in this paragraph) on Beverly Enterprises or any
of its subsidiaries' cost reports, cost statements or information reports.
Nothing in this Agreement shall constitute a waiver of the rights of the United
States to examine or reexamine the unallowable costs described in this
Paragraph.
28. Beverly Enterprises covenants to cooperate fully and truthfully with the
United States' investigation of individuals and entities not specifically
released in this Agreement, for the Covered Conduct. Upon reasonable notice,
Beverly Enterprises will make reasonable efforts to facilitate access to, and
encourage the cooperation of, its directors, officers, and employees, for
interviews and testimony, consistent with the rights and privileges of such
individuals, and will furnish to the United States, upon reasonable request, all
non-privileged documents and records in its possession , custody or control
relating to the Covered Conduct. Beverly Enterprises agrees to consent to a
motion filed by the United States to permit access by the Office of Counsel to
the Inspector General to information covered by Rule 6(e) of the Federal Rules
of Criminal Procedure.
29. This Agreement is intended to be for the benefit of the Parties, only, and
by this instrument the Parties do not release any claims against any other
person entity.
30. Beverly Enterprises agrees that it will not seek payment for any of the
health care billings covered by this Agreement from any health care
beneficiaries or their parents or sponsors. Beverly Enterprises waives any
causes of action against these beneficiaries or their parents or sponsors based
upon the claims for payment covered by this Agreement.
<PAGE> 12
12
31. Beverly Enterprises expressly warrants that it has reviewed its financial
situation after recording a pre-tax charge for the entire payment obligation
hereunder and believes that it currently is solvent within the meaning of 11
U.S.C. Section 547(b)(3). Further, the Parties expressly warrant that, in
evaluating whether to execute this Agreement, the Parties (i) have intended that
the mutual promises, covenants and obligations set forth herein constitute a
contemporaneous exchange for new value given to Beverly Enterprises, within the
meaning of 11 U.S.C. Section 547(c)(1), and (ii) have concluded that these
mutual promises, covenants and obligations do, in fact, constitute such a
contemporaneous exchange.
32. In the event Beverly Enterprises commences, or a thirty party commences,
within 91 days of any payment (or reduction in any HCFA payments) under this
Agreement, any case, proceeding, or other action (i) under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, seeking to have any
order for relief of Beverly Enterprises' debts, or seeking to adjudicate Beverly
Enterprises as bankrupt or insolvent, or (ii) seeking appointment of a receiver,
trustee, custodian or other similar official for Beverly Enterprises or for all
or any substantial part of Beverly Enterprises's assets, Beverly Enterprises
agrees as follows:
33. Beverly Enterprises will not plead, argue or otherwise take the position in
any such case, proceeding or action that: (a) Beverly Enterprises was insolvent
at the time this Agreement was entered into, or became insolvent as a result of
the payments (or reduction in the HCFA payments) made to the United States
and/or Relator hereunder; or (b) the mutual promises, covenants and obligations
set forth in this Agreement do not constitute a contemporaneous exchange for new
value given to Beverly Enterprises.
34. In the event Beverly Enterprises commences, or a third party commences, any
case, proceeding, or other action (i) under any law relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking to have any order for
relief of Beverly Enterprises' debts, or seeking to adjudicate Beverly
Enterprises as bankrupt or insolvent, or (ii) seeking appointment of a receiver,
trustee, custodian or other similar official for Beverly Enterprises or for all
or any substantial part of Beverly Enterprises' assets, Beverly Enterprises
agrees as follows:
<PAGE> 13
13
a. If, in any of the proceedings or actions described above in Paragraph 23,
Beverly Enterprises does not or is unable to honor the payment obligations
hereunder, the United States shall hold a valid, allowed, liquidated,
noncontingent, undisputed claim for $460 million under the False Claims Act and
other federal statutes and/or common law doctrines, as specifically enumerated
above, less payments received pursuant to this Agreement, or any other
applicable law in any case, proceeding, or other action described in the first
clause of this Paragraph, and in consideration for the final settlement of the
United States' claims against it in the Civil Action as described herein,
Beverly Enterprises expressly waives and agrees not to plead, argue or otherwise
raise any defenses otherwise available to it regarding the claim asserted by the
Untied States as set forth above in Paragraph 23.a. in such proceeding or other
action;
b. $170 million of the amount specified in Paragraph 23.a. shall constitute an
overpayment under the Medicare Provider Agreements held by Beverly Enterprises'
skilled nursing facilities;
c. If and to the extent that Beverly Enterprises' obligations hereunder are
avoided for any reason, including, but not limited to, through the exercise of
any avoidance powers under the Bankruptcy Code, the United States, at its sole
option, may rescind the releases in this Agreement, return to Beverly
Enterprises any payments collected hereunder, and bring any civil and/or
administrative claim, action or proceeding against Beverly Enterprises for the
claims that otherwise are covered by the releases provided in Paragraphs 2, 3
and 14, above, with Relator retaining all rights and interests under 31 U.S.C.
Section 3730;
d. If the United States chooses to rescind the releases in accordance with
Paragraph 23.c., Beverly Enterprises agrees that (i) any such claims, actions or
proceedings brought by the United States (including any proceedings to exclude
Beverly Enterprises from participation in Medicare, Medicaid and other Federal
health care programs) are not subject to the automatic stay imposed by 11 U.S.C.
Section 362(a) as a result of the action, case or proceeding described in the
first clause of this paragraph, and (ii) it will not plead, argue or otherwise
contend that the United States' claims, actions or proceedings are subject to
such automatic stay; (iii) it will not seek relief under
<PAGE> 14
14
11 U.S.C. Section 105 to enjoin or restrain the United States from pursuing such
claims, actions or proceedings; and (iv) it will not plead, argue or otherwise
raise any defenses under the theories of statute of limitations, laches estoppel
or similar theories, to any such civil or administrative claims, actions or
proceeding which are brought by the United States within thirty calendar days of
written notification to Beverly Enterprises that the releases herein have been
rescinded pursuant to this Paragraph, except to the extent such defenses were
available on October 18, 1995; and
e. Beverly Enterprises will not (a) oppose any attempt by the United States,
including, but not limited to, a motion filed by the United States seeking
relief from the automatic stay imposed by 11 U.S.C. Section 362, to recover,
either through set off or recoupment, monies owed by Beverly Enterprises to the
United States (either under this Agreement or otherwise) against any monies owed
by the United States to Beverly Enterprises or (b) seek relief under 11 U.S.C.
Section 105 to enjoin or restrain the United States from exercising these
rights.
35. Beverly Enterprises further agrees that the express waivers set forth in
Paragraphs 22 and 23 are in consideration for the final settlement of the United
States' claims against it in the Civil Action as described herein. In
consideration for the final settlement of the United States' claims against it
in the Civil Action as described herein, and in the event, and only in the
event, a proceeding or other actions in commenced as described in Paragraph 23,
Beverly Enterprises expressly waives and agrees not to plead, argue or otherwise
raise any defenses otherwise available to it regarding the claim asserted by the
United States as set forth above in Paragraph 23.a. in such proceeding or other
action.
36. Upon receipt of the payment described in Paragraph 1.a. above, the United
States and Relator shall promptly sign and file in the Civil Action a Notice of
Intervention and Joint Stipulation of Dismissal with prejudice of the Civil
Action pursuant to the terms of the Agreement.
37. Except as otherwise provided, each party to this Agreement will bear its own
legal and other costs incurred in connection with this matter, including the
preparation and performance of this Agreement.
<PAGE> 15
15
38. Beverly Enterprises represents that this Agreement is freely and voluntarily
entered into without any degree of duress or compulsion whatsoever.
39. This Agreement is governed by the laws of the laws of the United States. The
Parties agree that the exclusive jurisdiction and venue for any dispute arising
between and among the Parties under this Agreement will be the United States
District Court for the Northern District of California, except that disputes
arising under the Corporate Integrity Agreement shall be resolved exclusively
under the provisions in the Corporate Integrity Agreement.
40. This Agreement and the Corporate Integrity Agreement which is incorporated
herein by reference constitutes the complete agreement between the Parties. This
Agreement may not be amended except by written consent of the Parties except
that only Beverly Enterprises and OIG-HHS must agree in writing to modification
of the Corporate Integrity Agreement.
41. The undersigned individuals signing this Agreement on behalf of Beverly
Enterprises represent and warrant that they are authorized by Beverly
Enterprises to execute this Agreement. The undersigned United States signatories
represent that they are signing this Agreement in their official capacities and
that they are authorized to execute this Agreement.
42. This Agreement may be executed in counterparts, each of which constitutes an
original and all of which constitute one and the same agreement.
43. This Agreement is effective on the date of signature of the last signatory
to the Agreement.
44. This Agreement is binding on successors, transferees, and assignees of the
Parties.
THE UNITED STATES OF AMERICA
Dated: BY:
------------------ -------------------------------
Laurie A. Oberembt
Trial Attorney
Commercial Litigation Branch
Civil Division
U.S. Department of Justice
Robert S. Mueller III
United States Attorney
<PAGE> 16
16
Dated: BY:
------------------ -------------------------------
Gail Killefer
Assistant United States Attorney
Northern District of California
Dated: BY:
------------------ -------------------------------
Lewis Morris
Assistant Inspector General
Office of Counsel to the
Inspector General
Office of Inspector General
United States Department of
Health and Human Services
THE RELATOR
Dated: BY:
------------------ -------------------------------
Domenic Todarello
Relator
Dated: BY:
------------------ -------------------------------
Francis J. Balint, Jr.
Bonnett, Fairbourn, Friedman &
Balint, P.C.
Counsel for the Relator
Dated: BY:
------------------ -------------------------------
John J. Stoia, Jr.
Jeffrey W. Lawrence
Milberg Weiss Bershad Hynes &
Lerach LLP
Counsel for the Relator
BEVERLY ENTERPRISES - DEFENDANT
Dated: BY:
------------------ -------------------------------
Beverly Enterprises, Inc.
<PAGE> 17
17
Dated: BY:
------------------ -------------------------------
Griffin B. Bell, Esq.
J. Sedwick Sollers III, Esq.
King & Spaulding
Counsel for Beverly Enterprises,
Inc.
Dated: BY:
------------------ -------------------------------
Joseph E. Casson, Esq.
Proskauer Rose LLP
Counsel for Beverly Enterprises,
Inc.
<PAGE> 1
EXHIBIT 10.47
AGREEMENT BETWEEN THE
OFFICE OF INSPECTOR GENERAL
OF THE
U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES
AND
BEVERLY ENTERPRISES, INC.
REGARDING THE OPERATIONS OF
BEVERLY ENTERPRISES-CALIFORNIA, INC.
PRIOR TO ITS EXCLUSION PURSUANT TO 42 U.S.C. SECTION 1320a-7(a)(1)
1. This Agreement is entered into between the Office of Inspector
General ("OIG") of the United States Department of Health and Human Services
("HHS") and Beverly Enterprises, Inc. ("Beverly") (collectively, the "parties").
This Agreement addresses the arrangement between the parties regarding the
operations of certain Beverly nursing facilities and of Beverly
Enterprises-California, Inc. ("Beverly-California"), after its conviction and
prior to its exclusion, as further described below.
2. Beverly-California will enter a plea of guilty and be convicted in
the Northern District of California of one count of wire fraud (18 U.S.C.
Section 1343) and 10 counts of false statements (18 U.S.C. Section 1001) (the
entry of the Judgment in this matter is hereinafter referred to as the
"Conviction"). Beverly, Beverly-California, and the OIG agree that as a result
of the Conviction, Beverly-California will be subject to mandatory exclusion
from participation in all Federal health care programs pursuant to 42 U.S.C.
Section 1320a-7(a)(1).
3. At the time of the Conviction, Beverly-California will be comprised
of the 10 nursing facilities listed on Exhibit A (the "Facilities").
4. In order to ensure that the mandatory exclusion of
Beverly-California will not result in disruption or harm to the residents of the
Facilities, Beverly agrees that the Facilities shall be divested from
Beverly-California to unrelated parties in a manner consistent with this
Agreement and the OIG agrees to withhold notice of exclusion in a manner
consistent with this Agreement.
5. Beverly agrees that to the extent the interests of
Beverly-California in any Facilities are not divested to unrelated parties,
Beverly must ensure that the only interest in such Facilities held by
Beverly-related entities after the time of Conviction will be the interest in
the Facilities held by Beverly-California.
6. Beverly shall operate the Facilities in a manner consistent with
this Agreement. Beverly shall not attempt to transfer the Facilities to any
related entity, subsidiary, or affiliate of Beverly other than
Beverly-California. Beverly shall not: close the Facilities
<PAGE> 2
prior to any exclusion, convert the Facilities to "private pay," or transfer
residents eligible for coverage by Federal health care programs from the
Facilities unless such residents request transfers.
7. Within 120 days after the Conviction, Beverly (or
Beverly-California) shall be Under Contract (as defined in paragraph 17) with
unrelated third parties to divest itself, absolutely and in good faith, of any
interest in the Facilities, including such additional ancillary assets it owned
within the Facilities as are necessary to assure the operability and
marketability of the Facilities. Beverly also shall make all arrangements within
its control that are necessary to assure the operability and marketability of
the Facilities until such time as Beverly-California divests itself of all
interest in the Facilities as required under this Agreement.
8. Until Beverly and Beverly-California have completely divested
themselves of ownership of all of the Facilities and new owners are operating
all of the Facilities, Beverly shall: (a) ensure that employees provide the
legally required quality of care to the Facilities' residents and meet all of
the requirements applicable to nursing facilities participating in Medicare and
other Federal health care programs, e.g., 42 C.F.R. Part 483; and (b) take such
actions as are necessary to maintain the present marketability, viability, and
competitiveness of all of the Facilities, and to prevent the destruction,
removal, wasting, deterioration, or impairment of any of the Facilities or the
assets and businesses ancillary to the Facilities (except for ordinary wear and
tear). If a temporary manager appointed pursuant to paragraph 12 is managing a
Facility, Beverly is responsible to meet the requirements of this paragraph only
to the extent that Beverly has control over the Facility and its employees.
Nothing in this Agreement shall limit the ability of the Health Care Financing
Administration to take whatever enforcement actions it deems necessary against
Beverly facilities should it determine that quality of care has deteriorated in
a manner that causes a facility not to be in substantial compliance with Federal
certification requirements at 42 C.F.R. Part 483. Nothing in this Agreement
shall limit Beverly's rights in any such enforcement proceedings.
9. As soon as possible and prior to entering actively into divestiture
negotiations, Beverly shall provide the OIG with written notice of the identity
of potential future operators of the Facilities. Beverly agrees that
Beverly-California shall only become Under Contract to divest its interest in
the Facilities to third-party operators who have been approved by the OIG. The
OIG agrees that it will not unreasonably withhold consent to the divestiture of
Beverly's (or Beverly-California's) interest in any of the Facilities (or to the
transfer of Facilities' provider agreements) to qualified third-party nursing
home operators. Once Beverly has provided the identity of potential future
operators of a Facility, the time periods applicable to that Facility shall be
tolled until the OIG provides Beverly with written notice of: (a) approval of at
least one such potential future operator; or (b) disapproval of the proposed
future operators and the grounds for such disapproval. The OIG agrees to provide
written assurance to any approved potential
<PAGE> 3
future operator that, upon divestiture, a Facility will be permitted to operate
free from any encumbrances or limitations imposed by this Agreement or the
Conviction of Beverly-California.
10. Within 120 days after the Conviction, Beverly may notify the OIG in
writing of its inability to find a third party willing or able to enter into a
contract to divest Beverly-California of its interest in any Facility and
request substitution for such a Facility or appointment of a Trustee. Such a
notice shall include a description of Beverly's efforts to identify such a third
party for the Facility. After receiving such notification and considering
Beverly's report, the OIG, in its sole discretion, may replace the Facility
identified by Beverly with any appropriate nursing facility owned by Beverly or
any of its subsidiaries chosen by the OIG (such a facility shall be referred to
as an "Alternate Facility") or appoint a Trustee. In addition, if any Facility
is not Under Contract within 120 days after the Conviction, the OIG, in its sole
discretion, may substitute an Alternate Facility for such a Facility. If the OIG
exercises the authority described in this paragraph to substitute a Facility,
Beverly shall immediately take all necessary steps to divest the Alternate
Facility in a manner consistent with this Agreement. Ownership of the
substituted original Facility shall not be transferred from Beverly-California
until the Alternate Facility has been divested in a manner consistent with this
Agreement to a purchaser not affiliated with Beverly. Upon divestiture of an
Alternate Facility, the substituted original Facility may be transferred to any
Beverly entity or third party and may continue to operate free from any
encumbrances or limitations imposed by this Agreement or the Conviction of
Beverly-California.
11. In the event that, pursuant to paragraph 10, the OIG notifies
Beverly that it must substitute an Alternate Facility for a Facility, that
Alternate Facility will then be treated as one of the original Facilities for
the purposes of this Agreement. Thus, the obligations of Beverly under this
Agreement related to Facilities shall apply to any Alternate Facility for which
the OIG has given notice to Beverly to transfer ownership, e.g., Beverly shall
be obligated to divest the Alternate Facility as if it had been a Facility
listed on Exhibit A at the time of the Conviction. However, with respect to an
Alternate Facility, the time limits set forth in this Agreement shall be
extended by 60 days plus the number of days (if any) that elapsed between
Beverly's submission of the notice described in paragraph 10 and the OIG's
acceptance of substitution of that Alternate Facility in response to that
notice. If Beverly is not Under Contract to divest itself of all interest in the
Alternate Facility within the amended time period (the original deadline plus 60
days plus the number of days that elapsed between Beverly's submission of the
notice described in paragraph 10 and the OIG's substitution of that Alternate
Facility in response to that notice), the OIG shall have the authority to use
the remedies set forth in this Agreement with respect to that Alternate
Facility.
12. If Beverly (or Beverly-California) is not Under Contract for
divestiture of the interest of Beverly-California in any one or more of the
Facilities within 120 days after
<PAGE> 4
the Conviction, the OIG may appoint a temporary manager for that Facility. If
the OIG (or its authorized representative) appoints a temporary manager, the
temporary manager shall have full authority to manage the Facility in a
commercially reasonable manner for up to 120 days or until another facility is
substituted for such Facility pursuant to the provisions of this Agreement. If
Beverly (or Beverly-California) is not Under Contract for the divestiture of at
least eight of the Facilities within 120 days after the Conviction, the OIG has
the authority to appoint a Trustee who shall be authorized to divest Beverly (or
Beverly-California) of its interest in the Facilities that remain undivested. If
the OIG appoints a Trustee, the Trustee will also have full authority to operate
any Facilities not Under Contract on terms determined by the OIG, but shall not
otherwise be permitted to obligate Beverly beyond 120 days, or, if the Facility
becomes Under Contract within 120 days, beyond the time of divestiture. The
temporary manager and/or Trustee will report directly to the OIG or OIG's
designee (e.g., the appropriate state agency). Beverly shall pay the reasonable
costs associated with all temporary managers and/or Trustees appointed pursuant
to this Agreement.
13. Beverly and the OIG agree to the following provisions for the
imposition of penalties, in the OIG's sole discretion, in the event the
Facilities (or Alternate Facilities to the extent that they are substituted for
Facilities) are not divested in a manner consistent with this Agreement. For
each day after the 120th day after the Conviction that a Facility is not Under
Contract, the OIG may impose penalties on Beverly of up to $10,000 per day per
facility for each such Facility (up to a limit of 180 days of such penalties for
any particular Facility). The 120-day time frame of this paragraph shall be
extended by 60 days with respect to any Facility that was originally an
Alternate Facility. Beverly agrees not to contest these penalties in any state
or federal court or administrative forum, except that Beverly may seek review of
a penalty under this Agreement as if the penalty were a Stipulated Penalty
described in section X.A.1 of the Corporate Integrity Agreement entered into
between Beverly and the OIG on or about the date of this Agreement. The only
issues in such a proceeding will be whether: (a) any Facility was not Under
Contract after the 120th day after the Conviction (or 180th day after the
Conviction with respect to former Alternate Facilities); and (b) for how long
after the 120th day after the Conviction (or 180th day after the Conviction with
respect to former Alternate Facilities) such Facility was not Under Contract.
14. In exchange for the above agreements made by Beverly and
Beverly-California in this Agreement, the OIG agrees that it will not implement
an exclusion of Beverly-California based on the Conviction until after the
earlier of: (1) the date on which Beverly-California has fully divested itself
of the Facilities; or (2) the 120th day after the Conviction (except to the
extent that the time frame applicable to a Facility has been extended pursuant
to paragraph 11), except that the OIG will not exclude Beverly-California while
a Facility is Under Contract. The OIG retains sole discretion to determine the
date of implementation of any exclusion after the conditions set forth in this
paragraph have been met.
<PAGE> 5
15. Upon written notice from the OIG (consistent with paragraph 14),
Beverly-California hereby agrees to be permanently excluded pursuant to 42
U.S.C. Section 1320a-7(a)(1) from participation in Medicare, Medicaid, and all
other Federal health care programs as defined in 42 U.S.C. Section 1320a-7b(f).
Such exclusion will have national effect and will also apply to all other
Federal procurement and non-procurement programs. Beverly-California waives any
further notice of the exclusion and agrees not to contest the exclusion either
administratively or in any state or federal court.
16. If the OIG determines that Beverly owes money due to any of the
provisions of this Agreement, e.g., paragraphs 12 or 13, the OIG shall make a
written request for payment to Beverly including the amount owed and
instructions for paying. Beverly agrees to promptly pay such amounts upon
receiving such a request, except that if Beverly exercises its review rights
under paragraph 13 Beverly shall promptly pay any amount owed if and when it is
due under the process referenced in that paragraph. If Beverly does not make
payment as instructed by the OIG within 10 days of receiving the request for
payment (either under this paragraph or under the process referenced in
paragraph 13), the OIG may: (a) file an action for specific performance of this
Agreement; (b) offset the remaining unpaid balance, inclusive of interest
(calculated at 10% per annum, compounded daily, from the date the request for
payment was received by Beverly), from any amounts due and owing to Beverly by
any department, agency, or agent of the United States at the time of default;
and/or (c) exercise any other right granted by law, or under the terms of this
Agreement, or recognizable at common law or in equity. Except as provided for
under the review process described in paragraph 13, Beverly agrees not to
contest any offset imposed pursuant to this provision, either administratively
or in any state or federal court. In addition, Beverly will pay the OIG all
reasonable costs of collection and enforcement of this Agreement, including
attorney's fees and expenses.
17. For the purposes of the Agreement, a Facility shall be considered
"Under Contract" if Beverly has entered into a definitive agreement to divest,
to an unrelated third party, its interest in the Facility and has provided to
the appropriate state agency a notice of its intent to transfer its interest in
and the operation of the Facility, with a copy of the divestiture agreement, if
required. Notwithstanding the previous sentence, the Facility cannot become
Under Contract if: (a) Beverly has failed to provide notice to the OIG required
by paragraph 9 regarding the proposed future operator(s); or (b) the OIG has
notified Beverly of its disapproval of the proposed future operator(s)
consistent with paragraph 9. In the event a Facility becomes Under Contract and
the appropriate state agency subsequently disapproves the proposed divestiture,
the Facility will no longer be considered Under Contract for the purposes of
this Agreement. As explicitly set forth in other paragraphs, the applicable time
frames set forth in this Agreement shall be tolled with respect to a Facility
while that Facility is Under Contract. Such time periods shall further be tolled
during any time period that Beverly has an outstanding request for: (1)
<PAGE> 6
substitution of a Facility pursuant to paragraph 10; or (2) an extension of time
pursuant to paragraph 18. The tolling of the time periods applicable to one
Facility shall not affect the time periods applicable to the other Facilities.
18. If, prior to the 120th day after the Conviction, at least eight of
the Facilities are Under Contract, Beverly may request an extension of time to
become Under Contract with respect to the remaining Facilities. With any such
request, Beverly shall provide the OIG with a description of Beverly's efforts
to become Under Contract with respect to the Facility and a timetable for having
the Facility Under Contract and completing the divestiture of the Facility.
After receiving such request and reasonably considering Beverly's report, the
OIG, in its sole discretion, may deny the request or grant an extension that the
OIG deems appropriate. Notwithstanding any other provision in this Agreement, if
OIG grants the timely written request for extension, penalties for failure to
meet time frames shall not begin to accrue until one day after Beverly fails to
meet the revised deadline set by OIG. Notwithstanding any other provision in
this Agreement, if OIG denies such a timely written request, penalties shall not
begin to accrue until two (2) business days after Beverly receives OIG's written
denial of such request.
19. This Agreement expires when Beverly-California receives notice of
exclusion from participation in the Federal health care programs.
20. This Agreement shall be binding on the successors, assigns, and
transferees of Beverly (except that the obligations of this Agreement shall not
apply to facilities that Beverly or a Beverly successor does not own or
operate).
21. This Agreement shall become final and binding on the date the final
signature is obtained on the Agreement. This Agreement may be executed in
counterparts, each of which constitutes an original and all of which constitute
one and the same agreement.
22. Any modifications to this Agreement shall be made with the prior
written consent of the parties to this Agreement.
23. The undersigned Beverly signatories represent and warrant that they
are authorized to execute this Agreement and the undersigned OIG signatory
represents that he is signing this Agreement in his official capacity and that
he is authorized to execute this Agreement.
The remainder of this page intentionally left blank.
<PAGE> 7
ON BEHALF OF BEVERLY
- ----------------------------------------- ---------------------
DAVID BANKS DATE
Chief Executive Officer
Beverly Enterprises, Inc.
- ----------------------------------------- ---------------------
MARK BIROS, Esq. DATE
Proskauer Rose LLP
1233 20th Street, NW
Suite 800
Washington, DC 20036-2396
ON BEHALF OF THE OFFICE OF INSPECTOR GENERAL
OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES
- ----------------------------------------- ---------------------
LEWIS MORRIS DATE
Assistant Inspector General for Legal Affairs
Office of Inspector General
U. S. Department of Health and Human Services
<PAGE> 8
Exhibit A
1. Beverly Manor, Escondido, California;
2. Beverly Manor, San Francisco, California;
3. College Oak Nursing and Rehabilitation Center, Sacramento, California;
4. Hy-Long Convalescent Center, Sunnyvale, California;
5. Torreno Gardens, Los Gatos, California;
6. Hearthstone Nursing Center, St. John, Kansas;
7. Countryside Estates, Iola, Kansas;
8. Hospitality of Macon, Macon, Georgia;
9. Beverly Health and Rehabilitation Center, Aiken, South Carolina;
10. Pinewood Terrace, Colville, Washington.
<PAGE> 1
EXHIBIT 21.1
BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
A-1 Home Health Services, Inc. Georgia
AdviNet, Inc. Delaware
AGI-Camelot, Inc. Missouri
Arborland Management Company, Inc. South Carolina
Associated Physical Therapy Practitioners, Inc. Pennsylvania
Bercy International, Inc. California
Beverly Assisted Living, Inc. Delaware
Beverly Enterprises, Inc. Delaware
Beverly Enterprises International Limited California
Beverly Enterprises - Alabama, Inc. California
Beverly Enterprises - Arizona, Inc. California
Beverly Enterprises - Arkansas, Inc. California
Beverly Enterprises - California, Inc. California
Beverly Enterprises - Colorado, Inc. California
Beverly Enterprises - Connecticut, Inc. California
Beverly Enterprises - Delaware, Inc. California
Beverly Enterprises - Distribution Services, Inc. California
Beverly Enterprises - District of Columbia, Inc. California
Beverly Enterprises - Florida, Inc. California
Beverly Enterprises - Garden Terrace, Inc. California
Beverly Enterprises - Georgia, Inc. California
Beverly Enterprises - Hawaii, Inc. California
Beverly Enterprises - Idaho, Inc. California
Beverly Enterprises - Illinois, Inc. California
</TABLE>
1
<PAGE> 2
EXHIBIT 21.1
BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Beverly Enterprises - Indiana, Inc. California
Beverly Enterprises - Iowa, Inc. California
Beverly Enterprises - Kansas, Inc. California
Beverly Enterprises - Kentucky, Inc. California
Beverly Enterprises - Louisiana, Inc. California
Beverly Enterprises - Maine, Inc. California
Beverly Enterprises - Maryland, Inc. California
Beverly Enterprises - Massachusetts, Inc. California
Beverly Enterprises - Michigan, Inc. California
Beverly Enterprises - Minnesota, Inc. California
Beverly Enterprises - Mississippi, Inc. California
Beverly Enterprises - Missouri, Inc. California
Beverly Enterprises - Montana, Inc. California
Beverly Enterprises - Nebraska, Inc. California
Beverly Enterprises - Nevada, Inc. California
Beverly Enterprises - New Hampshire, Inc. California
Beverly Enterprises - New Jersey, Inc. California
Beverly Enterprises - New Mexico, Inc. California
Beverly Enterprises - North Carolina, Inc. California
Beverly Enterprises - North Dakota, Inc. California
Beverly Enterprises - Ohio, Inc. California
Beverly Enterprises - Oklahoma, Inc. California
Beverly Enterprises - Oregon, Inc. California
Beverly Enterprises - Pennsylvania, Inc. California
</TABLE>
2
<PAGE> 3
EXHIBIT 21.1
BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Beverly Enterprises - Rhode Island, Inc. California
Beverly Enterprises - South Carolina, Inc. California
Beverly Enterprises - Tennessee, Inc. California
Beverly Enterprises - Texas, Inc. California
Beverly Enterprises - Utah, Inc. California
Beverly Enterprises - Vermont, Inc. California
Beverly Enterprises - Virginia, Inc. California
Beverly Enterprises - Washington, Inc. California
Beverly Enterprises - West Virginia, Inc. California
Beverly Enterprises - Wisconsin, Inc. California
Beverly Enterprises - Wyoming, Inc. California
Beverly - Bella Vista Holding, Inc. Delaware
Beverly - Branson Holdings, Inc. Delaware
Beverly Clinical, Inc. Delaware
Beverly Funding Corporation Delaware
Beverly Health and Rehabilitation Services, Inc. California
Beverly Healthcare Acquisition, Inc. Delaware
Beverly Healthcare - California, Inc. California
Beverly Holdings 1, Inc. Delaware
Beverly Indemnity, Ltd. Vermont
Beverly Manor Inc. of Hawaii California
Beverly Manor Inc. of Phoenix California
Beverly - Missouri Valley Holding, Inc. Delaware
Beverly - Plant City Holdings, Inc. Delaware
</TABLE>
3
<PAGE> 4
EXHIBIT 21.1
BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Beverly - Rapid City Holding, Inc. Delaware
Beverly Real Estate Holdings, Inc. Delaware
Beverly Rehabilitation, Inc. Delaware
Beverly Savana Cay Manor, Inc. California
Beverly - Tamarac Holdings, Inc. Delaware
Beverly - Tampa Holdings, Inc. Delaware
Carrolton Physical Therapy Clinic, Inc. Texas
Catawba Rehabilitation Services, Inc. South Carolina
Columbia-Valley Nursing Home, Inc. Ohio
Commercial Management, Inc. Iowa
Community Care, Inc. North Carolina
Compassion and Personal Care Services, Inc. North Carolina
Continental Care Centers of Council Bluffs, Inc. Iowa
Eastern Carolina Home Health Agency, Inc. North Carolina
Eastern Home Health Supply & Equipment Co., Inc. North Carolina
ECT, Inc. North Carolina
Edgewood Convalescent Hospital California
Forest City Building Ltd. Missouri
Greenville Rehabilitation Services, Inc. Texas
Hallmark Convalescent Homes, Inc. Michigan
HomeCare Preferred Choice, Inc. Delaware
Home Health and Rehabilitation Services, Inc. Texas
Home Health Care of Carteret County, Inc. North Carolina
Home Technology Healthcare - Mid Cumberland, Inc. Tennessee
</TABLE>
4
<PAGE> 5
EXHIBIT 21.1
BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Home Technology Healthcare - Mid South, Inc. Delaware
Home Technology Healthcare - Nursing, Inc. Delaware
Home Technology Healthcare - St. Louis, Inc. Delaware
Home Technology Healthcare - Tennessee, Inc. Tennessee
Hospice of Eastern Carolina, Inc. North Carolina
Hospice of Tennessee, Inc. Delaware
Hospice Preferred Choice, Inc. Delaware
HTHC Holdings, Inc. Delaware
Kenwood View Nursing Home, Inc. Kansas
Las Colinas Physical Therapy Center, Inc. Texas
Liberty Nursing Homes, Incorporated Virginia
Long Beach Sports Medicine and Physical Therapy Center, Inc. California
MATRIX Occupational Health, Inc. Delaware
MATRIX Rehabilitation, Inc. Delaware
MATRIX Rehabilitation - South Carolina, Inc. Delaware
Medical Arts Health Facility of Lawrenceville, Inc. Georgia
Moderncare of Lumberton, Inc. North Carolina
Nebraska City S-C-H, Inc. Nebraska
Network for Physical Therapy, Inc. Texas
North Dallas Physical Therapy Associates, Inc. Texas
Nursing Home Operators, Inc. Ohio
Petersen Health Care, Inc. Florida
Physician's Home Health Care, Incorporated Tennessee
</TABLE>
5
<PAGE> 6
EXHIBIT 21.1
BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Piedmont No. 1, Inc. Missouri
PPI, Inc. New Mexico
PT Net, Inc. Tennessee
PT Net (Colorado), Inc. Colorado
Rehabilitation Associates of Lafayette, Inc. Louisiana
Riverside Physical Therapy, Inc. California
Shastina Properties Inc. California
Shastina Realty Inc. California
South Alabama Nursing Home, Inc. Alabama
South Dakota - Beverly Enterprises, Inc. California
Spectra Healthcare Alliance, Inc. Delaware
Tar Heel Health Care Services, Inc. North Carolina
Tar Heel Holdings, Inc. Delaware
Tar Heel Home Health, Inc. North Carolina
Tar Heel Home Health of Cape Fear, Inc. North Carolina
Tar Heel Home Health of Dare County, Inc. North Carolina
Tar Heel Home Health of North Central North Carolina, Inc. North Carolina
Tar Heel Infusion Company, Inc. North Carolina
The Parks Physical Therapy and Work Hardening Center, Inc. Texas
Theraphysics Corp. Delaware
Theraphysics Corp. of New York IPA, Inc. New York
Theraphysics Partners of Colorado, Inc. Delaware
Theraphysics Partners of Louisiana, Inc. Delaware
</TABLE>
6
<PAGE> 7
EXHIBIT 21.1
BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Theraphysics Partners of Western Pennsylvania, Inc. Delaware
Theraphysics Partners of Texas, Inc. Delaware
TMD Disposition Company Florida
Vantage Healthcare Corporation Delaware
Vaughn Home Health Care & Services, Inc. Illinois
</TABLE>
7
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements and amendments thereto
<TABLE>
<S> <C>
Form S-8 No. 33-21505 Employee Stock Purchase Plan
Form S-8 No. 333-41671 Non-Employee Director Deferred Compensation Plan
Form S-8 No. 333-41669 1997 Long-Term Incentive Plan
Form S-8 No. 333-41673 Executive Deferred Compensation Plan
Form S-8 No. 333-42131 Non-Employee Directors' Stock Option Plan
</TABLE>
of Beverly Enterprises, Inc. of our report dated February 17, 2000 with respect
to the consolidated financial statements and schedule of Beverly Enterprises,
Inc. included in this Annual Report (Form 10-K) for the year ended December 31,
1999.
/s/ ERNST & YOUNG LLP
Little Rock, Arkansas
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITS ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,652
<SECURITIES> 0
<RECEIVABLES> 432,372<F1>
<ALLOWANCES> 65,455<F2>
<INVENTORY> 32,276
<CURRENT-ASSETS> 493,796
<PP&E> 1,853,402
<DEPRECIATION> 743,337
<TOTAL-ASSETS> 1,982,880
<CURRENT-LIABILITIES> 388,054
<BONDS> 746,164
0
0
<COMMON> 11,038
<OTHER-SE> 630,086
<TOTAL-LIABILITY-AND-EQUITY> 1,982,880
<SALES> 2,546,672
<TOTAL-REVENUES> 2,551,007
<CGS> 0
<TOTAL-COSTS> 2,354,328
<OTHER-EXPENSES> 337,827
<LOSS-PROVISION> 0<F3>
<INTEREST-EXPENSE> 72,578
<INCOME-PRETAX> (213,726)
<INCOME-TAX> (79,079)
<INCOME-CONTINUING> (134,647)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (134,647)
<EPS-BASIC> (1.31)
<EPS-DILUTED> (1.31)
<FN>
<F1>EXCLUDES $9,262 OF LONG-TERM NOTES RECEIVABLE.
<F2>EXCLUDES $5,604 OF ALLOWANCE FOR LONG-TERM NOTES RECEIVABLE.
<F3>INCLUDED IN TOTAL COSTS AND EXPENSES LINE.
</FN>
</TABLE>
